Mexico Bumps Canada as America's Largest Trading Partner

Despite all of Donald Trump's bluster about Mexico and its people, America's southern neighbour has become its largest trading partner.

U.S. census data released last week showed that Mexico’s trade with the United States rose to $97.4 billion for the first two months of the year — enabling it to leapfrog ahead of Canada ($92.4 billion) and China ($90.4 billion).

“The fact that this surprises a lot of people is a reflection of the ignorance in the United States about this theme,” said Luis de la Calle, a former undersecretary of the economy here. “Mexico is a very important market for the United States, and it’s going to become the biggest market for the United States in the world.” 

It’s not quite there yet. For the first two months of the year, Mexico was the second-biggest export market for the United States, trailing Canada $45.8 billion to $42.1 billion. Exports to America’s southern neighbor were flat compared with the same period in 2018.

Much of the U.S.-Mexico commerce involves multinational firms that send products back and forth across the border as part of a giant, integrated manufacturing process that has flourished since the North American Free Trade Agreement took effect in 1994. 

“For the rest of the world, the U.S. is a market — that’s true for China, Korea, et cetera,” De la Calle said. “With Mexico and Canada and the United States, we trade in order to produce things together.”

Now That You Mention It...

Earlier this month the European Court of Justice issued a ruling that ISDS or Investor-State Dispute provisions in a trade deal between the Netherlands and Slovakia were contrary to European law. It seems that the ECJ found the secret court system invalid. The ruling is expected to call into question other free trade pacts with Europe, possibly including CETA, Canada's trade pact with the E.U.

The EU court decision hasn't created much of a stir in Canada although it's unclear why.

The only party that seems to have addressed it is the Green Party.

“This decision could call into question the legality of ISDS clauses in other EU trade deals, including the EU-Canada Comprehensive Economic and Trade Agreement (CETA),” said Green Party international trade critic Paul Manly. “In CETA, the Investment Court System is similarly structured to allow corporations to sue governments if legislation interferes with a corporation’s ability to maximize profits. The ECJ will soon rule on whether the Investment Court System is in fact consistent with EU laws. 

“The Green Party has long argued against trade dispute settlement mechanisms that allow foreign corporations to override domestic laws designed to protect the environment and community well-being. They are inherently anti-democratic and should be removed from all trade agreements and ISDS measures to which Canada has committed. That means NAFTA’s chapter 11 and the ISDS mechanism in the revised Trans-Pacific Partnership (TPP) must be scrapped as well. Canadian sovereignty is at stake,” concluded Mr. Manly.

What a radical idea that it may offend a nation's laws for its government to bind itself to legal proceedings in secret courts that may impact the citizenry by infringing on labour, environmental or other protections. Hmm, I wonder why we didn't think of that? I wonder why our political caste thought it okay to surrender these essential incidents of national sovereignty without our knowledge or consent?

Trudeau's Trade Fetish

One line from Vice news sums it up perfectly, "Justin Trudeau is one of the few world leaders still trumpeting the pre-2016 dream that everything will be hunky dory in the mad world of global politics if we can strike up a few more free trade deals."

Vice columnist Drew Brown skips the debate over whether Trudeau is wise or an utter fool to think he can or should entangle Canada in a trade pact with China. Instead he focuses on Trudeau's claim that a Canada-China free trade deal with help defuze the reactionary populist politics spreading around the world.

It is a talking point that Trudeau and his neoliberal fellow travellers have invoked before. While there may have been some structural discomfort involved in the opening of domestic markets to foreign capital (and vice versa), overall the outcome of liberal trade is an inevitable win for everyone involved. Goods and services cross borders more easily (and cheaply) and freer migration fosters a deeper appreciation for human diversity. Corporate greed might make things look a little lopsided, but it’s nothing that modest state redistribution of the quintessentially Canadian variety can’t sort out.

It is a very nice story but, as we now know, it leaves out a few loose ends. Whenever newly unfettered capital starts freely crossing borders, it is usually accompanied by a cast of somewhat less savory characters: community dislocation, deindustrialization, declining environmental and labour regulations, degraded national sovereignty, and the occasional financial meltdown. (For what it’s worth, Trudeau deserves credit for making more progressive environmental, labour, and gender regulations a sticking point in negotiations.)

