This Economy is Unsustainable - Part 1

---

The economist David Ricardo came up with the Theory of Comparative Advantage over 200 years ago and it has never been disproven. I won't explain it here, other than to say the theory shows that free trade is almost always beneficial to all parties. But the theory has an important caveat. Ricardo recognized that there will be winners and losers within each country as production of certain goods is closed down in some places to move elsewhere, so he explicitly stated that the winners must use part of their gains to compensate the losers. In our now completely globalized economy, it's this part that has been mostly forgotten and it's why there is only this inescapable conclusion: free trade hasn't in fact been beneficial for most people.

Free trade has been the one thing that almost all of our political, business and academic elites have agreed on. As such, multiple agreements were signed all over the world, and a tidal wave of capital began to slosh around the globe in search of ever greater returns. Manufacturing jobs left the so-called first world and migrated to countries with much lower wages, like Mexico. But soon even that wasn't cheap enough; luckily along came a newly industrializing China, with hundreds of millions of poor farmers in need of work. Then with the tech revolution that began in the 1990s, white collar jobs started moving too, with countries like India providing an educated work force at a fraction of the salary people earned here. We were told the economy would grow faster from free trade/globalization (I will use these terms interchangeably). If you look at GDP in isolation, it would appear that it did; Canada's GDP almost tripled from 1990 to 2010. Defenders of globalization also told us that everyone would benefit from the lower prices that free trade created. Again, the numbers seem to bear this out; inflation, as measured by the CPI, has been low for most of the last two decades. But do these numbers tell the full story? No, they do not.

The main accomplishment of globalization was that it dramatically increased the rate of corporate profits, which made the wealthy even wealthier and allowed the formation of ever larger pools of money/capital. Here's a stark example: 3M, a company that makes some 60,000 consumer and industrial products including the well-known Post-It Notes, had a market cap of $4.1 billion in 1990 and employed 86000 people. Today, its market cap is $103.4 billion and it employs 95000 people. This means its workforce only increased around 10 percent while its value went up by more than 2500 percent. (Cumulative inflation for those 30 years was about 109 percent, so it accounts for very little of the gains 3M has realized.) Almost all of this created value flowed to the company's management and its shareholders. This is how globalization has 'worked.'

Free trade certainly didn't benefit the working class. Wages in real terms have been stagnant over the last 30 years. It also helped crush unionization, as companies simply moved jobs to places where there weren't any unions. The manufacturing jobs lost were replaced with service jobs, which pay significantly less and are disproportionately filled by more women than men. This left a large swath of unskilled and semi-skilled men without jobs, hope or esteem and the numbers show the repercussions of this on nearly every social measure. Men without college educations are significantly poorer and have shorter life expectancies than either men or women with college educations. They are more likely to get divorced and have much higher rates of substance abuse.

Oh, and about that " winners need to compensate the losers" thing? The same companies who reaped all the gains of globalization fought tooth and nail to get their taxes lowered, over and over again, in almost every jurisdiction. Corporate tax rates are at all-time lows while profits are sky high because globalization was used to reduce taxes, too. Big Business said "If you don't cut our taxes, we'll just set up a fake head office in Ireland and pay miniscule taxes over there." Lose, lose. The amount spent by governments on worker retraining is a relative pittance - the US spends about two-tenths of one percent of GDP on it. Whenever some CEO was confronted with reality, his answer was invariably something along the lines of "people need to get an education and get better skills", as if that were just as easy as snapping your fingers.

The toll of globalization is clear to anyone who has travelled through the former industrial heartland in the US. There are dozens of small cities and towns that have been hollowed out by globalization. It's pretty much the same story every time. You have a town where a single factory employed a lot of the population but then the plant closed and moved overseas. At the same time Walmart came in with cheap, foreign-made goods and priced most of the local stores out of business. Eventually, the town dwindled to where Walmart decided it wasn't worth it and closed shop. What's left is a wasteland of boarded up businesses, pawn shops and payday loan offices, with sickeningly high rates of unemployment, addiction and suicide. A lot of ink has been spilled on this situation but I'll save you a bunch of time: spend four and a half minutes listening to Springsteen's My Hometown and you'll get it.

