Monthly Archives: January 2018

31/1/18: What Teachers of Piketty Miss on r vs g

A popular refrain in today’s political and socio-economic analysis has been the need for aggressive Government intervention (via taxation and regulation) to reverse growing wealth inequality. The narrative is supported by the increasing numbers of center and centre-left voters, and is firmly held in the key emerging demographic of the Millennial voters. The same narrative can also be traced to the emergence of some (not all) populist movements and political figures.

Yet, through regulatory restrictions, Governments in the recent past not only attempted to manage risks, but also created a system of superficial scarcity in supply of common goods & services (healthcare, education, housing etc) and skills, as well as access to professional services markets for practitioners. This scarcity de facto redistributes income (& thus, wealth) from the poor to the rich, from those not endowed with assets to those who inherit them or acquire them through other non-productive means, e.g. marriage, corruption, force. Many licensing requirements, touted by the Governments as the means for ensuring consumer protection, delivering social good, addressing markets failures and so on are either too cumbersome (creating a de facto bounds to supply) or outright skewed in favour off the incumbents (e.g. financial services licensing restrictions in trivial areas of sales and marketing). 

The re-distribution takes the form of high rents (paid for basic services that are woefully undersupplied: consider the California ‘water allocations’ and local authorities dumping federal subsidies to military personnel onto private sector renters, or consider the effect of pensions subsidies to police and other public services providers that are paid for by poorer taxpayers who themselves cannot afford a pension). 

This benevolent-malevolent counter-balancing in Government actions has fuelled wealth inequality, not reduced it, and the voters appear to be largely oblivious to this reality.

Crucially, the mechanism of this inequality expansion is not the simple r>g relationship between returns to capital (r) and the growth rate in the economy (g), but a more complex r(k)>r(hh)>r(g)>r(lh) relationship between returns to financial & restricted (r(k)), inc property & water rights in California, etc, high-quality human capital (r(hh)), inc returns to regulated (rationed) professions, the rate of growth in the economy (g), and the returns to low-quality human capital (r(lh)), inc returns to productive productive), but un-rationed professions. 

Why this is crucial? Because the r>g driven inequality, the type that was decried by Mr. Piketty and his supporters is missing a lot of what is happening in the labor markets and in large swathes of organisational structures, from limited partnerships to sole traders. Worse, lazy academia, across a range of second-tier institutions, has adopted Piketty’s narrative unchecked, teaching students the r vs g tale without considering the simple fact that neither r, nor g are well-defined in modern economics and require more nuanced insight. 

Yes, we now know that r>g, and by a fat margin (see And, yes, that is a problem. But that is only one half off the problem, because it helps explain, in part, the 1% vs 99% wealth distribution imbalances. But it cannot explain the 10% vs 90% gap. Nor can it explain why we are witnessing the hollowing-out of the middle class, and the upper middle class. A more granular decomposition of r (and a more accurate measurement of g - another topic altogether) can help.

The non-corporate entities and high human capital individual earners can still benefit from the transfers from the poorer and the middle classes, but these benefits are not carried through traditional physical and financial capital returns or corporate rent seeking. (Do not take me wrong: these are also serious problems in the structure of the modern economy). 

Take for example, two professionals. Astrophysicist employed in a research lab and a general medical practitioner. The two possess asymmetric human capital: astrophysicist has more of it than a general medical doctor. Not only in duration of knowledge acquisition (quantity), but also in the degree of originality of knowledge (quality). But, one’s supply of competitors is rationed by the market (astrophysics high barrier to entry is… er… the need to acquire a lot of hard-to-earn human capital, with opportunity costs sky-high), another is rationed by the licensing and education systems. Guess which one earns more? And guess which one has access to transfers from the lower earners that can be, literally, linked to punitive bankruptcy costs? So how much of the earnings of the physician (especially the premium on astrophysicist’s wage) can be explained by a license to asymmetric information (extracting rents from patients) and by restrictions on entry into profession that go beyond assurance of quality? How much of these earnings are compensation for the absurdity of immense tuition bills collected by the medical schools with their own rent-seeking markets for professional education? And so on.

In a way, thus, the Governments have acted as agents for creating & sustaining wealth inequality, at the same time as they claimed to be the agents for alleviating it. 