Free trade might be a win-win on paper for the countries involved, but within those countries themselves it’s very often a win-lose arrangement for the rich and the non-rich, respectively. In other words, it tends to create its own problems, one of which appears to be right-wing, nationalist reaction. (It’s a convention to just call this ‘populism’, which is sort of true, but also sort of not true, and something we should probably talk about later.)

In the case of Chinese-Canadian trade in particular, there are reasons to suspect that even a successful bilateral free trade agreement might do more to inflame reactionary populism at home than put it out. Wells observes that Canadian access to the Chinese market also entails China’s further access to the Canadian market. This risks further inflating urban real estate values (particularly on the west coast), as well as hollowing out communities based around agriculture and manufacturing. And as a general rule, people who lose a good job and/or get priced out of their home tend to become rather politically agitated.

It’s not clear whether or not the prime minister and his team genuinely believe more free trade will fix the problems it simultaneously causes, or if this is just a reflexive talking point he threw to the media after a long day of trade talks that amounted to fruitlessly banging his head against a wall in Beijing.

My take is that the school marm is still the school marm, short on both the experience and intellectual depth to tackle a hydra such as free trade with China. He can't even make any serious inroads on climate change, the gravest threat facing the Canadian people. That's something that will take a truly Herculean effort over many years, perhaps decades, and Trudeau won't even get near the starting blocks. In difficult and dangerous times it takes more than posing for selfies and making apologies, no matter how deserved, to lead a country. Going by his track record from his first two years in power, this son of Margaret does not seem to pass muster on leadership.

A Warning for Post-Mulroney Canada

The Conservative heavens aligned and brought us the magic of Thatcher, Reagan and Mulroney.   The Gang of Three then introduced us to the era of free trade, outsourcing and the wonders of the "knowledge economy."  In the new era we wouldn't toil with our hands any more but with our minds and endless riches would befall us.

Like all conjuring tricks it seemed to work well enough, for a while, but not forever.

America's manufacturing economy has been gutted, shelled out, lifted up and transported across the seas.   Easy money and low, low interest rates made it possible to extend the illusion of prosperity for decades as real wealth was transferred quietly out of the blue and white-collar middle class and to the richest of the rich.

New wealth did not come from foundries and shipyards and assembly plants but from computer entries and slips of paper passing back and forth.   New wealth was to be bubble wealth, grand illusions of immense prosperity.

Former Republican insider, Kevin Phillips, in his book American Theocracy explored how economic superpowers go through this process of crafting their own demise by outsourcing the manufacturing base that established their wealth and shifting, in its stead, to a knowledge economy, a FIRE (finance/insurance/real estate) economy, generating huge returns in the short and mid-term by using their wealth to grow their eventual successor's manufacturing economy.

In essence, the legacy of Thatcher/Reagan/Mulroney has been the utter selling out of their own nations in pursuit of a deeply flawed ideology.

Now Britain is discovering, quite painfully, that this ideology inevitably leads to a nation in decay.

Britain has been finding it difficult to recover from the financial crisis not just because of its austerity policy but also because of its eroding ability to engage in high-productivity activities. This problem is most tellingly manifested in the country's inability to generate a trade surplus despite the huge devaluation of sterling since 2008.

Compared with its height in 2007, the pound has been devalued about 30% against the dollar, 50% against the yen, and 20% against the struggling euro. Yet despite the huge incentive to export created by such devaluation, Britain is still running trade deficits because it has lost the productive capacity to respond.

Despite the devaluation, Britain's service exports have fallen – average annual service exports for 2008-11 were 8% lower than for 2005-07. This may be understandable, given the poor state of its financial sector – rocked by one scandal after another and hemmed in by a slow tightening of global financial regulation.

