I created the Musings Category so that I can include shorter articles in my postings. When I have enough topics for a posting I combine them together in the form of a Randy’s Musings Article. For the most part the postings are just random articles.

Contents

-How Free Trade Is Destroying the United States

-National Security Council Study Memorandum 200 (NSSM 200)

-How Deregulation Caused Our Economic Demise

-How Special Interests Groups and Greed Are Ruining Our Country

-How the Federal Reserve Stunted Our Country’s Growth

-FDR’s New Deal or Raw Deal?

-Globalism

How Free Trade Is Destroying the United States

Free trade is the idea that things should be able to be traded between countries with as few restrictions or limitations as possible. Pretty much nowhere in the word has 100% free trade; every country has a complex set of taxes on foreign goods (called tariffs), limits on how many goods can be brought in (called quotas) and outright restrictions on importing certain things. When people talk about ‘free trade’ they are talking about removing, or lessening some of these restrictions.

The idea of free trade is both loved and despised. Some people think it makes everyone richer and promotes development in poorer countries. Others think it increases inequality and gives corporations too much power.

People who support free trade often start with the idea of ‘comparative advantage’. In short, every country is better at making some goods than they are at making other goods. So instead of every country trying to make all the things they want, it makes more sense for each country to specialize and make the things they’re best suited to make. Then everyone can trade what they have for what they want. Because each country is doing what they’re best at, less time and resources are wasted, and there’s more to go around for everyone.

But for a lot of critics, it’s not just the size of the pie that matters, but who gets what. They argue that even if free trade actually creates more wealth overall, most of that wealth goes to the richest and most powerful, at the expense of everyone else. In richer countries people worry that free trade will make it easier for their jobs to be moved overseas. In poorer countries people worry that free trade will give international corporations too much control over their economies (and politics).

There’s also an argument that free trade makes it harder for countries to develop from poor to rich. If every country specializes in what they’re ‘best’ at making, poorer countries can get stuck specializing in lower wage industries like mining, fishing or farming. Instead they argue that some degree of protectionism is needed to build up more advanced industries.

In all of this it’s good to keep in mind that details matter. Some trade deals actually have provisions to help the people likely to be hurt by more trade. Other have provisions intended to force countries to protect the environment or improve working conditions. Other deals don’t do this at all.

Also, not all trade has the same economic consequences. For instance, trade between countries with similar economies—like the countries within Western Europe— is very different from trade between the EU and China. That’s part of the reason people can be for free trade in some cases and against it in others.

It’s hard to think of an issue that is more polarized than the one between free traders and protectionists. Those of us who favor free trade believe in the ethical principle that people should be free to buy from whomever they choose, and in the economic truth that wealth and efficiency increase as prices fall.

We sometimes forget, however, how unrealistic and even heartless those positions seem to people on the other side of the issue—nice-sounding theories that would work in a perfect world, but totally impractical and harmful in light of the allegedly unfair trade practices employed by foreign business competitors and the governments in their home countries.

Protectionists aren’t interested in what they consider abstract intellectual notions. Their opposition to free trade is visceral and passionate. They are driven by two fears: that without government protection (tariffs, quotas, and the like) against unfair foreign competition, they may lose their jobs—their livelihood—and also that the country as a whole will go down the tubes. The first concern is justified, the second is not; however, both fears need to be addressed head on by the free-trade camp if we wish to allay suspicions that we don’t care about our country and compatriots and that we are not interested in justice.

Let’s tackle first the issue of lost jobs. It is an economic fact of life that in a competitive marketplace less efficient (higher cost) providers of goods and services are replaced by more efficient (lower cost) providers. Protectionists routinely concede this point. Their standard line is that they have nothing against competition, as long as it’s fair competition. Indeed, “fairness” is the primary (and often the only) issue on which protectionists rest their case, so we need to examine the relative fairness of free trade and protectionism.

The first point that must be made is that American labor unions, which are some of the most vociferous advocates of protectionism, are being disingenuous at best if they pretend to welcome free and fair competition. By their very nature, unions today are anticompetitive and by law are often able to extract above-market wages from employers. In effect, labor unions have been the beneficiaries of domestic protectionism—legal protection from other American workers—so naturally they feel they also should be protected from foreign workers. One of the tragic ironies of unionism is that if unions hadn’t forced wages unnaturally high, then American businesses would be in a much more competitive position vis-à-vis foreign competition—that is, fewer American jobs would be in danger of being displaced by foreigners. In fact, what some American industries need to survive against foreign competition isn’t trade barriers, but simply for their own cost structure to be rationalized, such as by letting wages be determined by supply and demand and productivity, rather than by the monopoly bargaining power of unions.

Business Favored Protection

Of course, major business leaders in America favored protection from foreign competition throughout the nineteenth century, when unions had little influence.

Even if you agree that any clamor of labor unions for fair competition rings hollow, most American workers aren’t unionized, so let’s address their concerns about unfair foreign competition. Some Americans have a legitimate concern that they may lose their jobs as a result of such “unfair” trade practices as dumping or subsidies.

Dumping is one of those slippery concepts that is difficult to define and even more difficult to prove even when adjudicated by a panel of experts. The layman’s definition of dumping is: “selling goods below their cost of production.” This concept is problematical for several reasons. First, businesses do this all the time, and there is nothing inherently sinister about it. Think of loss-leaders and end-of-the-year clearance sales. In business there is a phenomenon known as “experience curve pricing” whereby a company will set prices low so as to accelerate sales and move down the learning curve as fast as possible. The issue is further complicated by uncertainty about how to calculate the cost of production. Should a business’s long-term fixed costs be amortized over ten years, 20, 30? Yes, there are times when a firm sacrifices profits for market share in what some call “predatory pricing” and laymen call dumping (either way, consumers reap a windfall from the discounted prices), but so what? The theory is that this is how one firm will gain a monopoly. In practice, there are those who claim that no company has ever engaged in constant perennial dumping. I can’t vouch for that assertion, but I challenge those who cite “dumping” as a bogeyman to name one industry now dominated by a monopoly as a result of dumping. Dumping is nothing more than a red herring used by protectionists to drum up support.

Foreign Subsidies to Industry

Unlike with dumping, the viability of some American businesses and jobs is undoubtedly jeopardized when foreign governments subsidize certain industries. Let’s overlook the fact that Uncle Sam subsidizes many American businesses and assume that an American business about to be crushed by foreign competition isn’t unionized, receives no subsidies, and would survive if it weren’t being undersold by the subsidized foreign competitor. Clearly, this is an unfair situation. It isn’t fair to the taxpayers of the foreign country whose government is conferring the subsidy on a favored enterprise, and it isn’t fair to the innocent Americans whose lives will be disrupted by the subsidies.

But look at what happens if the U.S. government erects trade barriers to reduce or eliminate the importation of the subsidized products. Yes, this can help the domestic competitor and preserve those particular jobs, but is it fair for American consumers to have to pay more for things than foreigners pay? At this juncture, the protectionists argue that jobs come first and consumers second. The problem is, when Americans have to pay a higher price than necessary for something, they have less purchasing power left to buy the product of other people’s labor, and so employment elsewhere is less than it could be.

Protectionism may indeed preserve specific American jobs, but it often does so at the expense of other American jobs. This is particularly evident when the protected good is used as a factor of production here. For example, when the domestic steel industry received tariff protection from lower-priced imports in the 1980s and in 2002–03, many more American jobs were lost in steel-consuming industries than were saved in the steel-producing companies. (This is predictable from an economic standpoint: if an American automobile manufacturer has to pay more for steel than a German carmaker, then the Germans’ lower costs will give them a competitive advantage over the Americans.) What is fair about the U.S. government saving the jobs of some Americans, however innocent, by introducing policies that inflict job losses on other innocent Americans—especially when the protectionist policies result in more jobs being lost than the absence of such policies would produce?

Here is an analogy: a ship is about to sink; the only lifeboat is filled with 12 small passengers; then eight large passengers persuade the ship’s officers to remove the 12 small passengers from the lifeboat—dooming them—so that the eight large passengers may have their places. That is the reality of protectionism. I’m not knocking the survival instinct, but let’s drop the pretense that such actions restore “justice” or “fairness.”

On a more elementary level, what is fair about protectionism in general when the U.S. government stands by and allows millions of jobs to disappear every year (outnumbered, thankfully, by newly created jobs) and then intervenes to save jobs for just certain Americans? Clearly, protectionist policies don’t produce the “level playing field” that protectionists claim to favor. Protectionism, unlike free trade, is discriminatory and confers a privileged political status on a minority of workers, thereby violating the first principle of justice: equality before the law.

In sum, protectionism makes our country poorer, while free trade makes us richer; protectionism’s inefficiencies reduce employment, while free trade’s efficiencies increase employment; protectionism curtails individual liberty, while free trade is an expression of liberty; protectionism corrupts justice, while free trade enshrines equality before the law.

Ah, but will free trade ruin the United States of America? That is the other major reason why so many Americans are leery of it.

Unlimited Work

The notion that free trade will gut any nation’s economy could only be valid in a zero-sum world with a fixed number of jobs, where one country’s gain would be another’s loss. In fact, though, the number of jobs, both at home and abroad, is locked into a clear uptrend. New businesses and industries continually emerge in the never-ending attempt to satisfy humankind’s insatiable wants. We can never run out of jobs.

Free trade doesn’t reduce employment, but rearranges it to more efficient applications, just as economic competition across town, across the state, or across the country causes some jobs to supplant others. This process is natural and healthy, not sinister or harmful. Yes, as counterintuitive or perverse as it may seem, a healthy economy is one that destroys jobs—by replacing them with new jobs. Just as a healthy human body undergoes a constant process of renewal by shedding dead cells and replacing them with living cells, so a healthy economy is one in which more-efficient providers of goods and services displace less-efficient providers.

If that sounds cold and clinical, ask yourself if you would rather be part of the U.S. economy (as hampered as it is) or to have been a worker in the Soviet economy. The Soviet Union had the most protectionist system possible—the government guaranteed everyone’s job so that there was never any unemployment. The price for guaranteed employment was an economy without flexibility or adaptability. With employment and the economy frozen in place, the Soviet planners in effect outlawed economic progress, resulting in devastating stagnation and impoverishment in the so-called “workers’ paradise.”

By contrast the dynamic, relatively free U.S. economy has always pushed people out of old jobs and into new ones. While challenging for the individuals affected, these are the inevitable growing pains associated with progress for us all. Look at American agriculture, for example. Over the past 250 years, farm employment has shrunk from over 80 percent of the American population to less than 2 percent. We may sympathize with the anguish of millions of Americans who have had to abandon farming as their source of income, but our society is much richer today as a result of this shift. Because so few people are needed to produce agricultural commodities, tens of millions of other Americans are now free to provide countless other goods and services that wouldn’t even exist if their providers were still back on the farm.

The slogan “Buy American” resonates within and appeals to our patriotism, but insofar as it means to shop for American-made products instead of the lowest-price, highest-quality products, it is a rejection of economic rationality. Economists going back to Adam Smith have understood that the true measure of “the wealth of nations” is how affordable is John Q. Public’s cost of living. If the United States had been closed to foreign trade over the past 50 years, we might be paying $40,000 for a Ford Pinto IV, $15 for a gallon of gasoline, and $5 for a quart of orange juice. We would all be a lot poorer.

Richer Households

What actually has happened over the past 50 years is that protectionist barriers have been lowered. It is estimated that the average American household’s income is $10,000 a year higher as a result of tariff reductions in the past half-century (“A Case For Trade,” Investor’s Business Daily editorial, September 14, 2006).

In 1992, Reform Party presidential candidate Ross Perot warned of “a giant sucking sound” from U.S. jobs moving to Mexico if the North America Free Trade Agreement (NAFTA) were adopted. Since NAFTA took effect in 1994, the United States has enjoyed a net increase of nearly two million jobs per year, with compensation in three-fourths of the new jobs above the national medians (U.S. Department of Commerce, “A Profile of U.S. Exporting Companies, 2000-2001,” February 2003).

What, then, in the face of all the evidence to the contrary, explains the persistent warnings about trade’s alleged threat to the country? These cries are protests from those Americans whose jobs are most threatened by lower-cost foreign competitors. Those workers will need to reinvent their careers as American production continues to evolve in the direction of higher value-added, digital- and knowledge-based goods and services, and away from low-tech or semiskilled physical labor. Who can blame these Americans for being unhappy? But like generations of bankrupt farmers before them, the travail of some individuals necessarily accompanies general economic advancement. Moreover, the need to adjust to change inspires people to grow and excel. As one who has suffered unemployment, I sympathize with those who are forced to change their jobs, but the overarching fact is that as long as our economy keeps generating new jobs, the country’s economic future is bright.

There are two major risks to this bright future. One would be if Americans have lost the will, energy, and can-do spirit that enabled earlier generations to surmount prodigious challenges. The other is the “government disease”—the myriad government interventions, like burdensome taxation, hyper-regulation, business privileges, unfair labor laws, and more that are so many Lilliputian strings threatening to tie down the American Gulliver. We need free trade if we are not to become global laggards, but we also need government to get out of the way so we can compete (and cooperate) with the rest of the world without one arm tied behind our back. Great economic success awaits America’s businesses and entrepreneurs unless the U.S. government, by meddling in the economy, snatches defeat from the jaws of victory.

The Folly of Free Trade

Any manager who tries to create a strategy out of worn-out clichés and unexamined nostrums is dismissed. Yet in the United States and other Western countries we have grown comfortable with the government following outworn nostrums about free trade. We have elevated the economic theory of free trade to the status of a national theology, and we follow its simple dictums as if they were immutable laws. We appear prepared to follow the precepts of free trade wherever they lead us, even if that means plunging lemminglike to our economic ruin.

Today the evidence should be clear to anyone who wants to look at it: our blind allegiance to free trade threatens our national standard of living and our economic future. By sacrificing our home market on the altar of free trade, we are condemning ourselves and our children to a future of fewer competitive businesses, fewer good jobs, less opportunity, and a lower standard of living. These unacceptable outcomes threaten us in ways that are all related to our practice of free trade.

American business’s stake in these matters is clear. If we do not wish to live with these outcomes, then we must construct a new and effective way to think about trade that will serve the interests of both business and the nation.

Threats of Free Trade

As we practice it, free trade has profoundly destructive results for the United States and other Western nations. First, nations that do not play by our rules practice unequal competition. Second, free trade puts us in direct competition with low-wage nations, countries that have a lower standard of living than the United States. Third, by allowing these nations to take over big sectors of our market, we permit the permanent interruption of an important relationship between demand and supply that has been the main engine of economic growth in American history.

Unequal National Competition

Classical economics teaches us that free exchange works to produce the best results for all, whether the exchange takes place within one nation or across national boundaries. But this concept works only when the exchange is an equal one that occurs within a common framework of laws, customs, rules, and regulations. Economic competition conducted under the law of the jungle leads to chaos and failure. The price system becomes a guide to nothing that is sensible or tolerable.

The laissez-faire approach to economics fashionable in the United States permits distorted outcomes precisely because it neglects the essential role of rules and regulations in preventing destructive competition. When each nation creates self-serving rules, free trade across national boundaries becomes destructive—an unequal competition under inconsistent and inharmonious rules.

Most American companies facing international competition have encountered the problem. Most governments are playing a simple game: they use their myriad powers—subsidies, favorable banking practices, local content requirements, exchange control, and the like—to win jobs and gain higher incomes for their people or to achieve a favorable national balance of payments.

American companies, therefore, end up competing not with foreign companies but with sovereign foreign states—states intent on winning jobs and sometimes whole industries for themselves. Foreign competitors are able to beat out a U.S. company not because of superior economic efficiency but because of subsidies. Japan grants favorable credit terms to certain industries, and many countries give cheap export-finance loans. European nations have special treatment for the value-added tax on exported goods. Most of the Pacific rim nations have weak or nonexistent environmental regulations, and Taiwan often fails to enforce its patent and copyright laws. Laborers in places like China lack the rights of U.S. workers.

Wage Competition Among Nations

Among nations, competition over wages causes desirable industries and jobs to move from countries with higher standards of living and higher wages to countries with lower standards of living and lower wages. It is an unequal form of competition that explains much of the recent movement of industries and jobs out of the United States, undercutting our production.

Low-wage nations can raise their standards of living at the expense of ours in two ways: export their people to the United States or import U.S. jobs to their people. The result of either approach would be the same—our wages and standard of living would fall to match the level of the lower-wage nation while, at least temporarily, those of the lower-wage nation would rise.

If there were free immigration and truly open borders, workers from the lower-wage countries would stream into the higher-wage countries. These new arrivals would compete for jobs, accept work for lower pay, and force the existing jobholders to accept either lower wages or unemployment. Precisely for this reason, of course, no one accepts or supports the notion of free immigration.

We do, however, accept and support the notion of free trade, which has the same effect. Instead of exporting workers to the United States, lower-wage countries simply import our jobs and industries to their workers. As the higher-wage nation suffers cutbacks in production, failures of companies, and losses of jobs, the market dictates that workers accept lower wages and a reduced standard of living to match the lower-wage foreign competition.

For example, Japan, Taiwan, and, most recently, South Korea have had rapid increases in desirable jobs in major industries and in their standards of living. Through unbalanced exports to us, they have taken over U.S. markets and jobs. They have gained industries and jobs that we have lost. These countries could not have risen so rapidly if they had based their advance on their home markets or on balanced and mutually beneficial trade with other nations.

Under either free immigration or free trade, however, the lower-wage nation enjoys only a short-term benefit. Rapid economic advance based on taking over the markets, the industries, and the jobs of high-income nations is likely to be a blind alley. Gradually, the higher-wage nation, deprived of its economic base, becomes poorer and its market shrinks—or it belatedly begins protecting itself from one-sided imports. The low-wage nation then may wish it had followed a pattern of economic growth that was sustainable and not parasitic.

Either free migration or free trade would work to turn the world into a “population commune,” drifting into global poverty, pulled down by the negative-sum game of international wage competition.

Demand & Markets

Our present-day economics fails to recognize the importance of demand and markets—and thus exaggerates what production alone can accomplish. Yet a nation’s productive capabilities are decisively limited by the levels and kinds of its domestic demand and its access to foreign markets. But in the United States, we persistently fail to see the importance of our vast, prosperous, and accessible domestic market. We don’t appreciate the key role that the demand side of our domestic market has played in generating economic growth for our country. As a result, we are now about to give away our great advantage to our foreign competitors.

America’s rise to economic preeminence was based on the interaction between the market’s demand and the pace-setting industries that developed to meet that demand. The process was self-feeding. Favorable circumstances—the size of the U.S. market, extraordinary resources, freedom from overpopulation, a favorable position in the two world wars—gave the U.S. market a unique richness and diversity. This market was the magnet that drew forth the new industries that, in turn, created even more wealth. In the interaction of demand and supply, the U.S. economy became the pathbreaker for the world.

But recently this self-feeding interaction has been interrupted, as Japan and other countries of the Pacific rim have taken over large shares of the U.S. market. These nations have recognized the role of demand in fostering industrial growth and, by using government subsidies and lower-wage workers, have simply substituted their industries for American industries in the demand-supply relationship. With the U.S. market switched over to fueling the meteoric advance of foreign industries, U.S. industry has begun to decline.

Unlike the historical demand-and-supply relationship between market and industry, the new relationship that substitutes foreign industry for American industry represents an economic blind alley. The domestic markets of these foreign producers have neither the size nor the wealth to support their own industries. As they undercut U.S. production, however, they will gradually weaken the American economic base that they have come to depend on. Rather than a self-sustaining, self-reinforcing process, this new relationship becomes self-liquidating.

Underlying Myths of Free Trade

Much of the debate over trade today is conducted within a narrow range of thinking, a set of ideas dictated by classical economics. If the United States is to develop a realistic trade policy, we first need to examine these underlying notions, recognize them for the myths that they are, and then substitute more practical attitudes toward the role of trade in our economy. Seven myths in particular dominate conventional thinking about trade.