Yes, consumer protecting regulation is necessary. No question. Yes, licensing is often necessary too (e.g. in the case of a physician as opposed to a physicist). But, no - transfers under Government regulations are not always linked to the delivery of real and tangible benefits of quality assurance. Take, for example, restrictive development practices and excessively costly planning bureaucracies in cities, like, San Francisco. While some regulation and some bureaucracy are necessary, a lot of it is pure transfer from renters and buyers to bureaucrats as well as investors. So, do a simple arithmetic exercise. Take $100 of income earned by a young professional. Roughly 33% of that goes in various taxes and indirect taxes to the Governments. Another 33% goes to to the landlord protected by these same Governments from paying the full cost of bankruptcy (limited liability) and from competition by restrictive new building and development rules. Another 15% goes to pay for various insurance products, again - regulated and/or required by the Governments - health, cars, renters’ etc. What’s left? Less than 20% of income puts gas into the car or pays for transportation, buys food and clothing. What exactly remains to invest in financial and real assets that earn the r(k) and alleviate wealth inequality? Nada. And if you have to pay for debt incurred in earning your r(hh) or even r(lh), you are… well… insolvent. Personal savings averaged close to 6.5-7% of disposable income in 2010-2014. Since then, these collapsed to 2.4% as of December 2017. Remember - the are percentages of the disposable income, not gross income. Is that enough to start investing in physical and/or financial capital? No. And the numbers quoted are averages, so \median savings are even lower than that.

Meanwhile, regulated auto loans debt is now at $4,340 per capita, regulated credit card debt is at $2,930 per capita, and regulated student loans debt is now at $4,920 per capita. Federal regulations on credit cards debt are know n to behaviourally create barriers to consumers paying this debt down and/or using credit cards prudently. Federal regulations make student loans debt exempt from bankruptcy protection, effectively forcing borrowers who run into financial troubles into perpetual vicious cycle of debt spiralling out of control. Auto loans regulations effectively create and encourage sub-prime markets for lending. So who is responsible for the debt-driven part of wealth inequality? Why, the same Government we are begging to solve the problem it helps create.

Now, add a new dimension, ignored by many followers of Mr. Piketty: today’s social & sustainability narratives risk to deliver more of the same outcome by empowering Governments to create more superficial scarcity. This does not mean that all regulations and all restrictions are intrinsically bad, just as noted before. Nor does it mean that social and environmental risks are not important concepts. Quite the opposite, it means that we need to pay more attention to regulations-induced transfers of wealth and income from the lower 90% to the upper 10% and to companies and non-profits across the entire chain of such transfers. If we want to do something about our social and environmental problems (and, yes, we do want) we need to minimise the costs of other regulations. We need to increase r(hh) and even more so, r(lh). And we need to increase the g too. What we do not need to do is increase the r(k) without raising the other returns. We also need to recognise that on the road paved with good (environmental) intentions, we are transferring vast amounts of income (and wealth) from ordinary Joe and Mary to Elon Musk and his lenders and investors. As well as to a litany of other rent-seeking enterprises and entrepreneurs. The subsidies fuel returns to physical and fixed capital, intellectual property (technological capital), financial capital, and to a lesser extent to higher quality human capital. All at the expense of general human capital.

Another aspect of the over-simplified r vs g narrative is that by ignoring the existent tax codes, we are magnifying the difference between various forms of r and the g. Take the differences in tax treatment between physical, financial and human capital. Set aside the issue of tax evasion, but do include the issue of tax avoidance (legal and practiced with greater intensity the higher do your wealth levels reach). I can invest in fixed capital via a corporate structure that allows depreciation tax claws-backs and interest deductions. I can even position my investment in a tax (non-)haven jurisdiction, like, say Michigan or Wisconsin, where - if I am rich and I do invest a lot, I can get local tax breaks. I can even get a citizenship to go along with my investment, as a sweetener. Now, suppose I invest the same amount in technological capital (or, put more cogently, in Intellectual Property). Here, the world is my oyster: I can go to tax advantage nations or stay in the U.S. So my tax on these gains will be even lower than for fixed capital. Investing in financial capital is similar, with tax ranges somewhere between the two other forms of capital. Now, if I decided to invest in my human capital, my investments are not fully tax deductible (I might be able to deduct some tuition, but not living expenses or, in terms of corporate finance, operating expenses and working capital). Nor is there a depreciation claw back. There is not a tax incentive for me to do this. And my returns from this investment will be hit with all income taxes possible - state, and federal. It is almost sure as hell, my tax rate will be higher than for any form of non-human capital investment. Worse: if I borrow to invest in any form of capital other than human capital, and I run into a hard spot, I can clear the slate by declaring bankruptcy. If I did the same to invest in human capital, student loans are not subject to bankruptcy protection.