However, manufacturing exports, which were supposed to make up the shortfall created by the services sector, also fell by 8% after the devaluation. This is highly unusual. For example, back when South Korea had a devaluation of similar scale after its 1997 financial crisis (the won, its currency, was devalued by 35% against the dollar), the country's manufacturing exports were 15% higher (comparing the 1998-2001 average to 1995-97).

The only reason the British balance of payments situation has not been worse is the large increase in primary commodity exports – oil, minerals and food. These were on average 22% higher in 2008-11 than in 2005-07. In other words, since the crisis the British economy has been moving backwards in terms of its sophistication as a producer.

All of this means that, without addressing the underlying decay in productive capabilities, Britain cannot fix its ailing economy. To deal with this problem, it urgently needs to develop a long-term productive strategy through a broad-based public consultation involving not just the government and private sector firms, but trade unions, educational institutions and research institutes.

The strategy should first carefully identify the industries, and the underlying technologies, that will be the future motor of the economy and then provide them with the necessary support. This could be in the form of subsidies for R&D, loan guarantees for small firms, or preferences in government procurement, and should be targeted at "strategic" industries, although they could also be in the form of policies that are apparently not industry-specific.

For example, infrastructural investment needs to be co-ordinated with the broader industrial strategy. Infrastructure is by definition location-specific, so depending on the industries you want to promote, you will have to build different types of it in different places. Similarly with education and skills. Without there being some national strategy, it is difficult for educators to know what kinds of engineers or technicians to produce, and for potential students to know what professions to study for.

Now, ask yourself what is Canada's industrial strategy?   What are we doing to align infrastructural investment to a broader industrial strategy?  Where lies the future motor of our economy?

If you haven't got a clue, well, neither does Stephen Harper and the same goes for the Liberals and the New Democrats.   That much was obvious as far back as 2009 when the Harper Cons, supported by Iggy and the Libs, passed the farcical stimulus budget, the Pinata Budget.  Remember?  That was the one where the government and opposition, instead of focusing stimulus spending in support of a broader industrial strategy, recklessly squandered it on giving you tax breaks to put a new deck on the family cottage, putting the cost on the tab for your kids to repay.

A study by the Pembina Institute concluded for the mountain of borrowed cash Harper & Iggy tossed haphazardly into the Canadian economy, they could have (and should have) generated 238,000 jobs.  Instead they achieved just 84,000.

Like Britain, like the United States, Canada too needs a healthy industrial economy.  We've become reliant on fossil fuel exports.  We've seen how that has wracked Alberta's economy through boom and bust cycles.   Why would we want to import that vulnerability and instability to the national economy?   Yet that seems to be all Harper can come up with.   He can see no further and he doesn't even try.  He is the embodiment of the One Trick Pony.

Forget this nonsense that's been drummed into our heads about the evils of duties and tariffs.  As former U.S. deputy treasury secretary, Paul Craig Roberts, has pointed out in The Failure of Free Market Capitalism and the Dissolution of the West,  

"The U.S. economy did not develop on the basis of free trade.  If the costs that free traders attribute to trade protection are real, the costs did not prevent America's economic rise.   Indeed much historical research concludes that trade protection was the reason for America's rises as an industrial and manufacturing power."

It's now becoming increasingly accepted in America and in Britain that the way forward from here may be the way back.   

It's Time that Canada Found a New/Old Economy

By the time you're in your 60s you've developed a sense of a certain cadence to life, something like a master Circadien rhythm that regulates life on our planet.   Every now and then something happens and mankind skips a quarter or half a beat.   That's what happened in the Great Depression and World War II.  But before long we get back into the beat and life goes on.  We have families, we make plans, we look to the future silently trusting in the metronome of life.

We don't do well when our civilizational beat becomes erratic, unpredictable, unreliable and yet that's what seems to be happening increasingly, certainly over the past ten years.   Those institutions of government and economy to which we gave our trust and fealty and from which we expected a measure of benevolence and well being have severed their connections with us.   They've moved off to greener pastures.   The commonality of interest that we thought bound us all together is broken.

Yesterday I read The Failure of Free Market Capitalism and Economic Dissolution of the West  by former U.S. Deputy Treasury Secretary Paul Craig Roberts, a PhD economist.  It's available only as an e-book, something that prevents me from excerpting it at any length.

