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Happiness and Freedom: East German Version

2015 April 30
by Ian Welsh


Picture: Fall of the Berlin Wall

Picture: Fall of the Berlin Wall

Many East Germans remember East Germany favorably:

Today, 20 years after the fall of the Berlin Wall, 57 percent, or an absolute majority, of eastern Germans defend the former East Germany. “The GDR had more good sides than bad sides. There were some problems, but life was good there,” say 49 percent of those polled.

The state with the Berlin Wall, which people died to get across, is remembered fondly?

Some of this, as the article points out, is nostalgia.  Some of it is from people who were children or not even alive when East Germany fell.

But I’m not surprised, because the happiness and life satisfaction data for East Germany showed a precipitous fall after unification, as it did in Russia after Communism fell there. (That drop has been made up since, but it was huge.)

I’m further not surprised because there were things that East Germany, in particular, did well. To start, it did community and civic association brilliantly: There were clubs for everything, people joined them, and they enjoyed them.

Happiness is strongly correlated to community: The sort of anomie which capitalist societies encourage, where you know hardly anyone well, destroys happiness.

Second, there wasn’t a great deal of inequality compared to modern capitalism. The research on happiness and equality is robust–the more equal a society, the happier people are.

Third, everyone was more or less taken care of. They may not have been taken care of with the finest consumer goods, but they had enough food, shelter, and so on.

Fourth, they didn’t have to move much. Labor force mobility in Germany today isn’t terrible, but the sure knowledge that you can stay where you were born and grew up can be as much a comfort as anything else, and it means that you don’t leave behind your community–your friends and family.

Capitalist transitions are brutal. The data from China is unambiguous: People moving from their ancestral villages to the city generally are never, personally, as happy as they were in the village.

The people interviewed in Der Spiegel’s article on East Germany tend to acknowledge the East German Stasi police state as bad, then wave it aside.

How badly has your life been affected by the fact that your government spies on you 24/7? East Germany may have had huge numbers of informants, but London has cameras everywhere and “anti-social disorder orders,” which make virtually any behaviour cops want to call illegal, illegal. Nor was East Germany’s incarceration rate nearly as high as America’s is now, and so on.

Sure, “the police state” was bad, but that wasn’t, to people who lived there, necessarily the most important thing about being an East German. Westerners believe this because of relentless cold war propaganda. Then the USSR and the Warsaw Pact fell, and our lords and masters started building their own surveillance and police states.

Still, it’s a bad sign when you aren’t even considered a better place to live than East Germany, with its Stasi. The failures of the post-Soviet era are making that period look better and better. In Russia, there is a surge of nostalgia for the USSR, for reasons which are are remarkably similar. People are discovering that, as wonderful as Levis jeans are, there is a cost to the modern consumer society in terms of anomie, corruption, and economic precarity.

Though I think I like the bitter joke from 1990s Russia best:

Everything they (Communist authorities) told us about Communism was a lie. Unfortunately, everything they told us about Capitalism was the truth.

And so the wheel turns. When capitalism, in a large region in one of the most successful countries in the West, has half the population thinking communism wasn’t so bad, something has gone off the rails. Triumphalism of the “we’ve won, so we don’t have to treat the population well” variety may well yet bite capitalists, and all of us, hard.

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Is Violence Ever Justified? Does Violence Ever Solve Anything?

2015 April 28
by Ian Welsh
Painting: Washington Crossing the Delaware

Painting: Washington Crossing the Delaware

I notice a fair number of sweet, well-meaning people saying “violence is never justified.”

This is a position I have a lot of respect for, though it’s not my position. The hard-core pacifist, who always opposes violence, is a person of great bravery.

But to say NEVER is a strong statement. In the US, if you are saying “violence is never justified” with respect to the Baltimore riots, for example, you must also oppose all the wars and killing the US is involved in.

In practical terms, that must mean that you believe that every politician who voted for war is more unethical than any rioter. You must believe that George W. Bush and Barack Obama are far fouler individuals than any rioter.

Ethical outrage must be proportionate to the violence and the violence in Baltimore is nothing compared to the scale of the Iraq War, or Afghanistan, or drone murders. Nor is it anything compared to the scale of police violence against Americans, especially African-Americans.

NEVER is a big word.

What most people really mean is that they condemn non-state sanctioned violence, except sometimes, like, say, in the American Revolution, or the Maidan protests.