Not to make a long argument any longer, but to acknowledge the depth of the tax policy problems, take another scenario. I join as a partner a start up and get shares in the company. Until I sell these shares as a co-founder, I face no tax liability. Alternatively, I join the same start up as a key employee, with human capital-related skills that the start up really, really needs to succeed. I get the same shares in the company. Under some jurisdictions rules, I face immediate tax liability, even if I can never sell these shares in the end. Why? Ah, no reason, other than pure stupidity of those writing tax codes. 

The net effect is the same across all of the above points: risk-adjusted after tax returns on investment in human capital are depressed - superficially - by policies. Policies, therefore, are driving wealth inequality. After-tax risk-adjusted returns to human capital are lower than after-tax risk-adjusted returns on physical, financial and technological capital.

Once again, we need to increase returns to human capital without raising returns to other forms of capital. And we need to increase real rates of economic growth (what that means in the real world - as opposed to what it means in the world of Piketty-following academia is a different subject all together). And we need to get Government and regulators out of the business of transferring our income and potential wealth from us to the 1%-ers and the 10%-ers. 

How do we achieve this? A big question that I do not have a perfect answer to, and as far as I am aware, no one does. 

One thing we must consider is systemically reducing rents obtained through inheritance, rent seeking and other unproductive forms of capital acquisition. 

Another thing we must have is more broadly-spread allocation of financial assets linked to the productive economy (equity). In a way, we need to dramatically broaden share holding in real companies’ assets, among the 90%. Incidentally, this will go some ways in addressing the threat to the social fabric poised by automation and robotisation: making people the owners of companies puts robots at work for people. 

Third thing is what we do not need: we do not need is a penal system of taxation that reduces r(hh) and r(lh). Progressive income taxation delivers exactly that outcome. 

Fourth thing: we need to recognize that some assets derive their productivity from externalities. The best example is land, which derives most of its value from socio-economic investments made by others around the site. These externalities-related returns must be taxed as a form of unearned income/wealth. A land value tax or a site value tax can do the job.

As I noted above, I do not claim to hold a solution to the problem. I do claim to hold a blue print for a systemic approach to devising such a solution. Here it is: we need sceptical, independent  & continuous impact analysis of every piece of regulation, of every restriction, of every socially and environmentally impactful (positive or negative) measure. But above all, we need to be sceptical about the role of the Government, just as we have become sceptical about the capacity of the markets. Scepticism is healthy. Cheerleading is cancerous. Stop cheering, start thinking deeper about the key issues around inequality. And stop begging for Government action. Government is not quite the panacea we imagine it to be. Often enough, it is a problem we beg it to solve. 

It’s really frustrating that the president continues to spew such nonsense on immigration.

It's really frustrating that the president continues to spew such nonsense on immigration. Unfortunately, people believe him. And why shouldn't they, you don't expect a president to lie so blatantly, so often, about such important issues that affect the lives of millions of Americans. There are tons of terrific articles out there debunking his statements.

I've really enjoyed reading Dara Lind at Vox (Trump’s biggest insult to immigrants in his State of the Union) and Lomi Kriel at the Houston Chronicle (Explainer: Why can't immigrants here illegally just apply for citizenship?).

Be sure to check out those two articles as well as Jose Miguel Cruz's take down of the president on MS-13 in Trump is wrong about MS-13. His rhetoric will make it worse.I think that his conclusion is a bit over the top but Trump's rhetoric and actions towards the MS-13 are bound to make matters worse.

Australian Politics 2018-01-31 15:53:00


Explosion of cookie cutter homes ‘wreaking havoc for homeowners’, experts warn

This is mostly just elitism and snobbery. The term "cookie cutter" is a reliable index of that. People will always use the materials and designs that are least costly for the purpose at the time. 