Comparative advantage governs international trade. To justify free trade, laissez-faire economists from Adam Smith to the present have claimed that international trade and competition work totally differently from trade within one nation’s borders. They argue that international trade and competition are not based on price comparisons—that is, that trade is not subject to the rule that low-priced goods undercut high-priced goods and that low-priced labor undercuts high-priced labor. Rather, they say, international trade is governed by comparative advantage. It depends on differences in the internal structures of prices in the trading countries and is not affected by differences in their absolute levels of costs and prices.

To support this contention, economists offer an example in which two nations with different wage and cost levels nevertheless have a pattern of trade that is balanced and mutually beneficial. They then say that the example shows how free trade will result in balanced and mutually beneficial international trade and competition. What it actually illustrates is that if the two nations require their trade to be in balance, then the trade will be governed by comparative advantage and absolute price levels will not matter. When trading nations require their trade to be in balance, the low-wage, low-price nation cannot pull away the industries and jobs of the other nation. Under this condition, differences in the nations’ absolute costs will not matter.

Most of international trade is not governed by comparative advantage. Rather, it reflects wage and price competition on the part of countries seeking jobs and economic growth.

Exchange rate adjustments automatically keep foreign trade in balance. According to our classical economics, the huge U.S. trade deficit and the export of American industries and jobs indicate only the need for an adjustment in the exchange rate: a decline in the international value of the dollar would make everything all right again. The implicit argument is that a decline in the dollar would balance U.S. trade and improve the competitiveness of U.S. industries without forcing a domestic decline in real wages and the standard of living.

Again, this argument is fallacious. A decline in the dollar is simply a way for the United States to become poorer. It is a way for the American economy to accede to the inevitable results of competition from lower-wage and lower-standard-of-living nations by becoming itself a lower-wage, lower-standard-of-living nation. A devalued dollar is, quite simply, worth less. By reducing the value of the dollar we cut real wages, diminish U.S. buying power, and bring the U.S. economy more in line with the lower-standard-of-living countries against which free trade has pitted us.

U.S. companies can become competitive through cost cutting. Others argue that the way to bring U.S. trade into balance is for American companies to compete by cutting costs. But in global competition, there is no way U.S. production at wages of $10 an hour can become competitive with efficient foreign production at wages of $1 an hour. Efforts to compete by cutting costs are suicidal.

Frantic cost cutting to accomplish what is impossible destroys the future capabilities of companies as well as the nation. Abandoning research and development, chopping investment, decimating staff is a formula for self-destruction. The U.S. oil industry is warning the nation that it is being forced to cripple its future capabilities by lowering costs to survive the flood of cheap foreign oil. Many other industries are also going through massive cuts in future-oriented expenditures.

First, they can find ways to economize within their companies—always a useful measure at the start. But the company that chooses to go this route will eventually find itself faced with deeper and deeper cuts. Almost inevitably, the process changes from cutting fat to cutting meat to cutting close to the bone. Some American companies have already reached the last steps—firing skilled people, abandoning research and development, scaling back investment. These actions, taken in the name of achieving competitiveness, will only destroy the company’s capabilities.

The second path is more direct but leads to the same outcome: to lower costs, American companies can turn to offshore sources and buy components or finished products from lower-cost foreign companies. If begun on a small enough scale, this approach can delude an American business into thinking it has restored its competitiveness. In fact, it is an admission of defeat—one that the foreign source will understand and gradually exploit by capturing more and more of the product’s value-added and eventually discarding the empty shell of the American business. Companies that shift production abroad through outsourcing, closing U.S. factories, building new ones abroad, establishing joint ventures with foreign companies, and giving up products become essentially importers of foreign goods. Such a shift has been prevalent in automobiles, apparel, footwear, computers, telephone equipment—perhaps in most manufacturing industries. It does not take much imagination to see what lies at the end of this road.

Low-cost goods are efficiently produced goods. Economists often assert that the production of something more cheaply in one country than in another is evidence that it is produced there more efficiently and therefore should be produced in the cheaper country. In the United States, this argument is used to support the conclusion that goods that can be made abroad more cheaply—and presumably more efficiently—should be made abroad.

This argument is based on a false assumption. Lower cost is linked with efficiency only when the goods under examination are of equal quality and the producers are all operating under the same rules, including government and labor policies that reflect accepted social and environmental values. To shift production from the United States to low-wage foreign labor may cut costs but does not necessarily raise efficiency. This is because low-cost labor, by definition, means a lower standard of living. If the standard of living in a low-labor-cost economy is low, how can anyone sensibly call that economy efficient?

In shifting production to countries with low wage rates, with large government production subsidies, or with lax production regulations, free trade actually reduces economic efficiency—as does producing goods for the American market on the opposite side of the world in order to take advantage of cheap labor. In international trade, the price system works perversely. Low cost does not imply efficiency.

All it takes to make free trade work is a level playing field. A popular argument designed to deal with the rising flood of foreign imports is the notion of the level playing field: since most of our foreign competitors do not play by the same trade rules as the United States, these countries must admit our goods to make things fair. Then we will be playing by the same rules—our rules.

Two things are wrong with this argument. First, since many other nations do not suffer from our delusions about free trade, they will not be threatened, cajoled, or pressured into adopting our rules against their self-interest. Second, since they generally have cheaper labor and yet increasingly use more of the advanced technologies of advanced nations, our foreign competitors will actually exploit the U.S. market even more under universal free trade. Our trade would not be brought into balance—certainly not at any acceptable standard of living—by other countries adopting free trade. We would only suffer more broadly the destructive consequences of free trade.

The United States should give LDCs unlimited market access. The argument that the United States has a responsibility to help less developed countries by granting them free access to its market has a humanitarian ring. For two reasons, however, such a position is good neither for us nor the LDCs.

First, granting unlimited access to our market is like signing a blank check—which nobody should ever do. Moreover, while less developed countries could cumulatively cause serious erosion in the U.S. standard of living, for each of them the benefits could be so small as to produce no marked improvement in their standard of living. Also, their basic economic underpinnings would remain unchanged.

Second, in encouraging LDCs to base their economic advancement on exploitation of the U.S. market, we are guiding these nations into a blind alley. The experiment can only fail, either because the United States belatedly wakes up to the ruinous effects of this approach and limits imports or because the wage competition causes the U.S. economy to decline and the U.S. market to shrink. A far more humanitarian approach would be for the United States to advise these nations to tie their economic programs into a pattern that would prove workable and sustainable over the long run.

The change to a global economy is inevitable and desirable. These days it is increasingly fashionable for Americans to say that the separate national economies must inexorably evolve into a global economy. This is simply the latest version of the kind of wave-of-the-future rhetoric that economists and others have applied to many movements now dead and forgotten.

The proposition is that the spread of free trade and international economic integration will proceed because all nations approve and desire it and because it will be successful. Put this way, the argument falls of its own weight. It is not true that all nations desire thoroughgoing international economic integration, with its implied override of national economic objectives, interests, and policies. For example, Japan—a model of realism and success in so many recent competitive undertakings—is hardly rushing to submerge itself in a one-world economic commune. And the destructive effects of free trade are now so obvious that at some point the United States and other high-income nations will wake up before worldwide economic integration drags them down into worldwide poverty. Rather than blithely assuming that a world economy is inevitable, we should expect worldwide economic integration to stop before it spreads much further. No nation is willing to preside over its own economic ruin.

Despite its fashionable ring, this one-world doctrine is dangerous. It simply reinforces the folly of free trade. The correct course is for nations to get their own economic affairs and their own international trade under control and to use the only functional structure that works—a world of effective national economies, engaged with one another in mutually beneficial trade and constructive competition.

A Realistic Trade Policy

With imports pushing them against the wall, American companies in many industries have seen only a narrow choice: leave the industry or move production overseas. The decision of AT&T to give in to foreign competition and shift production of telephones from Shreveport, Louisiana to a new factory in Singapore typifies one reaction to these inexorable pressures. Given this choice, which leaves out the prospect of a constructive U.S. trade policy opening a third option—remaining competitive at home—most companies, preferring foreign production to corporate failure, are moving their production abroad or buying foreign production for resale. But while it may be hopeless for these companies to try to compete from their U.S. production base under existing trade policy, managers choosing to move overseas should realize that there is no guarantee of success abroad. In fact, the American exodus to foreign production bases may bring about the very circumstances that will undermine that move.

From pressure in Congress to a new pragmatism about trade in the Reagan administration, the signs are clear: America’s willingness to play victim to the free-trade doctrine is unlikely to continue much longer. At some point in the not-too-distant future, the United States will put limitations on foreign imports to balance America’s trade. When that happens, companies that have moved abroad will find themselves on the wrong side of the fence. As a more reasonable U.S. trade policy begins to reconnect the powerful domestic market with U.S. companies—restoring the self-reinforcing process of economic growth in this country—American companies that have gone abroad will be on the outside looking in.

Moreover, in a world in which nations generally will be hard-pressed to meet domestic demands, the operations of American companies in other countries are unlikely to receive favorable treatment or political support. American companies will be the natural target of frustration and disappointment. The prospect of operating in such an environment—with but limited access to a rehabilitated U.S. economy and a flourishing U.S. market—should give American executives pause before they leap over the fence. Under U.S. trade policy, they are being asked to choose between two losing strategies: they can cease production now in the face of unfettered importation or they can move abroad and find themselves on the wrong side of the fence when the change in U.S. trade policy finally comes. The solution, of course, is for American business leaders to support a change in trade policy now, before it is too late.

A realistic trade policy would end the general underselling of American production by foreign production. It would set limits on the proportions of U.S. markets that could be taken by imports and ensure for U.S. industry a market on which it could rebuild and resume its advance. The new policy would put U.S. exports on a strong foundation by tying them to U.S. imports as in the principle of comparative advantage rather than by allowing low-wage foreign producers to generally undercut U.S. exporters through their absolute cost advantage.

These accomplishments will be possible only if we move beyond the slogans that dominate the trade debate: “Free trade is good.” “Protectionism is bad.” A revolution in ideas that replaces sloganeering with pragmatic analysis must underlie the revolution in accomplishments. American business must play the decisive leadership role.

A number of principles should guide this effort at understanding and shaping a new and pragmatic U.S. trade policy:

1. In a world of diverse nations, free trade works perversely, causing destructive competition among nations, including wage competition that tends to reduce all nations to a lowest-common-denominator standard of living.

2. Making trade among diverse nations constructive means balancing it and preventing destructive shifts of industries between nations. Just as they need a fiscal budget to keep expenditures in line with incomes, nations need a trade budget to keep imports in line with exports.

3. To Balance its trade and continue its economic growth, a nation with a high standard of living and an attractive market will find permanent limitations on imports necessary, just as limitations on immigration are.

4. In balancing its trade, the high-income, high-cost nation will tie its exports to its imports through trade packages or through exports subsidized from the proceeds of import licenses. These arrangements could bring about balanced international trade that would correspond to comparative advantage.

5. Import limitations supposed to be nondiscriminatory—such as tariffs—are actually very discriminatory. For example, uniform U.S. tariff rates high enough to balance U.S. trade with low-wage nations would virtually exclude imports from other high-income nations and would thus discriminate against those with high incomes.

6. Countries must manage their trade in ways that meet their particular needs and capabilities. National differences in circumstances, ideologies, administrative capabilities, and other factors are too important to permit any uniform and general system for arranging international trade.

7. National governments have a legitimate and necessary role in arranging constructive international trade. Government is the only agency that can assume the responsibility for managing a nation’s trade budget in a way beneficial to the interests of the nation. The interest of the nation in balanced trade is in concert with the interest of American business in guaranteed access to the American market.

Balancing U.S. Trade

The U.S. economy urgently needs immediate action to stop unfairly advantaged imports from undercutting U.S. production. Month by month, American companies are sinking, failing, or giving up on U.S. production and moving their operations offshore. The once mighty U.S. automobile industry, located in the nation with the world’s greatest market for automobiles, is being liquidated through joint ventures with Japanese companies, shifting the design and production of its cars abroad, producing American cars largely with foreign-made components, abandoning the small-car market to imports, and shifting its capital to secondary industries. The longer we allow this process to go on unchallenged, the dimmer our economic future will be.

Two kinds of trade policies, therefore, need to be put into place: some first steps to hold the line, halt the erosion of the American economy, and begin to move in the direction of balanced trade and some permanent measures that will ensure balanced and mutually advantageous trade among nations.

To hold the line, we should immediately impose quotas on certain goods, at least halting their increase in market share and, in some cases, reversing recent rapid growth. The inadequate quotas on autos, steel, textiles, apparel, footwear, and machinery can serve as a point of departure. The goal is a comprehensive trade policy that protects and defends the interests and future of the United States—that protects the nation rather than any special interest. The imposition of quotas would be a step in the direction of import limitations to balance our trade; quotas would begin the process of designing a system of mutually beneficial trade between us and our trading partners.

The United States should quickly establish provisional targets for the maximum share of its market available to various foreign-made products. Over time these targets would be tied to a balanced pattern of trade. In establishing the targets, we would send foreign producers a clear signal of what to expect in the way of access to our market. Even more important, the targets would tell American producers how much of the domestic market would be reserved for them so that they could begin gearing up for U.S. production and at the same time spell out the clear dangers of moving more production overseas.

Some quotas should be based on existing legislation and on the findings of the U.S. International Trade Organization regarding the economic injury that foreign competition has inflicted on such U.S. industries as footwear, textiles, and apparel. But we should reject the notion—on which ITO is based—that quotas are only a temporary remedy designed to give domestic industries time to shrink or become competitive.

Our new trade policy should make it clear that we want permanent limitations on imports to the American market. The basis of a realistic U.S. trade policy is a permanent system of limitations on imports to the American market, coupled with the promotion of desired exports within the framework of balanced and mutually advantageous trade with other nations. A trade policy that tries to force free trade on the world is doomed to failure—and would ruin us if adopted.

A permanent system limiting imports to the U.S. market and maintaining balanced trade should eventually replace these temporary measures. Such a system must serve a number of goals. It must:

• Preserve the United States as a high-income nation with a great market for advanced goods.
• Produce balanced and mutually advantageous trade plus debt dealings with each nation, nation-group, and the world.
• Produce an industrial composition of trade that serves U.S. interests and reserves a defined share of the home market for U.S. producers by taking into account factors like the defense implications, the development of breakthrough technology, the kinds of jobs produced, and the kinds of jobs required.

Creating and administering a trade policy that meets these goals is a demanding task—but so is running a corporation in today’s world. In either case, simple slogans that promise easy success are unrealistic. A successful trade policy requires foresight, realism, judgment, honesty, knowledge, administrative effectiveness, and toughness in enforcing rules and regulations, just as the operations of large companies do. At both organizational levels, that of the company and that of the nation, adapting successfully to a complex, uncertain, and changing economic environment is a hard-won achievement. The hope of the United States lies in recognizing and tackling this difficult task rather than in waiting for Providence or free trade to bring us success on a platter.

The permanent system of balanced trade should be based on the inherent value of the U.S. market. Its size and wealth give it great value to foreign producers and other nations. We should capture this value for the benefit of all Americans through two mechanisms: quid pro quo trade packages arranged with other nations and the sale at market price of a limited number of import licenses. We should use part or all of the revenue generated by these sales to support particular U.S. industries whose products we want to export to further national interests.

The United States should enforce these import-limiting arrangements rigorously and promptly—not in the way that the government now handles these matters. We should strive to detect trade violations quickly and take immediate action. Moreover, punishment must provide real remedies rather than the long-delayed hand slaps delivered now. We must treat the import limitation program as a set of serious business contracts between nations—not as a theater for acts of political symbolism.

A Time to Rethink

In touting free trade to other nations, the United States has not only invited its own economic destruction but also misled other countries in their expectations from international trade. It is time for America to reject this false god and accept the blame for preaching an unrealistic doctrine. We must repudiate the notion that the rest of the world can achieve economic growth by unbalanced sales to the U.S. market.

Mutually beneficial and balanced international trade is the only trade policy that makes sense. Apart from transition problems, it would do no violence to any nation’s valid claims. By moving to such a policy we would be helping low-income nations develop sustainable economic programs and safeguarding the living standards of high-income nations. We owe it to all countries of the world to put to an end the unrealistic idea that more countries can emulate Japan and achieve economic advance through a parasitic relationship with the American market.

The delusion that free trade is the road to worldwide affluence has influenced many countries; the delusion will hurt many of them. We need to escape from this belief and build a new system of international trade—one that rests on realism and mutual benefit for all nations.

SUPERPOWERS ARE FORSAKING FREE TRADE

Free trade is taking a back seat to powerful nations’ politics, hurting developing economies

The great powers that built and sustained the free trade system now have other priorities. This puts most emerging market and developing economies in a difficult position. The United States and China are changing the system and making other countries choose sides in a growing geostrategic rivalry. The best strategy for other countries might well be nonalignment—not just to protect their own interests, but also to restrain the superpowers.

The importance of safeguarding an open and inclusive multilateral trade system is underlined in a recent World Trade Organization (WTO) report, which argues that open trade (as opposed to all countries protecting their own producers and products) is the best way to cushion the enormous and growing costs of Russia’s invasion of Ukraine. The report highlights that, despite the war, global trade continued to increase in 2022, as did trade in global supply chains (which grew 4 percent year over year in the second quarter of 2022). Although experts (writing in Nature) initially predicted that the war would drive up food prices and cause millions to go hungry, global markets have in fact stabilized prices (see the food price index of the Food and Agriculture Organization).

The problem is that the great powers are turning away from the free trade system they created. Their priorities are being reordered by global security concerns and sharpening domestic political and economic demands. And for developing and emerging market economies the global trading system is increasingly reshaped by these priorities.

Jobs at home and social cohesion: Since the global financial crisis of 2008, growing criticism of globalization and open trade has rippled across industrialized countries, polarizing politics within them. At the core is the view that trade erodes social cohesion. The anti-trade sentiment was captured and accelerated by US President Donald Trump when he imposed tariffs on his country’s closest allies and trading partners, including Canada, Mexico, and the European Union, citing the need to protect national security and US jobs and manufacturing. Developing economies, whose economic strategies have been shaped by promises of market access, now risk being shut out of markets.

Winning the technological edge: China and the US are now fully engaged in a race to take the lead in technology. Both see free trade as a disadvantage in that race. In 2015 China launched “Made in China 2025,” a 10-year plan for rapid development of its tech industry through subsidies and state-owned enterprises. More recently, the US has deployed sanctions, blacklists, export and import controls, investment restrictions, visa bans, and technology transaction rules, in what has been described as “American techno-nationalism.” In October 2022 new restrictions were rolled out limiting China’s ability to acquire advanced semiconductors and the technology to make them, to hinder its artificial intelligence capability. For developing economies, the prospect of technological decoupling will likely force a choice between one camp or the other, as countries pressured by the US to cut ties with Chinese technology manufacturer Huawei have already found.

Security of supply: The COVID-19 pandemic led to disruptions in trade and supply chains, focusing attention on security of supply. “Friend-shoring”—reducing dependence on potentially hostile suppliers—entered the economics vocabulary. The WTO has argued convincingly that open markets help ensure secure supply, but the major powers are taking a different approach. In December 2022, Canada and its friends and allies (Australia, France, Germany, Japan, UK, US) announced the formation of the Sustainable Critical Minerals Alliance, and the Group of Seven is developing an initiative to invest in a secure supply of critical minerals. For developing economies, this may sound like a return to Cold War politics, when leaders of countries such as Zaire (now Democratic Republic of the Congo) with strategic resources were courted by one side or the other, usually with devastating governance consequences.

Nonalignment could permit countries to navigate tough economic straits in their own people’s interests and project their own values and priorities in international relations.  

