How Free Trade Wrecked England.

                              THE STORY OF THE CORLISS

            There is an antique fair held every year in northeast Iowa, at a place called Antique Acres. While most of the things to be seen at Antique Acres are items brought to the fair by individual collectors, there is a museum which houses a permanent collection of large stationary steam engines.  They have about six engines, though their boiler is only large enough to operate one at a time. The prize of their collection is a large Corliss engine. The Corliss was an American invention, and it marked a radical improvement in engine efficiency. The Corliss used spring-loaded valves. The engine still used an eccentric driven off the crankshaft to re-cock the springs and trigger the release. But when a valve on any Corliss opens or closes, it is being snapped open or shut by a spring, and the action is almost instantaneous.  This allows more precise valve timing, which radically improves efficiency.  I saw my first Corliss at the Smithsonian, about 1986.  Though still on display, it had been part of the exhibition of 1876, in fact it had been the crown jewel of that show—the summation of 19th century American genius.

            In 1999, my wife and I spent a week in London, and we spent most of the week in museums. At the Science Museum, they have a magnificent collection of old steam engines, including a small demonstration model built by James Watt himself. But what caught my eye was a huge old Corliss, shown in the above photo.  I asked why it was there. Wasn’t this museum just for British technology? I was told that this was indeed a British engine, and was shown the bronze nameplate. It was built in England, about 1885 I think—under license from Corliss USA.  This was pretty astounding. Why? Well, let’s take a look at what happened to the British industrial base in the 19^th century. 

             At the start of the 18^th century, England lagged far behind most of Europe in technology. So they deliberately became the most protectionist economy in the world.  All imports were heavily taxed. (Many novels set in that period mention smugglers or smuggling.) Local manufacturing thrived.  Factories became profitable and the profits were re-invested in those same factories, since investment in overseas facilities would make no sense if the output of such facilities could not be imported to England.  By the end of the Napoleonic Wars, after a century of protectionism, England led the world in every kind of manufacturing.  So, at the Congress of Vienna in 1815, Britain did an about face and proposed a free trade agreement. There is little advantage having a technological lead if you can’t pry open other countries’ markets to make use of that lead.  And no one will open markets to you, unless you open yours.

          But there’s a paradox. Any trade advantage gained this way will be short lived.  As soon as you open doors to imports, capital will begin to flow out of the country.  If a British factory owner chooses between building a new factory in England and building it in India or some other low-wage country, the low-wage option will surely be more profitable.  So when Britain adopted free trade, they began a period where for several decades, no Englishman with money invested it in England.  Being starved for capital, their industrial base declined, and their standard of living stagnated.

               Germany quickly realized that free trade with England would not benefit Germany.  If their factories lagged behind England, being forced to compete with British goods would only put them further behind, and eventually put them out of business.  So Germany pulled out of the free trade agreement and instead adopted the protectionist policies of Frederich List. The various German-speaking states entered a “Zollverein,” or customs district, in which goods among member states moved freely, but other goods was kept out.  This plan was superbly successful, and German industrial output doubled every decade for the rest of the century.  This boom paid for schools, so that near universal literacy was quickly achieved, and as Germany became food self-sufficient, German workers were better fed than the English.

               As Wm Engdahl points out in his excellent book, A Century of War, when Germany began to shift away from free trade in 1850, they produced only tiny amounts of iron. But by 1900, they passed Britain and by 1910 their output was 50% higher than Britain, at 15 million tons. Between 1880 and 1900, their steel output rose over 1000 %.   The situation was the same for coal, textiles, electric power, and chemicals.  In fact, Germany practically invented the modern chemical industry.  Mr. Engdahl’s book was not written till a few years after my visit to the Science Museum. But even then I knew that England’s 19th century free trade policy had cost it much of its manufacturing base. I knew this in spite of the fact that most history books take elaborate pains tell you the opposite, or at least manage to avoid discussing it.  (The royal tailors prefer not to discuss “the king’s new clothes.”)  But I was astounded to discover that as early as the 1880s,  Britain had lost not only manufacturing capacity, but had totally lost its edge in technical innovation. Think about it.  The steam engine is a British invention.  In 1840, Britain made the finest steam engines in the world. Yet by the 1880s, the American Corliss engine was so superior that British manufacturers were paying patent royalties for the privilege of building it.  Yet you could read 10,000 pages of nineteenth century history, written within that century, and find total agreement that free trade was a boon to England and would make the English rich.  In fact, even at the close of the 20^th century, fully a hundred years after free trade had finished wrecking what was once the greatest manufacturing base in the world, the standard explanation by the leaders of British government, business, and academia was that free trade was wonderful, and no one could disagree except those fools who didn’t quite understand it.

