Irwin on Smoot-Hawley

This is a very useful primer on interwar protectionism by the leading historian of US trade policy. (I had never heard of ‘Smoot Smites Smut’, which is worth the price of admission alone.) Although Doug could have usefully mentioned that the biggest costs of protectionism then were geopolitical, and those ended up being fairly catastrophic.

Economists sometimes assume that the right way to talk about protectionism is to moralize. I prefer analyzing the causes of protectionism: it may be a very bad idea, but sometimes, in democracies, it becomes inevitable. Doug, in a manner reminiscent of Adam Posen, argues that expansionary monetary policies in the US are a good way of keeping the protectionist wolf at bay there right now. The same logic applies to Europe as well.

26 thoughts on “Irwin on Smoot-Hawley”

  1. I suppose a crucial difference between now and then is that there are institutions like the WTO and IMF that are supposed to deal with things like trade tariffs and a coordinated monetary policy.

  2. The case regarding the US ban on online gambling — estimated at up to $100Bn — will test the cohesiveness of the WTO.

    Already since Sep 2008 an upsurge in populism has been observed in the USA. ‘Austrian’ (read: depression) economics is all the rage and we’re asked to believe that Bush caused the crisis *by not being conservative enough*. Psychologically, the Tea Party movement can be related to puritans of all stripes: those whose reflexive reaction to any reverse is to blame it on lack of faith.

    Unfortunately, the faith they espouse is in market fundamentalism — a form of economics not recognised by either economists or their philosophical luminary Adam Smith who listed the causes of market failure along with the virtues of market success. Smith’s ‘moral sentiments’ have been forgotten so completely that mention of them is heresy in those circles.

    The Tea Party has a strong nationalist/xenophobic element and targets Muslims in particular; on this side of the Atlantic, Sarkozy and a host of extremist parties promote similar policies.

    These political forces could switch to protectionism in a shot: something that would hurt the EU and US quite a bit but could have a crippling impact on other smaller and more open economies.

    Trade creates a pool of shared interests between nations. This wasn’t sufficient to prevent the outbreak of WWI when trade was admittedly less important but growing; the lack of trade prior to WWII on the other hand was decisive in the downward spiral into chaos. Even those oligarchs that sponsored Hitler would have acted differently if they felt he threatened their international position, or indeed if they had any international position to defend.

    The WTO is opaque and lacks legitimacy in the eyes of many. It would possibly collapse quite quickly if its fines had to be extracted in cash rather than in the form of special tariff awards. While the elites of all parties globally are strongly in favour of free trade, the very lack of diversity in their opinions risks the entire edifice of the ‘western’ establishment becoming discredited at once.

    Were the WTO to implode, the economic impact would itself be serious but the political impact would be grave by all historic standards.

    Happily, we can count on Fox News etc to torpedo the Tea Partiers etc once the Democrats are out of office, just as they did the (rather less loopy) insurgency campaign of Ron Paul in 2008. Just as David Cameron is discovering in the UK, the Murdoch press isn’t pro-conservative and anti-social democracy. Where social democrats are in power, they attack the government. Where conservatives are in power, they attack government itself and ‘bureaucracy’.

    They’re playing with fire, however. These are not normal times and the stakes are much higher than they were in 1989-2008.

  3. Excellent article.

    I hate what comes into my imagination when I read words like “interwar”. We really can be just a bunch of savages, lurching from one war to the next, with a very thin veneer of civilisation imposed in between them.

  4. First the good news!

    Monitoring by the OECD, World Trade Organization (WTO) and the UN’s Conference on Trade and Development (UNCTAD) has generally found that most G-20 members have been holding to their commitments to open trade and investment in the wake of the global economic crisis.

    That has been surprising given the severity of the crisis.

    However, currency intervention as protectionism by stealth is the main problem.

    Calls for protection are a popular panacea and in Ireland some saw the State bank guarantee as a means of attracting more deposits away from other countries and when the UK introduced a tax on bank bonuses as a ‘golden opportunity to attract disgruntled members of the financial elite from London to Dublin.

    The Economist says even when desperate, Wall Street bankers are not given to grovelling. But in June 1930 Thomas Lamont, a partner at J.P. Morgan, came close. “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff,” he recalled. “That Act intensified nationalism all over the world.”

    According to David Kennedy, an historian, Lamont was “usually an influential economic adviser” to the American president. Not this time. Hoover signed the bill on June 17, 1930, “the tragic-comic finale”, said that week’s Economist, “to one of the most amazing chapters in world tariff history…one that Protectionist enthusiasts the world over would do well to study.”

    @ Adrian Kelleher

    “These political forces could switch to protectionism in a shot: something that would hurt the EU and US quite a bit but could have a crippling impact on other smaller and more open economies.”

    You focus on what you term “an upsurge in populism has been observed in the USA,” and the rise of the apparently know-nothing Tea Partiers but what about the evidence nearer home?

    Mary Coughlan, as Minister for Agriculture, publicly responded to IFA pressure by calling for a complete EU ban on imports of Brazilian beef. Later, as Enterprise Minister, she left a junior minister to lead a trade delegation to that key BRIC economy.

    In Dec 2005, a 24-strong official Irish delegation arrived in Hong Kong for the Doha Round talks (3 ministers and 21 civil servants). It was basically a scroungers’ junket for most of the Irish there, as EU negotiations were led by Peter Mandelson.