Effective climate action: The US and the EU have launched a powerful combination of industrial policy, subsidies, and trade restrictions to motivate businesses at home and abroad to reduce greenhouse gas emissions. In the US the new Inflation Reduction Act includes $400 billion in subsidies for renewable energy and electric vehicles that contain a minimum amount of North American parts. This provision is already returning US companies’ investment to the United States and attracting foreign investors such as BMW, Mercedes-Benz, Stellantis, and Toyota. The EU has launched the European Green Deal and a carbon border adjustment mechanism (scheduled to go into effect in October 2023), which imposes an “emissions tariff” on imports. For developing economies, the trade aspects of these initiatives look like “Fortress US” and “Fortress EU”: Rich countries responsible for the most climate-threatening emissions are locking others out of the fortresses their prosperity built.

Responding to a war of aggression: When Russia invaded Ukraine, outraged Western powers quickly put together a package of economic and trade sanctions. However, many countries did not join them. Several developing economies grappled with issues including their reliance on Russia (for security or for grain), the failure to consult them about the sanctions, and fears that such a sanctions regime could work against them in the future.

The powerful states’ new priorities mean a far less certain world for smaller states and developing economies. The world economy may split into two rival blocs: the consequences are modeled in recent work by the WTO that projects welfare losses (or cumulative reductions in real income) as high as 12 percent in some regions, with the largest in the lower-income regions.

There is already evidence of US-China economic decoupling (beyond the technology decoupling cited earlier). Chinese direct investment in the United States fell dramatically from a peak of $46.5 billion in 2016 to $4.8 billion in 2019. This reflects controls on incoming capital imposed by the US government Committee on Foreign Investment in the United States and a sharp increase in control of outbound capital by the Chinese authorities. More recently—although in 2022 US-China trade flows hit an all-time record of $690.6 billion—the percentage of Chinese goods in total US imports fell, as did the value of US goods exported to China as a percentage of total US exports. A recent report by DHL and the Stern School of Business finds far less decline in cross-border flows between China and US allies. Decoupling may be a slower and more limited phenomenon elsewhere in the world.

If the US and China pursue a new strategy of balance-of-power politics, both will seek to enhance their power by demanding unequivocal allegiance. For a rival superpower, more “allies” means more credible power to make threats (whether economic or military) and a greater prospect of deterrence. But for all other countries, the calculation is different.

Some countries may find it advantageous to align with one side or the other. During the Cold War, Western Europe aligned with the United States and benefited from an open rules-based system that enabled postwar reconstruction, growth, and democracy. But the Cold War had other implications for many decolonizing countries whose corrupt and repressive regimes were propped up by the United States or the Soviet Union.

For some countries, it will make more sense to use nonalignment to bolster regional trade, investment, and production—exclusive of the great powers. In the words of a Singapore minister, “If we take sides, that is highly disruptive, either for our security or our economy.”

For developing economies, the uncertainties of the global trading system mean that most will want to negotiate trade, investment, aid, weapon purchases, and security from several sources. India and some African countries, among others, still rely heavily on Russian arms. Others depend on Russian energy, food, and fertilizer. Joining in sanctions against Russia for its illegal invasion would cost them dearly. Many countries are strongly dependent on Chinese aid, trade, and investment and are currently resorting to bailout loans from China. They also need markets in Europe and North America.

Nonalignment could permit countries to navigate tough economic straits in their own people’s interests and project their own values and priorities in international relations. Nonaligned Singapore refused to support Indonesia’s invasion of East Timor in 1975, opposed the US invasion of Grenada in 1983, and opposes Russia’s ongoing invasion of Ukraine.

By remaining nonaligned, countries could use their collective voice to urge the world’s great powers to use (or even create new) multilateral processes and institutions to help the world navigate the new priorities. This would not only give smaller and developing economies a voice, but would restrain the most powerful states from actions that would damage those that are smaller.

The great powers’ new priorities are currently being set and implemented unilaterally. If great powers are more and more concerned with balancing their own political and economic interests without regard for longer-term mutual interests, including those of other countries, the latter need to remind them that their support is conditional on processes that include them.

The global balance of power is unstable, and it is not clear where the relationship between the United States and China will land. Their rivalry is sharpening. Yet their influence over global trade affects not just their power relative to each other but the future of all countries. The rest of the world would do well to prepare itself with a measure of self-reliance in the meantime and to use nonalignment to make sure that both superpowers relate to each other in a way that does not endanger all others.

Biden is turning away from free trade – and that’s a great thing

President Joe Biden is making a break with decades of free-trade deals and embarking on an industrial policy designed to revive American manufacturing.

This has caused consternation among free-traders, including some of my former colleagues from the Clinton and Obama administrations.

For example, Larry Summers, the former treasury secretary, last month called the president’s thinking “increasingly dangerous” and expressed concern about what he termed “manufacturing-centered economic nationalism that is increasingly being put forth as a general principle to guide policy”.

Well, this veteran of the Clinton administration – me – is delighted by what Biden is doing.

Clinton and Obama thought globalization inevitable and bought into the textbook view that trade benefits all parties. “Globalization is not something we can hold off or turn off,” Clinton explained in 2000. “It is the economic equivalent of a force of nature, like wind or water.”

But “globalization” is not a force of nature. How it works and whom it benefits or harms depends on specific, negotiated rules about which assets will be protected and which will not.

In most trade deals, the assets of US corporations (including intellectual property) have been protected. If another nation adopts strict climate regulations that reduce the value of US energy assets in that country, the country must compensate the US firms. Wall Street has been granted free rein to move financial assets into and out of our trading partners.

But the jobs and wages of US workers have not been protected. Why shouldn’t US corporations that profit from trade be required to compensate US workers for job losses due to trade?

Why shouldn’t US corporations that profit from trade be required to compensate US workers for job losses due to trade?

The age-old economic doctrine of “comparative advantage” assumes that more trade is good for all nations because each trading partner specializes in what it does best. But what if a country’s comparative advantage comes in allowing its workers to labor under dangerous or exploitative conditions?

Why shouldn’t the US’s trading partners be required to have the same level of worker safety as that of the United States or give their own workers the same rights to organize unions?

Globalization doesn’t answer these sorts of questions. Instead, the rules that emerge from trade negotiations reflect domestic politics and power.

The Clinton administration lobbied hard for the North American Free Trade Agreement (Nafta). In the end, Congress ratified it, with more Republican than Democratic votes. Additional trade agreements followed, along with the creation of the World Trade Organization (WTO) and the opening of trade relations with China, which joined the WTO in 2001.

Trade rose from 19% of the US economy in 1989 to 31% in 2011, according to the World Bank. By 2021, following the pandemic and Trump’s trade war with China, trade’s share of the US economy had drifted down to 25%.

These trade deals have benefited corporations, big investors, executives, Wall Street traders and other professionals.

The pharmaceutical industry has gotten extended drug patents in Mexico, China and elsewhere. Wall Street banks and investment firms have made sure they can move capital into and out of these countries despite local banking laws. US oil companies can seek compensation if a country adopts new environmental standards that hurt their bottom lines.

The stock market has responded favorably to free trade policies. In 1993, when Clinton took office, the Dow Jones industrial average peaked at 3,799 points. By the time he left office in 2001, it had topped 11,000.

Middle- and working-class Americans have benefited from these deals as consumers – gaining access to lower-priced goods from China, Mexico and other countries where wages are lower than those in the US.

But the trade deals also have caused millions of US jobs to be lost, and the wages of millions of Americans to stagnate or decline.

Between 2000 and 2017, a total of 5.5m manufacturing jobs vanished. Automation accounted for about half of the loss, and imports, mostly from China, the other half.

You can trace a direct line from these trade deals and the subsequent job losses to the rise of Donald Trump in 2016.

Economists have estimated that, if the US had imported half of what China exported to us during these years, four key states – Michigan, Wisconsin, Pennsylvania and North Carolina – would have swung Democratic, delivering the presidency to Hillary Clinton.

Whether globalization is good or bad depends on who gets most of its benefits and who pays most of its costs. For too long, US workers have paid disproportionately.

The Biden administration is changing this. I say, it’s about time.

National Security Council Study Memorandum 200 (NSSM 200)

National Security Study Memorandum 200: Implications of Worldwide Population Growth for U.S. Security and Overseas Interests (NSSM200), also known as the “Kissinger Report“, was a national security directive completed on December 10, 1974 by the United States National Security Council under the direction of Henry Kissinger following initial orders from President of the United States Richard Nixon.

NSSM200 was reworked and adopted as official United States policy through NSDM 314 by President Gerald Ford on November 26, 1975. It was initially classified for over a decade but was obtained by researchers in the early 1990s. The memorandum and subsequent policies developed from the report were observed as a way the United States could use human population control to limit the political power of undeveloped nations, ensure the easy extraction of foreign natural resources, prevent young anti-establishment individuals from being born and to protect American businesses abroad from interference from nations seeking to support their growing populations.

Background

Under the administration of President Richard Nixon during the Cold War, his government adopted an agenda of enforcing human population control in order to prevent the global spread of communism and, under the advice of major general William Henry Draper Jr., supported the creation of the United Nations Population Fund (UNFPA) in order to establish a global source of population control to avoid an image of imperialism. Believing that future generations birthed throughout the world posed a danger to wealth accumulation, wealthy individuals and the US government backed a policy of global population control in an effort to avoid blame.

As a result, the NSSM200 was drafted primarily by Philander Claxton and concluded that global population control was necessary to protect US economic and military interests. The plan was created to avoid an appearance of “economic or racial imperialism” and “not be seen … as an industrialized country policy to keep their strength down or reserve resources for use by the rich countries”, with a written goal of “fertility reduction and not improvement in the lives of people” despite instructing organizers to “emphasize development and improvements in the quality of life of the poor”, later explaining such projects were “primarily for other reasons”.

Contents

The basic thesis of the memorandum was that population growth in the least developed countries (LDCs) is a concern to US national security, because it would tend to risk civil unrest and political instability in countries that had a high potential for economic development. The policy gives “paramount importance” to population control measures and the promotion of contraception among 13 populous countries to control rapid population growth which the US deems inimical to the socio-political and economic growth of these countries and to the national interests of the United States since the “U.S. economy will require large and increasing amounts of minerals from abroad” and the countries can produce destabilizing opposition forces against the US.

In summary, the NSSM200 provides four main observations:

1. Population growth of foreign nations provides more geopolitical power and possible opposition to US interests
2. The United States relies on countries being underdeveloped in order to easily obtain natural resources
3. High birth rates result with more younger individuals who oppose established governments
4. American businesses are vulnerable to interference by foreign governments that are required to provide for growing populations

It recommends that US leadership “influence national leaders” and that “improved world-wide support for population-related efforts should be sought through increased emphasis on mass media and other population education and motivation programs by the UN, USIA, and USAID.”

Named countries

Thirteen countries are named in the report as particularly problematic with respect to US security interests: India, Bangladesh, Pakistan, Indonesia, Thailand, the Philippines, Turkey, Nigeria, Egypt, Ethiopia, Mexico, Colombia, and Brazil. The countries are projected to create 47 percent of all world population growth.

It also raises the question of whether the US should consider preferential allocation of surplus food supplies to states deemed constructive in use of population control measures.

General oversight

The paper takes a look at worldwide demographic population trends as projected in 1974.

It is well divided into two major sections: an analytical section and policy recommendations.

The policy recommendations is divided into two sections. A US population strategy and action to create conditions for fertility decline. A major concern reiterated in the paper concerns the effect of population on starvation and famine.

“Growing populations will have a serious impact on the need for food especially in the poorest, fastest growing LDCs.[least developed countries] While under normal weather conditions and assuming food production growth in line with recent trends, total world agricultural production could expand faster than population, there will nevertheless be serious problems in food distribution and financing, making shortages, even at today’s poor nutrition levels, probable in many of the larger more populous LDC regions. Even today 10 to 20 million people die each year due, directly or indirectly, to malnutrition. Even more serious is the consequence of major crop failures which are likely to occur from time to time.

“The most serious consequence for the short and middle term is the possibility of massive famines in certain parts of the world, especially the poorest regions. World needs for food rise by 2.5 percent or more per year (making a modest allowance for improved diets and nutrition) at a time when readily available fertilizer and well-watered land is already largely being utilized. Therefore, additions to food production must come mainly from higher yields.

“Countries with large population growth cannot afford constantly growing imports, but for them to raise food output steadily by 2 to 4 percent over the next generation or two is a formidable challenge.”

Key insights

• “The U.S. economy will require large and increasing amounts of minerals from abroad, especially from less developed countries [see National Commission on Materials Policy, Towards a National Materials Policy: Basic Data and Issues, April 1972]. That fact gives the U.S. enhanced interest in the political, economic, and social stability of the supplying countries. Wherever a lessening of population pressures through reduced birth rates can increase the prospects for such stability, population policy becomes relevant to resource supplies and to the economic interests of the United States…. The location of known reserves of higher grade ores of most minerals favors increasing dependence of all industrialized regions on imports from less developed countries. The real problems of mineral supplies lie, not in basic physical sufficiency, but in the politico-economic issues of access, terms for exploration and exploitation, and division of the benefits among producers, consumers, and host country governments” [Chapter III, “Minerals and Fuel”].
• “Whether through government action, labor conflicts, sabotage, or civil disturbance, the smooth flow of needed materials will be jeopardized. Although population pressure is obviously not the only factor involved, these types of frustrations are much less likely under conditions of slow or zero population growth” [Chapter III, “Minerals and Fuel”].
• “Populations with a high proportion of growth. The young people, who are in much higher proportions in many LDCs, are likely to be more volatile, unstable, prone to extremes, alienation and violence than an older population. These young people can more readily be persuaded to attack the legal institutions of the government or real property of the ‘establishment,’ ‘imperialists,’ multinational corporations, or other — often foreign — influences blamed for their troubles” [Chapter V, “Implications of Population Pressures for National Security”].
• “We must take care that our activities should not give the appearance to the LDCs of an industrialized country policy directed against the LDCs. Caution must be taken that in any approaches in this field we support in the LDCs are ones we can support within this country. “Third World” leaders should be in the forefront and obtain the credit for successful programs. In this context it is important to demonstrate to LDC leaders that such family planning programs have worked and can work within a reasonable period of time.” [Chapter I, “World Demographic Trends”]
• “In these sensitive relations, however, it is important in style as well as substance to avoid the appearance of coercion.”
• Abortion as a geopolitical strategy is mentioned several dozen times in the report with suggestive implications: “No country has reduced its population growth without resorting to abortion…. under developing country conditions foresight methods not only are frequently unavailable but often fail because of ignorance, lack of preparation, misuse and non-use. Because of these latter conditions, increasing numbers of women in the developing world have been resorting to abortion….
• Population control and population reduction tactics.

Effects

Marshall Green was named Coordinator of Population Affairs on December 3, 1975. Days later on December 15, 1975, US ambassadors were ordered implement the policies of NSDM 314 and to assess population growth concerns in their host nations. The policies adopted from NSSM200 and NSDM 314 developed even further in 1976 after the National Security Council advocated for the use of withholding food through food power and using military force to prevent population growth, with a memorandum reading; “In some cases, strong direction has involved incentives such as payment to acceptors for sterilization, or disincentives such as giving low priorities in the allocation of housing or schooling to those with larger families. Such direction is the sine qua non of an effective program”. This resulted in proposing to foreign nations the creation of money-for-sterlization, housing-for-sterilzation or schooling-for-sterilization projects.

The Economic Warfare School (EGE) said that the memorandum resulted with the United States using population control policies as a weapon of economic warfare against Nigeria by utilizing social blackmail to force sterilizations and utilizing food power as a means of mitigating population growth. The EGE writes that Nigeria went from approaching potential nuclear capability to a less-developed country, with the United States being able to establish control of Nigeria’s resources and maintain the interests of Americans businesses there.

According to the Subcommittee of Inquiry of Voluntary Surgical Contraception of the Congress of the Republic of Peru in June 2002, NSSM200 was “the global strategy defined for the last quarter of the last century by the United States government in order to obtain a decrease in the birth rate” and was responsible for the involvement of the United States Agency for International Development (USAID) in forced sterilizations in Peru.

The President has directed a study of the impact of world population growth
on U .S . s ecurity and overseas interests. The study should look forward
at least until the year 2000 . and use several alternative reasonable projections of population growth. In te r ms of each projection, the study should assess:
the corresponding pace of development, especially in poorer countries;
the demand for US exports, especially of food, and the trade problems the US may face arising from competition for resources; and the likelihood that population growth or imbalances will produce disruptive foreign policies and international instability.
The study should focus on the international political and economic implications of population growth rather than its ecological, sociological or other aspects .
The study should then offer possible courses of action for the United States
in dealing with population matters abroad, particularly indeveloping countries, with  special attention to the sequestions: What, if any, new initiatives by the United States  are needed to focus international attention on the population problem?
Can technological innovations or development reduce growth or ameliorate its effects?

Could the United States improve its assistance in the population field and if so, in what form and through which agencies–bilateral , multilateral, private?
The study should take into account the President’s concern that population
policy is a human concern intimately related to the dignity of the individual
and the objective of the United States is to work closely with others, rather
than seek to impose our views on others .
The President has directed that the study be accomplished by the NSC Under
Secretaries Committee. The Chairman , Under Secretaries Committee, is requested to forward the study together with the Committee’s action recommendations no later than May 29 , 1974, for consideration by the President.

How Deregulation Caused Our Economic Demise

There is a long list of events that took place which precipitated the free for all in our economy. One of the major events was the 1982 Garn-St. Germain Depository Institutions Act. It was a bill signed into law by Ronald Reagan. It was intended to be a long-term solution for troubled thrift institutions. What actually happened was that the bill, by creating insurance for mortgage lenders, increased their recklessness and led directly to the savings and loan crash of the early 1980s, with a cost to the tax payer of $124.6 billon. It was this bill which stood at the beginning of two and a half decades of consistent deregulation and loosening of regulatory supervision.

The following are a summary of actions that banks requested to stimulate the economy, but in essence caused much of the problems we are experiencing now:

-insistence on free movement of capital across borders

-the repeal of Depression-era regulations separating commercial nd investment banking

-a congressional ban on the regulation of credit-default swaps

-major increases in the amount of leverage allowed to investment banks

-a light hand at the Securities and Exchange Commission in its regulatory enforcement

-an international agreement to allow banks to measure their own riskiness

an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation

What Is Deregulation?

Deregulation is the reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry. Over the years, the struggle between proponents of regulation and proponents of government nonintervention has shifted market conditions. Historically, finance has been one of the most heavily scrutinized industries in the United States.

Understanding Deregulation

Proponents of deregulation argue that overbearing legislation reduces investment opportunity and stymies economic growth, causing more harm than it helps. Indeed, the U.S. financial sector wasn’t heavily regulated until the stock market crash of 1929 and the resulting Great Depression. In response to the country’s greatest financial crisis in its history, Franklin D. Roosevelt’s presidential administration enacted many forms of financial regulation, including the Securities Exchange Acts of 1933 and 1934 and the U.S. Banking Act of 1933, otherwise known as the Glass-Steagall Act.

The Securities Exchange Acts required all publicly traded companies to disclose relevant financial information and established the Securities and Exchange Commission (SEC) to oversee securities markets. The Glass-Steagall Act prohibited a financial institution from engaging in both commercial and investment banking. This reform legislation was based on the belief that the pursuit of profit by large, national banks must have spikes in place to avoid reckless and manipulative behavior that would lead financial markets in unfavorable directions.

Deregulation proponents argue that overbearing legislation reduces investment opportunity and stymies economic growth, causing more harm than it helps.

Over the years, proponents of deregulation steadily chipped away at these safeguards until the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which imposed the most sweeping legislation on the banking industry since the 1930s. How did they do it?

