Is It Oil?

The Issue Revisited

Arthur MacEwan

Around the time that the United States invaded Iraq, 14 years ago, I was in an auditorium at the University of Massachusetts Boston to hear then-Senator John Kerry try to justify the action. As he got into his speech, a loud, slow, calm voice came from the back of the room: “O – I – L.” Kerry tried to ignore the comment. But, again and again, “O – I – L.” Kerry simply went on with his prepared speech. The speaker from the back of the room did not continue long, but he had succeeded in determining the tenor of the day.

Looking back on U.S. involvement in the Iraq, it appears to have been largely a failure. Iraq, it turned out, had no “weapons of mass destruction,” but this original rationalization for invasion offered by the U.S. government was soon replaced by the goal of “regime change” and the creation of a “democratic Iraq.” The regime was changed, and Iraqi dictator Saddam Hussain was captured and executed. But it would be very had to claim that a democratic Iraq either exists or is in the making—to say nothing of the rise of the so-called Islamic State (ISIS) and the general destabilization in the Middle East, both of which the U.S. invasion of Iraq helped propel.

Yet, perhaps on another scale, the invasion would register as at least a partial success. This is the scale of O – I – L.

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Lara-Resende, Cochrane and the Brazilian Recession

Matias Vernengo

GDP has collapsed by a bit more than 7% in real terms over the last two years in Brazil (graph below show more recent data). This constitutes the worst crisis in recorded macroeconomic history, worse than the debt crisis of the early 1980s, and even the Great Depression.

Vernengo, GDP Brazil

The reasons for this crisis are entirely self-inflicted. I discussed those issues before here (and here). The problem is not fiscal, which resulted from the crisis, nor external, since there was no real issue in financing the current account deficits. The fiscal adjustment was the main cause of the recession. And certainly monetary tightening didn’t help, actually it made the fiscal situation worse by increasing debt servicing costs. At any rate, recently a short newspaper piece (in Portuguese, and registration might be required) by André Lara-Resende, one of the authors behind the idea of inertial inflation, and a student of Lance Taylor at MIT in the 1970s, has received significant praise from a wide and diverse audience. So I finally decided to read it.

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Who Needs the Dakota Access Pipeline?

Frank Ackerman

The final link of the Dakota Access Pipeline (DAPL) can now be built, thanks to a recent decision by the Army Corps of Engineers (although the Cheyenne River Sioux have filed a last-minute suit to stop it). In light of the disappointing but unsurprising federal approval of the pipeline, it is worth pausing to ask who and what DAPL is good for.

Who needs the pipeline? There are four main answers: three are silly and one is dangerous.

Silly answer #1 is that the ravenous ego in the White House needs a continual flow of evidence that he is always a winner and his enemies are all losers. Indian tribes and environmentalists can get in line next to Muslims and Mexicans as obstacles, which he shall overcome, to the huge success of making America some kind of great again.

Answer #2, only slightly less silly, is that Energy Transfer Partners (ETP), the company that built the pipeline, has $3.8 billion invested and won’t earn a dime on it unless the pipeline is finished. ETP is a well-connected company: at least until recently, Rick Perry was on its board of directors and Donald Trump was one of its stockholders. Surely that’s irrelevant to the recent decision.

But it is well established in economic theory that people who make bad investments should lose money on them. Milton Friedman, the forefather of conservative free-market economics, was emphatic on this point. As Friedman might have asked, why is DAPL a worthwhile investment that deserves to make money? Who actually needs this pipeline?

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The Political Economy of Trumponomics

Gerald Epstein

The following interview with Gerald Epstein, contributor to Triple Crisis blog, professor of economics at the University of Massachusetts Amherst, and co-director of the Political Economy Research Institute (PERI), is based on his article “Trumponomics: Should We Just Say ‘No’?” forthcoming from Challenge magazine. The full article is available for download on the PERI website here.

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Major Crisis, Minor Reforms

Jomo Kwame Sundaram

The 2008-2009 financial breakdown, precipitated by the US housing mortgage crisis, has triggered an extended stagnation in the developed economies, initially postponed in much of the developing world by high primary commodity prices until 2014. Yet, the financial crisis and protracted economic slowdown since has not led to profound changes in the conventional wisdom or policy prescriptions, especially at the international level, despite global economic integration since the 1980s.