There's nothing particularly new in Roberts book but it's valuable for how he ties events together.  It's not a comfortable, assuring read for anyone on the approaching retirement or just starting out on the career path.   It's worse yet for those who already face employment insecurity.

Roberts book chronicles how we have given away our economic security and the future of our grandkids under the hollow promise of globalization.  He traces how we outsourced our manufacturing base to the Third World with the promise that our great future would be assured in a new, "knowledge economy" that, in turn, is being itself outsourced.

The book explains how this outsourcing played a major role in the massive transfer of wealth from blue and white collar workers to the richest of the rich, the 1%.   He delves deeply into the U.S. Bureau of Labor Statistics to explain his theories and sweep away the myths that have been used to blind us about globalization.  Roberts also depicts how globalized capitalism is incompatible with and ultimately destructive of our democracy and institutions.  Economists, he claims, have played dutiful whores to the undermining of western societies and their economies.

Roberts' economic theories have been controversial and widely criticized.   He is the father of Reagonomics, the "supply side" theory but he presents it merely as a vehicle for reconciling Keynesian economics' overemphasis on the demand curve with the aggregate supply curve.  He makes a point of criticizing those who used his supply side theories as a means of perpetrating the "trickle down" hoax of Voodoo economics.  That's a debate I'll leave to the economists.

An interesting discussion is had of how mainstream economics focuses on man-made capital without giving due recognition to the role of nature's capital, thus encouraging the exhaustion of nature's capital in pursuit of short-term profit at the expense of future generations.   Globalized capitalism, he argues, is extracting, pillaging even, the wealth that rightly belongs to future generations.

Roberts believes that unregulated capitalism is the main and inevitable cause of the recent global economic meltdown.   Private power and privilege will, if allowed, be abused.

The author explains how a globalized economy reveals the myths and contradictions of free trade that western societies have been conditioned to accept without question.   Offshoring, he argues, is not about free trade but is mere labour arbitrage between differently developed countries.

The consequences of deindustrializing are examined at length.  Roberts speaks of "tradable jobs" - those jobs that actually make things other nations might buy.  When nations give up their tradable job base they're left with service jobs and forced to import goods produced overseas by those outsourced tradable jobs.   While this inflates the profits for the rentier class, the investment class, their gains are vastly exceeded by the loss of GDP benefits from the lost manufacturing process and labour wages.

There are telling insights gained from the Bureau of Labour Statistics.   Since deregulation and the ascent of hyper-globalization, American job growth has been greatest for bartenders and waitresses.   Worse yet, the market for jobs requiring university education is in rapid decline.

"Jobs offshoring has moved to China and India not merely American jobs, the also the consumer income, tax base, GDP, supply chains, and life careers associated with the jobs."

"...official U.S. statistics prove that the U.S. has been unable for years to produce any jobs in the tradable category, whether manufacturing or professional services. ...the U.S. economy has only been able to create jobs in non-tradable domestic services such as waitresses and bartenders, ambulatory health care, and retail trade.   Before the real estate bubble burst, house construction was a [major] source of jobs."

"The current unemployment is unlike post-World War II unemployment.   During the second half of the 20th century, the Federal Reserve would raise interest rates and put the economy into recession in order to cool down the rate of inflation.  As inflation dropped and unemployment mounted, the Federal Reserve would reverse course and supply the economy with renewed growth in the money supply.  Stimulative policy worked in those days because the jobs still existed to which workers could be called back as consumer demand rose."

Roberts examines the double-whammy of job outsourcing, foreign labour importing, something that we're seeing in Canada's fossil fuel industry.

"It has not been possible for U.S. corporations to move all manufacturing and professional service jobs, such as software engineering, offshore.  Nevertheless, corporations have found another way to reduce their labor costs.  The corporations tell Congress that there is a shortage of labor and that they require more foreign laborers to fill the "skill gap."   The skilled workers brought in on H-1B work visas have no bargaining rights and are paid one-third less than U.S. wages.   The difference goes into corporate and shareholder profits.   Modern day capitalists are loyal only to money, not to country."

