Paul Krugman @ MindSay

Mary had a little lamb / And when she saw it sicken / She shipped it off to Packingtown / And now it’s labeled chicken.”

That little ditty famously summarized the message of “The Jungle,” Upton Sinclair’s 1906 exposé of conditions in America’s meat-packing industry. Sinclair’s muckraking helped Theodore Roosevelt pass the Pure Food and Drug Act and the Meat Inspection Act — and for most of the next century, Americans trusted government inspectors to keep their food safe.

Lately, however, there always seems to be at least one food-safety crisis in the headlines — tainted spinach, poisonous peanut butter and, currently, the attack of the killer tomatoes. The declining credibility of U.S. food regulation has even led to a foreign-policy crisis: there have been mass demonstrations in South Korea protesting the pro-American prime minister’s decision to allow imports of U.S. beef, banned after mad cow disease was detected in 2003.

How did America find itself back in The Jungle?

It started with ideology. Hard-core American conservatives have long idealized the Gilded Age, regarding everything that followed — not just the New Deal, but even the Progressive Era — as a great diversion from the true path of capitalism.

Thus, when Grover Norquist, the anti-tax advocate, was asked about his ultimate goal, he replied that he wanted a restoration of the way America was “up until Teddy Roosevelt, when the socialists took over. The income tax, the death tax, regulation, all that.”

The late Milton Friedman agreed, calling for the abolition of the Food and Drug Administration. It was unnecessary, he argued: private companies would avoid taking risks with public health to safeguard their reputations and to avoid damaging class-action lawsuits. (Friedman, unlike almost every other conservative I can think of, viewed lawyers as the guardians of free-market capitalism.)

Such hard-core opponents of regulation were once part of the political fringe, but with the rise of modern movement conservatism they moved into the corridors of power. They never had enough votes to abolish the F.D.A. or eliminate meat inspections, but they could and did set about making the agencies charged with ensuring food safety ineffective.

They did this in part by simply denying these agencies enough resources to do the job. For example, the work of the F.D.A. has become vastly more complex over time thanks to the combination of scientific advances and globalization. Yet the agency has a substantially smaller work force now than it did in 1994, the year Republicans took over Congress.

Perhaps even more important, however, was the systematic appointment of foxes to guard henhouses.

Thus, when mad cow disease was detected in the U.S. in 2003, the Department of Agriculture was headed by Ann M. Veneman, a former food-industry lobbyist. And the department’s response to the crisis — which amounted to consistently downplaying the threat and rejecting calls for more extensive testing — seemed driven by the industry’s agenda.

One amazing decision came in 2004, when a Kansas producer asked for permission to test its own cows, so that it could resume exports to Japan. You might have expected the Bush administration to applaud this example of self-regulation. But permission was denied, because other beef producers feared consumer demands that they follow suit.

When push comes to shove, it seems, the imperatives of crony capitalism trump professed faith in free markets.

Eventually, the department did expand its testing, and at this point most countries that initially banned U.S. beef have allowed it back into their markets. But the South Koreans still don’t trust us. And while some of that distrust may be irrational — the beef issue has become entangled with questions of Korean national pride, which has been insulted by clumsy American diplomacy — it’s hard to blame them.

The ironic thing is that the Agriculture Department’s deference to the beef industry actually ended up backfiring: because potential foreign buyers didn’t trust our safety measures, beef producers spent years excluded from their most important overseas markets.

But then, the same thing can be said of other cases in which the administration stood in the way of effective regulation. Most notably, the administration’s refusal to countenance any restraints on predatory lending helped prepare the ground for the subprime crisis, which has cost the financial industry far more than it ever made on overpriced loans.

The moral of this story is that failure to regulate effectively isn’t just bad for consumers, it’s bad for business.

And in the case of food, what we need to do now — for the sake of both our health and our export markets — is to go back to the way it was after Teddy Roosevelt, when the Socialists took over. It’s time to get back to the business of ensuring that American food is safe.