The History of Deregulation

In 1986, the Federal Reserve (Fed) reinterpreted the Glass-Steagall Act and decided that 5% of a commercial bank’s revenue could be from investment banking activity. In 1996, that level was pushed up to 25%. The following year, the Fed ruled that commercial banks could engage in underwriting, the method by which corporations and governments raise capital in debt and equity markets. In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed, amending the Bank Holding Company Act of 1956 and the Federal Deposit Insurance Act, to allow interstate banking and branching.

Later, in 1999, the Financial Services Modernization Act, or Gramm-Leach-Bliley Act, was passed under the watch of the Clinton administration and overturned the Glass-Steagall Act completely. In 2000, the Commodity Futures Modernization Act prohibited the Commodity Futures Trading Commission from regulating credit default swaps and other over-the-counter (OTC) derivative contracts. In 2004, the SEC made changes that reduced the proportion of capital that investment banks have to hold in reserves.

This spree of deregulation, however, came to a grinding halt following the subprime mortgage crisis of 2007 and the financial crash of 2007–2008, most notably with the passage of the Dodd-Frank Act in 2010, which restricted subprime mortgage lending and derivatives trading.

However, with the 2016 U.S. election bringing both a Republican president and Congress to power, then-President Donald Trump and his party set their sights on undoing Dodd-Frank. In May 2018, Trump signed a bill that exempted small and regional banks from Dodd-Frank’s most stringent regulations and loosened rules put in place to prevent the sudden collapse of big banks. The bill passed both houses of Congress with bipartisan support after successful negotiations with Democrats.

Trump had said that he wanted to “do a big number” on Dodd-Frank, possibly even repealing it completely. However, former Rep. Barney Frank (D-Mass.), its co-sponsor, said of the new legislation, “This is not a ‘big number’ on the bill. It’s a small number.” Indeed, the legislation left major pieces of Dodd-Frank’s rules in place and failed to make any changes to the Consumer Financial Protection Bureau (CFPB), which was created by Dodd-Frank to police its rules.

What Are the Effects of Deregulation?

The hoped-for effects of deregulation are to increase investment opportunities by eliminating restrictions for new businesses to enter markets and increase competition.

Increasing competition encourages innovation, and as companies enter markets and compete with each other, consumers can enjoy lower prices.

Lessening the need to use resources and capital to comply with regulations allows corporations to invest in research and development.

Without needing to comply with mandated restrictions, businesses will develop new products, set competitive prices, employ more labor, enter foreign countries, buy new assets, and interact with consumers without the need to obey regulations.

What are the most regulated industries in the United States?

The most regulated industries in the United States are:

• Petroleum and coal product manufacturing
• Electric power generation, transmission, and distribution
• Motor vehicle manufacturing
• Non-depository credit intermediation
• Depository credit intermediation
• Scheduled air transportation
• Fishing
• Oil and gas extraction
• Pharmaceutical and medicine manufacturing
• Deep sea, coastal, and Great Lakes water transportation

What would happen if there were no federal regulations in the U.S.?

Hazards would increase for people taking medicine, driving cars, eating food, and using other consumer products that were no longer subject to regulated safety standards.

Workplaces would lack safe environments or conditions. Weekends and overtime might be eliminated, forcing employees to work long hours or face the prospect of losing their jobs. For example, rivers and other bodies of water could become heavily polluted and even catch fire, as they did before the passage of the Clean Water and Environmental Protection acts in 1970.

What are some benefits to deregulation?

Deregulation can help economic growth thrive. It is thought that by permitting firms to run their business how they prefer, they are able to be more efficient. There are no rules that specify that they can only run their factories for a set number of hours per day or use specific materials in production.

When the company does not need to pay legal fees to ensure that it is in compliance, there is more available capital to use for investing in labor or new equipment. Companies can also lower their fees and thus attract more customers.

In sectors such as airlines and telecommunications, deregulation has increased competition and lowered prices for consumers.

As deregulation takes effect, it reduces barriers to entry. New businesses don’t have as many fees or regulatory considerations, so it is less expensive to enter markets.

The Bottom Line

Deregulation lowers costs of operations, allows more businesses to enter a market, and lowers prices for consumers. These factors can help stimulate efficiency and lead to increased economic growth.

Reasons governments refuse to nationalize the banking system:

1. Because the government would be bad at it.
2. Becasue if the banks were taken over, then every decision they made would come at a potentional political cost to the government.
3. They also don’t want to admit the extent to which we are all now liable for the loses made by the banks.
4. Because it would be embarrassing.

Rules That Define a Civilization

-A society that does not embrace a common purpose for its existence has no standard against which to judge itself, making it vulneralble to the corruptions of men who chafe at the limits of law.

-A societythat does not address the needs of its members, especially the vulnerable, weakens itself from within while wqasting its most valuable resource, the minds and talents of all its citizens.

-A society that takes from the many to give to the few undermines its moral basis and must in the end collapse.

The growing narrative in Washington is that a decades‐​long unraveling of the regulatory system allowed and encouraged Wall Street to excess, resulting in the current financial crisis. Left unchallenged, this narrative will likely form the basis of any financial reform measures. Having such measures built on a flawed foundation will only ensure that future financial crises are more frequent and severe.

Rolling Back the Regulatory State?

Although it is the quality and substance of regulation that has to be the center of any debate regarding regulation’s role in the financial crisis, a direct measure of regulation is the budgetary dollars and staffing levels of the financial regulatory agencies. In a Mercatus Center study, Veronique de Rugy and Melinda Warren found that outlays for banking and financial regulation increased from only $190 million in 1960 to $1.9 billion in 2000 and to more than $2.3 billion in 2008 (in constant 2000 dollars).

Focusing specifically on the Securities and Exchange Commission — the agency at the center of Wall Street regulation — budget outlays under President George W. Bush increased in real terms by more than 76 percent, from $357 million to $629 million (2000 dollars).

However, budget dollars alone do not always translate into more cops on the beat — all those extra dollars could have been spent on the SEC’s extravagant new headquarters building. In fact most of the SEC’s expanded budget went into additional staff, from 2,841 full‐​time equivalent employees in 2000 to 3,568 in 2008, an increase of 26 percent. The SEC’s 2008 staffing levels are more than eight times that of the Consumer Product Safety Commission, for example, which reviews thousands of consumer products annually.

Comparable figures for bank regulatory agencies show a slight decline from 13,310 in 2000 to 12,190 in 2008, although this is driven completely by reductions in staff at the regional Federal Reserve Banks, resulting from changes in their check‐​clearing activities (mostly now done electronically) and at the FDIC, as its resolution staff dealing with the bank failures of the 1990s was wound down. Other banking regulatory agencies, such as the Comptroller of the Currency — which oversees national banks like Citibank — saw significant increases in staffing levels between 2000 and 2008.

Another measure of regulation is the absolute number of rules issued by a department or agency. The primary financial regulator, the Department of the Treasury, which includes both the Office of the Comptroller of the Currency and the Office of Thrift Supervision, saw its annual average of new rules proposed increase from around 400 in the 1990s to more than 500 in the 2000s. During the 1990s and 2000s, the SEC issued about 74 rules per year.

Setting aside whether bank and securities regulators were doing their jobs aggressively or not, one thing is clear — recent years have witnessed an increasing number of regulators on the beat and an increasing number of regulations.

Gramm‐​Leach‐​Bliley

Central to any claim that deregulation caused the crisis is the Gramm‐​Leach‐​Bliley Act. The core of Gramm‐​Leach‐​Bliley is a repeal of the New Deal‐​era Glass‐​Steagall Act’s prohibition on the mixing of investment and commercial banking. Investment banks assist corporations and governments by underwriting, marketing, and advising on debt and equity issued. They often also have large trading operations where they buy and sell financial securities both on behalf of their clients and on their own account. Commercial banks accept insured deposits and make loans to households and businesses. The deregulation critique posits that once Congress cleared the way for investment and commercial banks to merge, the investment banks were given the incentive to take greater risks, while reducing the amount of equity they are required to hold against any given dollar of assets.

But there are questions about how much impact the law had on the financial markets and whether it had any influence on the current financial crisis. Even before its passage, investment banks were already allowed to trade and hold the very financial assets at the center of the financial crisis: mortgage‐​backed securities, derivatives, credit‐​default swaps, collateralized debt obligations. The shift of investment banks into holding substantial trading portfolios resulted from their increased capital base as a result of most investment banks becoming publicly held companies, a structure allowed under Glass‐​Steagall.

Second, very few financial holding companies decided to combine investment and commercial banking activities. The two investment banks whose failures have come to symbolize the financial crisis, Bear Stearns and Lehman Brothers, were not affiliated with any depository institutions. Rather, had either Bear or Lehman possessed a large source of insured deposits, they would likely have survived their short‐​term liquidity problems. As former president Bill Clinton told BusinessWeek in 2008, “I don’t see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill.”

Gramm‐​Leach‐​Bliley has been presented by both its supporters and detractors as a revolution in financial services. However, the act itself had little impact on the trading activities of investment banks. The off‐​balancesheet activities of Bear and Lehman were allowable prior to the act’s passage. Nor did these trading activities undermine any affiliated commercial banks, as Bear and Lehman did not have affiliated commercial banks. Additionally, those large banks that did combine investment and commercial banking have survived the crisis in better shape than those that did not.

Did the SEC Deregulate Investment Banks?

One of the claimed “deregulations” resulting from the mixing of investment and commercial banking was the increase in leverage by investment banks allowed by the SEC. After many investment banks became financial holding companies, European regulators moved to subject European branches of these companies to the capital regulations dictated by Basel II, a set of recommendations for bank capital regulation developed by the Basel Committee on Banking Supervision, an organization of international bank regulators. In order to protect its turf from European regulators, the SEC implemented a similar plan in 2004.

However the SEC’s reduction in investment bank capital ratios was not simply a shift in existing rules. The SEC saw the rule as a movement beyond its traditional investor protection mandates to one overseeing the entire operations of an investment bank. The voluntary alternative use of Basel capital rules was viewed as only a small part of a greatly increased system of regulation, as expressed by SEC spokesman John Heine: “The Commission’s 2004 rule strengthened oversight of the securities markets, because prior to their adoption there was no formal regulatory oversight, no liquidity requirements, and no capital requirements for investment bank holding companies.”

The enhanced requirements gave the SEC broader responsibilities in terms of the prudential supervision of investment banks and their holding companies.

Derivatives as Financial Mischief

After Gramm‐​Leach‐​Bliley, the most common claim made in support of blaming deregulation is that both Congress and regulators ignored various warnings about the risks of derivatives, particularly credit default swaps, and chose not to impose needed regulation. In 2003, Warren Buffett called derivatives “weapons of mass financial destruction,” and warned that the concentration of derivatives risk in a few dealers posed “serious systemic problems.” Buffett was not alone in calling for increased derivatives regulation.

But would additional derivatives regulation have prevented the financial crisis?

During her chairmanship of the Commodity Futures Trading Commission Brooksley Born published a concept paper outlining how the CFTC should approach the regulation of derivatives. Her suggestions were roundly attacked both by members of the Clinton administration, including Robert Rubin and Larry Summers, and by the leading members of the CFTC oversight committees on Capitol Hill.

Foremost among Born’s suggestion was the requirement that derivatives be traded over a regulated exchange by a central counterparty, a proposal currently being pushed by Treasury secretary Timothy Geithner. Currently most derivatives are traded as individual contracts between two parties, each being a counterparty to the other, with each party bearing the risk that the other might be unable to fulfill its obligations under the contract. A central counterparty would stand between the two sides of the derivatives contract, guaranteeing the performance of each side to the other. Proponents of this approach claim a central counterparty would have prevented the concentration of derivatives risk into a few entities, such as AIG, and would have prevented the systemic risk arising from AIG linkages with its various counterparties.

The most basic flaw in having a centralized counterparty is that it does not reduce risk at all, it simply aggregates it. It also increases the odds of a taxpayer bailout, as the government is more likely to step in and back a centralized clearinghouse than to rescue private firms. In the case of AIG, Federal Reserve vice chairman Donald Kohn told the Senate Banking Committee that the risk to AIG’s derivatives counterparties had nothing to do with the Fed’s decision to bail out AIG and that all its counterparties could have withstood a default by AIG. The purpose of a centralized clearinghouse is to allow users of derivatives to separate the risk of the derivative contract from the default risk of the issuer of that contract in instances where the issuer is unable to meet its obligations. Such an arrangement would actually increase the demand and usage of derivatives.

Proponents of increased regulation of derivatives also overlook the fact that much of the use of derivatives by banks is the direct result of regulation, rather than the lack of it. To the extent that derivatives such as credit default swaps reduce the risk of loans or securities held by banks, Basel capital rules allow banks to reduce the capital held against such loans.

One of Born’s proposals was to impose capital requirements on the users of derivatives. That ignores the reality that counterparties already require the posting of collateral when using derivatives. In fact, it was not the failure of its derivatives position that led to AIG’s collapse but an increase in calls for greater collateral by its counterparties.

Derivatives do not create losses, they simply transfer them; for every loss on a derivative position there is a corresponding gain on the other side; losses and gains always sum to zero. The value of derivatives is that they allow the separation of various risks and the transfer of those risks to the parties best able to bear them. Transferring that risk to a centralized counterparty with capital requirements would have likely been no more effective than was aggregating the bulk of risk in our mortgages markets onto the balance sheets of Fannie Mae and Freddie Mac. Regulation will never be a substitute for one of the basic tenets of finance: diversification.

Credit Rating Agencies

When supposed examples of deregulation cannot be found, advocates for increased regulation often fall back on arguing that a regulator’s failure to impose new regulations is proof of the harm of deregulation. The status of credit rating agencies in our financial markets is often presented as an example of such.

Credit rating agencies can potentially serve as an independent monitor of corporate behavior. That they have often failed in that role is generally agreed upon; why they’ve failed is the real debate. Advocates of increased regulation claim that since the rating agencies are paid by the issuers of securities, their real interest is in making their clients happy by providing the highest ratings possible. In addition they claim that the rating agencies have used their “free speech” protections to avoid any legal liability or regulatory scrutiny for the content of their ratings.

The modern regulation of credit rating agencies began with the SEC’s revision of its capital rules for broker‐​dealers in 1973. Under the SEC’s capital rules, a broker‐​dealer must write down the value of risky or speculative securities on its balance sheet to reflect the level of risk. In defining the risk of held securities, the SEC tied the measure of risk to the credit rating of the held security, with unrated securities considered the highest risk. Bank regulators later extended this practice of outsourcing their supervision of commercial bank risk to credit rating agencies under the implementation of the Basel capital standards.

The SEC, in designing its capital rules, was concerned that, in allowing outside credit rating agencies to define risk, some rating agencies would be tempted to simply sell favorable ratings, regardless of the true risk. To solve this perceived risk, the SEC decided that only Nationally Recognized Statistical Rating Organizations would have their ratings recognized by the SEC and used for complying with regulatory capital requirements. In defining the qualifications of an NRSRO, the SEC deliberately excluded new entrants and grandfathered existing firms, such as Moody’s and Standard and Poor’s.

In trying to address one imagined problem, a supposed race to the bottom, the SEC succeeded in creating a real problem, an entrenched oligopoly in the credit ratings industry. One result of this oligopoly is that beginning in the 1970s, rating agencies moved away from their historical practice of marketing and selling ratings largely to investors, toward selling the ratings to issuers of debt. Now that they had a captive clientele, debt issuers, the rating agencies quickly adapted their business model to this new reality.

The damage would have been large enough had the SEC stopped there. During the 1980s and 1990s, the SEC further entrenched the market control of the recognized rating agencies. For instance, in the 1980s the SEC limited money market funds to holding securities that were investment grade, as defined by the NRSROs. That requirement was later extended to money market fund holdings of commercial paper. Bank regulators and state insurance commissioners followed suit in basing their safety and soundness regulations on the use of NRSRO‐​approved securities.

The conflict of interest between raters and issuers is not the result of the absence of regulation, it is the direct and predictable result of regulation. The solution to this problem is to remove the NRSROs’ monopoly privileges and make them compete in the marketplace.

Predatory Lending or Predatory Borrowing?

As much of the losses in the financial crisis have been concentrated in the mortgage market, and in particularly subprime mortgagebacked securities, proponents of increased regulation have argued that the financial crisis could have been avoided had federal regulators eliminated predatory mortgage practices. Such a claim ignores that the vast majority of defaulted mortgages were either held by speculators or driven by the same reasons that always drive mortgage default: job loss, health care expenses, and divorce.

The mortgage characteristic most closely associated with default is the amount of borrower equity. Rather than helping to strengthen underwriting standards, the federal government has led the charge in reducing them. Over the years, the Federal Housing Administration reduced its down‐​payment requirements, from requiring 20 percent in the 1930s to the point today that one can get an FHA loan with only 3.5 percent down.

The predatory lending argument claims that borrowers were lured into unsustainable loans, often due to low teaser rates, which then defaulted en masse, causing declines in home values, which led to an overall decline in the housing market. For this argument to hold, the increase in the rate of foreclosure would have to precede the decline in home prices. In fact, the opposite occurred, with the national rate of home price appreciation peaking in the second quarter of 2005 and the absolute price level peaking in the second quarter of 2007; the dramatic increase in new foreclosures was not reached until the second quarter of 2007. While some feedback between prices and foreclosures is to be expected, the evidence supports the view that initial declines in price appreciation and later absolute declines in price led to increases in foreclosures rather than unsustainable loans leading to price declines.

Normally one would expect the ultimate investors in mortgage‐​related securities to impose market discipline on lenders, ensuring that losses stayed within expectations. Market discipline began to breakdown in 2005 as Fannie Mae and Freddie Mac became the largest single purchasers of subprime mortgage‐​backed securities. At the height of the market, Fannie and Freddie purchased over 40 percent of subprime mortgage‐​backed securities. These were also the same vintages that performed the worst; subprime loans originated before 2005 have performed largely within expectations. Fannie and Freddie entering this market in strength greatly increased the demand for subprime securities, and as they would ultimately be able to pass their losses onto the taxpayer, they had little incentive to effectively monitor the quality of underwriting.

Conclusion

The past few decades have witnessed a significant expansion in the number of financial regulators and regulations, contrary to the widely held belief that our financial market regulations were “rolled back.” While many regulators may have been shortsighted and over‐​confident in their own ability to spare our financial markets from collapse, this failing is one of regulation, not deregulation. When one scratches below the surface of the “deregulation” argument, it becomes apparent that the usual suspects, like the Gramm‐​Leach‐​Bliley Act, did not cause the current crisis and that the supposed refusal of regulators to deal with derivatives and “predatory” mortgages would have had little impact on the actual course of events, as these issues were not central to the crisis. To explain the financial crisis, and avoid the next one, we should look at the failure of regulation, not at a mythical deregulation.

How Special Interests Groups and Greed Are Ruining Our Country

How the Federal Reserve Stunted Our Country‘s Growth

“The Federal Reserve is neither truly federal, nor a full reserve. It is not owned or directly controlled by the United States government. The fact that the words ‘United States Federal Reserve System’ are printed on every U.S. bank note thus raises serious questions.”

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How much do you know about the banking system and who issues the money you carry in your pocket? Considering the vital role money plays both in our individual lives and in the world, our educational system teaches us amazingly little about how money is created, how banks operate, and what causes the huge banking scandals and bankruptcies that have occurred.

After reading the information below, you will understand why this information is kept quiet and why we feel it is important to reveal these major banking and financial cover-ups. The world’s wealthiest bankers guard their secrets very closely.

The Federal Reserve: Neither Truly Federal Nor a Full Reserve

Do you know who issues the money in your wallet or purse? For readers located in the U.S., take a look at the top of any U.S. bills and you will find “Federal Reserve Note” printed along the top. In a small black circle on the left side of these notes, you will also see the words “Federal Reserve.” It is the Federal Reserve which issues all bank notes in the United States. To see just how much control the Federal Reserve has over the issuance of U.S. currency, see their webpage at this link. Yet who owns the Federal Reserve?