In fact, they approve of some violence and not of other violence. Most such people, were you to dig down hard enough, are hypocrites, but some aren’t, even if one disagrees with them. If you were to allow the USSR the right to crush revolutions along with the US, and condemn the American revolution, you wouldn’t be a hypocrite, just not a very nice person.

Trying to argue about popular will and/or democracy is a slippery road, mind. For example, the numbers on the American revolution with which I’m familiar don’t show the majority of the population being for leaving British rule. Maidan overthrew a democratically elected government in the Ukraine and the French revolution was made by the Paris mob, while most people living in rural areas of France (the vast majority of the population) would have preferred to keep the Ancien Regime.

Relatedly, violence often does solve problems. The Native Americans cleansed from North America were “problems” to the settlers, and violence dealt with that problem just fine. Fascist Germany was a problem to most non-German countries, Jews, Gypsies, Socialists, Gays, and many others and violence solved that problem. Carthage was a problem to Republican Rome and violence solved that problem.

And riots, rather better organized than the Baltimore ones, granted, solved the Parisian problem with the old Regime, while the Terror, terrible as it was, did make sure that there was to be no going back–even if France was to alternate between Republics and Empires for some time.

Violence often solves problems and it often does so rather permanently.

Here is what history actually teaches us about violence: People who are better at violence than those they fight get the spoils and often keep them for a long time. You do know that the Angles and Saxons invaded Britain, yes? Then the Normans? Those people did very well out of killing the locals and wiped them almost entirely from the most fertile parts of what is today England.

Europeans conquered most of the world and Europeans today (and their descendants) are powerful and relatively rich compared to almost everyone they conquered. Many economic historians believe that imperialism and colonialism were required for the industrial revolution to really take off; and definitely for capitalism to find sufficient markets. Violence worked very nicely for Europe and especially for England and the United States.

Of course, history marches on, and eventually everyone will get their turn at the curb, their face stomped on. But history can take a long time, and multiple generations can enjoy the fruits of violence–theirs or their ancestors. Violence only doesn’t solve anything in the sense that nothing solves anything—extend history enough in any direction and all peoples eventually have a really bad day (or really bad hundreds of years or millennia). Heck, eventually, all species will go extinct.

I don’t know if violence is ever justified. But I do know that violence often does “solve” problems and I do know that peoples who insist on being entirely non-violent or bad at violence eventually discover that everything they have they hold at the sufferance of those who are good at violence.

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As Baltimore Riots

2015 April 27
by Ian Welsh

I don’t have a great deal to say about this. I’ll simply note that if you shove peoples faces into the concrete enough, it’s not strange that they will riot. Given the well documented rate at which police have been killing African-Americans (and getting away with it, in most cases), well—Baltimore is a city with a long tradition of poverty and police violence in any case.

I’m not going to wring my hands about this. It’s unfortunate, but those who want peace must work for justice, as Pope Paul VI once noted. Instead of just condemning the rioting, the middle and upper classes might bear in mind that those lower on the totem pole, and especially Blacks, live a very different life than them, one in which the police are a constant oppressive force which appears completely unaccountable.

(I will note, again, that rioters need to get it through their heads to take their rioting to the rich areas of town. Rioting in your own backyard is not particularly productive.)

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The Rise of the Islamic State

2015 April 27
by Ian Welsh


Islamic State Flag

Islamic State Flag

Der Spiegel had an excellent article on how ISIS rose to power, based on files recovered from the ex-Baathist spy master who planned most of its structure and early strategy.

It boils down to two main themes. First, ISIS set up charity offices in the territory it would later try to seize. The men assigned to those offices were tasked with finding out who the most important people in the area were and marrying into the most important families, if possible.

When ISIS went active, they had complete files on the power structures of every area. They knew who had power, who was likely to oppose them, and, to put it crudely, where they lived. Their enemies knew next to nothing about them, but they they were able to bribe, blackmail or kill anyone who was in a position to be useful or pose a threat.

Second, and especially interesting, the initial ISIS force was comprised almost entirely of people not native to Syria. On the face, this seems like a bad idea, but lack of local ties, combined with ferocious operational security, meant that ISIS could move its troops from place to place and the locals couldn’t easily track those movements.

ISIS soldiers who were local would have talked, their movements would have been easy to track. Foreigners with few to no local ties, not so much.

As a result, ISIS was able to make a small army effectively much larger than it seemed. They would march almost all their troops to the next theater, and because their enemies didn’t know it, they couldn’t take advantage.

The result of this was that ISIS’s local enemies, the local elites, were often unable to effectively oppose them (since they got dead or blackmailed if they did). Additionally, ISIS possessed operational flexibility their armed opposition didn’t have.