There is however one point below that does I think give concern:  Using polystyrene boxes for foundations. When I first saw it, I couldn't believe it.  It sounds like a joke but it has in fact become common practice. It is almost certainly a mistake

Australia’s love for cheap and quick to build “cookie cutter” homes is wreaking havoc for homeowners and the environment alike, according to building and design experts.

ArchiCentre Australia director Peter Georgiev has slammed developers and builders for the explosion of sub-par, one-size-fits-all homes that are based on “star gazing, fantasy and over-servicing” rather than tailoring to needs.

“There are display villages galore and the same product is trodden out street after street. The homes are quite repetitive” Mr Georgiev said.

“You now have the ability, in the backwaters of suburban Australia, to have as many bathrooms as you please. These are the trends happening not on need but on fantasy,” Mr Georgiev said.

He is concerned residential developments are flawed from the base up where builders are peddling cheap products and constructing homes in a stock-standard way, regardless of whether it is suited to a site’s different landscapes, and cutting corners at every turn to cash in the maximum amount of jobs possible.

“The standard approach to building design is being eroded. We’re talking about cutting to the bone to the point we end up with substantial defects,” Mr Georgiev said.

“Regulation is there to set a minimum standard. This quest with getting away with doing the least amount of work is endemic with the development mentality. It’s ‘what can we get away with and what don’t we have to do’ as opposed to ‘what is a good idea and how can we get a low cost for the life cycle of the home’,” he said.

One of the main structural problems he has come across repeatedly in the past two decades is “slab heave” which causes a house to twist and crack in the walls, doors and windows when “waffle pod slabs” are placed on inadequately compacted soil.

The product, which is a cheap alternative to your traditional concrete slab that’s excavated into the ground, is built on top of the ground using polystyrene pods. It needs very firm soil, excellent draining and sites that are virtually flat to work best.

But Housing Industry Association executive director of building policy Simon Croft said the commonly-used concrete slab, which was recognised in the Australian building standard, wasn’t ‘one-size-fits-all’.

“Site topography, building size, drainage (both natural and constructed) and the structural design of the load bearing elements can also influence the slab design,” Mr Croft said.

Since it arrived in the 1990s, the housing industry has seen a proliferation of this type of foundation and it’s had a disastrous effect, according to architect and builder Ian Forrest. “It may cost $10,000 to $15,000 on a job but it can cost owners and builders a lot more for bad workmanship and lack of design,” Mr Forrest said.

He estimated attending to one job a month with homeowners complaining about doors and windows unable to close and they are problems that are often extremely hard to fix.

“There was one place where the owner was jacking up his car in the garage and the concrete was so thin it broke through the ground and you could see the polystyrene,” Mr Forrest said.

He now wants the product banned across the country after observing countless defects in the product and flaws with the certification system and the building assessment process in Victoria.

But the country’s peak organisation representing builders, Master Builders Australia, said its members abided by current regulations and refuted claims that residential homes were poorly designed.

“Master Builders and our members are committed to building quality homes and the National Construction Code (NCC) sets minimum standards for housing design and construction including in those offered in house and land packages,” said Denita Wawn, CEO of Master Builders Australia.

“Keeping home ownership within reach of average Australians must also be a high priority and code compliant new homes in variety of price points is an important part of that equation,” she said.

Mr Georgiev has called on the government to question what is currently being delivered in the residential space.

“Government certainly has to review the outcomes of what is being constructed at the moment and the value over the life cycle of these buildings. How long do they last, how costly are they to maintain and should we really be cleverer about cost – not just cost today, although it’s important – but the cost over the life of the building and the life of the occupants,” Mr Georgiev said.

A spokesperson for the Department of Planning and Environment said while it was not aware of any specific issues raised in relation to waffle pod slab construction it was in the process of implementing a range of building regulation reforms.

The spokesperson said it follows a comprehensive review of the building regulation and certification system in 2015.


Big lurch to the Left by Shorty

What little was left of the traditional Labor model under the Keating and Hawke governments died with Bill Shorten’s speech to the press club yesterday.

The Labor leader delivered a hollow but unquestionably populist manifesto that sought to tap the rich vein of discontent in the community.

In defining Labor’s vision for the year ahead, Shorten borrowed from the playbook of the radical UK Labour leader Jeremy Corbyn, who used to great effect the concept of the “left-behind society” by exploiting class envy in an appeal to the disaffected.

It almost won Corbyn an election. In the end, it may well do the same for Shorten.