Though the Board of Governors of the Federal Reserve is categorized as an independent government agency, “The Fed” is not owned by the government. The Supreme Court stated that “instrumentalities like the national banks or the federal reserve banks, in which there are private interests, are not departments of the government. They are private corporations in which the government has an interest.” You can verify this by reading the court case at this link (case 406 F.3d 532) and going to Part II, paragraph 9. This case further states that “each Federal Reserve Bank is owned by the commercial banks within its district.”

It’s quite revealing that though the official website of the Federal Reserve contains a detailed description of the Federal Reserve that is over 20 pages in length, ownership of the Federal Reserve Banks is never even mentioned. Could it be that this information is conveniently withheld to keep the public from understanding who owns the banks which issue all U.S. dollars?

Though Federal Reserve Board members are appointed by the U.S. President and confirmed by the Senate, the Federal Reserve is a privately owned institution controlled mainly by large private banks. Once board members are appointed, the U.S. government has no control over their decisions other than the president’s ability to remove a board member.

Yet a study of the history and functions of the Federal Reserve reveals that powerful bankers such as J.P. Morgan have had inordinate power and control over the formation and management of the monetary policy of the United States through their power over the Fed. Congress has virtually no influence over this incredibly powerful institution.

Neither does the Fed have reserves to back all of the credit it issues. None of the money in circulation is backed by anything of real value such as gold or silver. The backing of U.S. currency by a gold standard was removed under President Nixon in 1971. In fact, the Fed, like all banks, at any one time has only 3 to 10% of all credit issued held in reserve as bank notes. So the Federal Reserve is neither truly federal, nor a full reserve. It is not owned or directly controlled by the United States government. The fact that the words “United States Federal Reserve System” are printed on every U.S. bank note thus raises serious questions.

The foundation for the Federal Reserve system was crafted in the utmost secrecy in 1910 at the Jekyll Island resort by several powerful men with very close ties to the Rockefellers, the J.P. Morgan family, and the Rothschilds — the richest and most powerful families in the world at that time. A version of the legislation crafted eventually passed in 1913 over the objections of many who feared that turning over control of the nation’s money supply to a consortium of private bankers would inevitably only produce more riches for the ultra rich at the expense of the general public.

Virtually everyone agrees that the Fed is highly secretive. Wikipedia lists other criticisms of the Federal Reserve in the below three paragraphs:

“A large and varied group of criticisms have been directed against the Federal Reserve System. One group of criticisms, typified by the Austrian School, criticize the Federal Reserve as an unnecessary and counterproductive interference in the economy. Other critiques include arguments in favor of the gold standard and criticisms of an alleged lack of accountability or culture of secrecy within the Reserve. Finally, a group of conspiracy theories make various charges against the Federal Reserve, generally claiming the Federal Reserve System is actually a scheme to enrich a few wealthy bankers at the expense of the public.

“Economists of the Austrian School such as Ludwig von Mises contend that the Federal Reserve’s artificial manipulation of the money supply leads to the boom/bust business cycle that has occurred over the last century. Many economic libertarians … believe that the Federal Reserve’s manipulation of the money supply to stop ‘gold flight’ from England caused, or was instrumental in causing, the Great Depression.

“Nobel Economist Milton Friedman said he ‘prefer[s] to abolish the federal reserve system altogether.’ [13]. Ben Bernanke, [former] Chairman of the Board of Governors of Federal Reserve, stated: ‘I would like to say to Milton [Friedman] and Anna [J. Schwartz]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.’ [22] [23]“

The Fractional Reserve System: Creating Money Out of Thin Air

Another aspect of banking about which most people know little to nothing is the fractional reserve system. Fractional-reserve banking refers to the standard banking practice of issuing more money than the bank holds as reserves. Banks in modern economies typically lend their customers many times the sum of the cash reserves that they hold. Did you know that for every dollar in your checking or savings account, the bank can legally lend out $10 or more?

Here’s a description of fraction reserve banking’s origins from a standard university macroeconomics text [1]:

“When the ancients began to use gold in making transactions, it became apparent that it was both unsafe and inconvenient for consumers and merchants to carry gold and have it weighed and assessed for purity every time a transaction was negotiated. It therefore became commonplace to deposit one’s gold with goldsmiths whose vaults or strongrooms could be used for a fee. Upon receiving a gold deposit, the goldsmith issued a receipt to the depositor. Soon goods were traded for the goldsmiths’ receipts and the receipts became the first kind of paper money.

“At this point the goldsmiths – embryonic bankers – used a 100% reserve system; their circulating paper money receipts were fully backed by gold. But, given the public’s acceptance of the goldsmiths’ receipts as paper money, the goldsmiths became aware that the gold they stored was rarely redeemed. Then some adroit banker hit on the idea that paper money could be issued in excess of the amount of gold held. Goldsmiths [then began to issue] additional ‘receipts’ … into circulation by making interest-earning loans in the form of gold receipts. This was the beginning of the fractional reserve system of banking.”

The college text from which the above quote is taken does not question the propriety of goldsmiths creating these new “receipts” or money without any gold backing, without any authority, and indeed without any real reason to do so other than to enrich themselves. In fact, the text even praises the questionable behavior of the one who began this hidden form of corruption as “adroit.”

The unsuspecting public had no idea that goldsmiths were issuing paper receipts accepted as money which were backed by no gold deposits at all for ten times or more the amount of gold that had been entrusted to them. The goldsmiths were secretly creating money out of thin air. They thus made themselves fantastically wealthy without anyone noticing what was going on. To better hide this deceit and divert people’s attention, the goldsmiths stopped their old practice of charging for storing gold and instead began to pay customers a small interest on their gold deposits to keep them happy. Thus it was that modern day bankers were born.

Amazingly, the system has changed little today. Macroeconomics professors, college texts, and all involved with banking almost never question the ethics or morality of this fractional reserve system. No one even questions in any meaningful way the ethics and corruption involved in creating money out of thin air. In fact, the fractional reserve system was formalized into law centuries ago and continues to be both legal and the accepted common practice around the world today.

Have you ever wondered how banks afford those massive buildings downtown if they charge only 10% or so on loans and pay 5% or less interest on deposits? If bankers were not allowed to create money out of thin air, they would be making only a few percent a year on every loan issued, far from enough to build the towering skyscrapers owned by banks in practically every major city. But by creating credit (money) using the fractional reserve system, bankers can legally claim credit to 10 times or more the amount of any loan. Now you can understand the foundation upon which global banking empires are built.

As this system has been used for centuries by every country in the world, it clearly works to maintain a relatively stable economic order. We are not advocating a dramatic change of this system. We do, however, feel that suppressing and otherwise hiding this key information is a massive deception which does not serve the public and only serves to allow the bankers to easily become excessively powerful and corrupt.

These fact-filled documentaries do an excellent job of introducing and educating viewers to key, little-known facts which impact our global economy and politics. We encourage you to have a healthy skepticism of what is presented, yet also to have an open mind to the possibility that much of what is presented is based on verifiable evidence. Note that the Ascent of Money has four parts, each one hour in length. The first two parts are excellent in revealing the hidden history of money in our world, though the third and fourth parts on more recent history are much weaker.

You can help to inform others of what is going on by educating yourself with the above videos and spreading the word on the banking and financial cover-up. For what you can do about it, see below. Thanks for caring.

Even deeper: See a treasure trove of major media articles revealing blatant manipulations by top bankers. A top Wall Street and government insider’s essay shows just how ruthless the power brokers can be. A more thorough history of the development of banking is available here. Read a top professor’s 10-page summary of the powerful role of bankers throughout history. Further information on this vital issue with realistic proposals for empowering change can be found on the American Monetary Institute’s website. And explore a highly decorated U.S. general’s essay revealing huge manipulations and profiteering by major banks in wartime.

After 80-plus years of inflation and devastating booms and busts, how do we get rid of the cause of these economic cancers? “The only way to do that is to abolish legalized counterfeiting: that is, to abolish the Federal Reserve System, and return to the gold standard,” answers Murray Rothbard in his book The Case Against the Fed.

For students who did not have the opportunity to take United States Economic History from the late Dr. Rothbard, this slim volume will give you an idea of what his classes were like.

Dr. Rothbard never bored his students with sterile graphs or convoluted equations. Neither does this book. This story of the Federal Reserve is about good guys, bad guys, and self-serving politicians helping their rich and famous friends. Also interesting is Rothbard’s discussion of nineteenth-century British case law that paved the way for fractional reserve banking. Rothbard points out that, with bailment law undeveloped in the nineteenth century, bankers were able to win three important court cases culminating with the Foley v. Hill and Others case in 1848. In this case, the House of Lords decided that bankers contract for an amount of money, but not necessarily to keep that particular money on hand.

Rothbard lays to rest the myth that the Panic of 1907 led to the creation of the Fed. Bankers began scheming for a central bank after William McKinley defeated William Jennings Bryan in the 1896 presidential election. Long gone were the days of the hard-money Jacksonian Democratic party, and the populist Democrat Bryan pushed for monetizing silver to increase the supply of money. Wall Street’s bankers supported McKinley, not wanting inflation that they couldn’t control.

The Panic of 1907 was used to whip up support for a central bank. But, it was the meetings of the Indianapolis Monetary Convention that started the political wheels turning, culminating in the passage of the Federal Reserve Act in December of 1913.

With the system in place, all that was needed was the “right” man to control the money machine. In 1914, that man was Benjamin Strong, then president of J. P. Morgan-owned Bankers Trust and best friend of Morgan partners Harry P. Davison, Dwight Morrow, and Thomas W. Lamont.

Strong ruled the Fed until his death in 1928. During World War I, he engineered a doubling of the supply of money, financing the U.S. war effort.

The continuous Fed propaganda is that a zealous public clamors for more inflation, and only the Federal Reserve’s cool heads are standing in the way of a hyper-inflation armageddon. Of course, just the opposite is true. As Rothbard points out, “The culprit solely responsible for inflation, the Federal Reserve, is continually engaged in raising a hue-and-cry about `inflation,’ for which virtually everyone else in society seems to be responsible. What we are seeing is the old ploy by the robber who starts shouting `Stop, thief!’ and runs down the street pointing ahead at others.”

Rothbard saves the fun part of dismantling the Fed for last. Liberty lovers are always being told that, “your ideas sound good, but how are you going to get there from here?” Rothbard has given us simple directions for the Fed’s liquidation.

With the Fed abolished, banks would be on their own; no more lender of last resort, or taxpayer bailouts. The inflation dragon would be slain. The boom-and-bust roller coaster ride leveled.

Governor DeSantis recently took aim at the Federal Reserve, presumably to bolster his national-issues profile ahead of announcing a run for the presidency, which he is expected to do in May. He lambasted both Chairman Powell’s leadership and the nascent moves towards a central bank digital currency (CBDC). DeSantis apparently wants to demonstrate his populist bona fides. He may even be trying to recapture some of the energy of Ron Paul’s “End the Fed” campaign from more than a decade ago.

The usual suspects are accusing DeSantis of spreading “misinformation” about the Fed’s effectiveness and activities. But it’s they who are misinformed. The Fed truly is a basketcase. It has persistently failed to achieve its basic mandate and has strayed into policy areas far outside its legal authority and core competence. And the United States is worse off for it.

The Fed is required by Congress to pursue stable prices and full employment. It is bad at both. Ongoing inflation demonstrates our chief central bankers never learned the lessons of the late 1970s. And the fixation on real variables such as employment — especially among “disadvantaged” groups — caused the Fed to lose sight of the one thing it can actually control: the purchasing power of the dollar. 

For two years, inflation has exceeded nominal wage growth, meaning the typical American has taken a real pay cut: He receives less purchasing power for an hour of work than he did two years ago. This is, indeed, the Fed’s fault.

Comparing the pre-Fed to the post-Fed periods, it’s clear the Fed is no improvement at best and a detriment at worst. Inflation is not persistently lower. Recessions are not persistently shorter. The only metric that comes down in the Fed’s favor is inflation volatility — and this is due to pre-Fed public-finance practices, not the wisdom of central bankers. 

Inflation volatility was higher during the 19th century because the government suspended the gold standard to fight wars. Printing greenbacks was a revenue-raising strategy. Once wars ended and redemption resumed, the economy gradually grew into the higher price level, bringing inflation down. The Fed deserves precisely zero credit for this.

As for a CBDC, it’s undeniable that the Fed has been experimenting with pilot programs, which Congress has not authorized. It’s also clear a CBDC would be a disaster for financial privacy and political liberty. 

Who in their right mind wants the government to control the payments process? The government would certainly abuse it, stifling payments to disfavored producers and perhaps even taxing CBDC balances to artificially boost consumption. We don’t want or need a financial panopticon. If the Fed won’t stop this dangerous experiment on its own, the people’s representatives should.

We have every reason to worry about Fed wokeness, too. The central bank’s research output and governance initiatives related to amorphous and partisan goals, such as DEI and climate change, demonstrate a frightening level of mission creep. Let me put it bluntly: The Fed has no authority to act in these areas. Any connection to the monetary mandate, or its related financial-stability mandate, is an illusion. 

The Fed has repeatedly shown it can’t even be trusted to manage the money supply responsibly. Why would one expect the Fed to make a positive contribution to environmental sustainability or social justice? Calling this implausible is a massive understatement.

Government agencies should serve the public interest while upholding the rule of law. The Fed does neither. It needs major reforms to put it back on track. 

The Fed’s monetary mandate should be constrained by a strict rule. Its financial mandate should be tightened so that Fed bureaucrats no longer have an excuse to use their jobs for social activism. 

DeSantis is right to call out the Fed. And honesty compels one to acknowledge the Fed’s failures, even if those failures are pointed out by politicians of whom one disapproves. Anything less subjects responsible policy analysis to rank partisanship.

What does the Federal Reserve do?

The Federal Reserve is the central bank of the U.S., one of the most complex institutions in the world. The Fed is best known as the orchestrator of the world’s largest economy, determining how much it costs businesses and consumers to borrow money by deciding to raise, lower or maintain interest rates. Cheap borrowing costs inspire businesses to expand teams or invest in new initiatives. Expensive rates, however, deter businesses from hiring and consumers from big-ticket purchases.

After raising interest rates a whopping 5.25 percentage points since March 2022, the Fed looks like it might be officially finished raising interest rates to combat inflation.

The impact, however, will live on: The best savings yields are now topping inflation, but borrowing costs have hit their highest in more than a decade. The rate environment is unlikely to shift materially until the Fed begins cutting interest rates — moves officials look increasingly likely to make in 2024, depending on what happens with inflation.

Here are the six main ways the Fed’s interest rate decisions impacts your money, from your savings and investments, to your buying power and job security.

1. The Fed’s decisions influence where banks and other lenders set interest rates

Higher Fed interest rates translate to more expensive borrowing costs to finance everything from a car and a home to your purchases on a credit card. That’s because key borrowing rate benchmarks that influence some of the most popular loan products — the prime rate and the Secured Overnight Financing Rate, or SOFR — follow the Fed’s moves in lockstep.

When interest rates are higher, the availability of money in the financial system also tends to shrink, another factor making it more expensive to borrow. Sometimes, rates even rise on the mere expectation the Fed is going to hike rates. And as in the aftermath of three major bank failures, lenders may even become stingier about loaning money out — meaning getting approved for a loan could get harder, too.

Case in point, here’s how much more expensive it’s gotten to finance various big-ticket items this year, after 5.25 percentage points worth of tightening from the Fed:

Product	Week ending July 21, 2021	Week ending Jan. 24, 2024	Percentage point change
30-year fixed-rate mortgage	3.04 percent	6.93 percent	+3.89 percentage points
$30K home equity line of credit (HELOC)	4.24 percent	9.18 percent	+4.94 percentage points
Home equity loans	5.33 percent	8.91 percent	+3.58 percentage points
Credit card	16.16 percent	20.74 percent	+4.58 percentage points
Four-year used car loan	4.8 percent	8.32 percent	+3.52 percentage points
Five-year new car loan	4.18 percent	7.71 percent	+3.53 percentage points
Source: Bankrate national survey data

Borrowers often see higher rates reflected in one to two billing cycles — but only if they have a variable-rate loan. Consumers locked in a loan with a fixed interest rate won’t feel any impact when the Fed raises rates.

One place where higher rates have been clear: credit cards. The average interest rate on a credit card has ratcheted to new record highs throughout 2023, hovering at the latest series high of 20.74 percent since December. Those higher interest rates, however, won’t impact you if you pay off your credit card balance in full each month.

“Borrowing costs tend to increase first after a Fed rate hike,” says Liz Ewing, former chief financial officer of Marcus by Goldman Sachs who’s now chief financial officer at Sapient Capital. “Banks are not required to line up their interest rates with the Fed’s rate, so each bank will respond to the Fed’s rate announcement and adjust rates in their own way.”

And while mortgage rates generally follow the Fed, they can often — and quickly — become disjointed. Mortgage rates mainly track the 10-year Treasury yield, which is guided by the same macroeconomic forces. But at its most basic level, those yields rise and fall due to investor demand.

Investors might pour more money into those longer-dated assets if the Fed is expected to cut ratest — weighing on the 30-year fixed-rate mortgageLonger-term yields, and consequently, mortgage rates, might also drop when the Fed is deep in the middle of an asset-purchase plan to lower longer-term rates, effectively making the U.S. central bank the biggest buyer in the marketplace.

Stubborn inflation helped send mortgage rates to the highest since 2000 last fall, with the key home-financing rate hitting 8.01 percent on Oct. 25, Bankrate data shows. That was paired with a similar uptick in the 10-year Treasury yield, which topped 5 percent on Oct. 23 for the first time since 2007.

But the tables can quickly turn. A cooler-than-expected inflation report for October sent the key yield tumbling 75 basis points in a little more than a month’s span. That helped take some pressure off the 30-year fixed-rate mortgage, which fell to 7.23 percent on Dec. 6, Bankrate data shows. With rate cuts now on the horizon, an even broader loosening in financial conditions has helped send the 30-year fixed-rate mortgage even lower: 6.93 percent as of Jan. 24, Bankrate data shows. An eventual slowdown in inflation could pave the way for a 5.75 percent mortgage rate, according to McBride’s 2024 interest rate forecast.

“We need to see meaningful improvement on core inflation and a trajectory toward slower economic growth before we’ll see a substantive pull back in mortgage rates,” McBride says. “We’re not there yet.”

2. Higher rates from the Fed also make it harder for borrowers to get approved for new loans

One of the reasons why higher interest rates slow demand: They cut off households from the never-ending credit spigot. Consequently, less access to credit leads to less spending — weighing on demand and taking some of the steam away from inflation.

A New York Fed report released July 17 showed rejection rates for any kind of credit — including mortgages, credit cards and auto loans — hit the highest in five years. In November, another record share of auto loans weren’t approved, an update to the New York Fed’s credit access survey showed. Rejection rates have been highest for individuals with credit scores below 680.

The phenomenon reflects one of the key features of a rising-rate environment: Lenders grow pickier about who they lend money to, out of fear that they may not be paid back. It all means that rates may climb even faster for borrowers perceived to be riskier.

Financial firms may fear that the risk of default is higher because monthly payments effectively become costlier when interest rates are high. Take the 30-year fixed-rate mortgage, for example. A $500,000 mortgage would’ve cost you $2,089 a month in principal and interest when rates were at a record low of 2.93 percent, according to an analysis using Bankrate’s national survey data. With the average 30-year fixed-rate mortgage hitting 6.93 percent, that same payment would now cost $3,303 a month.

“Tighter credit hits borrowers with less-than-stellar credit ratings the hardest – whether the borrower is a consumer, corporation, municipality or a national government,” McBride says. “The business of lending doesn’t stop but is instead more intensely focused on borrowers posing the least risk of default.”

