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.