    There were 16 Irish NGO reps also there. The WTO had 149 members and if numbers had been limited to the Irish total, almost 6,000 would have arrived in HK to participate in a circus.

    The Irish were concerned to placate the IFA and the potential of trading developed country agricultural protection concessions for better access for industrial goods in developing markets (for example India had tariffs of as high as 34% on some industrial imports) was irrelevant to Ireland.

    Maintaining the existing agriculture protections was the imperative and IBEC had a representative in Hong Kong and as usual he was on the fence as the employers’ body had to pander to both sides of the argument.

  5. @Michael

    Fair enough; I accept that the groups I referred to have expressed no interest in protectionism whereas others mentioned by you have engaged in creeping obstruction of trade. Those arguing for controls on Brazilian beef are at least behaving rationally if selfishly, however.

    What’s disturbing about the current populist wave is its deep irrationality. Bush has been disowned as if the Tea Partiers had never voted him in in the first place — for the sin of proposing the Wall Street bailout among other things. The orthodox explanation for the crisis espoused by everybody from Volcker or Krugman to Ben Bernanke is rejected and fringe ideas that would earn a 1st year undergrad a fail are embraced.

    Quite bizarrely, the Tea Party protests sprung up within weeks of Obama taking office. It’s not uncommon to hear him called a communist, liberal and fascist in the one sentence. Jonah Goldhagen even published a book called ‘Liberal Fascism’.

    Xenophobia is on the rise everywhere. What distinguishes the Tea Partiers from the likes of Sarkozy is their idealism; European populism has so far been basically cynical. Idealism and irrationality are a dangerous mix.

    Certain continuities link puritans throughout history, from the actual puritans of the English civil war to Robespierre’s directorate, Dzherzhinsky’s chekists, Hitler’s SS, political islamists, the environmental movement… and the market fundamentalists. My intention isn’t to smear (or to laud) particular movements. Puritanism as defined here is a psychological as opposed to a political or religious phenomenon. It characterises a strand of all political movements throughout history, although more obviously at the poles than in the centre. I’d consider Adam Curtis’ analysis of the Algerian islamists in The Power of Nightmares a classic treatment of the issue.

    Whereas a normal individual tends to lose confidence when reality confronts his mistakes, the puritan’s reaction is to blame an ideology’s adherents for their failings. For the Tea-Partiers, accepting conservative doctrine might be flawed would mean accepting moral responsibility for everything from the fiasco in Iraq and the banking meltdown on the one hand to Reagan’s callous treatment of the mentally ill on the other. Purity of ideology protects them from this guilt.

    Large parts of the Republican party establishment are being ditched; in fact the Republicans’ small cadre of realistic contenders to challenge Obama in 2012 have been hamstrung one by one. The Tea Partiers prefer ideologically pure no-hopers to pragmatists.

    Reflationary efforts during the current crisis have deferred much of the inevitable suffering that the bursting of the bubble must bring. Unfortunately, central banks’ ability to regulate the business cycle has been damaged and inflation is to be expected to kick in at much lower growth levels than previously, at least for the moment.

    The banking losses have been nationalised rather than made good and unemployment will remain high for a long time. Millions of people still untouched by the crisis will see their lives blighted in one way or another over the coming years. In other words, the forces of populism have only begun their rise.

    I don’t forecast armageddon exactly, but this is a severe crisis whose end cannot be reliably predicted. Water crises, surging demand for primary commodities and climate change will add progressively to the pressures. In all probability, China will rise to economic preeminence in a world where the USA has global alliances but lacks the economic power to maintain its position. This could create a situation of perpetual instability; the only crumb of comfort is that it’s still a few decades away.

    The budget battle over ‘Obamacare’ — which won’t become a reality until after the next election — will force the USA to choose between military funding and domestic stability. There’s a big difference between 3 decades and 5 decades of Reaganism. Social mobility has collapsed already in the USA and an unemployed young man, if he feels he’s no fair chance in life, is likely to get very angry when he looks at his grandfather’s war medals on the mantlepiece.

    It will be several more years before people fully understand the magnitude of the current crisis, but when that happens it will be a volatile moment: the kind of moment when radical ideological departures might be expected.

    I feel a little sad at clinging for comfort to the WTO, an undemocratic institution that erodes states’ ability to resist the impersonal forces of the capital markets while doing nothing to advance internationalism more broadly as current global challenges demand. The shared interest it creates between nations is still a genuinely stabilising factor in world affairs, though. If it fails, it’s time to head for the hills.

  6. I suppose we could all pretend that it was protectionism that caused the 1930’s depression to worsen, when the truth is probably far more complex. Smoot hawley was an attempt to tackle the symptoms of america’s massive overcapacity problem in the 1930’s. This capacity was financed by a river of debt that flowed both to US productive capacity and to finance overseas demand. And all of it was done on the pretense that, if we can only support demand for now, then eventually Germany will be able to pay reparations. It worked for a while. These ingenious plans always do for a while which is what makes them so dangerous, but once the point of self destruction has passed, there seems to be nothing anyone can do prevent the collapse. Central banks begin with a good reason for maintaining accommodative monetary conditions, but once they go there, the only thing that changes is the reasoning that supports continued low rates. In the 1920’s it began with Germany, then it was the support the uk, then it was to support us. In the 1990’s it started with a productivity miracle, then it was ltcm, then sept 11, then it was low inflation, the unstable emerging markets, now it’s unemployment.