The entire article is worth reading if you’re interested in how ISIS rose and worth thinking on how it could be applied elsewhere, or stopped. It’s also an excellent reminder that the best of the forces rising in the Islamic world are staffed and run by people who are brilliant and not to be underestimated. (They ought to be the best; a very harsh Darwinian selection has been run on them.  Slip up, wind up dead.)

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Ricardo’s Caveat

2015 April 25
by Ian Welsh


In 1817, David Ricardo formalized the Law of Comparative Advantage. Since then, it has stood the test of time as one of the very few laws that an economist can point to and say: “This is indisputably true.” It’s because of this law that you only rarely find an economist who doesn’t believe in unrestricted free trade. But Ricardo added an important caveat when he discussed free trade and comparative advantage and it’s one that most modern economists seem to have forgotten…

Let’s quote straight from Ricardo:

In one and the same country, profits are, generally speaking, always on the same level; or differ only as the employment of capital may be more or less secure and agreeable. It is not so between different countries. If the profits of capital employed in Yorkshire, should exceed those of capital employed in London, capital would speedily move from London to Yorkshire, and an equality of profits would be effected; but if in consequence of the diminished rate of production in the lands of England, from the increase of capital and population, wages should rise, and profits fall, it would not follow that capital and population would necessarily move from England to Holland, or Spain, or Russia, where profits might be higher.

This is the Achilles heal of comparative advantage–the flaw in the foundation of free trade that causes outsourcing woes. Those who say that the law of comparative advantage proves that free trade is good are absolutely right, but they’ve forgotten his caveat.

Because, in Ricardo’s world, it was true that capital was not particularly mobile. It is not true in our world and it wasn’t true in the Victorian world.

In a world in which I can move my capital freely between locales, in which I can also move my profits freely, and in which I don’t have to live where my capital is working, there is no reason to invest in any productive activity in my home country–I can make more money elsewhere.

The higher surplus locale is going to get as much free capital as it can soak up and as is available. The logic behind this is simple: Let’s say I have 1 million dollars to invest and I can invest it in two different locales. In one place, I’ll get 5% return, in another 10% return. In both locales, I can take my profit and do what I want with it and I can live in either locale and, in both places, my money is secure from being seized by the government or destroyed by violence. Obviously, I’m going to put my money into the place with the higher returns.

When I get those profits, I’m going to sink any reinvestment into the place with the higher returns again. It’s a virtuous circle–if you’re the place with the higher returns and it ends when returns even out or there is no more excess capacity.

If the higher-return country runs out of investment opportunities that pay higher than the low-return country, it makes no sense to invest in it. What matters here is the marginal rate of return–that is, the return on the next dollar of my investment. In principle, there ought to be diminishing returns; people snap up the good opportunities and, over time, the opportunities get worse and worse until returns equalize (this happens faster when currency values are decided independent of government intervention, but it doesn’t always happen–even in the long term–when we’re all dead).

Profit is just how much surplus you’re receiving. Let’s say my workers are capable of producing $5 of goods for every hour they work and my costs are $3/hour for everything (property, taxes, capital costs, and wages). I’m making $2 an hour for every worker I have working for me.

That’s country A. In country B, the average worker produces $10 an hour, but my costs are $9, so my surplus is $1. This is half  the profit of country A, even though my workers are more productive.

That’s why US workers are more productive and people are shipping jobs to China and India. Costs in the US are higher for property, wages, and taxation.

To stop capital (and jobs) moving from Country B to Country A, you have to increase surplus. There are two ways to do that: You can reduce costs (most easily by cutting taxes or wages) or you can increase productivity. If the average worker produces one more dollar of goods while costs stays the same, and Country A’s worker’s productivity doesn’t increase, then you’re even.

Or Country A could increase wages, taxation, or property costs and become less competitive.

In a world without mass capital flows, there was another way. You could have lower capital costs. But having the Fed set lower capital costs than another country means little–borrow in the US, invest it where the ROI is higher.

More than that , money you can’t use is, well, useless. Let’s say you’re investing in a factory in China, but you want to live in Europe or the US–and Europe and the US won’t let you use the money you have in China in their countries (or will only let a fraction back in). In this scenario, you’re not likely to invest in China, are you? In addition, money that can’t move is captive to political unrest and other such events, which gives mature, stable countries a big leg up. If moving money is hard or slow, then you’d better be sure that where you have it is stable because if something goes wrong, you can kiss it goodbye.