3. Savings accounts and certificates of deposit (CDs) move in lockstep with the Fed’s rate

You might not be able to borrow as cheaply as you used to, but higher interest rates do have some silver linings, especially for savers. Banks ultimately end up increasing yields to attract more deposits.

The average savings yield is almost three times higher than it was at this time last year, rising from 0.23 percent to 0.58 percent as of Dec. 4, the highest since March 2007, according to national Bankrate data.

Meanwhile, a 5-year certificate of deposit (CD) was paying 0.37 percent at the beginning of January 2022, before the Fed began raising rates. Today, it’s offering an average yield of 1.43 percent.

The caveat, however, is that the nation’s largest banks rarely lift yields as fast or as high as the Fed’s interest rate. Those traditional brick-and-mortar banks also aren’t clamoring for the deposits, especially today.

But there are banks offering even more money in interest, and finding them could help consumers preserve some of their purchasing power — and even beat inflation. Those yields are at online banks, which are able to offer more competitive interest rates because they don’t have to fund the overhead costs that depository institutions with physical branches have.

A big example: The 14 banks ranked for Bankrate’s best high-yield savings accounts in July 2021 were offering an average yield of 0.51 percent, with a high of 0.55 percent and a low of 0.40 percent. At the time, that was about nine times the national average.

As of Jan. 30, the 10 banks ranked for December 2023 are offering an average yield of 5.1 percent, almost nine times the national average and 400-500 times higher than yields at Chase and Bank of America. Those banks offer yields as high as 5.35 percent and as low as 4.75 percent, all of which are beating overall inflation. Use Bankrate’s tools to compare how much you could be earning if you move your account to one of the highest-yielding offers on Bankrate.

“Retail savings rates often move a bit slower in a rising rate environment, but can also fall slower in a declining-rate environment,” Ewing says. “Customers who have high-yield savings products could be getting good value in the long run.”

With the likelihood of a Fed pause soon approaching, experts say now may also be the time to lock in longer-term CDs. Banks often lower their interest rates as soon as the Fed looks like it won’t be raising interest rates any more.

“If you’ve had your eye on a CD with a maturity of two to five years, now’s the time to grab it,” McBride says. “CD yields have peaked and have begun to pull back so there is no advantage to waiting if you have the money to deploy right now.”

4. The Fed’s rate decisions influence the stock market — meaning your portfolio or retirement accounts

Cheap borrowing rates often bode well for investments because they incentivize risk-taking among investors trying to compensate for lackluster returns from bonds, fixed income and CDs.

On the other hand, markets have been known to choke on the prospect of higher rates. Part of that is by design: Essentially, the U.S. central bank zaps liquidity from the markets when it raises rates, leading to volatility as investors reshuffle their portfolios.

It’s also because of worries: When rates rise, market participants often become concerned that the Fed could get too aggressive, slowing down growth too much and perhaps tipping the economy into a recession. Those concerns battered stocks in 2022, with the S&P 500 posting the worst performance since 2008 in the year.

But the idea of rate cuts in 2024 is sparking a rapid market rally. The S&P 500 has closed at a new record high five times so far this year, as inflation slows and the economy remains resilient.

Markets, however, can be bumpy if the Fed fails to follow through with what investors expect. It’s important to keep a long-term mindset, avoid making any knee-jerk reactions and maintain your regular contributions to your retirement accounts. When the Fed raises rates, that’s mostly to make sure the financial system doesn’t derail itself by growing too fast. Not to mention, falling stock prices can create tremendous buying opportunities for Americans hoping to bolster their portfolio of long-term investments.

“Mom-and-pop investors should focus on the bigger picture: An economy that’s growing is conducive to an environment where companies will grow their earnings,” McBride says. “Ultimately, a growing economy and higher corporate earnings are good for stock prices. It just might not be a smooth road between here and there.”

5. The Fed has a major influence on your purchasing power

The Fed’s interest rate decisions are bigger than just influencing the price you pay to borrow money and the amount you’re paid to save. All of those factors have a prevalent influence on consumers’ purchasing power.

Low interest rates intended to stimulate the economy and juice up the job market can fuel demand so much that supply can’t keep up — exactly what happened in the aftermath of the coronavirus pandemic. All of that can lead to inflation.

Higher Fed interest rates are the main way to weigh on those price increases, but consumers won’t immediately feel an impact. The Fed can’t drill for oil or produce more food; all it can do is weigh on demand so much that it balances back out with supply, leading to a lower pace of price increases. Research suggests it takes a full year, if not longer, for one rate hike to make its way through the entire economy.

“Inflation is easing but has further to go to get to the 2 percent level,” McBride says. “Robust consumer demand and continued strength in the labor market could lead to inflation moving back up, or at least not moving lower as consistently as we’ve seen in recent months.”

Inflation has noticeably improved since surging to a 40-year high of 9.1 percent in June 2022. Overall inflation rose 3.4 percent in December, still more than a percentage point above the Fed’s 2 percent goalpost. Prices are up a higher 3.9 percent when excluding those more volatile food and energy costs, according to the Department of Labor’s consumer price index (CPI). The largest group of economists (60 percent) in Bankrate’s fourth-quarter Economic Indicator poll say prices likely won’t hit a level that the Fed considers optimal until 2025.

Fed officials, however, don’t target CPI. Instead, they prefer to look at the personal consumption expenditures, or PCE, index from the Department of Commerce. That gauge is showing much faster improvement, with overall prices rising a slower 2.6 percent in December from a year ago.Prices when excluding volatile food and energy costs rose 2.9 percent over the same 12-month period.

6. The Fed influences how secure you feel in your job or how easy it is to find a job

One of the biggest corners of the economy impacted by higher interest rates is the job market. Expansions that seemed wise when money was cheap might be put on the backburner. New opportunities made possible by low interest rates are no longer on the table.

That has implications for more than just businesses. Workers seeing new opportunities vanish might start to feel jittery about job-hopping.

All of those moving parts are becoming more apparent now. Job openings are still higher than at any time before the pandemic, though as of November, they’ve dipped to 8.8 million from a record high of 12 million in March 2022, Labor Department data shows. Job creation has also slowed from its burst in 2021, though employers in December added a healthy 216,000 new jobs, while the unemployment rate held at a historically low level of 3.7 percent — showing the job market is holding on strong.

Some industries have been tougher for jobseekers than others. Big tech firms including Meta, Amazon and Lyft laid off thousands of workers since the Fed started raising rates. Data from outplacement firm Challenger, Gray & Christmas show job cuts nearly doubled in 2023 compared with 2022, hitting the highest total since 2009 when excluding pandemic-related layoffs.

Layoffs aren’t widespread in data from the Labor Department, and they’re continuing to hold near record lows. The question, however, is how long that could last. Even though the job market is still chugging along, economists in Bankrate’s quarterly poll see joblessness rising from its current 3.7 percent level to 4.3 percent by December 2024 while job growth is projected to be almost three times slower over the next 12 months than it was in the previous period.

Revealing just how interconnected the economy is, sometimes a booming labor market can also contribute to inflation. When there’s a mismatch between labor demand and supply, companies often boost wages to recruit more workers.

How much tight labor markets are currently contributing to inflation is also up for debate. Research from the San Francisco Fed suggests higher wages have only contributed 0.1 percentage point to the growth to the Department of Commerce’s measure of inflation, excluding food and energy. Companies have been able to eat the higher cost of labor or make savings down the line with increased automation or efficiency, economist Adam Shapiro suggested in the research.

Raising interest rates is a blunt instrument with no method of fine-tuning specific corners of the economy. It simply works by slowing demand overall — but the risk is that the U.S. central bank could do too much. Put in the mix that officials are trying to judge how rates impact the economy with backward-looking data, and the picture looks even darker.

While the odds of a soft-landing look promising, eight of the Fed’s past nine tightening cycles have ended in a recession, according to an analysis from Roberto Perli, head of global policy at Piper Sandler.

Bottom line

There’s a common mantra when it comes to the Fed: Don’t fight it. Most of the time, it means investors should adjust their decisions to fit monetary policy.

Consumers, however, might want to take the opposite approach. A higher-rate environment makes prudent financial steps all the more important, especially having ample cash you can turn to in an emergency.

Boosting your credit score and paying off high-cost debt can also create more breathing room in your budget in a higher-rate environment. Use Bankrate’s tools to find the best auto loan or mortgage for you, and shop for the best savings account to park your cash.

“You need an emergency fund regardless of where interest rates and inflation are,” McBride says. “You can’t afford to take risks with that money. That’ll stabilize your financial foundation, in the event that tougher economic days lie ahead.”

The Great Depression

1929–1941

The longest and deepest downturn in the history of the United States and the modern industrial economy lasted more than a decade, beginning in 1929 and ending during World War II in 1941.

A bread line at Sixth Avenue and 42nd Street, New York City, during the Great Depression (Photo: Historical/Corbis Historical/Getty Images)

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by Gary Richardson, Federal Reserve Bank of Richmond

“Regarding the Great Depression, … we did it. We’re very sorry. … We won’t do it again.”
—Ben Bernanke, November 8, 2002, in a speech given at “A Conference to Honor Milton Friedman … On the Occasion of His 90th Birthday.”

In 2002, Ben Bernanke, then a member of the Federal Reserve Board of Governors, acknowledged publicly what economists have long believed. The Federal Reserve’s mistakes contributed to the “worst economic disaster in American history” (Bernanke 2002).

Bernanke, like other economic historians, characterized the Great Depression as a disaster because of its length, depth, and consequences. The Depression lasted a decade, beginning in 1929 and ending during World War II. Industrial production plummeted. Unemployment soared. Families suffered. Marriage rates fell. The contraction began in the United States and spread around the globe. The Depression was the longest and deepest downturn in the history of the United States and the modern industrial economy.

The Great Depression began in August 1929, when the economic expansion of the Roaring Twenties came to an end. A series of financial crises punctuated the contraction. These crises included a stock market crash in 1929, a series of regional banking panics in 1930 and 1931, and a series of national and international financial crises from 1931 through 1933. The downturn hit bottom in March 1933, when the commercial banking system collapsed and President Roosevelt declared a national banking holiday.¹  Sweeping reforms of the financial system accompanied the economic recovery, which was interrupted by a double-dip recession in 1937. Return to full output and employment occurred during the Second World War.

To understand Bernanke’s statement, one needs to know what he meant by “we,” “did it,” and “won’t do it again.”

By “we,” Bernanke meant the leaders of the Federal Reserve System. At the start of the Depression, the Federal Reserve’s decision-making structure was decentralized and often ineffective. Each district had a governor who set policies for his district, although some decisions required approval of the Federal Reserve Board in Washington, DC. The Board lacked the authority and tools to act on its own and struggled to coordinate policies across districts. The governors and the Board understood the need for coordination; frequently corresponded concerning important issues; and established procedures and programs, such as the Open Market Investment Committee, to institutionalize cooperation. When these efforts yielded consensus, monetary policy could be swift and effective. But when the governors disagreed, districts could and sometimes did pursue independent and occasionally contradictory courses of action.

The governors disagreed on many issues, because at the time and for decades thereafter, experts disagreed about the best course of action and even about the correct conceptual framework for determining optimal policy. Information about the economy became available with long and variable lags. Experts within the Federal Reserve, in the business community, and among policymakers in Washington, DC, had different perceptions of events and advocated different solutions to problems. Researchers debated these issues for decades. Consensus emerged gradually. The views in this essay reflect conclusions expressed in the writings of three recent chairmen, Paul Volcker, Alan Greenspan, and Ben Bernanke.

By “did it,” Bernanke meant that the leaders of the Federal Reserve implemented policies that they thought were in the public interest. Unintentionally, some of their decisions hurt the economy. Other policies that would have helped were not adopted.

An example of the former is the Fed’s decision to raise interest rates in 1928 and 1929. The Fed did this in an attempt to limit speculation in securities markets. This action slowed economic activity in the United States. Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed’s actions triggered recessions in nations around the globe. The Fed repeated this mistake when responding to the international financial crisis in the fall of 1931. This website explores these issues in greater depth in our entries on the stock market crash of 1929 and the financial crises of 1931 through 1933.

An example of the latter is the Fed’s failure to act as a lender of last resort during the banking panics that began in the fall of 1930 and ended with the banking holiday in the winter of 1933. This website explores this issue in essays on the banking panics of 1930 to 1931, the banking acts of 1932, and the banking holiday of 1933.

One reason that Congress created the Federal Reserve, of course, was to act as a lender of last resort. Why did the Federal Reserve fail in this fundamental task? The Federal Reserve’s leaders disagreed about the best response to banking crises. Some governors subscribed to a doctrine similar to Bagehot’s dictum, which says that during financial panics, central banks should loan funds to solvent financial institutions beset by runs. Other governors subscribed to a doctrine known as real bills. This doctrine indicated that central banks should supply more funds to commercial banks during economic expansions, when individuals and firms demanded additional credit to finance production and commerce, and less during economic contractions, when demand for credit contracted. The real bills doctrine did not definitively describe what to do during banking panics, but many of its adherents considered panics to be symptoms of contractions, when central bank lending should contract. A few governors subscribed to an extreme version of the real bills doctrine labeled “liquidationist.” This doctrine indicated that during financial panics, central banks should stand aside so that troubled financial institutions would fail. This pruning of weak institutions would accelerate the evolution of a healthier economic system. Herbert Hoover’s secretary of treasury, Andrew Mellon, who served on the Federal Reserve Board, advocated this approach. These intellectual tensions and the Federal Reserve’s ineffective decision-making structure made it difficult, and at times impossible, for the Fed’s leaders to take effective action.

Among leaders of the Federal Reserve, differences of opinion also existed about whether to help and how much assistance to extend to financial institutions that did not belong to the Federal Reserve. Some leaders thought aid should only be extended to commercial banks that were members of the Federal Reserve System. Others thought member banks should receive assistance substantial enough to enable them to help their customers, including financial institutions that did not belong to the Federal Reserve, but the advisability and legality of this pass-through assistance was the subject of debate. Only a handful of leaders thought the Federal Reserve (or federal government) should directly aid commercial banks (or other financial institutions) that did not belong to the Federal Reserve. One advocate of widespread direct assistance was Eugene Meyer, governor of the Federal Reserve Board, who was instrumental in the creation of the Reconstruction Finance Corporation.

These differences of opinion contributed to the Federal Reserve’s most serious sin of omission: failure to stem the decline in the supply of money. From the fall of 1930 through the winter of 1933, the money supply fell by nearly 30 percent. The declining supply of funds reduced average prices by an equivalent amount. This deflation increased debt burdens; distorted economic decision-making; reduced consumption; increased unemployment; and forced banks, firms, and individuals into bankruptcy. The deflation stemmed from the collapse of the banking system, as explained in the essay on the banking panics of 1930 and 1931.

The Federal Reserve could have prevented deflation by preventing the collapse of the banking system or by counteracting the collapse with an expansion of the monetary base, but it failed to do so for several reasons. The economic collapse was unforeseen and unprecedented. Decision makers lacked effective mechanisms for determining what went wrong and lacked the authority to take actions sufficient to cure the economy. Some decision makers misinterpreted signals about the state of the economy, such as the nominal interest rate, because of their adherence to the real bills philosophy. Others deemed defending the gold standard by raising interests and reducing the supply of money and credit to be better for the economy than aiding ailing banks with the opposite actions.

On several occasions, the Federal Reserve did implement policies that modern monetary scholars believe could have stemmed the contraction. In the spring of 1931, the Federal Reserve began to expand the monetary base, but the expansion was insufficient to offset the deflationary effects of the banking crises. In the spring of 1932, after Congress provided the Federal Reserve with the necessary authority, the Federal Reserve expanded the monetary base aggressively. The policy appeared effective initially, but after a few months the Federal Reserve changed course. A series of political and international shocks hit the economy, and the contraction resumed. Overall, the Fed’s efforts to end the deflation and resuscitate the financial system, while well intentioned and based on the best available information, appear to have been too little and too late.

The flaws in the Federal Reserve’s structure became apparent during the initial years of the Great Depression. Congress responded by reforming the Federal Reserve and the entire financial system. Under the Hoover administration, congressional reforms culminated in the Reconstruction Finance Corporation Act and the Banking Act of 1932. Under the Roosevelt administration, reforms culminated in the Emergency Banking Act of 1933, the Banking Act of 1933 (commonly called Glass-Steagall), the Gold Reserve Act of 1934, and the Banking Act of 1935. This legislation shifted some of the Federal Reserve’s responsibilities to the Treasury Department and to new federal agencies such as the Reconstruction Finance Corporation and Federal Deposit Insurance Corporation. These agencies dominated monetary and banking policy until the 1950s.

The reforms of the 1930s, ’40s, and ’50s turned the Federal Reserve into a modern central bank. The creation of the modern intellectual framework underlying economic policy took longer and continues today. The Fed’s combination of a well-designed central bank and an effective conceptual framework enabled Bernanke to state confidently that “we won’t do it again.”

9 myths about the Federal Reserve

FDR’s New Deal or Raw Deal?

The Causes of the Great Depression

1. World War One created a financial and social catastrophe. The US pretty much bankrolled the allied countries efforts in the war. Thanks to the poor economy after the war, almost all of the countries repudiated their debts, which caused untold financial hardships in the US.
2. The Smoot-Hawley Tariff Act was the single biggest c ause of the Great Depression. It was passed to protect the US markets and producers, but instead it caused the European countries to stop importing products from the US. It also made it very difficult for the war torn countries to fullfill their war time fiancial obligations in the US.
3. The Federal Reserve was still in its infancy and their were few economic tracking tools available at this time. This was before the advent of computers which made it very difficult to attain accurate data, so they were mostly flying in the dark. The Federa Reserve was just not up to the task. They essentially made matters worse.

In an interview with an economic organization from India last month, I discussed many of the economic issues associated with coronavirus (fiscal fallout, excess regulation, subsidized unemployment, etc).

But I want to highlight this short clip since I had an opportunity to explain how the “New Deal” made the Great Depression deeper and longer.

For newcomers to this issue, “New Deal” is the term used to describe the various policies to expand the size and scope of the federal government adopted by President Franklin Delano Roosevelt (a.k.a., FDR) during the 1930s.

And I’ve previously cited many experts to show that his policies undermined prosperity. Indeed, one of my main complaints is that he doubled down on many of the bad policies adopted by his predecessor, Herbert Hoover.

Let’s revisit the issue today by seeing what some other scholars have written about the New Deal. Let’s start with some analysis from Robert Higgs, a highly regarded economic historian.

…as many observers claimed at the time, the New Deal did prolong the depression. …FDR and Congress, especially during the congressional sessions of 1933 and 1935, embraced interventionist policies on a wide front. With its bewildering, incoherent mass of new expenditures, taxes, subsidies, regulations, and direct government participation in productive activities, the New Deal created so much confusion, fear, uncertainty, and hostility among businessmen and investors that private investment, and hence overall private economic activity, never recovered enough to restore the high levels of production and employment enjoyed in the 1920s. …the American economy between 1930 and 1940 failed to add anything to its capital stock: net private investment for that eleven-year period totaled minus $3.1 billion. Without capital accumulation, no economy can grow. …If demagoguery were a powerful means of creating prosperity, then FDR might have lifted the country out of the depression in short order. But in 1939, ten years after its onset and six years after the commencement of the New Deal, 9.5 million persons, or 17.2 percent of the labor force, remained officially unemployed.

Writing for the American Institute for Economic Research, Professor Vincent Geloso also finds that FDR’s New Deal hurt rather than helped.