The author makes the case for abandoning globalization and the introduction of tariffs and tax policy to restore America's industrial base and its tradable job base.


"Since the days of President Franklin D. Roosevelt in the 1930s, the U.S. government has sought to protect employment of its citizens.  President George H.W. Bush, William J. Clinton, George W. Bush and Barack Obama have turned their backs on this responsibility.

"'Free Trade' and 'Globalization' are the guises behind which class war is being conducted against the middle class by both political parties."

"Jobs offshoring neutralized the productivity advantages that American labor enjoyed.  Working with superior capital, technology, and business organization, U.S. workers had nothing to fear from cheap labor abroad.   Americans were far more productive than Indians and Chinese and their high productivity was reflected in high wages."

"Offshoring makes it possible for firms using First World capital and technology to produce goods and services for the U.S. market with low wage foreign labor.  The result is to separate Americans' incomes from the production of goods and services that they consume."

"[Service] jobs offshoring, which began with call centers and back office operations is rapidly moving up the value chain.  Business Week's Michael Mandel compared starting salaries in 2005 with those in 2001.  He found a 12.7% decline in computer science pay, a 12% decline in computer engineering pay, and a 10.2% decline in electrical engineering pay."

Roberts points out that not even minimum-wage service jobs are safe for Americans, referencing a McDonald's burger joint that's experimenting with their drive-through order taking.  The order is transmitted via satellite to a central location in India or China and from there back to the person preparing the order.  They've found they get the orders correct more often and perform that function at costs below U.S. minimum wage.


The gutting of America's manufacturing base continues apace.   Between 2001 and 2005 the U.S. lost 17% of its manufacturing jobs.

"The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a super-economy that is the 'envy of the world.'  Between 2001 and 2006, communications equipment lost 43% of its workforce.   Semiconductors and electronic components lost 37% of its workforce."

"Judging from its ten-year jobs projections for the years 2004-2014, the U.S. Department of Labor does not expect to see any significant high-tech job growth in the U.S.  The knowledge jobs are being outsourced even more rapidly than the manufacturing jobs.   The so-called 'new economy' was just another hoax perpetrated on the American people."

"In January 2011 there were 1,132,300 more waitresses and bartenders than in January, 2001, a gain of 14%.  ...As of January, 2011, total government employment in the U.S. was 22,226,000, almost twice the number of Americans employed in manufacturing.

"The evidence is conclusive, 'globalism' or jobs offshoring has given U.S. employment a Third World complexion with jobs available only in government and nontradable domestic services."

And here's something truly chilling.


"The BLS projects that of the thirty occupations with the largest employment growth, only seven require university degrees.   The BLS projects jobs for university graduates to total 1,434,000 over the decade of 2008-2018.   This figure is only 60% of the number of university graduates projected by the National Center for Education statistics for the academic year 2011-2012 alone."

"A country whose work force is concentrated in domestic, nontradable services has no need for scientists and engineers and no need for universities."

"No one seems to understand that research, development, design and innovation take place in countries were things are made. 
the loss of manufacturing means ultimately the loss of engineering and science.  The newest plants embody the latest technology.  If these plants are abroad that is where the cutting edge resides."

"The U.S. economy did not develop on the basis of free trade.  If the costs that free traders attribute to trade protection are real, the costs did not prevent America's economic rise.   Indeed much historical research concludes that trade protection was the reason for America's rises as an industrial and manufacturing power."

As noted at the outset, Robert's The Failure of Free Market Capitalism is a wake-up call not just for the States but for all of us in the West.   There's so much more in his book that I can't deal with in this modest post.   As mentioned earlier, there's really nothing new in this book, just the way everything is tied together.

The global economy has to be jettisoned.   One of the reasons we're so dependent on resources, particularly bitumen, is because we have surrendered sovereignty over our domestic markets the very thing that empowers offshoring of our own manufacturing base.  It hasn't worked.  It's been based on myths and outright lies.

