From a book ambitiously titled The Failure of Laissez Faire Capitalism and Economic Dissolution of the West: Towards a New Economics for a Full World, one should expect cogent arguments, structural coherence, weighing of competing theories, meticulous documentation, and other hallmarks of serious scholarship. Instead, this latest effort from Paul Craig Roberts summons vanquished arguments, meanders from grudge to grudge, entertains no alternative theses, and apparently considers quaint the notion that references and citations to trusted sources are essential to persuasive argumentation. Never judge a book by its cover, indeed!
With all of forty-nine endnotes, Roberts has written more of a rambling op-ed than a serious book—with page after breathless page of opinion, accusation, and hyperbole. It reads like one of those email rants that finds its way past your spam filter—you know the ones, written in bold and all caps. One struggles to avoid the conclusion that Roberts intended this book as a hymnal for angry nationalists, who tend not to care much for evidence, particularly if it comes at the expense of a good hunch.
In his own words, Roberts sets out "to show that offshoring is the antithesis of free trade and that the doctrine of free trade itself is found to be incorrect by the latest work in trade theory." That in itself implies a lot of lifting, but the objective is more ambitious still.
Roberts also intends to explain how globalism has eroded the efficacy of economic policy and destroyed the justifications for market capitalism; how jobs offshoring and financial deregulation have wrecked the U.S. economy; how capitalism has been delegitimized by its failure to account for environmental costs and other externalizes; how the European debt crisis is being used to subvert national sovereignty and to protect bankers from losses; and that Germany should leave the European Union and enter into an economic partnership with Russia.
All of these dragons to be slain in 175 pages!
The following passages (and page numbers) give a flavor of the book's random course:
- A massive new federal police agency, Homeland Security, was created in 2002 to protect Americans from a non-existent "terrorist threat" (p. 85).
- Today the President of the United States sits in the Oval Office in the White House and draws up lists of people to be murdered (p. 94).
- "Free trade" and "globalization" are the guises behind which class war is being conducted against the middle class by both political parties (p. 99).
- Globalism is a conspiracy against First World jobs (p. 13.)
- The American economic elite hide their treason to the American people behind "free trade" (p. 143).
- The United States cannot afford the neoconservative dream of world hegemony and a conquered Middle East open to Israeli colonization (p. 157).
- Washington has no concern for the economic welfare of citizens or for their civil liberties or for those of its European puppet states. Washington serves the purposes of the interest groups that control it. These interest groups are committed to financial fraud and to war (p. 172).
The thread binding these disparate assertions—to Roberts' mind, at least—is that each is evidence of the failure of laissez-faire capitalism, which has been coopted by elites to perpetrate a malicious plot against the global masses.
Like most manifestos, this book contains some nuggets of truth: unemployment, underemployment, growing wealth disparity, "too-big-to-fail," and other manifestations of crony capitalism are all legitimate problems that must be arrested and reversed. But there has been no failure of free trade; there has been no failure of laissez-faire capitalism. In fact, many of us are still trying to convince the world to try both.
Roberts attempts to dismiss free trade as a mistake without elaborating. Instead he defers to a book often cited by protection-seeking lobbies in Washington, which posits that today's mobility of capital refutes Ricardo's theory of comparative advantage, and thus the "doctrine of free trade." Nonsense.
Just because capital is more mobile today than it was at the beginning of the nineteenth century does not change the fact that different jurisdictions have comparative advantages by virtue of differences in their natural and man-made endowments. Comparative advantage is alive and well, but less so in the context of industries (English cloth and Portuguese wine), and more so with respect to the functions on global supply chains. China may have a comparative advantage in electronic assembly operations vis-à-vis the United States; the United States may have a comparative advantage in product design vis-à-vis Japan; and, Japan may have a comparative advantage in component production. Instead of trading wine for cloth, the modern set-up implies collaboration between U.S. engineers, Japanese manufacturers, and Chinese assemblers. But as countries' collective skill sets change, as well as their public policies, relative proficiencies will change too.
