Too Much of a Good Thing

In my last post, "Tonight We're Going to Party Like Its 1989", I argued that current American economic stagnation and high unemployment rates are a direct result of the trade policy that the US developed during the Cold War.  While I still stand behind this argument, I have begun to feel that it is incomplete.  In my mind, it does not answer the key question of "Why now?"

The Cold War has been over for 20 years.  There had to be another event that took place between the end of the Cold War and now to explain why our economy has descended into economic stagnation and unemployment so quickly.  I found this event this week when I finished "23 Things They Don't Tell You About Capitalism" by Ha-Joon Change.

“23 Things They Don’t Tell You About Capitalism”:
Chang’s book is a collection of 23 distinct case studies that serve as counterarguments to the ideology of free market capitalism.  My favorite is #22, in which he counters the argument that we need a free financial market to increase economic efficiency and kick start growth. 

In this case, Chang argues that the global financial systems have become too efficient.  His argument is that financial markets have been deregulated to the point where they are almost perfectly efficient.  In such an efficient market, investment capital can be instantly transferred from one side of the globe to another in search of a quick profit.  This puts pressure on publicly traded companies to make decisions that prioritize profit today over investment in tomorrow's success. 

His examples are General Electric (GE) and General Motors (GM).  Both have been traditional American industrial powerhouses.  Starting in the late 1990's, each adopted a seperate strategy to deal with the increased demands of the financial markets.   

GE responded to the financial pressures by outsourcing its manufacturing jobs to Asia in the early 2000's to lower production costs and increase margins.  It also acquired GE Capital as a separate business due to the financial markets' higher margins.  It is currently one of the world's most successful companies and, with offices in over 100 countries, a perfect example of a global conglomerate.

GM responded to the financial markets' demands by cutting back on product development.  It kept its manufacturing operations in the US, but funneled more and more funds directly to the bottom line and away from product development and strategy.  This led to GM producing inferior cars when compared to its German, Japanese, and Korean competitors and it had to be bailed out by the US government to prevent bankruptcy.  

My Take:

First of all, Chang's examples of GM and GE prove my original point that globalization has contributed strongly to our current unemployment rates and trade imbalance.  GE responded perfectly to the demands from the financial markets and did so in a way that hurt America's industrial base.  GM refused to do this and almost went bankrupt went pitted against foreign competition.

Next, Chang’s arguments can be taken one step further to identify the specific act that sent globalization and the global pursuit of short-term profit into overdrive.  This act is the Gramm-Leach-Bliley Act of 1999, which effectively removed all financial regulation.  It also combines with the US’s foreign policy strategy of trading to access to the US’s consumer markets for military alliances to explain the US’s current economic woes.

Don’t believe me?  Check out the history of the US’s trade balance below.  It can’t be coincidence that the graphs severe downward trend starts the year that Gramm-Leach-Bliley was passed and does not begin to recover until after the 2008 financial crisis and subsequent government bailout and market re-regulation.

Tonight We're Going to Party Like Its 1989

I just finished watching the South Carolina Republican debate and am left thinking two things:

1.       They didn’t spend enough time talking about unemployment and the economy

2.       When they did talk about unemployment and the economy, they missed the point

I say this because the core issues with the US economy and unemployment rate go much deeper than domestic, partisan politics.  The root of the current US economic issues lies in Cold War strategy.

During the Cold War, the US pursued a two part strategy of trying to defeat the USSR.  This strategy consisted of:

1.       Encircling the USSR with American allies to limit Soviet influence and prevent the spread of Communism.

2.       Make it impossible for the USSR to encircle the US with allies of its own.

The second of these strategies was the easiest to implement.  All North American powers are natural US trading partners.  The economies of US, Canada, and Mexico are complimentary and fit well together.  Canada’s economy is largely built around the export of raw materials such as timber, minerals, foodstuffs, and petroleum products.  Mexico’s is largely built around providing cheap, unskilled labor.  The US economy has a huge appetitive for both of these commodities, so the three economies fit well together.  This arrangement was formalized after the Cold War with the creation of NAFTA and, with the exception of the Cuban Missile crisis, made it impossible for the Soviets to get a foothold in North America.

The US pursued its first Cold War strategy by actively courting military and economic alliances in Europe (NATO), the Far East (Japan, South Korea, Taiwan, and eventually China), and the Middle East (Israel and Saudi Arabia).  It actively pursued countries in these regions that were on the Soviet periphery and enticed them to become US allies by offering them free access to the vast American consumer market.  This strategy encouraged the American allies around the world to adopt democratic, market based economies.  It also strangled the Soviet economy by denying them access to their most natural trading partners.

Now, let’s fast forward to 2012.  The USSR has collapsed and there is no longer a need to use the American consumer market to prop up other countries’ economies.  Despite the fact that the Cold War has been over for 20 years now, we continue to do just that.  Our trade imbalance in 2010 was $650B.  That just doesn’t make sense for a country whose domestic economy has access to plentiful raw materials, access to the most skilled work force in the world, and routinely produces the most innovative and popular products.  

The chart below shows the US's trade balance with its top 15 trading partners.  These partners represent 75% of the US's imports ($1.4T) and 73% of its exports ($940B).  These are the countries who have benefited the most from the US's trade imbalance.

Some will claim that this large trade imbalance is simply a byproduct of globalization and that it is natural to outsource manufacturing of American designed products to countries with lower wages.  I agree that this trade imbalance is a result of globalization, but counter that globalization was a result of the US’s Cold War strategy.  I also point out that with the exception of China, India, and Mexico, all of America’s manufacturing imports come from countries with similar income levels (Japan, Germany, South Korea, and Taiwan).