    It seems unfair, to me at least, to wring our hands over half baked populist ideologies when the mainstream infrastructure

  7. Main stream economists set the conceptual framework within which politicians can feel secure to act. But both politicians, and I would argue, economists have become trapped by the ideology because if you argue that a free and competitive market will solve policy problems then you must let the market work. In the last 20 years we have heard again and again that the magic of the market would hold the banks on a responsible course, while politicians and economists acted and justified policies that hollowed out the oversights that these markets need. Then when the moment came for the markets to finally impose discipline by driving most of the weak banks into the ground, we find that, well actually we can’t allow that particular market mechanism work.

    Populists don’t have any coherent ideology, but they know this. If we allow the current ideology to continue, then all wealth will end up concentrated in the hands of a Tiny few and that tiny few will own us body a soul. Also, they’ll pay the best storytellers to come up with reasons that logically explain exactly why this is not only just and proper, but is part of god’s plan for us. NO THANKS! That’s what all of the puritanical movements mentioned above understood and shame on us for even having to think for a second whether we are about to unleash more of this on humanity.

  8. @All

    Very relevant – and sane commentary.

    Hopefully the next mutation of the human species will be more in tune with the universe. New Earth, a planet similar to ours in living conditions, is only twenty light years away – and the pragmatic protectionists in the universe, if such exist, would be well advised to keep the present version of homo sapiens well away from it.

  9. @Adrian Kelleher

    +1

    It is so much more than only a financial crisis of course.

    The talks on climate in Tianjin collapsed, total failure. Six days consultations with 177 participating countries, two month before Mexico talks, results zero.

    Conflicts between USA and China rendered the six days more or less worthless. The participants in Kyoto represent only 28% of global emissions, yet, a renewed and extended contract looks rather impossible at the moment, with the blame game between USA and China and other factors blocking progress.

    Talks on currencies now appear to take the same direction.

    It is useful to take a closer look at what is happening in this very moment in the tiny state of Kyrgyzstan, it turns into a highly explosive situation and is a reminder what conflict levels we should try to avoid.

    Two major talks on global issues are making little or no progress and can be described as unsuccessful, this is not acceptable. The stakes are much higher in deed!

  10. In the 1930s, FDR had to contend with the likes of Huey Long of Louisiana who provided the basis for the main character in Robert Penn Warren’s famous novel: “All the King’s Men.” Another rabble-rouser was the Irish-Canadian priest Charles Coughlin who fed anti-Semitism, fascism and opposition to the New Deal to his national US radio audience.

    What is different now is that one of the main political parties has embraced the crackpots.

    Racism has also fired up opposition to Obama.

    What has been termed a ‘paranoid style’ has been enduring in American politics and in 1836 America abolished its central bank. President Jackson told the head of the Second Bank of the United States: “”I do not dislike your Bank anymore than all banks. But ever since I read the history of the South Sea bubble, I have been afraid of banks.”

    The bigger threat to free trade than the Tea Party is the stagnation of US middle income and the related decline of high paid manufacturing jobs.

    The FT’s Edward Luce on Friday said Obama may have to run on fear rather than hope in 2012 and he quoted from Obama’s speech in Minnesota on 3 June, 2008, when he finally vanquished Hillary Clinton – the day the Democratic party’s better angels trumped the devil it knew.

    “I am absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs to the jobless,” said Obama. “This was the moment when the rise of the oceans began to slow and our planet began to heal; this was the moment when we ended a war and secured our nation and restored our image as the last, best hope on Earth.”

    In his 1936 acceptance speech of the Democratic Party’s nomination, FDR castigated the ‘privileged princes of..new economic dynasties’ and said: “Governments can err, presidents do make mistakes, but the immortal Dante tells us that Divine justice weighs the sins of the cold-blooded and the sins of the warm-hearted on different scales.

    Better the occasional faults of a government that lives in a spirit of charity than the consistent omissions of a government frozen in the ice of its own indifference.

    There is a mysterious cycle in human events. To some generations much is given. Of other generations much is expected. This generation of Americans has a rendezvous with destiny.”

    The Federal Reserve and the paranoid style in American Politics

  11. What amazes me is that never before a country as poor as China has lent so much to a country as rich as the USA. I memory serves, the median income in the USA is roughly USD 45K, and this did not change significantly since the mid 70s, in contrast to China where the median is around USD 2,5K.

    What amazes me too is that somehow there appears to be a public perception, towards Germany for example, that trade surplus, export/high savings countries are the good guys and trade deficit, import/debtor countries are the bad guys.

    The very existence of surplus nations requires debtor nations, or would I be wrong on that part?

    Germany was often praised in that context as best in class, and I never understood why major contributors such as Germany’s massive increase of low income employment in the past 10 years and the doubling of weapon exports in the past five years never are mentioned in that context.

    If I put all this into context, it looks like the biggest fuck up I ever came across. Such imbalances simply contradict any lip-services towards sustainability in my book.

    This whole system is based on absorption in my understanding, otherwise it collapses, right?