In all its concavity, Shorten framed a platform for the political battle ahead that was unapologetic in its populism if rich in contradiction.

The speech was a vision of an empowered union movement and interventionist government based on a bombastic class-driven promise to carve up and redistribute Australia’s wealth by taxing high income workers more and everybody else less.

The rhetoric around the disenfranchised drew an obvious ring around low-income workers, welfare recipients, students and pensioners. These have become the Labor “dependants”.

Where Julia Gillard and Wayne Swan drew the income line between the haves and have nots at $150k, Shorten has lowered the bar to $87k.

This is the new battleground where he believes the cost of living debate will be won or lost, the new “left-behind society”.

Ironically, this populism appears aimed at a large percentage of people who end up paying little or no tax.

It would have been a folly to expect that an Opposition Leader at this stage of the political cycle would offer anything more than hints as to the enabling policies that would deliver on this quixotic dream.

What hints there were included a legislated cap on private health insurance premiums, reversing company tax cuts and re-regulating the Labor market.

On energy policy, Shorten appeared to suggest the path to lowering energy prices was to build more wind farms.

His speech demonstrated how far the ideological ballast has shifted to the left both in ideology and rhetoric under his leadership, yet he spoke directly to the issues that preoccupy the minds of most Australians.


Bill Shorten backflips on private health insurance rebate

A day after suggestions Labor would make changes to private health insurance rebates, leader Bill Shorten has clarified his comments.

Health Minister Greg Hunt quickly fired back at the Opposition Leader, criticising him for keeping the door open to ending the rebate and warning that its abolition would drive up the cost of living for regular people.

"What Shorten has announced today is a plan to dismantle private health insurance and drive up the cost for pensioners, for seniors, for families and for young people," Mr Hunt said.

Asked on Wednesday morning to clarify if Labor would be targeting the subsidy, Mr Shorten said no.

"I just think that the government wasn't listening yesterday and we are very clear that we think there is a role for private health insurance but it's got to work for people," he told Nine's Today show.  "I mean, if they are going to get billions of dollars in taxpayer subsidy and they are making 25 per cent profits...where do people come into the equation here?"

Mr Shorten said a Labor government would be meeting with the private health insurance companies and telling them their premiums are "out of control".

Currently, the government provides a means-tested rebate for Australians holding policies with private funds.

Single people earning more than $90,000 and couples earning more than $180,000 pay a Medicare levy surcharge of up to 1.5 per cent if they do not have a private policy.

Premiums will rise by an average 4 per cent this year despite Turnbull government changes designed to restrain growth. This rate, while the lowest increase since 2001, is still nearly double the inflation rate and adds $200 [annually] to the average policy.


Classrooms powered by renewable energy to be trialled in NSW schools

This sounds like fun.  What happens when it is an overcast day?  Do the kids alternately freeze and boil?
School children across Australia could soon be taught in classrooms powered entirely by renewable energy as a result of the innovative ‘Hivve’ modular classroom, now being trialled in two New South Wales schools.

On behalf of the Australian Government, the Australian Renewable Energy Agency (ARENA) is providing Hivve Technology Pty Ltd with $368,115 in funding to pilot their modular classrooms in a school environment.

Known as the ‘Hivve’, the portable classroom incorporates solar PV generation, real time energy metering, CO2 metering, data capture and communications to actively manage energy demands and control indoor environment quality.

Each Hivve classroom has the potential to generate enough electricity to power itself and two other classrooms in the school.

A regular classroom can consume on average 3,800 KWh per year, but when a HIVVE classroom is in use, there is an estimated net energy generation of 7,600 KWh per year.

Ready for the start of 2018 school year this week, the two pilot classrooms are being trialled at St Christopher’s Catholic Primary School in Holsworthy in Sydney’s south western suburbs and at Dapto High School in Dapto where the performance of the Hivve classrooms will be monitored and evaluated over a 12 month period.

A prototype building built by Hivve Technology Pty Ltd has successfully demonstrated the functionality in a controlled environment and this will be the first time the Hivve classroom and technology has been trialled in a real school.

ARENA CEO Ivor Frischknecht said there was enormous potential for Australia’s public schools to not only educate on renewables, but also reduce their reliance on the grid.