My conclusion is therefore this: the US has not properly adjusted our economic policy to reflect the new global reality.  The Cold War is over, yet the US continues to trade access to the US market for relationships with foreign countries.  I now find myself wondering if we couldn’t create a few more jobs by moving beyond the Cold War with our economic foreign policy.

The Real Reason Illegal Immigration Matters

Election season in the US is right around the corner and one of the main topics that should be on every candidate’s agenda is how to fix illegal immigration from Mexico to the US.  The reason that this issue should be discussed is because a classic borderland is developing in the Southwestern US.

The current border between the US and Mexico has very little natural barriers.  This is why it is so easy for illegal immigrants to pass over the border into the US.  The only real geographic border of note is the Rio Grande, which runs along the Texas-Mexico border.  Despite its name, the Rio Grande is actually quite shallow.  West of the Rio Grande, there are no natural boundaries at all.  This results in the boundary between the two countries existing only on a map.  This is proven by the fact that the two largest bi-national urban areas in the world (San Diego-Tijuana and El Paso-Juarez) lie directly on this border.    

With more and more illegal immigrants entering the US and settling down just north of the border, the demographics of the Southwest US are beginning to change.  In the 2010 census close to 64M US citizens reported having a Hispanic descent.  This represented only 16% of the total population, but a 40% increase to the Hispanic population since 2000.  This growth far exceeds the 4% increase seen by the rest of the population.

As the graphic to the right shows, a large percentage of the Hispanic population live in states that on the Mexican-American border.  These states, in dark blue, also have a Hispanic population that represents over 30% of their total populations.  If the growth rates mentioned above continue, and they will until illegal immigration is addressed, it won’t be long until the majority of the population is Hispanic.  This creates a potential borderland situation between the US and Mexico.

Complicating the matter is the fact that both countries have claimed sovereignty over the states of California, Texas, Arizona, New Mexico, Utah, Nevada, and Colorado in the past.  The US and Mexico even went to war over this territory in the 1840’s and 1850’s.  This war, which the US won, resulted in the US annexing Texas and the Mexican Cession (highlighted in red).

With the population in these border states expanding to include a sizeable Hispanic and Mexican population, Mexico will be able to press the US for influence over them.  It will have an economic incentive to do so because Texas and California have the two largest economies among the US states ($1.2T and $1.9M in 2010).  It will also have a potential historical claim over the territory since the US originally annexed it from Mexico.  This is the reason why the issue of illegal immigration matters. 

Iraq - Middle Eastern Borderland

A few weeks ago, I wrote an article explaining why Iran is incentivized to be a disruptive force in the Middle East.  Since then, Iran has begun to publicly posture with the US over control of the oil trade through the Strait of Hormuz.  This posturing is the first sign that Iran is seeking to disrupt the status quo in the Middle East.  Along with protecting its oil trade, Iran’s aim is to control the Middle East’s borderland – Iraq.  In this post, I will address why Iraq is a perfect example of a borderland and why I believe Iran will make an attempt to control it.

Geography:

Iraq is the natural borderland between the Arabian Peninsula and Iran.  It also combines with Syria, its western neighbor, to form the borderland between the Arab and Turkic lands.  

Its low terrain and lack of mountains give it very little natural boundaries.  Its position on the Tigris and Euphrates Rivers also makes it a valuable commercial and agrarian resource for its neighbors. 

Lastly, it is located in the middle of the Middle East and shares borders with Iran, Kuwait, Turkey, Syria, Saudi Arabia, and Jordan.  This makes it the logical launching point for any invasion of these countries.   

History:

Iraq has played important parts in many Empires that controlled the Middle East.  These empires included the Persian (Iranian) Empires from 600BC to the 6^th century AD, the Islamic (Arabian) Caliphate from the 6^th to 13^th centuries, and the Ottoman (Turkish) Empire from the 13^th to 20^th centuries.  It was only after the British took control of the Middle East from the Ottomans defeating them in WW1, that modern day Iraq was created out of what had historically been a Middle Eastern province.

Demographics:

Iraq’s population of approximately 30M contains a large proportion of ethnic minorities with 20%-25% of its population being Kurds (Yellow) and Turks (Orange).

Its majority population, which is Arab, is also split along religious lines.  60%-65% of its Arab population is Shiite Muslim (Red), while the other 35%-40% are Sunni Muslim.

This creates the demographic mess that is typically found in borderlands.  The Shiite Arabs are drawn to Iran, which is the only other Shiite country in the Middle East; the Sunni Arabs are attracted to the other Sunni Arab states in the area (Syria, Saudi Arabia, Kuwait, etc); and the Kurds and Turks feel an affinity with their brethren in Turkey.  This makes it possible for all of Iraq’s neighbors to claim rightful sovereignty over a portion of its population. 

Conclusion:

In addition to the traditional borderland complications, Iraq possesses an abundance of a lucrative resource - oil.  It ranks in the top 3 in the world for proven reserves and close to 95% of its 2010 exports were oil related. 

The oil reserves (starred to the right) are located mainly in the Shiite dominated region on Iran’s border.  This gives the Iranian’s an economic, as well as demographic, reason to claim sovereignty over this region of Iraq.  It is also the reason that I believe Iran will move to control this Middle Eastern borderland.

With the US drawdown in Iraq complete, an opportunity has been created for Iran to begin exerting itself in Iraq.  Iran has the geographic, economic, and demographic motivation to press for control over this Middle Eastern borderland and that is why it is making so many aggressive moves in the Middle East.