…let us state clearly what is at stake: did the New Deal halt the slump or did it prolong the Great Depression? …The issue that macroeconomists tend to consider is whether the rebound was fast enough to return to the trendline. …The…figure below shows the observed GDP per capita between 1929 and 1939 expressed as the ratio of what GDP per capita would have been like had it continued at the trend of growth between 1865 and 1929. On that graph, a ratio of 1 implies that actual GDP is equal to what the trend line predicts. …As can be seen, by 1939, the United States was nowhere near the trendline. …Most of the economic historians who have written on the topic agree that the recovery was weak by all standards and paled in comparison with what was observed elsewhere. …there is also a wide level of agreement that other policies lengthened the depression. The one to receive the most flak from economic historians is the National Industrial Recovery Act (NIRA). …In essence, it constituted a piece of legislation that encouraged cartelization. By definition, this would reduce output and increase prices. As such, it is often accused of having delayed recovery. …other sets of policies (such as the Agricultural Adjustment Act, the National Labor Relations Act and the National Industrial Recovery Act)…were very probably counterproductive.

Here’s one of the charts from his article, which shows that the economy never recovered lost output during the 1930s.

In a column for CapX, Professor Philip Booth adds some interesting evidence on how the United Kingdom adopted a smarter approach in the 1930s.

…the UK had a relatively good Great Depression by international standards. There was an extremely conservative fiscal policy (much more so than during the so-called austerity after 2008) and yet the economy bounced back. In the period 1930-1933, the average public sector deficit was just 1.1% of GDP. And there were only two years of negative GDP growth (1930 and 1931). By 1938, GDP growth had been sufficiently rapid, that the country had returned to trend national income as if the Great Depression had never happened. …In the UK, we had a stable regulatory environment, a liberalised market for land for building purposes and fiscal austerity. …though Roosevelt is often regarded as the great saviour, he is nothing of the sort. …taking the period 1929-1939 as a whole, real GDP growth was only 1% per annum. There was no return to trend national income levels. …unemployment in the US was much higher than in the UK. For the economy to be operating at those levels of unemployment for so long requires some very bad policies. …Arbitrary regulation damaged business and created “policy uncertainty” and top marginal tax rates were raised.

For what it’s worth, I also think it’s worth comparing what happened in the 1930s with the genuine economic recovery from the deep recession in 1920-21.

Or, look at how the economy boomed after World War II even though the Keynesians predicted the economy would fall back into depression without a massive expansion of domestic spending.

Nonetheless, as illustrated by this cartoon, some people still want to blame capitalism for problems caused by government.

P.S. FDR not only wanted a 100-percent tax rate, he actually tried to impose it without legislative approval.

P.P.S. FDR also wanted an “Economic Bill of Rights” that would have created a far-reaching entitlements to other people’s money.

In announcing the biggest public works spending in 50 years, President-elect Obama takes a page from the Great Depression that is both model and cautionary tale.

Model, because the programs put paychecks into workers’ pockets and laid a concrete and electrical foundation for America‘s postwar boom. Cautionary tale, because the effort did not jolt the Depression economy back to health.

One big reason is that President Roosevelt didn’t spend enough to really boost the economy, historians say. But US history offers no guide on how much stimulus is too much, especially since the timing of today’s crisis and the Depression are so different.

The Great Depression had been in full swing for three years when Roosevelt came into office and proposed his massive work relief program. Obama will enter the White House as the economy is still unraveling, which may help him.

“This time we’re trying to have the bailout and rescue as the crisis is unfolding before our eyes; there’s a sense that ‘Can we prevent this before it really gets rolling?’ ” says Jason Smith, author of “Building New Deal Liberalism.” “The Roosevelt administration was experimenting – they were kind of operating blindfolded and in the dark – they didn’t have the kind of economic expertise that’s available to us today.”

The infrastructure component of the still-evolving Obama economic-recovery plan would inject billions of dollars into repairing old roads and bridges and constructing new ones, upgrading the nation’s schools with new technology, and making public buildings energy efficient.

When Obama announced those “few key parts” of his plan on Saturday, he called them “the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s.” That’s when the federal government invested $25 billion and built more than 41,000 miles of roads, highways and bridges over a 20-year period. In today’s dollars, that would be the equivalent of $197 billion investment.

How much Obama will spend on infrastructure is unknown. His economic team is still “crunching the numbers,” in his words, on the economic-recovery package, which would include far more than infrastructure and could end up costing $700 billion or more. Much will depend on Congress.

But US governors say they already have $136 billion dollars in projects that are “shovel ready,” which means they could be under way within months of the new administration taking office. Each $1 billion of infrastructure is expected to create 25,000 to 40,000 jobs.

Still, some critics point to the Depression and note that infrastructure spending did not create enough of a stimulus to revitalize the economy. It took World War II to get it back on track. Depression historians contend that’s because the Roosevelt administration didn’t spend enough.

“There was a kind of crude sense that generating economic activity was what you needed to do to get the economy going,” says Alan Brinkley, a professor of history at Columbia University. “But they didn’t spend nearly enough. They were constrained by all kinds of traditional ideas about balanced budgets and austerity.”

There is a consensus today among economists, even many conservative ones, that the government needs to inject some Keynesian stimulus to keep the economy from spiraling further downward. But some conservatives do disagree.

The consensus is “bad theory and bad evidence,” says Robert Higgs, a senior fellow at the Independent Institute, a libertarian think tank in Oakland, Calif. Government spending in the 1930s crowded out potential private investment, he says.

Government infrastructure projects “are inherently wasteful because they are designed with political objectives in mind,” he says “The [Works Progress Administration], which was probably the major New Deal infrastructure building program, was an enormous vote-buying scheme for Democrats.”

Some conservative economists also argue that injecting massive government spending now will only make the deficit worse without providing the promised stimulus. But other economists point out that during the first three years of the Depression, when there were far fewer major spending programs, gross domestic product (GDP) continued to plummet.

Timing is key, because the scale of today’s problem looks much smaller than the Depression. While today’s 6.7 percent unemployment rate looks bad from a modern perspective, it’s practically vibrant compared with the 24.9 percent in 1933, when the Roosevelt administration came into office. At last measure, today’s GDP is down half of one percent after increasing during the first half of the year. In 1933, it had declined almost 30 percent from its 1929 peak.

That’s why some analysts conclude that some infrastructure spending now may work as an effective stimulus. “The standard objection to public works spending – that it takes too long to get going and arrives after the economy has already begun recovering – really doesn’t seem operative this time,” says Mr. Smith.

Others disagree, and contend it could take many more months than predicted to get projects started because of the complications of contracting out the projects.

“There are some practical realities that don’t support the expectation of ‘Oh, just give us the money and we can go,’ ” says Richard Little, director of a public finance institute at the University of Southern California. “Over time we will start to see some projects rolling out and once that momentum builds up we’ll see more of it. The only problem is that it’s like mobilizing for war, once you get all geared up, don’t cut the money off.”

Today’s crisis is also different because of the size of the federal deficit. Republicans in Congress are balking at increasing it even more. Here the New Deal does not offer much help.

“When Roosevelt came in there was some deficit spending in the 1930s, but he was committed to a balanced budget so the deficits were never extraordinary,” says Margaret Rung, director of the Center for New Deal Studies at Roosevelt University in Chicago.

In the 1950s and 1960s, the last time there was a major investment in infrastructure, the US economy was thriving and deficit was negligible.

Obama acknowledges that a projected trillion-dollar deficit is problematic. But on NBC‘s “Meet the Press” over the weekend, he argued that the need to stimulate the economy outweighs immediate concerns about the deficit.

That has prompted many people to hope that today’s stimulus package will work better than Roosevelt’s did in the Depression.

“In the long run, you have to hope that the recovery is robust enough to deal with this enormous deficit which has been run up – which is scary and has repercussions beyond the immediate fiscal health of the country,” says Professor Rung.

The New Deal was a response to the worst economic crisis in American
history. As the United States suffered from the ravages of the Great Depression,
the administration of Franklin D. Roosevelt, which took office in March 1933, tried
a host of different, often contradictory measures in an aggressive effort to provide
relief for the unemployed, to prompt the recovery of the faltering economic
system, and to propose the kind of structural reform that could protect people in
future crises. But the New Deal was never a coherent, interconnected effort to
deal with the various dimensions of the Depression in a systematic way. Rather
it was a multi-faceted attmept to deal with different elements of the catastrophe in
ways that sometimes seemed haphazard and occasionally were contradictory.
On balance, though, the New Deal enjoyed some notable accomplishments,
even if it failed to promote full-scale economic recovery.
The Great Depression was an economic disaster. While the stock market
crash of 1929 need not have precipitated a depression, structural weaknesses in
the economy, unbridled speculation in financial markets, and lack of regulation
on Wall Street led to an unprecedented economic calamity that soon affected the
entire world economy. In the United States, unemployment was the chief
symptom of the depression, and by the time FDR took office there were
approximately 13 million people unemployed – fully one quarter of the working
population – with another quarter underemployed. In some cities, unemployment
reached 75 percent.

The response of President Herbert Hoover did little to alleviate distress.
Though he took a more activist role that many of his predecessors, his own
commitment to individualism and belief that government should not play an
aggressive role in an economic bailout impeded action, and the few measures he
did take had little impact. Even the Reconstruction Finance Corporation,
established as a result of Democratic pressure, proved unable to reduce
unemployment in the Hoover years.
Franklin D. Roosevelt, elected in 1932, had no clear sense of what he
might do when he assumed office. Some people viewed him as something of a
lightweight. Journalist Walter Lippmann called him an “amiable boy scout,” and
on another occasion said, “He is a pleasant man who, without any important
qualifications for the office, would like very much to be president. But
Roosevelt’s experience as Governor of New York for two terms taught him how
he might respond to the economic crisis.
FDR struck just the right note in his inaugural address. At a time when
bank failures across the country swept away the savings of millions of small
investors, he promised “action, and action now,” and he boosted spirits with his
stunning assertion that “the only thing we have to fear is fear itself.” It was clear
evidence of a sense of self-confidence and self-assurance that played a powerful
part in helping Americans feel better in the midst of hard times. Just as the
presidency had been a “bully pulpit” for Theodore Roosevelt, it was “preeminently
a place of moral leadership” for FDR.
Then he embarked on what came to be called the First Hundred Days.
There was no blueprint. Roosevelt needed to do something about the banks,
and so, working with officials left over from the Hoover administration, he
proposed a bank holiday. The Emergency Banking Act authorized the Federal
Reserve Board to issue new bank notes, allowed the reopening of banks that had
adequate assets, and arranged for the reorganization of those that did not.
With that somewhat surprising success, he pushed ahead with a measure
to cut the budget, for the conventional wisdom held that a balanced budget was
necessary for economic health, and then a bill to legalize 3.2 beer, to help make
people happy as Prohibition came to an end. By the time the First Hundred Days
came to an end, he had made 10 major speeches, sent 15 messages to

Congress, and helped push through the passage of 15 major pieces of
legislation. It was, in short, the most extraordinary period of legislative actifvity in
American history. And it set the tone and template for the rest of the New Deal.
Overall, what did the New Deal do?
First, it addressed the unemployed. A Federal Emergency Relief
Administration provided direct assistance to the states, to pass it on to those out
of work. The next winter, a work-relief program provided jobs in the brief period it
existed. Then, in 1935, FDR created the Works Progress administration, which
paid all kinds of people, including artists, actors, and authors, to work and built
new schools, bridges, and other structures around the country. It was expensive,
to be sure, but it made a huge economic and emotional difference to the people it
assisted.
Second, the New Deal sought to do something to promote recovery. The
National Recovery Administration attempted to check unbridled competition
which was driving prices down and contributing to a deflationary spiral. It tried to
stabilize wages, prices, and working hours through detailed codes of fair
competition. Meanwhile, the Agricultural Adjustment Administration sought to
stabilize prices in the farm sector by paying farmers to produce less.
Finally, over the course of the New Deal, the administration addressed
questions of structural reform. The Wagner Act, which created the National
Labor Relations Board in 1935, was a monumental step forward in giving workers
the right to bargain collectively and to arrange for fair and open elections to
determine a bargain agent, if laborers so chose. The Social Security Act the
same year was in many ways one of the most important New Deal measures, in
providing security for those reaching old age with a self-supporting plan for
retirement pensions. But there were other reform measures as well. The
Securities and Exchange Commission and Federal Deposit Insurance
Corporation were new. And the Glass-Steagall Act, only recently repealed with
frightful consequences, separated commercial and investment banking.
The New Deal was responsible for some powerful and important
accomplishments. It put people back to work. It saved capitalism. It restored
faith in the American economic system, while at the same time it revived a sense
of hope in the American people. But economically, it was less successful.

Monetary policy, as Christina Romer has suggested, made the most difference.
Fiscal policy didn’t really work because it wasn’t really tried.
Why, then did the New Deal fail to achieve economic recovery? The
answer rests with the theoretical speculations of English economist John
Maynard Keynes. In 1936, he published his powerfully important book The
General Theory of Employment, Interest and Money, but he had been lecturing
about the concepts for several years to his Cambridge University students.
Basically, Keynes argued that depressions would not disappear of their own
accord. It was rather necessary to take aggressive action to jumpstart the
economy. Ideally, such action should come from the private sector. But if such a
response was not forthcoming, the government could act instead. It could spend
massive amounts of money on public works or other projects, or cut taxes, or
both. What was necessary, in Keynes’s phrase, was deliberate, sustained
countercyclical spending.
Keynes came to the United States and had one ill-fated meeting with FDR.
Neither man understood the other. Keynes remarked that he had “supposed that
the President was more literate, economically speaking.” FDR simply
commented that Keynes “left a whole rigaramole of figures. He must be a
mathematician rather than a political economist.” And that was that.
Furthermore, the New Deal often worked in counterproductive ways, at
least economically. Whereas Keynes demanded what we would today call a
major stimulus package, and while the New Deal did spend more than ever
before, it also embarked on contradictory initiatives. For example, the
Agricultural Adjustment Administration spent large amounts of money to take
land out of circulation, to cut down on production and thereby raise prices. But it
diminished the effect of that spending by paying for it with a sizeable processing
tax. Likewise, Social Security, which aimed to plow a huge amount of money into
pensions, was not slated to make payments until 1942, but began taking money
out of circulation through a withholding tax long before then.
The New Deal also alienated businessmen, something Keynes counseled
against. “Businessmen have a different sense of delusions from politicians,” he
once said. “You could do anything you liked with them, if you would treat them
(even the big ones) not as wolves and tigers but as domestic animals by nature,

even though they have been badly brought up and not trained as you would
wish.” The NRA alienated business, and never did encourage private expansion
or investment. It may have halted the deflationary spiral, but it failed to create
new jobs. And it contributed to a measure of ill will. As Roosevelt got frustrated,
his rhetoric marginalized business interests. Speaking of business interests in
the reelection campaign of 1936, he proclaimed, “They are unanimous in their
hate for me – and I welcome their hatred.” That may have helped politically, but
it hurt economically.
Fiscal policy, in short, along the lines Keynes counseled, did not work
because it was never really tried. The unemployment rate never dropped below
14 percent, and for the entire decade of the 1930s, it averaged 17 percent.
Slowly, however, the New Deal learned fiscal lessons In 1937, assuming
that the economy was improving and could manage without assistance,
Roosevelt slashed half of all WPA jobs and cut the allocation to less than a third
of what it had been. At the same time, workers were just beginning to contribute
to Social Security, though payout were still in the future. Industrial production fell
precipitously. The stock market plunged. Unemployment soared back to 19
percent. A quick restoration of spending brought matters under control.
But spending for World War II really vindicated Keynes and his theories.
With the onset of the war, even before American entrance, defense spending
quadrupled, and unemployment vanished virtually overnight. The lesson was
clear. There was no need to suffer the ravages of depression any longer. We
now had the tools to help the economy revive.
Some parts of the New Deal worked; some did not. The New Deal
restored a sense of security as it put people back to work. It created the
framework for a regulatory state that could protect the interests of all Americans,
rich and poor, and thereby help the business system work in more productive
ways. It rebuilt the infrastructure of the United States, providing a network of
schools, hospitals, and roads that served us well for the next 70 years.
Did the New Deal, as has sometimes been charged, exacerbate and
extend the Great Depression? Hardly. The regulatory state provided protections
that benefited all Americans. The administration could have treated business
interests better, but they were often responsible themselves for the antagonism

that persisted throughout the 1930s. Fiscal policy would certainly have worked
better had it been better understood. The fact that we were slow to embrace
Keynesian theory is one of the disappointments of the decade.
Today, the lessons are clear. Government can make a difference. A
major stimulus is essential and can promote recovery. We need to ensure that
measures do not work in contradictory ways against the stimulus. We can do
something about unemployment. It is as important today as it was in the 1930s
to bolster security, as we turn our attention to health care reform just as the New
Deal crafted a program, pathbreaking for us, for retirement assistance. The New
Deal made a profound difference in people’s lives and in the lives of our nation.
Now it behooves us to learn from the lessons of the 1930s and take the actions
necessary to promote a return to prosperity.

Democratic presidential candidates as well as some conservative intellectuals, are suggesting that Franklin Delano Roosevelt’s New Deal is a good model for government policy today.

Mounting evidence, however, makes clear that poor people were principal victims of the New Deal. The evidence has been developed by dozens of economists — including two Nobel Prize winners — at Brown, Columbia, Princeton, Johns Hopkins, the University of California (Berkeley) and University of Chicago, among other universities.

New Deal programs were financed by tripling federal taxes from $1.6 billion in 1933 to $5.3 billion in 1940. Excise taxes, personal income taxes, inheritance taxes, corporate income taxes, holding company taxes and so‐​called “excess profits” taxes all went up.

The most important source of New Deal revenue were excise taxes levied on alcoholic beverages, cigarettes, matches, candy, chewing gum, margarine, fruit juice, soft drinks, cars, tires (including tires on wheelchairs), telephone calls, movie tickets, playing cards, electricity, radios — these and many other everyday things were subject to New Deal excise taxes, which meant that the New Deal was substantially financed by the middle class and poor people. Yes, to hear FDR’s “Fireside Chats,” one had to pay FDR excise taxes for a radio and electricity! A Treasury Department report acknowledged that excise taxes “often fell disproportionately on the less affluent.”

Until 1937, New Deal revenue from excise taxes exceeded the combined revenue from both personal income taxes and corporate income taxes. It wasn’t until 1942, in the midst of World War II, that income taxes exceeded excise taxes for the first time under FDR. Consumers had less money to spend, and employers had less money for growth and jobs.

New Deal taxes were major job destroyers during the 1930s, prolonging unemployment that averaged 17%. Higher business taxes meant that employers had less money for growth and jobs. Social Security excise taxes on payrolls made it more expensive for employers to hire people, which discouraged hiring.

Other New Deal programs destroyed jobs, too. For example, the National Industrial Recovery Act (1933) cut back production and forced wages above market levels, making it more expensive for employers to hire people — blacks alone were estimated to have lost some 500,000 jobs because of the National Industrial Recovery Act. The Agricultural Adjustment Act (1933) cut back farm production and devastated black tenant farmers who needed work. The National Labor Relations Act (1935) gave unions monopoly bargaining power in workplaces and led to violent strikes and compulsory unionization of mass production industries. Unions secured above‐​market wages, triggering big layoffs and helping to usher in the depression of 1938.

What about the good supposedly done by New Deal spending programs? These didn’t increase the number of jobs in the economy, because the money spent on New Deal projects came from taxpayers who consequently had less money to spend on food, coats, cars, books and other things that would have stimulated the economy. This is a classic case of the seen versus the unseen — we can see the jobs created by New Deal spending, but we cannot see jobs destroyed by New Deal taxing.

For defenders of the New Deal, perhaps the most embarrassing revelation about New Deal spending programs is they channeled money AWAY from the South, the poorest region in the United States. The largest share of New Deal spending and loan programs went to political “swing” states in the West and East — where incomes were at least 60% higher than in the South. As an incumbent, FDR didn’t see any point giving much money to the South where voters were already overwhelmingly on his side.