To be sure, the spread of the crisis caused the G20 group of US-selected important economies to convene for the first time at a heads of government level in a mid-November 2008 White House summit instigated by then French President Sarkozy. Various national initiatives to save their financial sectors were followed by a Gordon Brown UK initiative to significantly augment IMF resources. Soon, however, the appearance of supposed ‘green shoots of recovery’ led to premature abandonment of fiscal recovery efforts, reinforced by Eurozone fiscal rules, the powerful influence of financial rentier interests and bogus academic claims of impending doom due to public debt growth.

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DAPL Doesn’t Make Economic Sense

The Dakota Access Pipeline (DAPL) imposes huge environmental and health costs, creates few jobs, and generates little government revenue.

Mark Paul

Mark Paul is a postdoctoral associate at the Samuel DuBois Cook Center on Social Equity at Duke University. He holds a Ph.D. in economics from the University of Massachusetts Amherst.

Last week, Donald Trump signed an executive order to advance approval of the Keystone and Dakota Access oil pipelines. This should come as no surprise, as Trump continues to fill his administration with climate deniers, ranging from the negligent choice of Rick Perry as energy secretary to Scott Pruitt as the new head of the Environmental Protection Agency. Pruitt, a man who stated last year that “scientists continue to disagree” on humans role in climate change may very well take the “Protection” out of the EPA, despite a majority of Americans—including a majority of Republicans—wanting the EPA’s power to be maintained or strengthened.
As environmental economists, my colleague Anders Fremstad and I were concerned. We crunched the numbers on the Dakota Access Pipeline (DAPL). The verdict? Annual emissions associated with the oil pumped through the pipeline will impose a $4.6 billion burden on current and future generations.

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The Global Economy Today, Part 3

Arthur MacEwan is professor emeritus of economics at the University of Massachusetts Boston and a co-founder and associate of Dollars & Sense magazine. This is the final part of a three-part series on the era of economic globalization, the distribution of power worldwide, and the current crisis. It was originally published in the January/February issue of Dollars & Sense, commencing the magazine’s year-long “Costs of Empire” project. Parts 1 and 2 are available here and here.

Arthur MacEwan

Global Commerce and Political Power

The rhetoric of free trade, in any case, is simply one of the tools that the U.S. government, its allies, international agencies, and large firms use in shaping the world economy. Economic and political-military power is the foundation for this shaping. Following World War II, when the U.S. accounted for more than a quarter of world output, it had tremendous economic power—as a market, an investment source, and a source of new technology. U.S. firms had little competition in their global operations and were thus able to penetrate markets and control resources over a wide range (outside of the U.S.S.R., the rest of the East Bloc, and China). Along with this economic power, the military power of the United States was immense. In the context of the Cold War and the rise of democratic upsurges and liberation movements in many regions, the role of the U.S. military was welcomed in many countries—especially by elites facing threats (real or imagined) from the Soviet Union, domestic liberation movements, or both.

This combination of economic and military power, far more than the rhetoric of free trade, allowed the U.S. government to move other governments toward accepting openness in international commerce. The Bretton Woods conference was a starting point in this process; U.S. representatives at the conference were largely able to dictate the conference outcomes. In terms of international commerce, things worked quite well for the United Sates for about 25 years. Then, however, various challenges to the U.S. position emerged. In particular, the war in Indochina and its costs, competition from firms based in Japan and Europe, and the rise of OPEC and increase in energy costs began to disrupt the dominant U.S. role by the early 1970s.

Still, while the period after the 1970s saw slower economic growth, both in the United States and in several other high-income countries, the United States continued to hold its dominant positon. In part, this was due to the Cold War—the Soviet threat, or at least the perceived threat, providing the glue that attached other countries to U.S. leadership. Yet, by the 1990s, the U.S.S.R. was no more, and China was becoming a rising world power.

In spite of the changes in the world economy, the United States at first appears to have almost the same share of world output in 2016, 24.7%, as it had in the immediate post-World War II period, and is still considerably ahead of any other country. Yet this figure evaluates output in the rest of the world’s countries at market exchange rates. When the figures are recalculated, using the real purchasing power of different currencies, the U.S. share drops to 15.6%, behind China’s 17.9% of world output. Of course, as China has a much larger population than the United States, even using the purchasing power figures, per person GDP in the U.S. is almost four times greater than in China; it would be almost 7 times greater using the market exchange rates.