    China, Germany and Japan are on the strong export side, USA, Spain, Italy and Greece on the weak. I think in June the US trade deficit exceeded $ 50 bln.

    So where does that leave Ireland, with a leadership that tells us the export will bring us out of the crisis and 300,000 new jobs will be created. Ah well, just forget it, we should stop listening to party propaganda, in that respect Ireland and China have a lot in common.

    If the so called deficit countries would refuse demand, where would that leave the surplus trade countries?

    The way I look at it is, we can observe that bondholders are unwilling to share the pain, politicians ‘protect’ them and bleed the public dry instead, and now the next denial and avoidance of sharing the burden takes place….

    Are we heading towards beggar-thy-neighbour, again?

    Sorry if this is too simplistic for you economy educated folks, it is the way I understand what is happening here, and may be I am wrong in my understanding, and somehow, honestly, I hope I am wrong and this is just a bloody Nightmare….

  12. @Bklyn_rntr

    Well Paul Volcker has launched some scathing attacks on the finance industry without deviating a bit from his monetarist principles.

    Big banks enjoy an implicit government guarantee everywhere — something that basically forces the public purse to subsidise their borrowing even when times are good. If finance is to serve the economy rather than the other way around, banks must accept either reasonable and moderate restrictions on their activities along the lines suggested by Volcker or be broken up until they’re no longer ‘too big to fail’.

    Oddly, rightwingers have missed a chance to tout their claims to universalism and fairness during the current crisis; the banking collapse was the result of bank employees exploiting their positions to maximise their bonuses by ‘betting the farm’ on lucky outcomes, something directly contrary to shareholders’ interests.

    Shareholders’ interests are supposedly the concern of the right, but barely a murmur has been heard from them about the failure of non-executive directors etc. to protect owners’ rights. The bankers didn’t work for the banks; they worked *in* the banks *for* themselves.

  13. @Georg

    The problem with the climate talks is that politicians won’t adopt a negotiating position they regard as domestically impossible. Unfortunately, any climate deal acceptable to the electorates of the developed economies would condemn developing countries to poverty forever, so the maximum offer of one side is considerably less than the minimum demand of the other.

    A binding climate deal would require each signatory nation to act contrary to its own interests in pursuit of the greater good. Such an agreement has never in history been achieved or even attempted; the task is monumental. Each country has every incentive to let the others shoulder the burden.

    Once a molecule of CO2 is emitted into the atmosphere, it becomes a global problem. The costs of GHG reduction are borne locally whereas the burden of climate change is global. Global problems require global solutions and the power structures to effect this simply do not exist.

    Unlike the WTO, any prospective Global Climate Agency would need to directly punish nations that fail in their obligations and some of the fines are certain to be gigantic. An independent GCA set up along WTO lines could not have the legitimacy needed for the task; it needs an independent mandate. An independent mandate would make it in effect a single world government.

    In principle, the nations of the world might constitute such a GCA by binding treaty in such a way that its leadership had democratic legitimacy independent of the signatories; founded on this basis, it would still be legally constrained from raising revenue independently or redrafting its constitution. These would be prudent steps taken in deference to the fact that peoples’ loyalties lie primarily with their states as currently constituted.

    Viewed as a legal problem, this is rather simpler than say the US constitution. The constitution of the USA was a product of reason and common sense; it has fulfilled its designed purpose admirably. If the spirit of the enlightenment that gave rise to it could be brought to bear on the GCA, there would be no reason for paranoiacs’ fears to be aroused.

    Now there are certainly some problems with the approach described above.

    Firstly, a democratic WCA would tend to absorb or else de-legitimise the WTO. Neither outcome would be patatable; absorbtion would make a WCA a rival to national governments, likely initiating a struggle it could only lose. Further damage to the WTO’s legitimacy on the other hand might destroy one or both institutions.

    Secondly and more obviously, nobody is even arguing for such a solution. Internationalism is all but dead. Even the EU can’t arrive at solutions to constitutional issues that are trivial by comparison.

    The only fair approach to accounting for GHG pollution is that everyone be compensated equally for the damage inflicted on their environment; this would mandate that emissions permits be allocated to everybody, or at least to national governments in proportion to population. This was the among the first solutions dreamt up in the 80s.

    This approach would see a large surplus of permits in poor countries and a deficit in rich ones; trade in permits would then see the poor that constitute 80% of the world’s population receive the compensation due them for a problem not of their making. The volume of permits issued could be reduced gradually year-on-year.

    It’s impossible to envisage how any solution currently on the table could ever work. Better for today’s politicians, like Churchill, to sit on the backbenches until history comes round to their way of thinking than to pretend otherwise and thereby cease defending a reasonable case. It’s hardly surprising that the answers suggested cannot succeed when nobody fights for ones that might.

    The problems facing the world have seldom been more obvious or severe. At the turn of the 20th Century, an elderly Warsaw banker called Jan Bloch turned his mind to the problems of that era.

    He anticipated that there would never again be a major war, reasoning as follows: burgeoning world trade had created a pool of shared interests across the world. War had never been such a negative sum game.

    Furthermore, the technology of warfare now strongly favoured the defense: modern weapons enabled rapid fire accurate to 600m but soldiers were no more able to withstand its effects and could run no faster than previously. Extended siege warfare must then result. Any war would not test national virility or élan; rather it would be an attritional struggle between rival war industries.