A key problem right now is demand. Capital flows to low-production-cost/high-surplus domiciles. But there’s only so much demand for goods and only a limited amount of growth in demand for goods. So you’ve got your profits and you have to figure out what to do with them. You can’t plow all of it back into productive investment, because you’d wind up with more productive capacity than there is ability to buy the goods. As a result the excess money has to go into nonproductive uses.

The money that does go into productive uses will go to the domiciles that produce the greatest surplus (profit). Many people have pointed out that the US hasn’t lost jobs to outsourcing, that’s only true in a technical sense. What has happened is that the new jobs have been mostly created overseas (in cases where they can be done overseas). Old jobs haven’t (mostly) been moved because of sunk capital costs. Once you’ve paid ten million dollars to create a factory, spending another ten million dollars to relocate the factory usually doesn’t make sense. But if you have to build a new factory anyway (either because you need more capacity or because the old factory would have to be replaced for some reason), then it makes sense to build it in the domicile with the higher surplus production. That’s exactly what we’ve seen over the last few years: China and India getting the new jobs in non-protected sectors. It’s not rocket science, it’s just ROI (Return On Investment).

Because you can’t put all the money back into production, you’ve got to stick some of the money elsewhere. And what we have going is a nice reinforcing trend. Oldman had called it strip mining the US economy. The money is used to buy your customers’ assets or lent to your customers. In exchange, they put up as collateral either the full faith of their government (we’ll see how good that is in a few years) or their assets, which in the current case means mortgage backed securities, bonds, and common shares in companies (which represent ownership of assets). They then use that money to buy your goods and the cycle continues.

This vicious cycle (or virtuous if you’re the one getting rich and you get out in time) results in excess productive capacity, a slow decline in employment in the low-surplus domicile, and an increase in debt in the low-surplus domicile. It also pushes costs in the low-surplus domicile lower (meaning wages and taxation, primarily).

In the meantime, if the developed world (and specifically the US) were to stop borrowing to buy, the entire engine would collapse. This is not a sustainable development; if the US were to buy only what it could afford, based on its own exports, there would be an economic shockwave–not just in the US, but in China, India, and other high-surplus/low-cost domiciles. And right now, the dynamic is being funded by taking money out of the US and other high-cost domiciles, which must ultimately end in a reduction of demand. If the low-cost domiciles, which have been getting the capital investment, are not capable of soaking up the excess capacity when the US’s consumption comes in line with what the US can afford, then you will have a worldwide recession at the least–and likely a depression.

Economics views systems as moving towards equilibrium. But it’s more useful to view systems as subject to multiple different tendencies. At any given time, different tendencies may be stronger than others. What should be happening is that US costs should drop and developing country costs should rise. It is happening, but it’s not happening very fast. Where these costs meet is going to be somewhere a lot south of the current US standard of living. In the meantime, the dynamic has the US shipping its capital and its growth in productive capacity to lower-cost/higher-surplus domiciles. This will continue until the conditions enabling it end and not before. The conditions which can end it are increased shipping costs (favouring more localized production), surplus production evening out, a political decision to discourage either trade or capital flows, or an unwillingness or inability of either the US to borrow or its creditors to lend (the end of the housing bubble strikes directly at this). Until then, capital will go to the higher returns and since the highest returns on production are mostly not in the US, capital that creates production jobs will flow disproportionately away from the US while asset bubbles form in the United States in order to pay for imports. (And the assets they have bought, or allowed the US to borrow against, are likely to crash in the final days of this system. A suckers game all around, but the only thing worse than playing is trying to stop playing.)

(Originally published years ago at BOP news, I put it back up here because this is what is at the heart of problems with globalization and why comparative advantage no longer works.  April 25, 2015 —and back to the top again, in honor of the Trans-Pacific Partnership Trade Agreement.)

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Free Trade Is Elites Betraying Their Own Populations

2015 April 25
by Ian Welsh

The odd thing about free trade is that it is both meaningless and vastly important. Comparative advantage, which is supposed to be a straight win for both partners who are trading, is a rounding error even when it works, if you don’t have full employment.  However free trade and the free capital flows that are part of what we call “free” trade, are used to systematically undercut wages and working conditions and destroy environmental safeguards, making trade, as we practice it, vastly important.

(In light of the Trans-Pacific Partnership Trade Deal, I have put this back to the top–originally published Nov. 23, 2013.)