It's time to shift into steady-state economics, even Roberts gets that.  Let's take our markets back, restore our manufacturing base and our middle class and let's do it while there's still time.

China - Using American Wealth to Cement Its Supremacy

It's the way these things go - and it's too late to do a damned thing about it.

The West, particularly the U.S., spent the past two decades pouring wealth from Western economies into China's. That came in the form of moving manufacturing from Western factories to Chinese factories and from engaging in free trade (i.e. enormous balance of trade deficits) that left China awash in foreign currency, including something close to a trillion dollars in US cash.

We spent two decades bleeding our wealth away to grow China's economy, wealth we were too greedy and short-sighted to invest in our own economies. Now while the world is in a recessionary slow-down, China has all that money to go on a distress-sale shopping spree. From the G&M Report on Business:

Flush with cash at a time when most countries and corporations are struggling to gain access capital, the Asian economic superpower has spent nearly $60-billion (U.S.) in less than a week in a series of deals that will secure a long-term supply of iron ore, copper, zinc and oil.

Desperate for financing amid stalled capital markets and investor abandonment of the sector, resource producers are turning to China for a commodity it has in spades: ready money.

China is the world's largest consumer of commodities. While the country's economy has slowed due to the global economic downturn, its gross domestic product is still expected to increase by about 6 per cent this year compared with 9 per cent in 2008 and 13 per cent in 2007. A $586-billion (U.S.) stimulus package will spur infrastructure spending, which is expected to underpin commodities demand.

The country's voracious need for metals helped push prices for iron ore, coal and copper to record highs last year. The global financial crisis has now cut prices for most metals in half; China is throwing its cash around to secure a cheap supply.

It's those last two words, "cheap supply," that will come back to haunt us. By the time our own economies have recovered sufficiently to restore demand for energy and metals, prices for those commodities will have recovered - except for our main competitor, China, which will have locked in both supply and price at recessionary values. It was one thing when we were all competing for resources at the same price. Now, thanks to our investor-classes and their greed, China will have the one remaining strategic advantage it didn't already possess.

The Problem with Deregulation

It's the mantra of the rightwing - deregulate now, deregulate everything. The idea is that it's always better to rely on free enterprise, on the markets to self-regulate. After all, they know what's best, not some bureaucrat regulator.

Brian Mulroney deregulated Canada's airline industry. At the time we had a reasonably stable system of carriers headed by Air Canada and Canadian Pacific Airlines, two flag carriers. Below them were a stable of charter and regional carriers.

One of the advantages of airline regulation was the advancement of public policy. The big carriers were given preferred access to the major, big-city and international routes but they were also expected to bring air service to smaller centres that might otherwise not have been served. Like the early investment in microwave towers, regulated air travel helped open up Canada's remote regions.

Everything seemed to be ticking alone reasonably well when the whole business got overrun by free enterprise in the wake of Mulroney's deregulation of the industry. Air Canada was privatized and began the steady descent that continues to this day. Canadian Pacific got into an aggressive takeover and expansion mood, in the process swallowing Pacific Western Airlines and even Max Ward's Wardair, emerging as the bloated, Canadian Airlines International.

Both airlines engaged in a mutually-destructive air war, each scheduling unnecessary flights trying to muscle the other out on major routes such as Vancouver-Toronto. The revenue lifeblood drained out of both, forcing the final showdown.

The inevitable dog fight ensued (not the aerial kind, the sort that involves dogs tossed into a ring). Canadian tried to salvage itself by overrunning Air Canada. The former People's Airline fought back. Canadian Airlines finally collapsed under its own weight and Air Canada got busy picking at the corpse before wrestling with its own insolvency.

Where are we today? That all depends on your perspective. If you don't recall Canadian air travel at its zenith in the late 70's/early 80's, today's airline service might not look godawful. If you do, it does.

But the airline industry doesn't stand alone as an indictment of deregulation. A more recent example is the sub-prime mortgage debacle in the United States. Rather than intervening to regulate excesses, the Fed sat back and let havoc ensue. In the months leading up to the bubble bursting, two out of three new mortgages in California were "interest only."