“This is a great way to get the next generation involved in renewables at an early age and educate them as to what the positive benefits will be as Australia continues its shift towards a renewable energy future,”

“The success of the Hivve project could lead to a nation-wide adoption of the modular classrooms, reducing reliance on the grid and even providing a significant amount of electricity back to the NEM.” Mr Frischknecht said.

Hivve Director David Wrench said the Hivve Technology was conceived and designed to deliver sustainable solutions – both environmental and economic – to help meet Australia’s growing school infrastructure needs.

“We are very pleased to be partnering with ARENA on this exciting project. We have carefully designed every element of the Hivve classroom to create the best possible learning environment for students”, Mr Wrench said.

Via email from

Posted by John J. Ray (M.A.; Ph.D.).    For a daily critique of Leftist activities,  see DISSECTING LEFTISM.  To keep up with attacks on free speech see Tongue Tied. Also, don't forget your daily roundup  of pro-environment but anti-Greenie  news and commentary at GREENIE WATCH .  Email me  here

U.S. Recession Risk Minimal

The risk of a national recession beginning in the United States anytime in the next year, or specifically between 30 January 2018 and 30 January 2019, is slightly over 0.5%. That value is about a tenth of a percentage point higher than our previous report on the topic about a month and a half ago.

Normally, we would have waited until after the Fed completed its end-of-January meeting before updating our recession probability track, but we decided to jump the gun given the sudden increase in volatility in the U.S. stock market, which is in part tied to rising yields for U.S. Treasuries.

Rising bond yields are starting to compete with stocks that pay some of the biggest dividends, leaving these companies behind even as the stock market has rallied to new highs.

The S&P utilities sector is down about 10% since the end of November and the real-estate sector has fallen 4.9%, sharply underperforming the S&P 500’s 6.6% rise. Companies in both groupings typically pay out big dividends relative to their stock prices, giving them high dividend yields.

For years, investors poured money into high-dividend stocks as they sought investment income that outpaced superlow yields in the bond market, which were held down by the Federal Reserve’s low-rate policy. But the central bank is reversing course, leading to a rise in bond yields that has accelerated in recent days.

The interesting thing about what's happening in the bond market is that long-term yields are increasing faster than short term yields, where the spread between the 10-Year and 3-Month constant maturity Treasury yields bottomed at 0.98% on 27 December 2017. Since then, the spread between the two Treasuries has opened up to 1.29%.

For our recession probability track, that means momentum has been building for a potential reversal in the downward component of its trajectory toward increased odds of recession.

U.S. Recession Probability Track Starting 2 January 2014, Ending 30 January 2018

That change will take some time to show up in the chart, where we're showing the trailing quarter average values for both the spread between the 10-Year and 3-Month Treasuries and the Federal Funds Rate. Meanwhile, the Fed is currently expected to increase the Federal Funds Rate by a quarter percentage point in March, then again in June and again in December 2018, so we would expect see the rightward component of its trajectory continue.

The Fed's hiking should also increase the yields of the 3-Month Treasury faster than longer-term Treasuries, so it's quite possible that the Fed's rate hiking will contribute to shrinking the size of the spread between long-term and short-term Treasury yields, offsetting the growing spread between the two in today's bond markets. At the very least, we'll have an interesting dynamic to watch to see which forces are winning out at any given point of time.

Fortunately, as it appears today, there is currently minimal risk that the National Bureau of Economic Research will someday declare that a national recession began in the U.S. between now and 30 January 2019 according to Jonathan Wright's recession forecasting methods, which provides the basis behind our recession probability track.

Previously on Political Calculations

Protectionism in the age of solar cells, Part 2

When the Trump administration announced last week that it was imposing tariffs on solar cell panels mostly coming from South Korea and China, it appears that the progressive blogosphere was almost unanimous in condemning the action as an attack on solar energy.

I was dismayed that the neoliberal lies about free trade had apparently been accepted by so many. As Jon Larson wrote on Real Economics, “In certain corners of the economic world, this is a major story—mostly because it flies in the face of neoliberalism's first commandment—Thou shall not condone protectionism!”

The tariffs should be attacked, but not because they are tariffs, not because they are protectionist, not because they may lead to less imports of panels and therefore the loss of jobs of people installing them.

The tariffs should be attacked because they are not accompanied by a robust industrial policy that will help USA manufacturers replace panels no longer being imported, by panels of domestic manufacture.