The classic case for trade is comparative advantage: You do what you’re best at, I do what I’m best at, we trade, and we both wind up with more stuff. The math on this is impeccable, but it works in the real world only under very specific conditions. The most important part is this: If I have the extra resources (both material and labor), I’m better off producing the goods myself, rather than trading with you–even if my production methods are less efficient than yours. I’ll still wind up with more stuff.  In short, if I don’t have full employment, then free trade is a rounding error.

This is related to Ricardo’s Caveat, where the economist noted that, in his time, capital was not mobile. If it was not being used to do one thing in Britain or France, it would be redeployed to do something else in its own country. It would not be used to create  jobs in another country. In our system, with mobile capital, there is no reason to employ either capital or people in the country of origin if higher profits can be made elsewhere. In this case, free trade can lead to an actual loss of jobs.

One standard argument made for free trade is that it produces cheaper consumer goods, and that makes people in a country better off, even if jobs are being off-shored. This  is only marginally true. Most of the reduced cost of foreign goods is taken as profits, not passed on to consumers. The loss of jobs means that some people lose outright and completely: those who can’t find jobs or can only find low-paying service jobs. But even those who keep their jobs are disadvantaged if trade means the labor market is not tight, because if the labor market is not tight, labor has no pricing power and gets almost no raises (this is why there have been no significant median wage raises since the mid-70s or so.)

The renunciation of tariffs and trade controls is a form of betrayal by in-country elites who have capital to deploy outside the country against everyone else in the country. If a foreign country has lower wages, worse environmental standards, horribly unsafe or coerced labor conditions, this is a comparative advantage. It is a comparative advantage even within countries, mind you.

If I pay less, or I work my workers like dogs, or I dump effluent into rivers, or I don’t bother to pay for fire escapes and sprinklers, I have an advantage over anyone who does these things. The standard solution to this is to legally mandate that I must pay a decent wage, not dump effluent, and pay for a safe work space. If everyone is forced to do so, no one is at a disadvantage.

This can only be done if there is a legal mandate over a territory and an enforcement mechanism. That means, usually, it can only be done within a single country.

Anyone outside the country can betray and can do any of these noxious things which increase their productivity at the cost of the environment or the people.

The standard response to this is to say: “Sure, you can do that, but if you do, we’ll just add it to the price of any goods you sell to us.”

Free trade agreements take the ability to do that off the table and force roundabout methods (like currency manipulation) which don’t work as well and instead of earning a government income, cost the government money. Alternatively, though it costs money, one can subsidize one’s own industry, but most free trade agreements make that illegal as well.

Free trade is harmful to the economy of nations. It is also not necessary for industrialization, rather the reverse is true. Every nation larger than a city-state, other than Russia, has industrialized behind trade barriers of some kind and that includes the United States, Japan, Britain, and China. (There is an argument that mercantilism requires one party to have trade barriers and another party to have no barriers. However, a country with full employment can allow free trade for things it doesn’t produce itself, thus allowing foreign mercantilism.)

As long as the capital of a country is deployed within that country and the country has some access to markets, protected trade works. Sub-Saharan African countries had higher GDP growth in the 50s and 60s, under managed trade, than they did when their markets were forced open.

Often, the practical effect of free trade and free capital flows is to allow foreigners to buy out large parts of the foreign economy, as when NAFTA was used to buy out Mexico’s major food producers. Foreign goods from other countries flood into whatever country is forced to, or agrees to, open its borders, destroying the local economy. This is most dangerous when food is involved. In Mexico, millions of farmers were forced off the land because of US subsidized agricultural products post-NAFTA. African and Latin American countries forced their own farmers off the land so they could agglomerate agricultural land for cash crops, leading to food insufficiency, and because everyone was selling the same cash crops, they didn’t even get very much hard currency for it.

Once your country can’t feed itself, you are at the complete mercy of other countries and you have lost significant sovereignty–especially if you don’t generate sufficient hard currency to pay those who sell you food (see Greece or Egypt).

Internal elites are often happy to sign destructive trade agreements because they win, even if their country loses. They get to skim off money from the loans, they are the ones who run the cash-crop farms, they are the ones who are able to sell whatever it is that foreigners want to buy, in exchange for hard currency.

If you want a country that’s self-sufficient and which is also heading towards economic prosperity, you must have elites and a population which do not want foreign luxuries, or are at least willing to forgo them. When Korea was modernizing, foreign cigarettes, for example, were demonized. Every bit of foreign exchange was used not for luxuries, but to buy capital goods which could be bought only with hard currency. If your elites want a Mercedes-Benz, a vacation on the Riviera, a flat in London, to see shows on Broadway–if they want things which can only be bought in hard currency, they will sell you out and you will not industrialize or modernize. The tastes of the elites and the population must be for whatever your country produces or whatever can be bought in your currency from partners with whom you do not have a significant trade deficit.