    Bloch’s analysis was eminently sensible but was ignored in spite of immediate confirmation of his claims by the Boer war. He can hardly be blamed for the general failure to comprehend what seems obvious in retrospect. His great achievement was to demonstrate the possibility of precience founded on patient analysis and common sense.

    Of course military men have no way of proving their worth in peacetime and the route to advancement did not lie in counselling governments that attack was suicide. The military establishments of Europe entered WWI with self-evidently assinine policies as a result, policies tragically effected with modern industry and technical precision.

    Only the introduction of storm trooper tactics — a revival of the raiding approach of the US Civil War — broke the deadlock. Storm troopers must be fanatics as dispersed fighting does not permit an officer to discipline his men with pistol and sabre. Thus, after 1918 every nation had tremendous need for fanatics. Ideologies fostering this fanaticism rapidly sprung up, making a virtue of necessity.

  14. @Michael

    Many felt a real risk existed that Long would pitch the US into fascism had he not been assasinated.

    US history conforms to the same rules as other nations. What distinguishes the USA is that history as universal in academia is decried as unpatriotic. Americans mostly have no idea of their nation’s role in Guatemala, Indonesia, Nicaragua, Chile, Congo or Argentina (etc. etc.), and Errol Flynn is more prominent in their vision of the frontier than Wounded Knee or the Trail of Tears.

    I once heard the peculiarities of the US right explained in terms of the horrors the “manifest destiny” of 19th C America visited on the native population. Conceiving of the USA as ‘a Christian nation’, they exclude the first nations from the script. The one Amerian I asked about the Mexican-American war told me the territory conquered was empty before it was seized by the USA.

    The old colonial empires have made some effort to come to terms with their past. The US by contrast is in denial that it ever possesed an empire, even though it seized one pre-baked from Spain. “Remember Concord/the Alamo/Fort Sumter/Lusitania/Pearl Harbor/Tonkin Gulf/September 11” (delete as appropriate) has been the catchphrase, but “Remember the Maine” has ironically been forgotten.

    A thread of guilt and denial then runs through US history, from the fate of the Indian nations, through slavery and segregation, pseudo-imperial exploitation of central America, the scattering of the WWI veterans at sabre-point, the victimisation of thousands of innocents as ‘communists’, the disproportionate force employed against Cambodia, Laos and Vietnam and support for inumerable dictators in defense of the ‘free world’ right up to the exploitation of the permanent undocumented immigrant class that is essential to large parts of the US economy in the present day.

    The recent controversy about Texas school books, which are used across much of the country, illustrates that patriotic history is alive and well in the USA. This is a virus that cannot easily be contained once released.

    Thankfully, the inertia in the US political system is enormous and extremism by its very nature alienates the middle ground. People like Newt Gingrich have often been popular in opposition only to rapidly lose support in office. Still the potential for massive disruption and gridlock remains. The unfortunate fate of the Equal Rights Amendment, something that would hardly cause a stir elsewhere, suggests the USA will struggle accomodate the multilateralism 21st century problems require.

  15. @Adrian Kelleher

    Yes the Texas TextBook story is some story …. Cutting poor ol’ Tom Jefferson out of American History! Where will it all end? (of course, we had/have our own versions …)

    New York Times March 2010 – Well worth a read …
    http://www.nytimes.com/2010/03/13/education/13texas.html

    ‘…the Texas Board of Education on Friday approved a social studies curriculum that will put a conservative stamp on history and economics textbooks, stressing the superiority of American capitalism, questioning the Founding Fathers’ commitment to a purely secular government and presenting Republican political philosophies in a more positive light.’

    … ‘Cynthia Dunbar, a lawyer from Richmond who is a strict constitutionalist and thinks the nation was founded on Christian beliefs, managed to cut Thomas Jefferson from a list of figures whose writings inspired revolutions in the late 18th century and 19th century, replacing him with St. Thomas Aquinas, John Calvin and William Blackstone. (Jefferson is not well liked among conservatives on the board because he coined the term “separation between church and state.”)

  16. @Adrian kelleher

    Well I agree that Volker is the last true monetarist in the major anglo economies to worry about the pernicious effects of prolonged periods of monetary accommodation.

    I don’t understand your points about implicit government gaurantees everywhere. I agree that they do, but I don’t get why that would translate into employee or even management responsibility. If those that are carrying the ultimate liability, in this case the government, abdicates responsibility to protect their liability, why would a limited liability entity not run itself for the benefit of those that make them money while ignoring the downside?

    The American right wing has an agenda and I think it is to reverse every progressive policy enacted since FDR. They do that with a mixture of personal attacks and populist rhetoric. They don’t hide their agenda. They want a self healing system that allows the market to work and they hate the hypocrisy and the potential corruption that goes with progressive politics. The center and right wing refuse to see that their policies are wide open to corruption, even when they themselves are bought and paid for by their base. Ireland’s NAMA, the Mexican Fobraproa, The US FED program to buy assets are all vulnerable to massive corruption. I think voters understand this and although they may not articulate their rage it is there nonetheless.

    The tea party seems to me to be just as dangerous for the established right wing as it is for the center.

