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The World is Unstable: Surprise!
By Shlomo Maital
In my previous blog, I quoted experts who warned that in a globalized world, an epidemic will spread quickly via travelers – quoted in a book published two decades ago by a brilliant science writer Mark Buchanan * and in an article published in the leading science journal NATURE in 1998.
It is worth another short blog to describe Buchanan’s main message in his book.
Economics is all wet; beware. The world is inherently unstable, including financial markets; markets are not efficient and no, supply does not always balance demand and no, prices do not always and everywhere reflect true underlying value. The opposite: There are frequent ‘avalanches’, and infrequent but massive huge crashes. Earthquakes are unpredictable; because the plate tectonics that cause them are unstable. So are financial markets. A vast industry, and an army of misguided economists, exist based on an enormous fallacy – prediction is possible. Data prove otherwise. Post hoc explanations of crashes are simply amusing; they are ad hoc, not just post hoc. Both physical and human systems are simply – inherently unstable. It is the way of Nature.
There is an important personal lesson in Buchanan’s fine book (he has a Ph.D. in theoretical physics). If the world is unstable, then be prepared to adapt to major, sudden crises. Keep a small reserve of resources on hand. Forewarned is forearmed; if you anticipate avalanches, if you are aware they happen, you may be less shocked when they occur. If you are head of a family or a parent, embrace this in your family setting. If you are a junior or senior manager, prepare your organization.
If you are a political leader, start now – with ‘build back better’, and ‘prepare for an avalanche’ — but, probably, given US, UK, and Brazilian loser-leaders, that is way too much to ask.
- Mark Buchanan: Ubiquity: Why Catastrophes Happen. Three Rivers Press, New York: 2001.
The Real Culprit of the Pandemic: Globalization
By Shlomo Maital
Nov. 9, 1989. The Berlin Wall falls. The two Germany’s unite quickly. The European Union expands. And the age of globalization begins.
December 2019. Wuhan. A novel coronavirus is identified. It spreads globally.
Has the age of globalization ended? And – is globalization the true underlying culprit?
I’ve been reading a remarkable book, two decades old, by a brilliant science writer Mark Buchanan: Ubiquity: Why Catastrophes Happen. Three Rivers Press, New York: 2001.
In Chapter 8, Buchanan recalls the “six degrees of separation” discovery of social psychologist Stanley Milgrom, in 1967 – in which any two people anywhere can be connected, by no more than six direct links, each link comprising someone you know personally. Based on Milgram’s work, Buchanan writes, two scholars, Watts and Strogatz, modeled such ‘networks’ as a tool for modeling the spread of infectious diseases. [Duncan Watts and Steve Strogatz. “Collective dynamics of small-world networks”, Nature 393, 1998, pp. 440-442.]
Their finding: (in 1998): “Watts and Strogatz also modeled the spread of infectious diseases on small-world networks, and found that they spread much faster than they would on ordered networks. What’s more, only a very few shortcut links are necessary to make this happen. This has disturbing implications for how dangerous diseases might be able to spread over the world, carried to or from remote places by just a few long-distance travellers”.
Explanation: “ordered networks” are regular ‘grids’, where your links are your immediate neighbors. Small-world networks are like ‘six degrees of separation’ disorderly ones, like the kind Milgrom discovered – in other words, real networks as they are in the real world.
Globalization has massively expanded trade and travel. The benefits have been massive. Emerging markets, especially in Asia, have grown wealthy. Western consumers have been flooded with inexpensive goods from Asia.
But apparently, the price is the current pandemic. When the whole world is interconnected by flows of goods, people and information, it grows wealthy and prosperous (though not everyone of course) – and also becomes highly vulnerable to pandemics.
I am, and have been, a big fan of the benefits of globalization. But as often happens, we ignored the attendant risks. We were told in 1998 and in 2001. I guess we were not listening too closely.
Blue Collars Lose Ground – Don’t Blame Trade
By Shlomo Maital
Led by the Trump Administration in the US, worldwide there is a counter-revolution against globalization. Right wing governments are being elected in Hungary, Italy, Austria, partly in Germany, and elsewhere, reacting against the ravages of globalization – particularly, the claim that blue collar workers are being scalped by it – by migrants (free flow of labor) and by trade (free flow of goods).
America, which invented this amazing system that made many emerging economies wealthy (East Asia, primarily) now leads the charge against it.
And this whole counter-revolution is based on a falsehood. Don’t blame trade. Blue collar woes have another primary cause, according to Harvard University Professor Elhanan Helpman, in his new book Globalization and Inequality. It was not primarily free trade (globalization) that caused the large gap between blue collar and white collar wages.
Earlier, in 2016, Helpman published an NBER working paper * showing this (typically understated, as academic researchers are wont to do):
Trade played an appreciable role in increasing wage inequality, but its cumulative effect has
been modest, …globalization does not explain the preponderance of the rise in wage inequality
within countries.
What, then, does explain it? Technology and productivity.
Studies show that the premium for a college education (i.e. skilled workers) was 63%. The blue collar/white collar wage gap results from basic supply and demand factors, “…the dominant cause was an increase in the relative demand for skilled workers”.