None of this is to say that trade is always bad, it is important and necessary. But trade must always be managed. Just as you don’t want resource prices to increase your currency to the point where your manufactured products are uncompetitive (thus destroying your manufacturing base), you don’t want trade to destroy your sufficiency in food or to lock you into a low tier of production forever. Comparative advantage screams “Do what you’re good at,” but if what you’re good at is growing soybeans, you may not want to do that for eternity. You may want to do what you’re not good at and get better at it. If Korea or Japan had taken Western economists’ advice, as Ha-Joon Chang has pointed out, they’d still be growing silk and rice, which is where they had an advantage, instead of making some of the best cars in the world, which is where the US had a comparative advantage.

No country can do everything and every country will need to trade for the resources it cannot obtain otherwise, but trade should be rationally managed so that a country has a manufacturing sector and enough self-sufficiency that it doesn’t absolutely require another country’s goods if that can at all be avoided. (It can’t always, we don’t all have oil.) At the very least, a country should be as close to able to feed itself as possible, something which was long understood by statesmen as an absolute priority.

Internally, free trade is used to create betrayals. Trade deals do not allow environmental protections, do not allow high wages,and do not allow fair treatment of workers. Otherwise, you aren’t competitive and the usual remedies, like tariffs and subsidies, are not allowed by those same trade deals. This allows oligarchs in every country involved in the deal to put downward pressure on wages, regulations, benefits, and even standards of humane treatment, in the name of “competitiveness.”

A wise society, including a global society, takes certain types of behavior “off the table,” by just forbidding them. Absent that, they make it so that those who do such things are not rewarded. Fail to do either of these things and you find yourself in a race to the bottom.

Note, again, that this is in oligarchs’ best interest EVEN if their country loses. Greek oligarchs, post-crash, are doing just fine. African potentates walk away with multi-million dollar bank accounts even as their own citizens starve to death. Business owners want to push down wages and costs, no matter where they are. This devastates countries and even the citizenry of many of the winning countries (like the US), but it benefits the few a great deal in relative terms. They’d be better off, as a class, in absolute terms if they took this behaviour off the table, but they wouldn’t be as rich relative to everyone else, or as powerful, and they value that relative wealth and power more than absolute wealth and power. It isn’t enough that they win, their own populations must be poor and weak, too.

Free trade is a bad idea. Free capital flows are a worse idea. Managed trade is a good idea and slow capital flows are a better idea (there is no evidence that foreign capital develops countries, as an aside, see Ha-Joon Chang on that).

Free trade, as we practice it, is about our country’s elites betraying their own populations.

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Obama Tries to Make His Bones Again with the Trans-Pacific Partnership

2015 April 24

Apparently Obama is angry at progressives for attacking the Trans-Pacific Partnership. 

“What I am averse to is a bunch of ad hominem attacks and misinformation that stirs up the base but ultimately doesn’t serve them well. And I’m going to be pushing back very hard if I keep hearing that stuff,” Obama told a small group of reporters on the call.

Of all the criticisms, “The one that gets on my nerves the most is the notion that this is a secret deal,” he said. “Every single one of the critics saying this is a secret deal, or sent out e-mails to their fundraising base that they’re working to stop a secret deal, could walk over and see the text of the agreement.”

No: Every critic doesn’t have access. Only a partial version of the deal is available to the public, and only because it was leaked.  The very idea that these deals should be done in secret is fundamentally anti-democratic. They do it because they know people would object if they knew what was in them.

The Electronic Frontier Foundation has a good summary of what’s wrong, in terms of copyright enforcement. 

In short, countries would have to abandon any efforts to learn from the mistakes of the US and its experience with the DMCA over the last 12 years, and adopt many of the most controversial aspects of US copyright law in their entirety. At the same time, the US IP chapter does not export the limitations and exceptions in the US copyright regime like fair use, which have enabled freedom of expression and technological innovation to flourish in the US. It includes only a placeholder for exceptions and limitations. This raises serious concerns about other countries’ sovereignty and the ability of national governments to set laws and policies to meet their domestic priorities.

Go read the rest if you want to be sick to your stomach.

The bill also includes takings tribunals, in which firms would be able to sue governments for violating the terms of the deal. (In the past, such tribunals have been used successfully to sue for such things as banning additives which cause cancer, since the lost sales are a loss for the company involved.)