The rise of China has not moved the United States off its pedestal as the world’s dominant economic power. Moreover, U.S. military strength remains dominant in world affairs. Yet the challenge is real, even to the point that China has recently created an institution, providing development loans to low-income countries, to be an alternative to the (U.S.-dominated) World Bank. Investment by Chinese firms, too, is spreading worldwide. Then there are the military issues in the South China Sea.

At the same time, the United States is engaged in seemingly intractable military operations in the Middle East, and has continued to maintain its global military presence as widely as during the Cold War. Having long taken on the role of providing the global police force, for the U.S. government to pull back from these operations would be to accept a decline in U.S. global power. But, further, the extensive and far flung military presence of U.S. forces is necessary to preserve the rules of international commerce that have been established over decades. The rules themselves need protection, regardless of the amount of commerce directly affected. The real threat to “U.S. interests” posed by the Islamic State and like forces in the Middle East, Africa, and parts of East Asia is not their appalling and murderous actions. Instead, their threat lies in their disruption and disregard for the rules of international commerce. From Honduras and Venezuela to Saudi Arabia and Iraq, if U.S. policy were guided by an attempt to protect human rights, the role of U.S. military and diplomatic polices would be very different.

Continuing to operate on a global level to halt threats to the “rules of the game”—in a world were economic power is shifting away from the United States—this country is threatening itself with imperial overreach. Attempting to preserve its role in global affairs and to maintain its favored terms of global commerce, the U.S. government may be taking on financial and military burdens that it cannot manage. In the Middle East in particular, the costs of military operations during the 21st century have run into the trillions of dollars. Military bases and actions are so widespread as to limit their effectiveness in any one theater of operations.

The potential danger in this situation is twofold. On the one hand, the costs of these operations and the resulting strain on the U.S. government’s budget can weaken the operation of the domestic economy. On the other hand, in the context of the rising challenges to the U.S. role in global affairs and the rising role of other powers, especially China but also Russia, U.S. forces may enter into especially dangerous attempts to regain U.S. power in world affairs—the treacherous practice of revanchism.

Are There Alternatives?

Although globalization in the broad sense of a geographic expansion of economic, political, social, and cultural contacts may be an inexorable process, the way in which this expansion takes place is a matter of political choices—and political power. Both economic and political/military expansion are contested terrain. Alternatives are possible.

The backlash against globalization that appeared in 2016, especially in the U.S. presidential campaign, has had both progressive and reactionary components. The outcome of the election, having had such a reactionary and xenophobic foundation, is unlikely to turn that backlash into positive reforms, which would attenuate economic inequality and insecurity. Indeed, all indications in the period leading up to Trump’s inauguration (when this article is being written) suggest that, whatever changes take place in the U.S. economic relations with the rest of the world, those changes will not displace large corporations as the principal beneficiaries of the international system.

Nonetheless, the Sanders campaign demonstrated the existence of a strong progressive movement against the current form of globalization. If that movement can be sustained, there are several reforms that it could push that would alter the nature of globalization and lay the foundation for a more democratic and larger changes down the road (Sanders’ “revolution”). Two examples of changes that would directly alter U.S. international agreements in ways that would reduce inequality and insecurity are:

Changing international commercial agreements so they include strong labor rights and environmental protections. Goods produced under conditions where workers’ basic rights, to organize and to work under reasonable health and safety conditions, are denied would not be given unfettered access to global markets. Goods whose production or use is environmentally destructive would likewise face trade restrictions. (One important “restriction” could include a carbon tax that would raise the cost of transporting goods over long distances.) Effective enforcement procedures would be difficult but possible.

Establishing effective employment support for people displaced by changes in international commerce. Such support could include, for instance, employment insurance funds and well funded retraining programs. Also, there would need to be provisions for continuing medical care and pensions. Moreover, there is no good reason for such support programs to be limited to workers displaced by international commerce. People who lose their jobs because of environmental regulations (such as coal miners), technological change (like many workers in manufacturing), or just stupid choices by their employers should have the same support.