Protectionism is an issue on which the Democratic Party and the left in general are very vulnerable. Basically, they have forgotten the actual history of industrial development: every single country that successfully industrialized did so behind trade barriers. Many readers may not believe me, but it is historical fact. For a relatively short but full explication of the fact that protectionism works, I point you to James Fallows’ December 1993 article in The Atlantic, “How the World Works.” For an entire book on this topic, the best is probably South Korean economist Ha-Joon Chang's 2007 book, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, available as a large pdf file here. An excellent review of Chang’s book, by Chalmers Johnson, is here.

For a brief discussion of how this history was purposefully and deliberately eradicated from American universities and economics courses a century ago, read “Prophet of Prosperity” in a recent issue of The Pennsylvania Gazette of the University of Pennsylvania. The motive? “...landlords and other rentiers were reclassified as capitalists, just ones who invested in land and raw assets rather than machinery, and thereby earned “the increments of value attaching to land,” thus removing the social opprobrium of being exploiters, parasites and usurers. And, more importantly, to allow “money to make money.”

We like to taunt our conservative and libertarian opponents that you are entitled to your own opinions, but you are not entitled to your own facts. Well, the same applies on this issue, and to the neoliberals amongst us: you are entitled to your own opinions, but you are not entitled to your own facts. The facts are clear that historically, countries that successfully industrialized did so behind trade barriers that protected their infant industries, and protected the earning power of their working people. The facts are equally clear that since the imposition of economic neoliberalism and free trade on developing countries, and their enforcement by the World Bank, the International Monetary Fund, and other international NGOs, not to mention the USA government and others, the growth rate of the national economies of developing countries has been LESS than it was before neoliberalism and free trade. Those are the facts, and all the crap you were taught in college economics courses will not change them.

But protectionism alone does not work. There must be a national industrial policy to promote and encourage the development and growth of new industries. As originally developed by George Washington and his Treasury Secretary, Alexander Hamilton, and later in the 19th century by Henry Clay, Henry Carey, Abraham Lincoln (on Lincoln, see one of the best overlooked books on historical political economy, Lincoln and the Economics of the American Dream, by Gabor S. Borit, Memphis State University Press, 1978)., and others, protectionism was one pillar of a three-part program for national economic development. The other two were a national banking system, and internal improvements (what we today call infrastructure).

Also, American economic thought — outside the oligarchical slave south — in the 19th century was dominated by the now forgotten Doctrine of High Wages. According to this doctrine, there was a virtuous circle in which paying labor high wages allowed labor to avoid penury and the bodily and mental exhaustion that accompanies it, making labor more productive and thus generating the ability to pay labor high wages. It was explicitly recognized that to force Americans to compete against the poorly paid labor of the British empire (in the dreadful conditions of industrial Birmingham and London as well as the wretched poverty of India and other colonies) was crazy. In the Conclusion to his 1851 book, The Harmony of Interests: Agricultural, Manufacturing & Commercial, Carey wrote that the British system of free trade "looks to pauperism, ignorance, depopulation, and barbarism," while protectionism and the American School of political economy aims "to increasing wealth, comfort, intelligence, combination of action, and civilization."

The history of a national banking system is now obscured by Jackson's demolition of it during the 1830s fight over the rechartering of the Second Bank of the United States. But the key point was that financial activity must be steered toward productive investment and away from mere speculation and "stock jobbing." Hamilton set down a firm and concise test in The Federalist Papers number 15: "Is private credit the friend and patron of industry?"

Today, that would mean a severe crackdown on the over $5 trillion a day of trading in stock, bond, futures, options, and foreign exchange markets, as well as seizing the estimated $50 trillion in hot money sitting in tax havens around the world. A tax on trading in the financial markets would go a long way to eliminate much of the speculative trading, and shift the socially harmful short term outlook of financial markets to a more long term outlook more attuned to the real economy ordinary people experience day to day. High frequency trading in particular, since it serves no economically productive or socially useful purpose whatsoever, needs to be eradicated.