        But it was all self-delusion, lies, and nonsense.  If any of it at all had been true, then that bronze plaque in the Science Museum could not exist.  But it did exist. Archaeology is history, except that the artifacts speak for themselves. Histories can be in error, or can be written to deliberately deceive. Engdahl claims that Arnold Toynbee, the premier British historian of the 20^th century, was a British MI 5 agent for nearly his whole life.  But iron doesn’t lie.  It is what it is.

          All archaeology draws inferences about a society by observing the remains of its material culture. When you walk through a museum, an antique shop, or even a junk yard, you are studying the remains of our own material culture. And there are “Rosetta stones” hiding behind every corner, if only we could read them. Here’s to the perusal of elderly iron. 

                       

               

Matching the Message to the Market

                                                                                              

            I just got my hands on a copy of The Heliand.   Some of you may be familiar with this work.  It’s also known as the Saxon Gospels.  In about 820 AD, King Louis the Pius, the son and immediate successor of Charlemagne, commissioned a Saxon poet to translate the New Testament into the Saxon language.  He felt that the long and bloody struggle to convert the Saxons to Christianity might be easier if the Saxons could hear the stories of the gospel read to them in their own language.   

            But the poet tinkered with the message to match the market.  Instead of a “word for word” transliteration, he produced an imaginative fiction--loosely inspired by the gospels. It is a heroic epic poem in which Jesus is depicted as a warrior chieftain of a band of bold thanes.  Of course, that is exactly the kind of story that these people could relate to.  The Saxons are the original “Klingons.” For the gospel to be at all attractive to them, the poet had to add a little “Saxon violence.”  In the early nineteenth century, this work was re-constructed and translated into modern German and modern English.  I’m using an English translation from the Old Saxon done by Mariana Scott, published in 1966 by the University of North Carolina press. Let me share a brief excerpt.  This is the account of the arrest of Jesus in the Garden of Olives.  I’ll pick up the story just after Judas has betrayed Jesus with a kiss, and the mob of angry Jews is about to seize Jesus:

           

They surrounded Christ Savior.            There stood the wise men

Grieving greatly--            Christ’s goodly disciples,

Before this most dreadful deed;            and to their Dear Lord they did speak:

“Were it now Thy will,” quoth they,                “My Wielder, My Liege,

That they shall slay us                        with the spear-point here,

Shall wound us with weapons,            then would naught be one whit as good,

But that we might die                        here for our Dear Lord,

Pale in expiring.              Then plenteously wroth grew he,

The swift swordsman,                        Simon Peter.

It welled up with his heart,             so that not a word could he speak,

So sorrowed his soul,                        since they were about to enchain

His Beloved Lord there.            Bloated with anger, the bold-minded

Thane strode ahead,                        stood before his Liege,

Hard by his Lord;                        nor was his heart e’er in doubt,

Fearful within his breast,            but he drew his bill,

The sword at his side,             and with the strength of his arm

He struck the first of the foe                        standing before him,

So that Malchus            was marked by the knife

On his right side,                        slashed by the sword’s edge.

His hearing had been hewn:                        sore was the hurt  ‘round his head,

So that sword-gory,                        cheek and ear in mortal wound

Burst sunder,                         and blood did spring forth,

Welling up from the wound.                        Then was the cheek indeed scarred

Of the enemy’s leader.            Those around stood away,

Dreading the bite of the bill.                         Then spake  God’s Bairn

Himself to Simon Peter, said                        that he should put his sword,

The sharp one, back in its scabbard.              “If I truly cared,” said He,

"To wage conflict            against this crowd of the warriors,

Then I would remind Him,  the Glorious,            the Almighty God,

The Holy Father            in the Kingdom of Heaven,

That He send hither to Me            a host of His angels,

Wise in warfaring;                        these men could not indeed withstand

Their weapon-strength ever.                        Nor could such a host of warriors

Stand against them, though gathered            together in groups.