The massive growth in corporate profits created huge pools of capital, which then create greater opportunities for rent-seeking behaviour. In simple terms, this means that large amounts of money have the power to make more money by doing very little. It's why the finance sector, which is where most of this unproductive sponging takes place, is now about 25 percent of the world economy. (For example, did all those payday loan leeches exist in 1990? No.) This is why our economies are now stagnant and why no amount of tax decreases will bring about a significant rise in business investment. Big money is lazy money. You don't need to take on risk by investing in a real business when you can just arb cheap labour, bombed out currencies, asymmetrical information, regulatory loopholes and assorted other bullshit into huge, riskless profits.

What's most amazing is that all of this has been known for a long time; in fact some people predicted it right from the start. Our mainstream politicians on the left and right denied reality and stubbornly stuck to the globalization party line. But then along came Donald Trump, the proverbial blind squirrel who stumbled into a nut. Trump attacked free trade continually in the 2016 campaign. Now, Trump didn't actually understand free trade nor did he really care about those who were impacted - if he did, he would have followed through on his promises instead of merely making cosmetic changes to NAFTA and dishing out a few meaningless tariffs on China. But nonetheless, Trump did put the issue of free trade's failures into the forefront and for that he deserves credit. (On the left, Bernie Sanders was saying the same thing for years but he was mostly ignored until Trump came along.)

In Canada, we took Ricardo a little more seriously and tried to compensate those left behind. We have a better safety net than the US, our health care is publicly funded, and we spent more dollars on retraining. But we mainly skated through this by relying on the extraction of natural resources - energy, mining, logging, We sold all these resources at the prevailing market price, with very little value-added processing - for example, not much oil is refined here in Alberta - and we continually decreased royalties. The Right has successfully planted the idea that royalties are just another tax grab but they really aren't. Royalties belong to you and I and every citizen and they are at least a partial financial remuneration for the inescapable reality that these resources are finite and that digging, drilling and chopping has permanent consequences. So while Canada has come though this somewhat better than the US, we are likely running on borrowed time.

So to summarize, this is where we are: We have a working class that has been ignored and abused in the name of globalization, while multinational companies have made incredible profits. Not only did they refuse to compensate those displaced, they are now plowing a lot of that surplus cash into automation, thus ensuring that many more people will lose their livelihoods in the coming years. The governments who led the charge for globalization now seem powerless to reverse course and stop capital from doing whatever the hell it wants. A wealth tax? Pffft. See you in Cayman.

There has been a lot written about why we have seen the rise of populism and the far right but there's really no mystery. The disappearance of blue collar jobs and the diminishment of people without a college education is the biggest reason for the political mess we have entered, and it's not going away. Ricardo said we needed to compensate the losers but he missed something crucial: There is no compensation that can really make up for what's been lost. Most people don't want a handout. They want meaningful work and they want to feel like they are contributing. Making things that others need, even if you were just a cog in an assembly line, at least provided some of that feeling. But we don't make much anymore and being able to buy cheap crap from China doesn't begin to make up for a loss of stature and self-esteem.

As this situation gets even worse because of automation, more people will find themselves in the same boat. Some have floated the Universal Basic Income (UBI) as a solution, in which everyone will be paid to do nothing. Those pushing the UBI idea seem to think that a subsistence income is all people need in life. They also assume that the 'winners' from automation will have no issue sharing their gains with the 'losers' - as we saw with free trade, this is a pipe dream. Furthermore, the UBI does nothing to address the structural flaws in our economy that lead to the need for a UBI in the first place. At best it will be a band aid on a gaping wound.

Meanwhile, the dispossessed will grow in number and they will be louder and angrier and ever more desperate. As ugly as our politics have become these last few years, it's only going to get much worse.