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Globalism's Gift: High Unemployment, Low Wages, Financial Crises and the Erosion of the Dollar

The Social Costs of Capitalism

by PAUL CRAIG ROBERTS

When I was a graduate student in economics, the social cost of capitalism was a big issue in economic theory.  Since those decades ago, the social costs of capitalism have exploded, but the issue seems no longer to trouble the economics profession.

Social costs are costs of production that are not born by the producer or included in the price of the product. There are many classic examples: the pollution of air, water, and land from mining, fracking, oil drilling and pipeline spills, chemical fertilizer farming, GMOs, pesticides, radioactivity released from nuclear accidents, and the the pollution of food by antibiotics and artificial hormones.

Some economists believe that these traditional social costs can be dealt with by well defined property rights. Others think that benevolent government will control social costs in the interests of society.

Today there are new social costs brought by globalism. For developed countries, these are unemployment, lost consumer income, tax base, and GDP growth, and rising trade and current account deficits from the offshoring of manufacturing and tradable professional service jobs. The trade and current account deficits can result in a falling exchange value of the currency and rising inflation from import prices. For underdeveloped countries, the costs are the loss of self-sufficiency and the transformation of agriculture into monocultures to feed the needs of international corporations.

Economists are oblivious to this new epidemic of social costs, because they mistakenly think that globalism is free trade and that free trade is always beneficial.

Economists are also unaware of the social costs of deregulation. The ongoing financial crisis which requires massive public subsidies to “banks too big to fail” is a social cost resulting from government accommodating Wall Street pressure to deregulate the financial system by repealing the Glass-Steagall Act, by removing the position limits on speculators, by preventing the CFTC from regulating derivatives, and by turning the Anti-Trust Act into dead-letter law and permitting massive economic concentrations. The social costs of successful corporate lobbying is enormous. But economists who believe that markets are self-regulating imagine that an enormous gain in efficiency has occurred, not massive social costs.

In order to keep the deregulated financial system afloat, the Federal Reserve has monetized trillions of dollars of debt over the last several years.  Real interest rates have been driven into negative territory. Retirees are unable to earn any interest income  on their savings and have to draw down their capital in order to cover their living expenses.

The liquidity injected into financial markets by the Federal Reserve’s policy of quantitative easing has produced huge bond and stock market bubbles. When they pop, more American wealth will be wiped out and more jobs will be lost.

Consider just one example of the social costs of jobs offshoring. When US corporations produce
howeconabroad the goods and services that they market to Americans, the goods and services that flow into the US arrive as imports. Thus, the trade deficit rises dollar for dollar.

The trade deficit means that the US has imported more than it has earned in foreign currencies by exporting. For most countries this would be a problem, but not for the US.

The US dollar is the world reserve currency, which means that it is the means of international payment and that foreign central banks hold US dollars as reserves to secure the values of their own currencies.

With the passage of time, this advantage becomes a disadvantage, because foreigners use the dollars gained from their trade surpluses to buy up American income-producing assets.  They buy US Treasury bonds and US corporate bonds, and the interest income leaves the country. They purchase US companies, and the profits, dividends and capital gains leave the country.  They lease Chicago’s parking meters and American toll roads, and the revenues flow abroad.

The enormous outflow of income streams creates a large current account deficit for the US, which means that foreigners have even more surplus dollars with which to buy up more US assets. In other words, a chronic trade deficit is a way to redirect a country’s revenues and profits into overseas hands.

The ownership of a country changes from its own citizens to foreigners.  According to Reuters, in 1971 foreign companies owned 1.3% of all corporate US assets.

By 2008 foreigners owned 14.2 percent of all US industries, including 21.5% of mining, 25% of manufacturing, 30.2% of wholesale trade, 12% of information industries, 12% of real estate, 15% of finance and insurance, 25% of professional, scientific, and technical services, 11% of entertainment and recreation and 11% of accommodation and food services, according to a report from Economy In Crisis.

Numerous famous American brand names now are companies owned by foreigners.

Budweiser belongs to a Dutch company. Alka Seltzer belongs to a German company.

Firestone belongs to a Japanese company. The magazines Car and Driver and Woman’s Day are owned by a French company. Gerber baby food and Purina dog food belong to Swiss companies. Hellman’s Mayonnaise and Ben & Jerry’s ice cream belong to UK companies. Many thousands of former US companies have moved into  foreign control as a result of the US trade deficit, which is swollen by the offshored production of US corporations.

The policy of chasing lowest labor cost abroad, that is, of pursuing absolute advantage, the antithesis of comparative advantage which is the basis of free trade, is the redirection of US profits, capital gains, rents, interest, parking meter and toll road fees into foreign hands.

Thus, there is a high social cost from corporate executives pursuing short-term profits in order to maximize their performance bonuses. The profits from offshored production are not indications of economic efficiency and social welfare. Most likely, the social costs to the US of offshored production are larger than the profits gained, making jobs offshoring a net loss to the US economy. There is little doubt that the social costs of GMOs exceed the profits of Monsanto.

But don’t expect mainstream economists to pay any attention. They are still waxing eloquently about the advantages of Globalism’s gift of the New Economy of high unemployment and low wages, financial crisis and dollar erosion.

Paul Craig Roberts is a former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal. His latest book is  The Failure of Laissez-Faire Capitalism. Roberts’ How the Economy Was Lost is now available from CounterPunch in electronic format.