Still they could not save their lives.                        But the All-Wielding Lord,

The Father Almighty,                         hath marked it otherwise:

We are to bear all the bitterness,             whatsoever these

                        People bring unto us…”            

            If this strikes you as radically different from any biblical account of this event you’ve ever read, you’re absolutely right.  Jesus was not a warrior chieftain—He was a spiritual leader.  The disciples were not a band of bold thanes—they were Jewish fishermen, and the Jews were not a clan. Peter did own a sword, and he did attempt to defend Jesus.  And yes, he did draw that sword and smite the servant of the High Priest, severing his ear.  But in no way was he any kind of berserker.  In fact, the whole point of the original story—that Jesus had deliberately surrendered himself to be crucified—is eclipsed by this emphasis on the boldness and courage of the disciples.  But the idea of meekly surrendering was totally foreign to the Saxons.  They were, in effect, the original “Klingons.”  So the story had to be altered to make the message match the market.

            I’ve shown you a portion of the Heliand to make a simple point, which is that throughout history, all Christian scriptures, and for that matter, scriptures of all religions have been regularly and systematically re-interpreted make the message match the market.  You can’t sell buggy whips to sky-divers, or snowmobiles to Bedouins.   A church that refused to re-interpret its message to meet the challenge of changing expectations of the faithful would be like a used car dealer that refused to roll back the odometers.  There might actually be a few such dealers, but that’s not how you stay in business.   Any scriptural text is subject to a variety of interpretations.

           

Deregulation versus Growth

   If you wish to read a quick article on how deregulation has undermined the American economy, check out Alan Guebert's column this week.

Russia Most Corrupt Nation?

   According to an article in the Washington Post,  Transparency International has just rated Russia as the most corrupt major country in the world, and 154th in honesty among all 178 nations.  Well, my Rusky friends, enjoy your number one status while you can—but in the end, Yankee ingenuity will beat you, and you will have to settle for being number two.  It will be just like the space race.  You will assume a commanding early lead which will inspire awe and fear throughout the world.  But the U. S will rise to the challenge. 

            In the space race, it was a visionary president, John F. Kennedy, who challenged the country to put a man on the moon in ten years—and turned the tide in our favor.  But this time, it is not a president but another of our fine American institutions, the Supreme Court (same fine folks who brought you the Dred Scott Decision) which will allow us to become the clear world leader in corruption. The court made the ingenious discovery that corporations, as “corporate persons,” have First Amendment Rights-- and are therefore are allowed to spend unlimited amounts of corporate money to influence the outcome of elections.  And if they do it right, they can do it anonymously. 

            Anyone with an IQ higher than his sock size comprehends that in any country, the cause of all corruption is the mixing of public power and private wealth.  We have always known this and have passed a few feeble laws trying to limit the political effect of corporate wealth.  We have always understood that to make government more transparent and more answerable to the people, our task was to pass stronger and more effective laws in this direction.  Now, in the Citizens United decision, the court not only forbids this but wipes out the few feeble laws we still had.  But all corruption starts at the top.  Who appointed these judges—and what was their agenda?

            Enjoy your number one status while you can, Ruskies!   Once the floodgate of corporate wealth is unleashed against Congress, our economic elites will have enough control over the people from whom they steal as to make the Russian oligarchs look like a convention of Boy Scouts.    And remember that though we are coming from behind in this race, we are not really all that far behind.  The Governor of Illinois tried to openly sell a senate seat to the highest bidder, and a jury failed to convict him of any wrong-doing.  You may protest that in the matter of Governor Blagojevich, we are cheating.  He is not really a Yankee, but a Slav.  We are bringing in a “ringer,” an outside expert.  But remember, if he were really an expert, he would not have been caught.  We have others who do the same sort of thing every day and never come to trial.  And what about financial fraud?  It took 25 years to catch Bernie Madoff, and he stole more money than the GDP of most countries.  Yet the government regulators investigated him every year--and could never seem to find anything wrong.