A growing number of American economists are raising concerns about the American economy and the apparent consequences of America’s having adopted an economic policy featuring what passes as “free-trade,” the off-shoring of our productive resources, and so-called globalization, but few seem to be listening. Read Ralph Gomory, Paul Krugman, Henry C K Liu, and many others to see powerful critiques of globalization. Some of these critiques are suitable for popular consumption, but many are written in a language of economics that seem suited for only trained economists. And although these critiques are powerful, none gets to the absolute bottom of things. Current American economic policies are promoted under the guise of trade, and no one seems to have seen its inherent  contradiction.

 

Ask any child what trade means, and you’ll be told that trade is giving someone something he wants and getting back something you want. Trade involves giving a thing to another in return for another thing for him. But off-shoring doesn’t work that way; it is not trade.

 

When a nation off-shores its productive capacity, it produces less and less. The products produced by companies engaged in off-shoring produce nothing in their home countries. The production is done in foreign countries. When carried to its logical conclusion, any nation that promotes off-shoring will sooner or later have no products to trade. The only thing that makes such activities seem like trade is the transfer of capital in the form of fiat money. But fiat money is not a tradable product. As Hugo Salinas Price has pointed out, "Today, not a single currency in the world has a valuable content; all of the one hundred and eighty or so currencies in the world have absolutely no intrinsic value at all."

 

Now the American dollar is rapidly losing it purchasing power; the value of the dollar is dropping precipitously. The only thing that continues to prop its value up is the fact that since 1973, the US dollar, a fiat currency since 1971, serves as the primary reserve currency for international trade because oil continues to be denominated in fiat dollars. As long as that continues, the American dollar has real value, for while not backed by any commodity such as gold or silver, it is, in a sense,  backed by oil. But the oil that backs the dollar is not America’s oil. It is oil owned by foreign nations, many of whom have good reason to dislike the United States.

 

But this situation may be nearing its end. Within the last few days, Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signaling that the oil-rich kingdom is preparing to break the dollar currency peg. Kuwait became the first oil rich state to break its dollar peg in May. Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements. Russia and the members of the Organization of the Petroleum Exporting Countries cut their dollar holdings in the second quarter of this year. Qatar and Iran also recently cut their dollar holdings.

 

So consider this scenario: The United States trades fiat money, dollars with no intrinsic value, for products made overseas, but manufactures fewer and fewer products for foreigners to buy. When it gets to the point that they can no longer even buy oil with the dollars they hold, what will they be able to buy with them? The only answer is America itself; they will buy American assets—American companies, American real-estate, and America’s infrastructure. It’s already beginning to happen.

 

A company in United Arab Emirates recently tried to purchase the company that controls our ports. Network equipment maker 3Com is giving up its independence in a $2.2 billion buyout by Bain Capital Partners, a Chinese company. In June, an Australian-Spanish partnership paid $3.8 billion to lease the Indiana Toll Road. An Australian company bought a 99-year lease on Virginia's Pocahontas Parkway, and Texas officials decided to let a Spanish-American partnership build and run a toll road from Austin to Seguin for 50 years. The tolls from the U.S. side of the tunnel between Detroit and Windsor, Canada, go to a subsidiary of an Australian company -- which also owns a bridge in Alabama. Chicago sold a 99-year lease on the eight-mile Chicago Skyway for $1.83 billion to Macquarie Infrastructure Group of Sydney, Australia and Cintra Concesiones de Infraestructuras de Transporte of Madrid, Spain. Illinois lawmakers are examining privatizing the Illinois Tollway, New Jersey lawmakers are considering selling 49 percent of the state's two big toll roads and a gubernatorial candidate in Ohio wants to sell the turnpike.

 

Orange County, Calif., got burned by a toll-road lease. The road, part of state Route 91, was built and run for $130 million by California Private Transportation Company, partly owned by France-based Compagnie Financiere et Industrielle des Autoroutes. The toll road opened in 1995. Seven years later, Orange County was looking at gridlock. But it could not build more roads because of a provision in the lease. So it bought back the lease -- for $207.5 million, a loss of $77.5 million. Patrick Bauer, the Indiana House's Democratic leader, says such deals are taxpayer rip-offs. Bauer believes Macquarie-Cintra could make $133 billion over the 75-year life of the Indiana Toll Road lease -- for which Indiana got $3.8 billion. Taxpayer rip-off? Much more: the giving away of America by America’s business and political leadership.