Several other particular reforms would also be desirable. Obviously, the elimination of ISDS is important, as is cessation of moves to extend U.S. intellectual property rights. The reforms would also include: global taxation of corporations; taxation of financial transactions; altering the governance the IMF, World Bank, and WTO to reduce their role as instruments of the United States and other high income countries; protections for international migrants and protection of their rights as workers. The list could surely be extended. Changes in international economic relations, however, cannot be separated from political changes. The ability of the United States and its allies to shape economic relations is tied up with military power. Military interventions and the threat of military interventions have long been an essential foundation for U.S. power in the global economy. These interventions and threats are often cloaked in democratic or humanitarian rhetoric. Yet, one need simply look at the Middle East to recognize the importance of the interests of large U.S. firms in bringing about these military actions. (Again, see the box on Smedley Butler.) It will be necessary to build opposition to these military interventions in order to move the world economy in a positive direction— to say nothing of halting the disastrous humanitarian impacts of these interventions.

No one claims that it would be easy to overcome the power of large corporations in shaping the rules of international commerce in agreements or to reduce (let alone block) the aggressive military practices of the U.S. government. The prospect of a Trump presidency certainly makes the prospect of progressive change on international affairs—or on any other affairs—more difficult. There is, however, nothing inevitable about the way these central aspects of globalization have been organized. There are alternatives that would not undermine the U.S. economy (or other economies). Indeed, these alternatives would strengthen the U.S. economy in terms of improving and sustaining the material well-being of most people.

The basic issues here are who—which groups in society—are going to determine basic economic policies and by what values those policies will be formulated. D&

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The Global Economy Today, Part 2

Arthur MacEwan is professor emeritus of economics at the University of Massachusetts Boston and a co-founder and associate of Dollars & Sense magazine. This is the part two of a three-part series on the era of economic globalization, the distribution of power worldwide, and the current crisis. It was originally published in the January/February issue of Dollars & Sense, commencing the magazine’s year-long “Costs of Empire” project. Part 1 is available here.

Arthur MacEwan

Financialization and Crisis

There is also the international financialization phenomenon— the rising role of financial markets and financial institutions in the operation of the economy. The global amount of debt outstanding grew from $45 trillion in 1990 to $175 trillion in 2012, increasing from almost 2¼ times global GDP to almost 2½ times. (The most rapid growth took place before the Great Recession, followed by a slow-down in subsequent years.)

The economic instability associated with financialization became apparent in the Asian financial crisis of 1997. The rapid exodus of capital from countries where economic problems were developing greatly exacerbated the downturn. The financial crisis that emerged in the United States in 2008 and 2009, then spread to Europe and elsewhere, exposed the full and devastating force of global financial activity. The great size and extensive web of connections among financial institutions created a severe threat to the world economy. “Free market” ideology was put aside, and the U.S. government intervened heavily—with a huge bailout of the banks— to keep the economy from imploding.

Financialization created, and continues to create, a vast increase in debt levels in many counties. “Debt … is an accelerator,” notes University of Massachusetts economist Gerald Epstein, “that enables the financial system to generate a credit bubble.” The bubble allows financial institutions (banks, hedge fund, private equity firms, etc.) to extract wealth form from non-financial firms and individuals, and can also quicken the pace of economic activity more generally. Bubbles, however, burst, leading to economic distress, deflation, and bankruptcies.

Beyond instability and crises, financialization appears to impede economic growth by diverting resources from productive activity into financial speculation. Also, financialization harms economic growth by contributing to extreme income inequality, which is increasingly recognized to have a negative impact on growth. Furthermore, though perhaps in a more extreme form, large financial firms present the same problems that arise with other large firms operating internationally, namely that the many options created by their global operations— to say nothing of their political influence— make them difficult to tax and regulate.

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Trade War Threat Grows

Jomo Kwame Sundaram

New American President Donald Trump has long insisted that the United States has been suffering from poor trade deals made by his predecessors. Renegotiating or withdrawing from these deals will be top priority for his administration which views trade policy as key to US economic revival under Trump. What will that mean?

The new administration promises ‘tough and fair agreements’ on trade, ostensibly to revive the US economy and to create millions of mainly manufacturing jobs. The POTUS is committed to renegotiating the North American Free Trade Agreement (NAFTA), signed in 1994 by the United States, Canada and Mexico. And if NAFTA partners refuse what the White House deems to be a ‘fair’ renegotiated agreement, “the President will give notice of the United States’ intent to withdraw from NAFTA”.

Constraints?