            We have many natural advantages in this area, and we are not so far behind you as you may think.  But if these advantages should prove insufficient, we have other options.   We could allow a tax deduction for bribes paid to Congressmen.  But wait—I think we already do this.  What, after all, is a “lobbying expense?”  Well, if worse comes to worst, we can bring in foreign experts.  We can hire corporate ethics panels comprised of Italian pickpockets.

TARP Bailout Revisited

            About two years ago, as the Wall Street Collapse was unfolding, an old friend said that her European friend had asked why the U.S. financial collapse should cause the Dollar to appreciate against the Euro.  One would think it should cause the Dollar to fall.  I wrote a response, but before I mailed it I showed it to a few close friends who had been asking the same question.  They all said, “This is what you should be posting on your blog!”  I explained that I didn’t have a blog.  In fact, in the rural area in which I live, no high speed internet connection was available then.  This spring, air cards became available, and I began a blog, mostly in response to urging by friends who had read this opus.  This analysis is now two years old, but viewing it in retrospect, it holds up pretty well.  Keep in mind when reading this that it was written while the crisis was still unfolding—while Henry Paulsen was still trying to persuade Congress to pass the TARP bailout.                                                                       

                             ******WRITTEN  Oct 7, 2008:*****

Dear Jane, (Her name isn’t really Jane, but I try to protect the confidentiality of my friends.)

            Yesterday, you said your European friend was puzzled that the U.S. Dollar should be rising against the Euro, when it is our financial house that seems to be collapsing.  I gave you a brief, almost flippant answer at the moment.   Having thought about it, I believe it is a question that deserves an “in depth” answer, and I will try to provide one.

            Although it seems counter-intuitive, there are three main reasons why this happens:  the collapse of liquidity, the sell-off of commodities in exchange for Dollars, and the tendency to retreat to safe havens in times of trouble.  To wit:

·         The collapse of liquidity:  During the Great Depression of the 1930s, what puzzled most people was that no one could explain where all the money suddenly went.   In the 1920s, the country had been awash with Dollars—yet suddenly no one had any Dollars. Where did they go? Most people assumed that a few rich people still had all the Dollars, but were keeping them hidden in their mattresses, and were not spending them.  While such things actually happened, what mostly happened is that this money had simply, and instantly, ceased to exist.  Only about 5% of the money in circulation at any time is actually issued by the government.  Most of the money on which the country operates exists in the form of “commercial paper.”  This term refers to the IOUs which banks give to other banks.  These are various instruments of debt; they may be corporate bonds, bundles of mortgages, negotiable debentures, or may take many other forms.  But they are all really IOUs.  If you and I both owned banks, and my bank owed your bank 10 million dollars, I could repay this debt by delivering a suitcase containing $10 million worth of this commercial paper.   Your accountants would sort through it all, and then issue a receipt for “paid in full.” When instruments of debt are circulated as a form of cash, this process is called “monetizing debt.” It is how most money is created. The Fed makes a great pretense of controlling the money supply.  But any large corporation can add to the money supply by issuing debt, and these companies are completely beyond the ambit of the Fed.  But is this stuff really money?  It is as long as someone will accept it for payment of debts.  That is the litmus test.  A dollar bill says, “legal tender for all debts, public and private”--everyone has to accept dollar bills. And when times are good, most banks will cheerfully accept most commercial paper, in fact they prefer it. Dollar bills don’t yield interest—but these IOUs do.  A liquidity collapse occurs when some of these debt instruments, (i.e. sub-prime mortgages) become suspect, and serious doubt arises as to whether they will all be redeemed.  When this happens, then a bank which holds these instruments finds that no other bank will accept them, so they have a problem.  This drop in liquidity undermines their balance sheets so much that other banks become skeptical of the IOUs issued by any bank which holds such questionable assets. At this point, any bank which has loaned money to banks holding these questionable mortgages now has a problem on its own balance sheet, as does any insurance company who insures banks against default.  So as the problem spreads, the questionable loans undermine the credibility of all other classes of loans. Banks are supposed to keep cash reserves to offset losses from bad loans.  My own brokerage, Stiffel-Nicholas, has one dollar in cash for every three held in speculative assets.  But Merrill had a ratio of only one to thirty.  They were way over-leveraged.  But to get back to how the crisis can cause the Dollar to appreciate:  Everything Roosevelt did was aimed at trying to put more dollars back into circulation, and that is what Paulsen is trying to do.  One would think that an announcement that the U.S. was preparing to print 7 hundred billion more dollars would erode the value of the Dollar.  But remember that this amount is issued to partially compensate for the fact that a much larger amount, about 4 trillion, has just ceased to exist.  So Paulsen proposes to place into circulation only seven dollars for every 40 dollars which have just removed themselves from circulation.  The net effect is that U.S. Dollars are about to become much harder to obtain than was only recently the case. Therefore, a Dollar will buy much more.  This is already starting to occur with oil.  Since dollars are becoming scarce, the U.S is starting to enter a recession.  Americans will spend less, so any country exporting to the U.S. will find the U.S. Dollar harder to obtain, even though the new exchange rate, which values the Dollar higher, would ordinarily make it easier to export to the U.S.