Internal improvements were carried into effect by dozens and dozens of government programs and projects, beginning with the building of lighthouses under the direction of Treasury Secretary Hamilton. Even Hamilton's political enemy, Jefferson, engaged in internal improvements — sending out the Lewis and Clark Corps of Discovery to explore and map the northwest, followed by similar Army expeditions — almost completely forgotten today — to the southwest, to explore the Platte, Arkansas, Canadian, Red, and upper Rio Grande Rivers of the lower Great Plains. Army officers leading these expeditions included Stephen H. Long and Zebulon Pike. Altogether, over 40 Army expeditions would be sent out over the first half of the 19th century, and the information they returned with enabled the vast overland migrations to California and Oregon. In the 1850s, Army engineers led survey expeditions to select the route for transcontinental railroads.

There were many other government programs besides these Army expeditions. There were Navy expeditions to the South seas and the Antarctic, which brought back specimens which formed the basis for creating the Smithsonian Institution. There were programs to build roads and canals, harbor improvements, and improvements to river navigation. There were clean water and sanitation projects carried out by state and municipal governments. There was direct funding of Samuel Morse to build the telegraph, and direct Navy funding of experiments to determine the most efficient designs of steam engines. There were state and national programs to study problems of agriculture, and to find, introduce, and develop new animal and crop breeds more resistant to the pests and germs of North America. There were deliberate policies to spread the new technologies and capabilities of metalworking machine tools from the national armories where they were first designed and developed, to general industry.

In short, there was ACTIVE government promotion of economic development that complemented trade protectionism to encourage the creation and growth of new industries and new transportation capabilities, while at the same time (in the North at least), ensuring that American workers were the highest paid and most productive in the world. (It must be noted that this record of nationalist economic achievement is easily obscured by focusing only on the "peculiar institution" of slavery in the South, or on the emergence of a new class of Gilded Age robber barons who consciously modeled their tastes, biases, and social outlook on British oligarchs.)

Without these two other two pillars — national progressive banking, and massive infrastructure programs — and a discontinuation of the war on the wages and benefits of American workers, then Trump's protectionist attempts to reverse the deindustrialization of the USA economy will be largely ineffective.

There also remains the problem of avoiding a trade war. There are too many brainwashed so-called progressives who aggressively characterize critics of free trade as “isolationists” and jingoistic “economic nationalists.” Again, they may have their own opinions, but they may not have their own facts. And one important fact going forward is that the world desperately needs $100 trillion in new investment to build energy and transportation systems that run on renewable energy sources alone.

The present world trade regime was designed mostly by people working for multinational corporations, and is designed to take advantage of sources of cheap labor that can be exploited to make cheap, increasingly shoddy consumer goods, and to avoid taxes on the resulting high profits. Proponents of this trade regime claim it has helped lift millions of people in developing countries into the middle class. Why then has so little progress been made in areas such as providing access to clean drinking water, waste disposal and treatment, and public mass transit? Why are growth rates for most developing countries slower under this regime than they were before it?

The present world trade regime must be discarded, and replaced with a world trade system which promotes national economic development of the industry, agriculture, and infrastructure of all nations. This must include strict limits on speculative and hot money capital flows. This means negotiating with countries like Algeria — not to open up their markets to speculators and usurers, but to assist them in acquiring and developing the scientific and technological knowledge to build their own fresh water systems, renewable energy systems, and transportation grids. Algeria wants to build its own automobiles and eliminate imports. This desire should not be attacked and disparaged as contrary to free trade, but encouraged as a solid way of providing high paying jobs for Algerians. And it should also be encouraged to be steered in such ways as to move beyond internal combustion engines as quickly as possible, to electric vehicles.

There are hundreds of millions of people across the globe without access to clean water, without indoor plumbing, without heating or cooling. How many steel plants and plastics plants are there in Africa that produce pipe? How many factories are there in Africa to produce valves, faucets, gaskets, grommets, nuts and bolts? If there are not any, rich countries like USA have a moral obligation to help establish them, and get them running. And NOT for exporting all this new pipe, valves, and faucets back to USA or other already developed markets.

In sub-Saharan Africa, 70 percent of people live with no access to electricity. Yet there is enough solar energy hitting one square kilometer of desert in Africa to supply all the electricity needed -- in all of Europe as well as Africa. Deploy enough photovoltaics, and Africa has a huge surplus of energy it can export to Europe. There is no reason that these solar cells can’t be built by countries in Africa. No reason except plain racism, and blind ideological faith in free trade.

We need a new world trade system based on actual national development of industries and domestic markets in the less developed countries. Free your mind of its free trade lies!