Americans needed bargains, but FDR hammered consumers — and millions had little money. His National Industrial Recovery Act forced consumers to pay above‐​market prices for goods and services, and the Agricultural Adjustment Act forced Americans to pay more for food. Moreover, FDR banned discounting by signing the Anti‐​Chain Store Act (1936) and the Retail Price Maintenance Act (1937).

Poor people suffered from other high‐​minded New Deal policies like the Tennessee Valley Authority monopoly. Its dams flooded an estimated 750,000 acres, an area about the size of Rhode Island, and TVA agents dispossessed thousands of people. Poor black sharecroppers, who didn’t own property, got no compensation.

FDR might not have intended to harm millions of poor people, but that’s what happened. We should evaluate government policies according to their actual consequences, not their good intentions.

Globalism

The order of the day ever since the end of the Second World War has been, more or less, a trend towards increased globalism. It is hard not to acknowledge the path the international community is collectively taking given the cooperation between otherwise distant nations that has resulted from the advent of organizations such as the United Nations, the European Union and NATO. Between these colossal organizations and the commercial treaties which have resulted, our world has found itself resembling a diverse monolith despite the existence and non-resolution of individual age-old issues and disputes between individual countries.

Nationalism, ever since its coherent emergence in the 19th century, has been to some extent a force for good in respect to the achievements and maintenance of interests of certain countries. However, without moderation everything is bound to spoil and result in chaos. Too much nationalism can turn a country paranoid and instill in it a sense of superiority over other nations or even the minorities within its boundaries.

The brutal Armenian Genocide is a ghastly example of uncontrolled nationalism, specifically pan-Turkic nationalism. Much of the geopolitics in the Caucasus today is still conducted under the shadows cast by the long-extinct empires of the Ottomans, Russians and Persians. Through disputes that were aggravated or otherwise not concretely resolved even under the authority of those imperial powers more than a century ago, our people today find themselves under threat. The main point to be made is that the world should not continue on this path of ardent globalism, with aspirations of landing on Mars and becoming a multi-planetary species, without first addressing the myriad inter-ethnic problems that we have inherited through the policies of nationalist powers before us. An expanding and globalizing world will no longer take seriously the issues of individual countries since there’s ultimately a bigger picture in play, globalism.

Therefore, Armenia should now do its best to ensure that its interests are also respected in the eyes of the world and that if we are to continue on this path of globalization, it should in no way come at the cost of Armenian lands and its people.

Globalization was meant to bring the world closer together, enmeshing advanced and developing economies in a web of mutually beneficial economic and financial linkages. From about the mid-1980s, trade and financial flows between countries expanded rapidly as governments dismantled barriers to these flows. 

Not everything went according to plan. Tensions rose as the benefits were not equally shared within or among countries. Widening economic inequality, often attributed to free trade, roiled many advanced economies and has had far-reaching political consequences. While they benefited from access to foreign markets for their exports, many emerging market countries were ravaged by volatile capital flows and the fickleness of international investors. Still, there was a broad consensus that shared economic interests would ultimately triumph and even help smooth over geopolitical frictions. 

This script held up well through the mid-2000s. Over the last decade and a half, a series of shockwaves has shredded the script. These include the 2008-09 global financial crisis, the COVID-19 pandemic, and various geopolitical ructions, such as rising U.S.-China tensions and the Russian invasion of Ukraine. Worldwide trade and financial flows have fallen well below their peaks. 

While economic factors account for much of this decline, industrial policies in various guises are spurring the shift toward weaker global trade and financial integration. China’s “dual circulation” policy, for instance, involves a state-led focus on increasing self-reliance (by boosting domestic demand and indigenous innovation) while remaining engaged with the global economy. The “Make in India” initiative has similar objectives of boosting Indian manufacturing by protecting domestic manufacturers in specific sectors from foreign competition. Even advanced economies, once seen as unabashed proponents of free trade, are joining the bandwagon. The Biden administration’s Inflation Reduction Act aims to boost green technologies by deploying subsidies and tax breaks to incentivize the domestic production of electric vehicles and renewable energy components. The CHIPS and Science Act provides similar incentives to semiconductor firms to set up manufacturing facilities in the United States and bans outsourcing to “China and other countries of concern.”

As countries retreat from globalization and begin to look increasingly inward, there could be wide-ranging implications for both economic and geopolitical stability. Just as with the surge in globalization, however, the consequences of this pullback are proving to be unevenly distributed, with low- and middle-income countries bearing the brunt. 

During the era of globalization, trade and financial flows around the world were driven mainly by economic considerations. With transportation costs falling, corporations in advanced economies found that they could take advantage of lower labor costs in developing countries. Moreover, they were able to structure lean and efficient supply chains that threaded through multiple countries, enabling cost savings by relying on different countries’ specialization in various intermediate products. To this day, iPhones and MacBooks have electronics and other components sourced from multiple Asian countries, with the final stages of production mostly being handled in China. 

Foreign direct investment (FDI) flows have tended to follow trade, with corporations setting up operations abroad and investing in manufacturers as well as suppliers of various kinds of inputs, including raw materials and intermediate goods. Emerging market countries, which had for a long time been able to get foreign financing only in the form of debt and at unfavorable terms, were now receiving more stable flows and at better terms that did not require them to assume all the risk. Direct investment tends to be less volatile than debt or other forms of financing, and foreign investors share in the risks of such investment in return for prospects of better returns.

Financial flows ran both ways, with many emerging market countries using their trade surpluses to accumulate rainy day funds and invest them in government bonds issued by the United States and other advanced economies. This way, if and when foreign investors turned their backs on an emerging market country that had been in their favor, that country would still be able to pay for its imports in hard currencies and protect the value of its own currency. A symbiotic relationship developed between advanced and emerging market countries, with both groups profiting from relatively unfettered trade and financial flows.

Emerging market countries benefited from globalization in multiple ways. They were able to expand markets for their products beyond their national borders, allowing them to build strong manufacturing sectors and robust middle classes. Trade relationships with advanced economies and their more sophisticated corporations facilitated transfers of technology as well as state-of-the-art production processes and managerial practices. As a result, many companies in emerging market countries became large and modern enough that they were able to compete toe-to-toe with their advanced economy counterparts, engendering more competition, innovation, and benefits for consumers worldwide. 

Foreign investment played a similar role, as corporations had an incentive to ensure that their suppliers in emerging market countries were operating with the best technological and managerial practices. Foreign funds even helped in creating more robust financial markets with larger trading volumes and better regulation. Domestic financial market development in fact came to be seen as a key “collateral benefit” of globalization, as it allowed emerging market countries to channel not just foreign funds but even domestic savings to more productive investments. 

Cross-border financial flows fell after the global financial crisis, mainly as a result of Western banks reining in their global aspirations, while trade flows continued to expand. For both types of flows, economic considerations such as efficiency and cost minimization remained front and center in determining their patterns. It seemed just a matter of time before financial flows, or at least FDI flows, would also return to pre-crisis levels. 

Then the world changed. The COVID-19 pandemic disrupted supply chains worldwide. With various countries affected at different times and with varying intensities, this worsened the pandemic-induced recession as one broken link could disrupt the entire chain. China’s zero-COVID strategy wreaked further havoc on global supply chains. Corporations that had touted the efficiency of their supply chains were left adrift as those became points of vulnerability. The pandemic accentuated other fragilities that had already been brewing in the background. Geopolitics took a turn for the worse, with rising tensions between the United States and China exacerbating these problems. Russia’s invasion of Ukraine showed that relying on a single supplier of energy products could leave an entire continent vulnerable. 

National governments and corporate leaders have taken note. There is change in the air and on the ground as they adapt to difficult new realities. Trade tensions, geopolitical fractures, and efforts to combat climate change are shifting the focus away from efficiency, typified by lean and mean supply chains, toward stability and resilience. One way to deal with uncertainty is through diversification of supply sources and export markets for goods and services. Apple, for instance, is trying to switch some of its production and assembly to India and Vietnam. But diversification is typically costly and adds complications of a different sort, including having to manage multiple supply chains. 

Instead, countries and corporations are taking a different tack, redirecting their trade and financial flows to align with geopolitical commitments. Such responses include trade measures (tariffs as well as import and export restrictions) but also industrial policies to promote domestic technologies—policies that effectively act as trade and investment barriers. Governments of all stripes feel a need to stimulate investment in new technologies, especially green technologies. For emerging market economies—especially countries with unfavorable demographic trends, such as China—such investment is viewed as essential to keeping economic growth from declining precipitously. For advanced economies facing rising competition from emerging markets, such investment is seen as existential for their shrinking manufacturing sectors. 

Supply chain disruptions, geopolitical fragmentation, adaptation to climate change, and a host of economic and political pressures are thus all pushing in the same direction, toward an inward tilt of economic policymaking. In the guise of preserving U.S. technological supremacy, improving energy security, and promoting domestic investment in green and other new technologies, the Inflation Reduction Act has put in place a number of policies that implicitly serve as barriers to free trade, such as tax credits for electric vehicles made in the United States. 

Private corporations are also causing a pullback from globalization, with reshoring and friendshoring having become their mots du jour. Reshoring involves moving a good’s entire production process back within the borders of the home country; friendshoring involves threading supply chains only through countries that are seen as geopolitical allies to eliminate the threat of disruption as a result of geopolitical tensions. 

Globalization is not dead, but it has clearly taken a turn toward fragmentation along geopolitical lines, which could have important economic consequences for all countries. Patterns of both trade and FDI flows are gradually shifting in ways that mirror geopolitical alliances. Emerging market economies, which have in many ways benefited from global trade and financial flows but also been subject to globalization’s whiplash effects, now stand to suffer the adverse effects. 

For emerging market economies not politically aligned with advanced economies, lower trade and financial flows will mean fewer technology and knowledge transfers, hindering their path to development. With countries pulling back from global integration, access to export markets could also become more constrained over time. This might matter less for countries such as China, India, and Brazil—which have grown large, more self-sufficient, and richer than many other emerging market economies—but could stifle those countries that are smaller and still at earlier stages of economic development. 

These trends will hamper the economic development of low-income countries, many of which have the advantage of relatively young and expanding labor forces but remain bereft of financial and other resources. Low-income countries in sub-Saharan Africa, in particular, lack the financial capital and technological know-how to build basic manufacturing, let alone compete effectively in the industries of the future. Limited foreign investment, especially in manufacturing rather than just resource-extraction industries, and restrictions on access to global markets for their goods will make it even harder for these countries to attain economic progress and improved standards of living for their populations. 

It’s possible that the magnitude of financial flows to emerging markets will essentially remain the same. Advanced economies are beset by aging populations, high levels of public debt, and low productivity growth. For investors looking for better returns on their investments or, at a minimum, diversification opportunities, emerging market economies are likely to remain attractive. But the nature of that financing could change in important ways. Rather than more stable flows such as FDI, emerging markets might receive more of this funding in the form of portfolio investment—money flowing into equity and corporate debt markets—that is still welcome but tends to be volatile. These flows also tend to bring with them fewer collateral benefits such as technology transfers. 

Many low-income African countries are becoming increasingly indebted to foreign creditors, both private and official, who provide them with foreign currency loans that are inherently riskier for borrowing countries. Meanwhile, direct investment flows to much of the region have leveled off in recent years. These countries typically have low levels of foreign exchange reserves, leaving them vulnerable to the whims of their creditors.

The restricted patterns of trade represented by reshoring and friendshoring, which are intended to lower volatility, could also increase rather than decrease vulnerability to certain types of adverse events. Climate change is, after all, becoming a greater risk that transcends economic and geopolitical frictions among countries. In 2011, floods in Thailand brought global supply chains for automobiles and certain electronic products to a grinding halt because the country was a manufacturing base for certain types of electronic chips. Regional concentration could make supply chains more vulnerable to such climate-related events. 

There are other costs as well. As economic flows come to closely parallel geopolitical alignments, an important counterweight to geopolitical frictions is being eroded. Take the complicated U.S.-China relationship, which has become increasingly fraught as China’s rising economic might puts the two superpowers in direct competition on multiple fronts. 

The economic and financial relationship between the two countries once served as a counterweight to geopolitical tensions. After all, such a relationship can be constructed and maintained in a way that benefits both countries, making it a positive-sum game. By contrast, geopolitical influence is inherently a zero-sum game, with one country’s rising influence coming at the expense of its rival. 

The evolution of the U.S.-China relationship is a precursor for how even economic relationships have come to be seen as a zero-sum game. China’s aspirations to ascend from middle-income status to the ranks of rich economies will require an upgrade of its industrial structure and a shift from low-wage, low-skill manufacturing to higher-productivity firms that are at the frontiers of technology. Indeed, technology has become the new battleground, with China aiming for self-sufficiency and looking to increase its global market share for high-tech products and the United States seeing a threat to its commercial interests as well as national security as Chinese companies increase their global footprint. The United States has restricted exports of high-tech products and technologies and even tried to dissuade private investment from flowing to China. Trade and economic tensions between the two countries are now feeding into and heightening political tensions. 

Thus, and somewhat ironically, fragmentation of trade and finance along geopolitical lines might not deliver the presumed benefits of greater economic stability and resilience. Rather, these forces might ultimately foment even greater volatility, both economic and geopolitical. The burden of these shifts will fall disproportionately on low- and middle-income economies. Such developments are also leading to restrictions on the free flow of ideas and intellectual property. Restrictions of this sort come at the cost of hindering the advancement of technology and other forms of knowledge at a global level. 

A retreat from globalization might leave countries feeling more secure and less exposed to global volatility. The costs of such a retreat will be less evident but will be large nonetheless, and all countries, both rich and poor, will one day come to rue their inward turn.

Resources

How Free Trade Is Destroying the United States

fee.org, “The Fear of Free Trade: Addressing Protectionists’ Fear of Job Loss.” By Mark Hendrickson; ecnmy.org, “What is ‘free trade’?”; hbr.org, “The Folly of Free Trade.” By John M. Culbertson; imf.org, “SUPERPOWERS ARE FORSAKING FREE TRADE.” By Ngaire Woods; theguardian.com, “Biden is turning away from free trade – and that’s a great thing.” By Robert Reich;

National Security Council Study Memorandum 200 (NSSM 200)

nixonlibrary.gov, “National Security Study Memorandum 200.”; en.wikipedia.org, “National Security Study Memorandum 200.” By Wikipedia Editors;

How Deregulation Caused Our Economic Demise

“The Road to Ruin: The Global Elite’s Secret Plan dor the Next Financial Crisis.” By James Rickards; The Trillion-Dollar Conspiracy: How the New World Order, Man-Made Diseases, and Zombie Banks are Destroying America.” By Jim Marrs; “How the West Was Lost: Fifty Years of Economic Folly-and the Stark Choices Ahead.” By Dambisa Moyo; “The Tyranny of Good Intentions: How Prosecutors and Bureaucrats are Trampling the Constitution in the Name of Justice.” By Paul Craig Roberts and Lawrence M. Stratton; “Bad Money: Reckless Finance, Failed Politics, and The Global Crisis of American Capitalism.” By Kevin Phillips; cato.org, “Did Deregulation Cause the Financial Crisis?” By Mark A. Calabria; investopedia.com, “Deregulation: Definition, History, Effects, and Purpose.” By Will Kenton; “The Greatest Bank Robbery: The Collapse of the Savings and Loan Industry.” By Martin Mayer; I.O.U.: Why Everyone Owes Everyone and No One Can Pay.” By John Lanchester;

How Special Interests Groups and Greed Are Ruining Our Country

“The Secret History of the American Empire: Economic Hit Men, Jackals and the Truth About Global Corruption.” By John Perkins; “The Ttyranny of Big Tech.” By Josh Hawley; “Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else.” By Chrystia Freeland; “The New Confessions of an Economic Hitman.” By John Perkins; “Bailout Nation: HowGreed and Easy Money Corrupted Wall Street and Shook the World Economy.” By Barry Ritholtz and Aaron Task; “Take This Job and Ship It: How Corporate Greed and Brain-Dead Politics are Selling Out America.” By Senator Byron L. Dorgan; “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.” By Gretchen Morgenson and Joshua Rosner; “Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense.” By David Cay Johnston; “The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.” By James K. Galbraith; “Power to Destroy: The Political Uses of the IRS From Kennedy to Nixon.” By John A. Andrew III; “Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right.” By John Mayer; “Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super-Rich-and Cheat Everybody Else.” By David Cay Johnston; “The Tyranny of Good Intentions: How Prosecutors and Bureaucrats are trampling the Constitution in the Name of Justice.” By Paul Craig Roberts and Lawrence M. Stratton;

How the Federal Reserve Stunted Our Country‘s Growth

“End the Fed.” By Ron Paul; “The Creature from Jekyll Island: A Second Look at the Federal Reserve.” By G. Edward Griffin; “Lords of Finance: The Bankers who Broke the World.” By Liaquat Ahamed; “Secrets of the Temple: How the Federal Reserve Runs the Country.” By William Greider; fee.org, “The Case Against the Fed: How Do We Eliminate Inflation and the Boom-Bust Cycle?” By Douglas French; aier.org, ” Yes, the Fed is a Failure.” By Alexander William Salter; wanttknow.info, “Financial and Banking Cover-ups
Key Information and Facts Reveal Major Cover-up.” By McConnell, Campbell R. & Brue, Stanley L.; federalreservehistory.org, “The Great Depression.” by Gary Richardson;

FDR’s New Deal or Raw Deal?

“FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression.” By Jim Powell; “New Deal or Raw Deal? How FDR’s Economic Legacy has Damaged America.” By Burton Folsom Jr.; fee.org, “FDR’s ‘New Deal’ Worsened and Prolonged the Great Depression: The gargantuan expansion of the federal government undermined prosperity.” By Daniel J. Mitchell; csmonitor.com, “Was the New Deal too small? A lesson from Great Depression, historians say, is that Roosevelt didn’t spend enough to jolt economy into recovery.” By Alexandra Marks; banking.senate.gov, “THE NEW DEAL: ACCOMPLISHMENTS AND FAILURES.” By Allan M. Winkler; cato.org, “How FDR’s New Deal Harmed Millions of Poor People.” By Jim Powell;

-Globalism

“The Globalization Paradox: Democracy and the Future of the World Economy.” By Dani Rodrik; Bad Money: Reckless Finance, Failed Politics, and The Global Crisis of American Capitalism.” By Kevin Phillips; “The Road to Ruin: The Global Elite’s Secret Plan for the Next Financial Crisis.” By James Rickards; “How the West Was Lost: Fifty Years of Economic Folly-and the Stark Choices Ahead.” By Dambisa Moyo; “The Trillion Dollar Conspiracy: How the New World Order, Man-Made Diseases, and Zombie Banks are Destroying America.” By Jim Marrs; “A Century of War: Anglo-American Oil Politics and the New World Order.” By F. William Engdahl; “The War on Normal People: The Truth About America’s Disappearing Jobs and Why Universal Basic Income is our Future.” By Andrew Yang; linkedin.com, “Nationalism in The Age of Globalism.” By Garen Harboyan; foreignpolicy.com, “The World Will Regret Its Retreat From Globalization: Trade and financial flows have fallen well below their peaks, and poorer countries will bear the brunt.” By Eswar Prasad;

Randy’s Musings
https://common-sense-in-america.com/2021/04/02/randys-musings/
https://common-sense-in-america.com/2021/04/13/randys-musings-2-0/
https://common-sense-in-america.com/2021/10/22/randys-musing-3-0/
https://common-sense-in-america.com/2021/10/05/randys-musing-4-0/
https://common-sense-in-america.com/2021/11/12/randys-musings-5-0/
https://common-sense-in-america.com/2021/11/23/randys-musings-6-0/
https://common-sense-in-america.com/2021/12/17/randys-musings-7-0/
https://common-sense-in-america.com/2022/12/30/randys-musings-8-0/
https://common-sense-in-america.com/2024/04/16/randys-musings-9-0/