·         The sell-off of commodities.  Between July 1 and Oct 1, the U.S. stock market, (S&P 500 index) fell 13%.  In the same period, commodities declined an average of 25%.  Deutsche Bank calls this commodity crash “the most aggressive sell off ….in recorded history.” Corn is down $3.00, (from $7.00 per bushel to $4.00)  a decline of 38%;  wheat is down 26%, soybeans 36%, cotton 27%.  Oil, copper, and other commodities have also dropped precipitously. As mentioned earlier, all the large Wall Street investment Banks were dangerously over-leveraged.  So when the crisis began, they all had to sell assets in exchange for cash, to improve their ratio of cash to speculative assets. But what can be sold quickly? Certainly not real estate mortgages, not even the good ones. But corn (maize) and wheat, or oil can always find buyer. So the banks all dumped their commodities futures contracts. The effect on this region could be disastrous. At $7.00 per bushel, corn was selling for well above the cost of production. Farmers were making record profits, and were aggressively buying John Deere tractors, which is what we manufacture here in Waterloo, Iowa.  But a price of $4.00 per bushel is slightly below the cost of production, even without considering land costs. What farmer will buy new equipment when he is losing money?  And it all happened overnight. The day that The House of Representatives rejected the first bailout bill, the stock market lost 700 points on the Dow Jones average. But corn fell from $5.50, (still a profitable level) to $4.00, a much steeper drop.   In one day, American farmers went from having the brightest future they had ever known, to having none whatsoever. (I’m reminded of Rudolfo’s air in La Boheme, where he laments, “En Un Coupe.”)  Besides the disastrous effect which this grand sell-off has on those who earn their living from producing commodities, there are another couple of effects. One is that cheaper prices of oil, wheat and corn in Dollars means the Dollar will buy more--therefore the Dollar is worth more, and will command a higher price. The other effect is that as banks frantically sold these assets for cash, they took in tens of billions of Dollars, effectively removing these Dollars from circulation. They are not going to spend this cash; they will hold it in reserve, since low cash reserve is at the heart of the problem.  And this removal of Dollars from circulation will make Dollars even harder to obtain, which will also raise the price which bidders will pay for them.