America was awash in cheap, unregulated money for which there were far too few legitimately qualified borrowers. That didn't bother many mortgage lenders who weren't planning on holding on to the securities anyway but, instead, bundling them and flogging them out to eager buyers. Lending mortgage money became a means to create product for the "asset-backed commercial paper" market. Insane? Of course. Inherently self-destructive? Absolutely. Yet these realities don't bother the deregulated hucksters who see easy, short-term money and have no plans on being around for the collapse anyway.

These are just a couple of examples of the downside of deregulation. There is an unspoken assumption in deregulation - that the newly deregulated will act rationally and in the best interests of their industry and society.

Government doesn't deregulate an industry hoping it will fail and collapse. Deregulation is always presented as a means to free up and thereby strengthen the affected sector. The logic is always the same - the industry knows better than the government regulating it. In reality that's usually true. The industry usually does know better. However there's a giant leap between knowing what's best for one's own industry and actually doing what's best instead of what offers the greatest, short-term reward or immediate competitive advantage.

I'm not sure whether the problem is inherent in deregulation of itself or in our poor grasp of the deregulation process. Maybe we just don't understand how to deregulate effectively. Maybe we're too quick to throw the doors wide open before laying the groundwork for self-regulation.

Was the implosion of the Canadian airline industry not foreseeable? I think it was. Was the subprime collapse not foreseeable? Sure it was. What about the preceding bubble, the dot.com collapse? Not foreseeable? Of course it was. Enron, WorldCom? You decide.

The subprime fiasco may be the straw that broke the camel's back. E.J. Dionne, writing in the Washington Post, claims that a new reality is settling over American capitalism:

"Since the Reagan years, free-market cliches have passed for sophisticated economic analysis. But in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing.

You know the talking points: Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn't matter. Providing incentives for the investors of capital to "grow the pie" is the only policy that counts. Free trade produces well-distributed economic growth, and any dissent from this orthodoxy is "protectionism."

"... [In a recent speech, Federal Reserve Chairman Ben] Bernanke sounded like a born-again New Dealer in calling for "a more robust framework for the prudential supervision of investment banks and other large securities dealers."

Bernanke said the Fed needed more authority to get inside "the structure and workings of financial markets" because "recent experience has clearly illustrated the importance, for the purpose of promoting financial stability, of having detailed information about money markets and the activities of borrowers and lenders in those markets." Sure sounds like Big Government to me.

This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free-market notions. What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era.

[Chairman of the House Financial Services Committee, Barney] Frank also calls for new thinking on the impact of free trade. He argues it can no longer be denied that globalization "is a contributor to the stagnation of wages and it has produced large pools of highly mobile capital." Mobile capital and the threat of moving a plant abroad give employers a huge advantage in negotiations with employees. "If you're dealing with someone and you can pick up and leave and he can't, you have the advantage."

"Free trade has increased wealth, but it's been monopolized by a very small number of people," Frank said. The coming debate will focus not on shutting globalization down but rather on managing its effects with an eye toward the interests of "the most vulnerable people in the country."

We're only just beginning to recognize that our notions of capitalism are based on a deeply flawed understanding of economics. It's not all "supply and demand" curves any more. Our traditional economic models based on the mythical producer and mythical customer are increasingly failing us. Some of the best minds in the business are now introducing us to the powerful realities of things like social economics and environmental economics. We're beginning to see the notion of "costs" as never before.

We're entering an era in which "growth" may no longer be the saviour of our economies and our societies. We're witnessing the inescapable consequences of massive growth in emerging economies such as China's and India's. We're confronting the realities of resource depletion and renewable resource exhaustion and the resultant excessive demand. This rising tide doesn't float all boats, it causes some to settle lower in the water.

As we adapt to these new economic realities we'll probably require more regulation, not less, to help us adjust. Call it protectionism if you like but unless you've got a better idea...

Now, as I noted a tad prematurely in my previous post, I've gone fishin'. See ya later.

http://www.washingtonpost.com/wp-dyn/content/article/2008/07/10/AR2008071002264.html?wpisrc=newsletter