Obama made his bones by completing the Wall Street bailout. Now, before he finishes his term, he wants to give the people who can make him filthy rich after he’s no longer President a big, fat, slobbery kiss that will make them billions. This may well be, to him, the most important thing he’s done in his entire presidency:

In a meeting with reporters in the US Capitol, Senator Sherrod Brown of Ohio said his caucus has been “talked to, approached, lobbied, and maybe cajoled by more cabinet members on this issue than any [other] issue since Barack Obama has been president. And that’s just sad.”

Brown continued: “I wish they had put the same effort into the minimum wage. I wish they had put the same effort into Medicare at [age] fifty-five. I wish they had put the same effort into some consumer strengthening on Dodd-Frank.”

Like all Presidents, even George W Bush, Obama has done both good and evil. But the TPP, from what we know, is almost entirely bad and no one should trust a deal like this that is largely secret.

As usual, the TPP is about constraining Democracy, not just internally, but by locking countries in to laws which they then can’t change without abrogating the trade deal.

I covered this in “Free Trade is Elites Betraying Their Own Population“.  You should read it.

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The Three Types of People Who Wind Up Rich and How They Destroy the Wealth of Others

2015 April 22
by Ian Welsh

Models of economics which don’t handle power are marginal at best. They serve only to describe what happens in situations where no one has enough power to set the rules or where there is a central authority which acts to keep any other actor from having enough power to set the rules.

The Standard Model of Power in Markets

Assume that people want two things: They want stuff and they want security. That is to say, they want to know they can keep what they have.

People who become rich usually fall into one of three categories:

1) People who lucked out by being in the right place at the right time (many people who became rich in the internet bubble, for instance, just happened to be working at the right place at the right time);

2)People who are obsessed with something that other people value highly. Like many musicians in the era of mass-produced music before the rise of the internet. Or like J.K. Rowling. These people are also lucky, in the sense that the products of their obsessions are highly marketable at the time of  output;

3) People who are obsessed with making money. They think of little else and have devoted their life to it.

In all three cases, once you’re rich, the needs that drove you there don’t go away. Wealth effects people, but it rarely changes either the obsessive need that drove them, nor the human need for security.

The second group is the least dangerous because their primary motivation was never money and their obsession drives them away from thinking too much about money.

The first group, those who got lucky, are the rank and file of the “I’ve got mine, screw you. Jack” brigade. This includes people far beyond those who became truly rich, like those who worked at startups by luck or those who won the genetic jackpot and inherited; it also includes those who won the generational jackpot: the GI Generation, for example, or older Boomers.

The GIs may have been born during the Great Depression, but they spent their prime working years during the greatest general wage increase of the last few centuries. They bought houses when they were cheap, then they benefited from the massive appreciation of housing values from a multi-generational period in which house prices increased faster than wages, capped by an actual housing bubble for those who lived long enough.

In generational terms, they were born on second (though not third). They had the GI Bill, great jobs, great job security, great pensions, great health care, and so on.

They lucked out. It’s not that they didn’t work hard for what they got, but the same amount of work in a different time or place wouldn’t have reaped the same rewards.

People like this become conservative. The GIs start off as the footsoldiers of post-war liberalism, but they wind up Reagan Democrats. They have theirs and they vote for politicians and policies which make sure that what they have is secure. The net result of those policies has been to pull the ladder up after them–to make their children and grandchildren less prosperous.

If you got lucky, then preservation of capital is the first rule. People who got lucky are against high taxes, because they can’t expect to make more money.  They are especially against high taxation of unearned income, because their advantage is unearned income–their houses, stock portfolios, bonds, and so on. Their money makes money.

These are their interests. Most people act on their interests as filtered through their beliefs.

Thus, we come to group #3. The people who made a ton of money and who did so because that was their goal; they were always obsessed with money. This group also includes those people who came into a lot of power because they were obsessed with power, though the dynamic is a bit different.

These people still have the need for security. The best security is the legal protection of no one else being able to join your business. Some businesses have this quality innately. For instance, suppose you are the cable or phone provider to an area. You have the phone lines, you have the cable; it’s unlikely anyone else can drive those lines.

But the government, in the 90s, forced phone providers to lease their phone lines to internet providers (dial up, for ancients). So even having a physical monopoly isn’t security if the government acts against you.

High speed internet, over phone or cable, is not something those companies in the US (or Canada) are forced to allow other companies to sell.