·         The retreat to “safe havens” in times of crisis.  In about 1924, my mother’s family barn was struck by lightning, was immediately engulfed in flame, and burned to the ground.  The horses were outside the barn when the lightning struck, and the barn door was open.  They were frightened, and they did what frightened horses always do—they ran into the barn—where they died. The U.S. Dollar and its economy is the great barn of the world, and it’s where everyone runs when they are frightened. Are those who are now buying dollars behaving as irrationally as the horses—running into a barn which is burning? Perhaps they are; Perhaps not.  While it is probably true that the current crisis began in the financial sector of the U.S., the smaller economies of Europe, to which it is now spreading may be less able to cope with it. In 200 years, the Dollar is the only major currency that has never become completely worthless. Its value will fluctuate, but it will always be there.  When you consider the large trade deficit which we routinely run, and the large budget deficit, you’d think foreigners would shun our currency.  But as Warren Buffett, who has been the most outspoken critic of these deficits points out, they really don’t.   When the treasury offered $40 billion in short term notes last week, all 40 billion were snapped up in 20 minutes. The bidding was so aggressive that the last few bidders were accepting interest rates lower than 1/20^th of 1% per annum.  Considering inflation, this is a very negative interest rate.  The U.S. can still instantly borrow whatever amount it chooses, in its own currency, at a negative interest rate.  The reason, as Buffett points out, is that our deficits are still not large compared to the massive size of our economy.  Although, every day, we consume 2 billion dollars more in goods than we produce, we still export 17% of our GDP, and produce products that are in demand all over the world. If we were to shrink our consumption a mere 2 billion dollars per day, we could have a trade surplus.  According to Buffet, we could do this at any time, and everyone knows this. Also, even the modest tax reforms of the Clinton administration ended the budget deficit and produced a surplus. We could do this at any time also. We allow other countries to sell more to us than they buy because we have been willing to be the “buyer of last resort” for the world.  We probably do this because somebody has to do it, and we have the only economy large enough to withstand that kind of strain.  There is a little hypocrisy here.  Many of the foreign governments who publicly criticize our profligacy, our irresponsibility in running these deficits, are privately trembling in fear of what will happen if we ever stop. To sum up, for all its problems, the U.S. is still the safest place to put money.  The largest banks in the world and many foreign governments still aggressively bid for our treasury notes, even at zero interest.

Climate Change and Fall Leaf Color

   Can the Decline in the Diversity of Fall Leaf Colors be a Proxy for Climate Change?

            In the high latitudes, the effects of climate change are not subtle.  A friend of mine who has lived in Valdez Alaska for forty years says that the changes there since he moved to Alaska have been so stark that Valdez doesn’t even seem like the same place that he knew when he first came there.  But at the lower latitudes, here in the upper Mississippi Valley at 42-43 degrees, the changes so far are too subtle to positively establish much change, except for one thing:  We don’t get much fall leaf color anymore.  My daughter, born about 35 years ago, is not quite old enough to remember a good year for fall leaf color.

            This was not always the case.  My wife and I were married in the fall of 1971 and in that year and every year for the first ten years of our marriage, we would take a half day off work every October, so that we could drive up to a stretch of the Mississippi between Dubuque and Prairie Du Chien to see the glorious leaf show. The first frost would come about Oct 5^th and a week later the leaf color would be at its peak.  For Iowans in the 1940s, 50s, 60s, and 70s, this was an annual ritual.  The car traffic on the roads along the river would be a bumper to bumper gridlock for a hundred miles.  And the newspapers and TV stations would compete in giving advice as to the exact day when the leaf color would be at its peak.  But few people bother to do this anymore.  The last few times we took our leaf trip, we didn’t even take the camera out of the case—there was nothing to see.  Sometime after 1980, it all changed.

            To have a diverse palate of fall leaf color requires an exact confluence of events. You need a warm enough and moist enough August and September so that when the frost comes, the trees are still fully foliated, and the leaves are all healthy and turgid. Then you need a single, sharp frost.  The temperature must drop to about 26 degrees F and stay there for 5 or 6 hours. And then the weather must warm back up to a pleasant and sunny 65 or 70 degrees Fahrenheit, and stay that way for a few days.  When all this happens, the chemical changes which occur in the leaves of deciduous hardwoods will show a maximum diversity of colors.  But for maximum effect, all these elements must fit together like the parts of a watch. The slightest change in this pattern of inputs will show a dramatic change in outputs; and perhaps this could give us a sensitive instrument of climate measurement--if we knew how to use it.  

            In the years when leaf color was good, what made it exceptionally good was the fact that this river valley is a zone of extreme diversity in species and sub-species of temperate hardwoods. Some years ago, a study found over 40 kinds of oak in just a two acre plot.  And that was just the oak.  There were also many different kinds of maple, birch, ash, hickory, elm, walnut, chestnut, poplar, sumac, cottonwood, box elder, and dozens of others.  And each species responds slightly differently to frost, yielding a slightly different color.   And in the river gorges cut by small streams flowing into the Mississippi, there are steep hillsides; and different elevations respond to frost differently. The tops of the highest trees will be colored slightly differently than the trees down in the valley, even if they are the same species. But we still have this same diversity of species, and the same topography.  The only thing that could have changed is the climate. 