  17. This is wrongly cast as a moral issue.

    There is nothing moral about unrestrained trade. Currently, many substances are illegal to possess let alone to trade. Yet they increase in trade, year by year. They have been used by parties with official approval in certain countries, to subvert other countries: Opium War?

    Restrictions are moral therefore. The degree is often determined by choice and an economic cost voluntarily borne by those so restricting.

    History and wealth diminishing determine mens affairs when analysed as a country. Right wing etc is merely a policy group that has access to laws etc. Inevitably, the mob organize. Leaders are found after one or two faltering choices, that address income disparities. The Anglo-Saxon model is based upon squeeze and release. Redress of imbalances means refreshment. It is, so far, the most successful mass economic model and it is based upon excessive credit. Those who know this and guide their family and urban affairs accordingly, become wealthy and more powerful. There are seasons in the K-cycle. Ireland has entered winter. Australia is still in Autumn, thanks to higher interest rates and booming eastern economies.

    Restrictions indicate maturity but may be taken too far.

    In the Kaliyuga a virtue easily becomes a vice!

  18. AK
    Irrationality.
    Emotional reactions are inevitable, given the K cycle. Rendered into poverty by greed will do that to one! This is then channeled into what the media and those in power want to energize, often ending in War. War is impossible without borrowing and no less a commentator than Mel Gibson has arrived at that conclusion, so it must be true! He slightly mis identifies those responsible.

    Thus borrowing begins again. In WWII, America and China were the winners and Russia, Germany, England, Japan, France etc. losers. But note that reparations were not directly imposed beyond confiscation of technology, scientists, land and some assets. The massive slavery that faced Germany after WWI was seen to be a mistake by bankers.

    WE now have an economic war in the form of depreciating fiat currencies. Very little will be gained. So where to from here? Japan style deflation? The war on Terra? Warming is cooling! Where to disperse those energies and employ the mob?

  19. @Bklyn_rntr

    The point about management responsibility and the effective state subsidy of banks are not very closely related; I maybe should have ordered my remarks more clearly.

    The point about the implicit guarantee granted to institutions ‘too big to fail’ is that such institutions are in a position to profit from the public purse (via borrowing costs) *whether the state wants them to or not*. It follows that banks should either be kept small enough that failure is a realistic option or that the state should impose controls on their activities that curb excessive risktaking.

    The former is a blunt instrument to prevent pilfering from state finances and eliminate an unfair competitive advantage, the latter a constraint justifiable on the grounds that the banks in question are state-subsidised and so must accept state regulation.

    You ask “why would a limited liability entity not run itself for the benefit of those that make them(selves) money while ignoring the downside”? Well beyond Adam Smith’s ‘moral sentiments’, not a major factor in banking if recent history is any guide, none whatsoever. Shareholder oversight failed completely in the current crisis. One wonders if any of those who brought centuries-old institutions to their knees felt any shame whatsoever.

    When right-wing parties ignore this element of the crisis, it suggests they’re simply the business faction.

    Reagan and Thatcher claimed to represent universal values of fairness and opportunity. Their left-wing detractors tended to blame the electorate for moral failure rather than acknowledge the powerful draw of Reaganite ideology. It escaped their notice that Reagan/Thatcher supporters were energised to an extend not seen since prior to the new deal: that there was an element of zealotry fueled by righteousness to their politics.

    The right’s failure to address the issue bank employees exploiting their positions, enriching themselves at the expense of shareholders, suggests that that zealotry is now a thing of the past: that the right broadly speaking has reverted to a simple business faction. In Ireland’s case, dark rumours about bondholders’ influence tend to bolster this point of view.

    Regarding FDR, it’s hardly remembered now he was the object of intense hatred from elements of the right during his lifetime. The wife of Truman Smith recorded his “fierce, dark exultation” at FDR’s death in her diary — this at a time when the US was still facing a land invasion of Japan with the real possibility of mass casualties. Smith and his friends held a convivial drinks party that night in celebration.

    Within ten years, the faction Smith represented would be completely out of control: immune from government oversight, toppling elected leaders in Central America in the interests of the United Fruit Company, operating slush-funds and committing secret assassinations. As C-in-C in Korea, McArthur openly queried presidential orders, agitated in the press for nuclear attacks on China and endorsed statements by opposition politicians.

    Only controls brought in in the late 70’s brought the CIA somewhat under control. The PATRIOT act has since removed the controls introduced in 1978.

  20. One of my favourite, non-moralist based, parabals against protectionism come via Brad de Long.

    In a fictional country that exported grain and imported cars, a protectionist movement developed that demanded iports of cars stop in favour of domestically produced cars.

    As this movement built political momentum (“protect the jobs”) a billionaire announced that he had discovered a technology that would allow for the transformation of grain, or which the country produced plenty, into cars, which the country at present imported. On the back of of a substantial government grant (!), the billionaire built a sprawling site on the coast, protected by massive security. He employed a workforce that was sworn to secrecy and then began buying up large amounts of the locally produced grain.

    The grain was shipped into the secretive site in trainloads and amazingly cars were shipped out ot be sold to customers. The billionaire was a national hero, lauded by poltiicians for singlehandedly ending the need to import cars. No longer were imports needed. In addition, he was also a big buyer from domestic farmers. And of course he employed people and made huge profits.

    The country was universally in awe of this national miracle of economics, except for one curious journalist who managed to infiltrate the secretive site, into which the grain went and cars emerged.