However, the current state of U.S. or global trade relations can hardly be described as "free trade." We are operating in a world of managed trade, where policy reflects a blend of business-driven, pro-export advocacy and business- and labor-supported anti-import measures. The centrality of politics to this endeavor makes us poorer, as resources are diverted from production and research and development to government affairs offices and K Street firms because the return on lobbying is found to be more profitable. Roberts is right to criticize this, but this is not free trade.
Regrettably, Roberts is guilty of perpetuating oftrepeated fallacies about offshoring and U.S. manufactur-ing decline, which has the effect of putting further distance between the real economic problems we face and their solutions.
- U.S. manufacturing has declined so much that, should its creditors permit, the time is not far off when the U.S. trade deficit becomes as large a share of GDP as its manufacturing output (p. 46).
- Approximately half of U.S. imports from China are the offshored production of U.S. firms for the U.S. market (p. 49).
- When an American firm moves production offshore, U.S. GDP declines by the amount of the offshored production, and foreign GDP increases by that amount. Employment and consumer income decline in the United States and rise abroad. The U.S. tax base shrinks, resulting in reductions in public services or in higher taxes or a switch from tax finance to bond finance and higher debt service cost (p. 52).
- Some offshoring apologists go so far as to imply, and others even to claim, that offshore outsourcing is offset by "insourcing"... The Japanese produce [cars] in the United States [not] for the purpose of sending them back to Japan (p. 54).
So passively entrenched is the conventional wisdom that manufacturing vacated our shores long ago that most readers wouldn't question Roberts' assertions. But year after year, every year (with the exception of during formal economic recessions), the U.S. manufacturing sector has set new records with respect to output, value added, revenues, exports, and imports, and almost as frequently it sets new records for profits and returns on investment.
The metrics routinely and mistakenly cited as evidence of decline are manufacturing employment, which peaked in 1979 at 19.4 million workers, and manufacturing's share of GDP, which peaked in 1953 at 28.3 percent. But the decreases in neither reflect poorly on industry. Producing more with less, which is essentially the story behind manufacturing job attrition (and before that agriculture) is the answer to the essential economic problem of scarcity. The fact that manufacturing as a share of GDP has been shrinking for sixty years speaks not to declining manufacturing health, but to the rise of services, on which Americans now spend double their expenditures on manufactured goods.
U.S. companies invest abroad for a variety of important reasons, but serving U.S. demand from those foreign locations is not prominent among them. According to Bureau of Economic Analysis data, over 90 percent of the value of output from foreign affiliates of U.S.-based companies is sold in foreign markets.
Moreover, offshoring is rarely the product of U.S. businesses chasing low wages or lax standards abroad. Businesses are concerned about the entire cost of production, from product conception to consumption. Foreign wages and standards are but a few of the numerous considerations that factor into the ultimate investment and production decision.
If low wages and lax standards were the real draw, the United States would not be the world's largest single country destination for direct investment. In 2011, the value of the stock of foreign direct investment in the U.S. manufacturing sector alone amounted to $838 billion, while the value of the stock of U.S. direct investment in foreign manufacturing sectors amounted to $589 billion. Those figures amount to a $250 billion manufacturing "insourcing" surplus.
These insourcing companies produced $649.3 billion in output, which was 5.8 percent of all private sector output; purchased $149 billion in new property, plant, and equipment, which was 14.4 percent of all non-residential, private sector capital investment; exported $229.3 billion of goods, which was 18 percent of the U.S. total; performed $41.3 billion of research and development, accounting for 14.3 percent of the total performed by all U.S. companies; and purchased 80 percent of their intermediate goods—nearly $2 trillion worth—from U.S. suppliers.
Contrary to Roberts' allegations of a zero-sum game, the performance of foreign affiliates and their U.S. parents seems to be positively correlated, improving or declining contemporaneously. In a forthcoming Cato Institute study, annual changes in affiliates' and parents' capital expenditures, output (value-added), total compensation, compensation per worker, and research and development spending are shown to move in the same direction in most years.
What Roberts really is assailing is crony capitalism— where vested interests capture the process and the levers of power. That, indeed, is problematic. But the solution is not more crony capitalism, which is enabled under the solutions Roberts suggests. The solution is to embrace globalization, which contains all of the incentives to foster smart policy at home.