            The photo shown above was included, not to show an example of diverse leaf color, but an example of the lack of it. The picture was taken on Oct 20 of this year, at Backbone State Park.  This is one of the places I used to go, 40 years ago, to take pictures of fall leaf color. It’s a pretty little place.  But 40 years ago, at that time of year, there would have been a brilliant splash of color—bright crimsons and golds, almost fluorescent chartreuse, and almost every conceivable color except blue, which was amply supplied by the renaissance blue of the October sky reflected in the waters. I still enjoy going there, but as you can see, half the trees have already lost their leaves, and what is left has little color. 

            I suppose that if we were to use this effect to detect climate change, then it would be required that in the decades of bright leaf color, this color would have to have been documented in some systematic way.  Did anyone do this?  No; not that I know of.  We all took pictures, but not in any systematic way.  We easily could have.  But how were we to know that a phenomenon which we had always taken for granted was about to disappear forever?

GM Bailout Predicted in 1968

                                                                                                                      

                  We live in a strange time. In the late 1960s, at the absolute apogee of leftist political ambitions, if someone had told me that I would live to see the day that our government would take over Wall Street (meaning, take over any of our major investment banks,) I would have thought this most unlikely. And if that someone had said that this takeover would occur under the direction of the most conservative Republican administration in recent history--that a Republican Secretary of the Treasury would be begging a reluctant Democratic Congress to take over Wall Street--I would have wondered what kind of hallucinogenic drugs they were using. Yet in 1968, I had already read Galbraith’s The New Industrial State, which offered a vague premonition of this turn of events to those who understood what he was saying. I‘ll return to that point shortly.

                  A couple years ago I read a piece about the work of the late economist Hyman Minsky,  who spent his life developing models proving that capitalism (the “free market system,” if you prefer) is inherently unstable.  According to Minsky, market based systems have to be tightly regulated, and even when very tightly regulated, they occasionally crash and have to be bailed out anyway. There is no avoiding it—it’s in the nature of the beast.  If there were any justice in the world, Minsky would still be alive today.  He would find it quite gratifying to hear former FED chairman Allen Greenspan testify that he was “shocked and dismayed that simple self-interest did not prevent the bankers from acting foolishly.”  But Minsky was not alone in his opinions; he was simply a Keynesian.

                  John Kenneth Galbraith, certainly a more famous Keynesian, maintained to the end that capitalism was systemically unstable, but didn’t waste his time trying to prove it. Having begun his career in the Great Depression, he would have considered this effort equivalent to proving that water is wet.  And if there were any justice, Galbraith would also be alive today, and so would Milton Freedman.  But alas, Galbraith spent his last years seeing Freedman accept a Nobel Prize for showing that markets were self-regulating, (and if government didn’t get in the way, everything would work perfectly.)  If the two men were both alive today, I’m sure Galbraith would derive a certain well-deserved schadenfreud at seeing Freedman testify before Senator Henry Waxman’s committee, trying to explain why the ideas that had won him a Nobel Prize didn’t actually work.

                  Yet, though the government bailout of the finance industry was astounding, the event I find more interesting was the bailout of the auto industry. Oh, they argued about it and wrung their hands over it for a while, but eventually, congress passed this bailout.  There really wasn’t any choice. The barriers to entry in auto manufacturing are so absurdly high that, once gone, the American auto industry would be gone forever. The American public would then be dependent on foreigners not just for fuel, but for cars as well. We would spend the next century sending dollars overseas for cars that could as easily have been made by American workers.  Some will tell you that we would still have American-made cars—just produced by Toyota and Honda.  I beg to differ. What we would have is American assembled cars.  And the foreign companies owning these factories would pay no American taxes, because by manipulating the price paid to themselves for component parts, they could insure that no profit was ever made in this country.  And in any economic downturn, when faced with a choice between laying off American workers or Japanese workers, what do you think they would choose? It is true that for a long time, Japanese companies provided us high quality cars at a competitive price. But  this was part of a long-term strategy to put the Big Three out of business. Once this was accomplished, we would get whatever quality they chose to supply at whatever price they chose to charge.  