    This journalist discovered that the site, hidden from outside eyes, consisted of little more than a massive rail freight and dock facility. The grain was being transferred from the incoming trains on to bulk transports sailing off to foreign countries. At a different point, car transports were arriving, unloading their cargo onto trains heading off to be sold across the country.

  21. @Adrian Kelleher
    I think we agree on a lot. FDR’s enemies still exist and they are all probably hiding within the ranks of the republican party. I suppose I would differ in blaming any failure of shareholder oversight. US securities laws don’t encourage, and in fact are often downright hostile, to shareholder activism. Board appointments are an insider gift to other insiders and election rules can be designed to ensure that a board, once in place, stays there for a long time. Managers enjoy the same rights, because they appoint the boards. Understandably, managers fight attempts to change these rules. with that arrangement shareholders basically go along for the ride, the jump in when times are good and bail out when the smell any bad stuff in the pipe. The regulatory regime encourages this with rules designed to promote liquidity, index trading etc.

    The center and center left don’t have much to be proud of either though. You the mention that the republicans a rye explicitly pro business. The democrats are also very one sided in their loyalties, but they don’t enjoy the luxury of being open about it.

  22. @Michael

    (Apologies for the slow reply. This was harder to write than I anticipated.)

    I would argue that the British Empire comes off very well in a number of ways compared with its sole heir and inheritor, the USA. I’m not some sort of imperial nostalgic and must hold my nose when I say it, but it’s true.

    Sen McCarthy’s purges of the early 50s removed more than 5000 supposed communists from the US civil service on the flimsiest of evidence; the character Federal government was enduringly altered as a result with dire consequences for millions worldwide.

    Subsequent US actions in the period 1950-73 represented a radical deviation from historic norms of liberal democracy. Here’s a cross section, representative but by no means exhaustive, of US government actions carried out during the period. Only events uncontroversial among historians are included.

    * President Arbenz-Guzman of Guatemala was toppled by the CIA and evidence was concocted to show him to be a “communist”. Arbenz was democratically elected as was his predecessor. The violence that followed his overthrow had a strong ethnic character and amounted to genocide.

    * Black americans were deceived into allowing syphilis to go untreated for the purposes of medical experimentation. A separate programme in Guatemala involved the deliberate infection of psychiatric patients and prisoners with the same disease.

    * The US military drew up plans to blow up US airliners and pin the blame on Castro.

    * J Edgar Hoover bugged and otherwise spied on political leaders, in particular Martin Luther King. Smears were circulated in the press, e.g. by Pat Buchanan, to destroy political enemies.

    * In CIA-funded experiments Doctor Ewan Cameron blanked the memories of psychiatric patients with LSD and massive repeated electro-convulsive therapy. Victims were left with no recollection of their family, friends or former lives.

    The thinking behind the experiments inspired the film “The Manchurian Candidate”. Ironically, the USSR which was believed to have fantastical powers of mind control had no such programme.

    * The airspace of the USSR was routinely violated until Gary Powers was shot down.

    * Just days before Nixon took office, President Johnson learned via Hoover’s FBI that Nixon had encouraged S Vietnamese President Thieu to wreck the ongoing peace talks until the campaign was over. This was done in direct contravention of numerous promises Nixon had made during the campaign.

    Nixon’s defeated opponent, Hubert Humphrey decided to keep the information secret, preventing a constitutional crisis of explosive potential at a time when the stability of the USA was widely doubted.

    * Nixon conducted secret bombing campaigns in Laos and Cambodia in violation of assurances given to Congress. The official record was again polluted as false flight records were kept.

    A Khmer Rouge officer later told a US journalist “The ordinary people sometimes literally sh[anti_filter]it in their pants when the big bombs and shells came. Their minds just froze up and they would wander around mute for three or four days. Terrified and half crazy, the people were ready to believe what they were told. It was because of their dissatisfaction with the bombing that they kept on co-operating with the Khmer Rouge, joining up with the Khmer Rouge, sending their children off to go with them…”

    Estimates of the dead in Cambodia alone range from 30,000 to 500,000.

    * The slaughter of 504 unarmed civilians at Mai Lai, mostly women and children, was described by US commander General William Westmoreland as an “outstanding job”. Two Army investigations cleared the perpetrators of any wrongdoing.

    The atrocity went unreported until a former member of the company responsible sent letters to Nixon, the Joint Chiefs, the State Department and numerous members of Congress describing the massacre; all were ignored except for one, received by Congressman Morris Udall. Ultimately, the only punishment meted out was three years of house arrest served by a 2nd Lieutenant, William Calley.

    A great many more massacres went unreported. Villages were frequently razed without warning using napalm or heavy artillery both by the USA and its S Vietnamese allies.

    * The S Vietnamese government was meanwhile funded largely through giant heroin smuggling operations. CIA marketed the drug via its ‘Air America’ operation in order to buy loyalties and continued supporting and protecting its ‘assets’ even as the US Army itself rapidly turned into the largest heroin market of all. By the end of the war, tens of thousands of GIs were addicts.

    (Review of The Politics of Heroin by Alfred McCoy here http://www.organized-crime.de/revmcc01.htm)

    In fact CIA involvement in drugs extended into the 80s (Iran-Contra related Cocaine smuggling into the USA!) and 90s (Afghanistan).