 

Globalization and off-shoring under the guise of “free-trade” is not trade at all. It involves no swap; it is a complete misuse of the language; it involves an oxymoron. There is no such thing as trade that does not involve a swap. As America gets deeper and deeper in debt to foreign countries, as it continues to give fiat currency that is continually losing its value for imported products, America has hung a huge for-sale sign on itself—and our creditors are buying.

 

We Americans strange. Although we want immigrants to learn English, America’s official language, we may all soon have to learn Chinese and, perhaps, French, Spanish, and even Arabic.

©2007 John Kozy

Paul Krugman, an economics professor at Princeton University, has an article on the internet entitled, “Ricardo’s Difficult Idea” (RICARDO'S DIFFICULT IDEA http://web.mit.edu/krugman/www/ricardo.htm). Numerous comments on this article can also be found on-line; however, none raises what I consider to be its fundamental errors.

 

First, professor Krugman claims that people, especially those whom he calls “intellectuals,” are critical of the claims made by economists in support of free-market globalization for three reasons:

• They do so to be intellectually fashionable.
• They do so because the theory of Comparative Advantage is more difficult than it seems, because it is part of a network of ideas which constitute a mathematical model. 
• They do so because of an aversion of mathematical ways of understanding of the world.

 

What evidence Mr. Krugman or anyone else could have to support the first and last of these items is hard to even imagine. Has he or anyone else taken a random survey of the people who are critical of globalization and counted their responses?

 

So, here is Mr. Krugman, passing himself off as some kind of  “scientist” (Oh, how economists like to make that claim!) making claims for which there is little if any evidence, which is not a practice that any legitimate scientist would ever engage in.

 

But even more so, consider the third item. There are countless people who will freely admit that they have no understanding of, say, the theory of relativity or quantum mechanics. Many of these people, perhaps, are not mathematically inclined and thus can be said to have an “aversion” to mathematical ways of understanding the world.  Yet there is no mass rejection of the claims of physicists made by such people, especially by those whom Krugman would characterize as “intellectuals.” So it follows that there must be something more than a mere aversion to mathematical models behind the criticism made of the economists’ claims about globalization. No mere aversion can account for them.

 

Second, just because a theory has a mathematical model means noting . Any good mathematician can mathematically model any theory that does not involve a logical contradiction. The Earth Centric Theory of the Universe can be modeled mathematically; yet it is completely false. And anyone who has studied non-Euclidean geometry knows that numerous such geometries can be developed mathematically, but most have no application in the world we live in. So merely because economists have a mathematical model from which they derive their claims does not validate them.

 

Third, all sciences are not cut from the same cloth, so to speak. Some, like geology and the theory of evolution are almost entirely descriptive. They attempt to tell us how the present was formed based upon data about the past derived from searches of the earth’s layers and fossils. They make no attempt to predict the future. Contrast those sciences to plate tectonics, for instance, which not only describes how the present continents were formed but also describes what the continents will look after some eons in the future. So if one claims that economics is a science, we can rightfully ask, “What kind of science is it?”

 

Furthermore, some sciences can be bifurcated into theoretical and applied branches. Theoretical physics, in most cases, cannot be directly applied to the world we live in. To do that, we need applied physics (engineering). Although theoretically a feather falls at the same rate as a metal sphere, no engineer would use that theoretical finding in building a roller-coaster, for example. An engineer would take into consideration the factors in the real world that the theorist ignores, such as the resistance of air and various weather conditions, especially the forces involved in storms. So again, we need to know whether, if economics is claimed to be a science, it is theoretical or applied, and how theoretical economics differs from applied economics. To my knowledge, no economist has never ever made the distinction, no less studied it.