                  In The New Industrial State, at the height of the cold war, Galbraith argued that if you were to tour a new factory in the Soviet Union and one making the same product in the West, you wouldn’t notice much difference. We both used almost the same technology. Yet every technology has its own requirements as to what kind of political, social, and economic structures it needs to support its continued function.  A good example of this would be ancient Egypt. At one time, the Egyptians had little or no government at all.  Five hundred years later, they had pharaohs with god-like power.  The pharaohs used that power to build great monuments, but that’s not how they got their power.  What happened is that the climate dried out, and they needed massive irrigation works to survive.  One man with one shovel cannot divert the course of the Nile. But a million men and a million shovels can—if they all work under a single authority. So the Egyptians made a radical change in social systems because that’s what was needed for the change in technology. Technology trumps ideology. So today, when East and West both adopt the same technologies, then they are both destined to move in the same direction in many other ways as well.

                  Galbraith pointed out there is not, and never has been, any such thing as a pure market economy, or a purely socialist economy.  Every economy is a mixed economy, employing several aspects of capitalism and socialism. We, and the Soviets, he argued, had a wide range of choices as to what kind of mix of systems we wanted.  But as technology evolves and makes more demands, the range of choices must become narrower for us both. As we both adopt the same technology, then we both end up moving toward the same point in social and economic systems as well.  He predicted that ideological purists on both sides would be loath to accept some of the coming changes. But their objections would be over-ruled.  Technology will trump ideology.

                  Twenty years ago, when the Soviets made an attempt to make a massive shift to market-based economics, it was done because the kind of classic socialist incentives and Marxist industrial organization in use no longer supported the modern industry they were trying to build. But they completely over-shot the mark. The result was a disaster. The Russians are now re-trenching, moving to a system that is about half-way between where we were and where the Soviets were in 1968. This is about what Galbraith would have assumed. But technology put limits on us too, as well as it did for the Soviets.

                  As to how technology places constraints on social systems, Galbraith gave the following explanation: If a large corporation (he cited General Motors as an example) decides to launch a new product, the lead time may be 3 to 4 years, and the sunken investment is enormous.  In 1910, there were 200 car companies, and new ones coming into existence every year.  Barriers to entry were minimal, and only a few months of lead time was needed to market a new product, and capital investment was modest.

                  But now (writing in 1968) Galbraith says, just designing the car will take over a year and tens of millions of dollars. In fact, even the alloys of sheet steel used may need to be custom designed to accommodate the specific draw-dies used to make stampings for a particular design. And after the patterns and tooling are made, another multi-million dollar campaign is needed to sell the product.  And even if a product is successful, it may take at least a three year production run to return capital costs. So when deciding to launch a product, a company is building for a market seven or eight years into the future.  Once it has committed this capital, what if the future it has prepared for doesn’t happen?

                  What happens is that the company goes broke.  But what if the company is too big to be allowed to fail?  In 1910, a dozen car manufacturers went broke every year, and this loss rarely affected anyone except the investors who owned them.  And even when Studebaker went down, it only trashed South Bend, Indiana. But if GM goes down, this would affect over 50 host communities, hundreds of suppliers all over the country, millions of workers, and trillions of dollars in stranded assets—it would be a national disaster. No country is rich enough to write off that big a loss. So there would have to be a bailout. But bailouts of this magnitude are also too big for any country to afford very many of them.

                  So what has to happen?  What has to happen is that once the money for a new product for a future market is committed, government has to ensure that this future actually happens, if it can do so. But what if it can’t.? Well, the other thing that has to happen is that there must be sufficient oversight by government to see that any business plans used by very large corporations fall within the range of futures which government can deliver.  (i.e., if a product requires cheap oil, and government isn’t sure it can deliver such a future, then it must veto any plan to build 8 mpg SUVs.)  Also, if taxpayer money is to be promised for any bailouts that may become necessary, then executive perks and total compensation must be well within limits which typical taxpayers would regard as reasonable.

                   It appears that in certain industries, we will end up with a quasi-public, quasi-private, industrial landscape that looks very much like what Galbraith saw in 1968.  And no one of any political stripe is going to like it—and Galbraith saw that too.