The first concern for someone who is wealthy is getting protection from whoever is politically powerful. Government, if you wish, though it can be warlords or Kings or the local tribe, depending on the culture. They need sanction to keep what they have.

This is especially true of businesses which aren’t natural monopolies: selling weapons to the government, for obvious reasons, or; selling music, which could be copied by anyone (say hello to copyright laws); being a lawyer and not wanting too many other people to act as lawyers (say hello to bar exams and law schools); selling genetically modified food of which people are scared (make GMO labeling illegal). Creating money out of thin air, which is what banks, brokers and so on do, might be considered the ultimate monopoly. They sure don’t want Joe Blow to be able to say “I have one hundred thousand dollars, and if Goldman Sachs (in the 00′s) can create money through leverage at 41/1, I can too.”

Creating and lending money is a valuable perogative, one worth defending.

And what if everything goes wrong? What if, despite all your money, and all the defenses you’ve bought, you lose everything anyway?

Be clear: This is what happened in 2007 and 2008. If you take into account counterparty risk and you mark assets to market (value them at what they could be sold for), every bank and major brokerage in the United States, and probably all of those in Europe, was bankrupt.

Bankrupt. Even the ones who made the right bets, like Goldman Sachs: because if all their counterparties go under, so do they.

This sort of risk, the kind that is backed up by the full credit of the United States, requires owning government. It requires knowing the central bank is yours and will act to save you.

The first thing a capitalist does when he or she gets rich enough, is buy the system.

They do this for three reasons: 1) to secure their current privileges; 2) to provide a backstop in case of disaster; 3) to create new opportunities.

The consequence of these actions is to drive up prices and keep out competition. It is explicitly to reduce competition, because competition is a danger. The fewer entities controlling more of a market, or controlling politicians, the more money is made and the more secure the current (and future) fortune is.

What this does is destroy the future.  To those who are currently in power, the future cannot be allowed to happen until they control it: until they are the ones who will make a profit from it.This doesn’t mean all distruptive change is impossible. There are, even today, many factions amongst the rich: Wall Street, Oil, Silicon Valley, etc.. They have interests in common, and cooperate around those interests, but they are competing to see who will control the future.

This doesn’t mean all disruptive change is impossible. There are, even today, many factions amongst the rich: Wall Street, Oil, Silicon Valley, etc.. They have interests in common, and cooperate around those interests, but they are competing to see who will control the future. Largely, they agree on the basics–things like continually extending copyrights, for example, or free movement of capital, or making regulations so that government can’t enact laws which would make their business go away. They agree about low taxes on capital and low wages (Apple and other Silicon Valley companies conspired to keep engineer wages low by not bidding against each other). They agree about unions not being too powerful.

Anywhere Capital has consensus, if they have been able to buy the system, it is virtually impossible to do anything against their consensus.

Gays have rights because it’s not important to most rich and powerful people that they don’t; and it is important to some of them (say, Tim Cook) that they do.

Effective wages have stagnated or dropped for over 40 years now because it is important to most rich and powerful people that they do; your wages are their costs.

Unions have lost massive power because rich and powerful people find that in their interest–even those in industries without unions want them kept weak so they will never have unions.

Concentrated wealth quickly turns into concentrated power and concentrated wealth will always be inimical to widespread prosperity. Wealth is power when it is concentrated. Wealth that is not disproportionate is not power. If it is not power, it cannot protect wealth.

If you allow any group, especially any small group, to obtain disproportionate wealth, they will always use it to protect their wealth.

Part II will discuss how the drive for further wealth leads to the vast impoverishment of everyone outside the wealthy and a small retainer class. Part III will discuss how moderate concentration of wealth can lead to general progress for everyone.

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Austerity in the EU—in Rap

2015 April 21

The entire video is worth watching, but if you want to skip to the meat, go to 3:37. This is one of the most accurate portrayals of Lagarde (in charge of the IMF) and Merkel I’ve seen. Better than most written analysis.

Also, funny.

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Libyan Refugees and European Intervention

2015 April 21
by Ian Welsh

Perhaps, as Europe destabilized Libya through invasion and then failed to re-stabilize it afterwards, the Europeans should stop caviling about Libyan refugees and start rescuing them and helping them settle in Europe?  (America and Canada might wish to follow suit.)

It could just be that intervening militarily in other countries should be the last resort, done very rarely. I know most European governments don’t care about the people they kill with their interventions, but the blowback in terms of terrorism, refugees, and economic effects might be worth considering?

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