    * Henry Kissinger gave right-wingers in Chile the green light to overthrow the elected President, the Marxist Salvador Allende. Once in power, Pinochet immedatiately began a round up of leftists in a Santiago football stadium. More than 3000 were murdered over the course of a weekend, and death squads roamed the length of the country for years after. The Nixon tapes record Kissinger excusing himself by saying “Well we didn’t do it… I mean we helped.”

    * Latin American rightists were trained in torture, state terrorism, extortion etc. etc. at the School of the Americas in Panama. Perpetrators of first-rank crimes against humanity such as Efraín Ríos Montt passed through the school.

    The orchestrator of every dirty war in the continent was trained there, including Ríos Montt, Manuel Noriega, Roberto D’Aubuisson, and Leopoldo Galtieri. All followed an idential modus operandi, disappearing opponents with the ‘nacht und nebel’ of state terror. Generally, rulers of European ancestry preyed on indigenous peoples.

    * Leaders of the 1962 coup in Iraq were given death lists by the CIA. Hundreds of suspected communists were massacred under the direction of a certain S Hussein who would later rise to prominence.

    Picking out a single outstanding criminal among US allies is difficult, but for cruelty alone if not in terms of numbers, Morocco comes to mind:

    * The CIA-trained security services of Hassan II of Morocco broiled opponents for years in tiny corrugated-iron cages in the desert. Others were simply thrown from Helicopters into the Atlantic ocean.

    … It goes without saying that all of this was kept secret from the American public.

    It should be acknowledged that the UK cooperated in the 1953 Iranian coup, root of all the anti-westernism in Iran today, and conspired with France and Israel in the Suez crisis. It is still difficult to imagine Disraeli or Gladstone ordering murders abroad or arming and equipping genocidal war criminals.

    At least three factors separated the USA from the old empires.

    First was the attitude to international law. British leaders intuitively understood that the laws and treaties it had done so much to shape were a cornerstone of its global position. A full treatment of this would take a long time, but the seizure of the Mavi Marmara immediately called to mind the Trent affair. Britain’s narrow legalism in the latter case bolstered the law of blockades, the USA’s endorsement of a legal travesty in the former weakened it; this was a misguided act for the world’s preeminent naval power. The invasions of Kosovo and Iraq seriously undermined core principles of international relations dating back to the Treaty of Westphalia.

    As the status-quo power, the USA will have reason in the coming decades to regret undermining the edifice of international law for negligible short-term advantage.

    Secondly, France and Britain had generations of experience in colonial conflict. Britain in particular was adept tailoring to the specific circumstances of a given conflict a mix of coercion, cooption of local rulers and auxiliaries, financial and other inducements and subversion. It furthermore possesed a plentiful supply of colonial administrators, people who were not afraid to deal with the locals without a platoon of infantry in support.

    The UK managed to defeat a communist insurgency in Malaya, a war that would certainly have provoked the US into massive use of firepower and covert methods had it been involved, methods history has proven to be counter-productive. Even in Kenya, the UK managed to score at least a half-success. In Vietnam, the USA bet all on total victory and lost.

    A third distinguising feature between the USA and previous hegemonic powers is the wild hysteria that gripped it in the post-war decades, hysteria its leaders encouraged rather than calmed. Republicans and Democrats got into a race to see who could paint the USSR in more apocalyptic terms.

    The USSR was incapable of projecting power overseas: Cuba, Vietnam, Angola etc. were mere hostages to fortune. None would have been of any consequence in a general war and the USSR never controlled them as it did the Warsaw Pact.

    The USA got sucked into fighting Marxist insurgencies everywhere simply because they existed with no thought for its aims or objectives. Any number of alternative strategies were available; Kennedy’s more enlightened approach to S America was one although he too was extremely hawkish.

    The US might have rewarded its closest friends and supported reform; economies built on plantation agriculture cannot advance socio-economically. The reactionaries the USA propped up were not its natural allies — those were the urban middle classes US policy effectively prevented from emerging.

    This strategy would have created allies that regarded the US with affection rather than fear, that were self-supporting and that might actually have made a useful contribution to common defense instead of draining US federal funds ad-infinitum with no objective in sight.

    The USA could simply have ignored Soviet encroachments in areas outside the USSR’s logistical reach. Instead, it chose to spend masses of blood and treasure in fighting, at little cost to the USSR, liberation movements it made no effort to comprehend. Many insurgencies were as nationalist as they were Marxist and many could have been coopted. The moment it actually thought to try, the USA found it could conclude an anti-Soviet alliance with Maoist China without trouble.

    The countries the USA fought over were of no strategic value, possessing neither advanced technology nor industry.

    All of these ideas were current in the USA of the 50s and 60s — mention of them was heresy, however, and guaranteed exclusion from influence in the post-McCarthy Pentagon, State Department etc. Having thus blinkered itself, the USA remained mired in its quixotic battle with an enemy that was no match industrially, was essentially defensive psychologically, and could not sustain a global position.

    Chavez and Ahmedinejad are the product of this mentality, as is the paranoia of 9/11 truthers, birthers etc. To this day, dozens of countries including numerous regional powers like South Africa, Brazil and India remain suspicious of the USA thanks to the treatment they received during the era.

Comments are closed.