Presidential fiat may well be extended in radically new ways by the incoming president with, or perhaps even without the support of a Republican-controlled Senate and Congress. However, in terms of trade, Trump may be constrained by his own party’s ‘free trade’ preferences, while the minority Democratic Party is likely to remain generally hostile to him.

Many informed observers doubt the ability of the US President to unilaterally impose trade policies, as the POTUS is subject to many checks and balances, conditions and constraints. But a widely held contrary view is that existing legislation allows the president considerable leeway. But as such ambiguity can be interpreted to grant the president broad authority over trade policy, Trump is likely to use this to the fullest.

Worryingly, Trump and his appointees often appear to see trade as a zero -sum game, implying that the only way for the US to secure its interests would be at the expense of its trading partners. Their rhetoric also implies that the most powerful country in the world has previously negotiated trade deals to its own disadvantage – a view almost no one else agrees with.

Thus, Trump’s belligerent rhetoric threatens trade wars or acquiescence to the US as the only means to change the status quo. But future deals even more favourable to the US can only be achieved with weaker partners, e.g., through bilateral treaties, or those with ulterior motives for accepting even less favourable terms and conditions.

Unequal effects

Of course, the real world is more complicated than one of competing national interests. For example, while US corporations and consumers may benefit from relocating production abroad, American workers who lose their jobs or experience poorer working conditions will be unhappy. Clearly, there is no singular national interest.

Trump’s rhetoric so far implies an opposition of American workers to the ‘globalist’ US elite with scant mention of consumer interests, the main source of support for the globalists. The unequal effects of freer trade have long been recognized by international trade economists except globalization cheerleaders who insist that freer trade lifts all boats – a myth belied by the experiences of increasing numbers of American workers and others in recent decades.

Meanwhile, US protectionists have been in denial about labour-displacing automation throughout the economy. They also fail to recognize how ‘laissez faire’ American capitalism has let the devil take the growing ranks of the hindmost. In contrast, ‘managed’ capitalism has often ensured less disruptive and painful transitions due to trade liberalization and automation, e.g., through government retraining schemes.

Trade rules biased

Nevertheless, it remains unclear how the Trump administration’s trade strategy will unfold. While trading system rules are skewed to favour the powerful, US relations with trading partners have sometimes become dysfunctional and perhaps less advantageous. Hence, a more aggressive Trump administration may well secure better deals for US interests. Some options favouring US companies would only involve minor disruptions, while others could disrupt the US as well as the world economy, possibly precipitating another global recession.

Besides renegotiating or rejecting bilateral and plurilateral deals, the US could also bring more cases before the World Trade Organization (WTO). After all, the US and Europe wrote most WTO rules after the Second World War, and the US has almost never revised its trade rules and practices, even after losing cases. The US has long used the WTO dispute settlement mechanism to great effect until it began disrupting its functioning recently after losing a case.

Trump has long threatened targeted duties to ensure compliance and more favourable deals. While trade lawyers debate the scope for and legality of such actions, most trade economists have argued that US consumers will pay much higher prices to save relatively few jobs.

Triggering trade war

However, instead of imposing duties on specific products, as allowed for by WTO rules, emergency authority may be invoked to impose broad-based tariffs on exports from specific countries, as Trump has threatened to do.

Such an escalation risks causing significant economic damage all round, especially if it provokes retaliatory actions, with no guarantee of securing a more favourable deal. A relatively minor trade dispute can thus easily spin out of control to become a very disruptive global trade war.

After Trump’s inauguration, the White House announced US withdrawal from the Trans-Pacific Partnership (TPP) trade deal, effectively killing the agreement. Ironically, the Obama administration had claimed the TPP would enable the US to write economic rules for the region instead of China, Trump’s favourite bogey. Thus, even presidential one-upmanship can trigger the new world trade war.

Bullying as global trade strategy?

In yet another irony, in Davos last week, a Goldman Sachs veteran announced the sale of a majority stake in his multibillion dollar business to a Chinese group before joining the Trump administration as senior trade adviser. Perhaps as a foretaste of what to expect, in response to Chinese President Xi’s reminder that “No one will emerge as a winner in a trade war”, he warned that China stands to lose ‘way more’ than the US if it retaliates when the new administration imposes selective tariffs on its exports.

Originally published by Inter Press Service.

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