 

Fourth, scientific theories are subject to verification. Empirical data. that is not contradicted by similar data from somewhere else, must be provided that supports scientific theories and in many cases, crucial experiments must be devised and carried out to acquire that data. No one really knew, for instance, not even Einstein, whether the theory of relativity was valid until a British solar eclipse team proved that light rays from distant stars were deflected by the gravity of the sun just as the theory of relativity had predicted.

 

Economics cannot provide any empirical data not contradicted by similar data gathered somewhere else to support its models and economists, to my knowledge, have never devised and carried out any crucial experiments.

 

Fifth, at least since the nineteenth century, scientists have engaged in an examination of their foundations, that is, their assumptions. Even the foundations of arithmetic have been investigated, yielding some spectacular results. All modeled theories are based on assumptions which need to be investigated. Free market economic theory is chock full of such assumptions, the validity of which are merely taken for granted by economists. For instance, Ricardo’s difficult idea makes the following assumptions:

• Labor is only factor of production.
• The supply and productivity of labor is fixed in each country.
• Perfect competition prevails.
• Perfect mobility of factors of production within countries exists.

 

None of these assumptions hold in the real world we live in.

 

Sixth, in science results matter. Physical laws work just as well in Austria, Australia, and Argentina. The results don’t vary in different parts of the world. The same claim cannot be made for economics.

 

Since the eighteenth century, physicists have enabled mankind to put men on the moon, send planetary probes to the outer reaches of the solar system, land probes on comets, build countless appliances, skyscrapers, and vehicles, to mention just a few of their accomplishments.

 

Since the eighteenth century, economists have had some astounding successes; unfortunately there have been even more astounding failures. Yes free market Capitalism has brought wealth to some peoples, but it has also institutionalized human exploitation, poverty, child labor, greed, and general immorality. None of the authentic sciences has such a dismal history.

 

Some unabashedly admit that the prime motivation for globalization is that it reduces labor costs, and they advance at least one position that would be positively hilarious if the subject matter were not so grave. On one hand, they assure us that we needn't worry about losing jobs in software maintenance and development... automotive and aerospace component design, and pharmaceuticals research due to globalization since 70 percent of jobs in the U.S. result from services such as retail, restaurants and hotels, personal care services, and the like,  necessarily produced and consumed locally. On the other hand, they admit that many of the jobs lost to outsourcing are relatively undesirable because of their low pay or low prestige.

 

Is this an argument for outsourcing? Laid-off programmers can always get their cosmetology license? Americans don't want those undesirable jobs in aerospace design because of the more prestigious positions available in the hospitality industry? Oh, sure!

 

Our economists make equally ludicrous claims about their mathematical model. They claim that globalization produces increases in “net” wealth. Well, so did mercantilism. An economist might reply that that depends on how wealth is measured, and I would reply, “Yes, indeed it does.”

 

Economists need to ask themselves whether economics exists for the benefit of people or people exist for the benefit of economic theory. The people believe it should exist for them, not the other way around. Economists seem totally oblivious to this reality. Even the measurements of the economy they take ignores it. The distinction between core and total inflation leaves people cold. When told that they are not much worse off because core inflation is negligible, they react with incredulous disgust. What matters to them is total inflation. The employment rate is just as unimpressive. All of the factors that effect people’s lives are absent from it. People who have given up looking for work because they have not been able to find any are unemployed; yet, the employment rate doesn’t measure them. And who cares if 10,000 jobs lost are balanced by 10,000 jobs gained? What people care about is what kinds of jobs have been lost and what kind have been gained. Ten thousand high-paying jobs lost are not balanced by 10,000 low-paying jobs gained. And now it has been pointed out that even our GNP measurements are faulty. Business Week has recently pointed out that we are measuring “phantom GNP.”

 

But there is something even more fundamentally wrong with free market Capitalism—it institutionalizes immorality. Its engine is exploitation, deceit, greed, and fraud, and any economist who defends it, no matter how brilliant, lacks even a scintilla of moral sense. So the gross criminals of this world are not those in prisons; they are the people who defend and manage this abominable model.

©2007 John Kozy, Jr.