OK – so who is to blame? American political leadership, for failing to find ways to upgrade the skills of blue-collar workers, especially in America’s failing and failed educational system. And, as New York Times op-ed columnist David Brooks has noted – the educated elite simply ignored the plight of the non-educated elite – and the price they pay is the election of Donald Trump.
* Elhanan Helpman. “Globalization and wage inequality”. NBER working paper 22944, Dec. 2016.
3 Decades in 364 Words:
A Guide for the Perplexed
By Shlomo Maital
The world has become a chaotic, complex system, hard to understand, impossible to predict. Here in 300 words is a vestpocket history since 1989 –hope it will help.
On Nov. 9 1989 the Berlin Wall fell. This led to the rapid unification of the two Germany’s (note: this can also happen to the 2 Korea’s, equally fast), which accelerated the European Union, and marks the onset of true globalization – free movement of ideas, capital, labor, goods, services and information across borders.
Globalization created massive wealth for a handful smart enough to take advantage. It created unprecedented growth for China and other Asian nations; for Germany to some extent; for India, and some poor countries. But most poor nations were left out, especially those in Africa.
Capitalism broke down. Great wealth bought political influence, and corruption became rampant, in Russia, and elsewhere. The huge canyon between rich and poor led desperate people in corrupt nations (Mideast, Africa, some Central and Latin American countries) to migrate, at risk of life and limb, toward the wealth. Meanwhile, in many countries democracy regressed. The EU pushed union too far, seeking to unify politically, leading to widespread pushback and Britain’s exit. The flood of migrants to Europe threatened the foundations of European unity.
In the ongoing historical cycle, the wave of democracy that swept the world after WWII, and during globalization, began to retreat, as corruption, influence of money and wealth disparities led democracy to break down in many places that tried it. The Arab Spring became the Mideast winter. Russia, China and other nations seemed to entrench leaders permanently. Globalization receded.
Even America, a bastion of democracy, regressed under Trump, embracing the backlash of the white minority against migrants. Trump’s “trade wars are good” reflects abysmal ignorance of the last Great Trade War, 1933, that brought a world depression. Italy’s election tomorrow will focus not on key issues (economy, jobs) but on Italy’s 650,000 migrants. In my country Israel, a right-wing government seeks to illegally expel African migrants, against their will.
This cycle will play itself out. We will eventually return to democracy and globalization will again grow and spread. We will find ways to include poor nations left out of the global system. Racist ignorant leaders will be deposed. We are seeing signs everywhere of an uprising, of young people taking responsibility. Take a long view of history and remain hopeful.
= = = = = =
A brief p.s. In May, if sufficient numbers register, I will offer a one-week course on How to Change the World With Ideas, at a beautiful spot in northern Greece. If this interests you, check out: http://unboundprometheus.com/program-one/
Did Open Borders Destroy U.S. Manufacturing?
By Shlomo Maital
In the recent US Presidential election, Donald Trump campaigned largely on how trade (i.e. imports, open borders) has destroyed blue-collar jobs. His voters agreed.
But is this true? Have globalization, open trade in goods and services, and cheap imports, destroyed good US jobs? Or were there other causes?
You won’t find a more authoritative answer than that from MIT, in Suzanne Berger’s 2013 book Making in America: From Innovation to Market (MIT Press), based on her work with the MIT Task Force on Production in the Innovtion Economy.
Here are some relevnt passages:
“Even taking into account job losses resulting from outsourcing as well as import competition, it was difficult as recently as a decade ago to find clear evidence of a heavy impact of open borders on manufacturing employment. …In 2003, [such job losses] involved less than one percent of layoffs; in 2004 they went up to 2 per cent. …job losses in manufacturing were mainly the result of productivity gains which might reduce the total numbers of those needed to produce a finite quantity of goods. …[Studies showed] the bottom line was that Chinese imports accounted for 33 per cent of manufacturing job decline between 1990 and 2000 and 55 per cent between 2000 and 2007. But [focusing mainly on rising Chinese productivity and falling China-facing trade barriers] 16 per cent of manufacturing job losses between 1990-2000, and 26 per cent between 2000 and 2007, were attributable to rising import competition from China.”
Bottom line: At most, a third to a half. And more likely: one-sixth to one quarter of job losses were due to Chinese imports.
So what does that mean? There were other causes, deeper ones. Labor-saving machinery and automation (robots). Low skills. And dumb policy. Berger notes: “Germany abandoned much of its low-end manufacturingwhile expanding employment in higher value-added segments.” And America??
Recently a former senior VP of Intel, Mooly Eden, spoke at Technion and noted that the moment manufacturing wages rose in China, Intel shifted to Vietnam and built 1 million square feet of manufacturing capacity there.
China lost jobs – why? Globalization? Or because their productivity failed to keep pace with wage increases?
It’s hard to predict the future. But here is one pretty safe guess. While Trump tackles America’s job problem and rebuilds manufacturing, based on a wrong assumption, he will fail. It won’t help to start a trade war with China. So in four years, his supporters will find that he failed to deliver.
What then? Will they vote Democrat? Or will we get an even farther-right crackpot candidate, as has happened in Europe?
Restart for Globalization? What Went Wrong? What Might Go Right?
By Shlomo Maital
What went wrong with globalization? Where did we screw it up? My friend Clyde Prestowitz, President Ronald Reagan’s trade negotiator, has summed it up very well in his article in The Atlantic.
Put very simply: America ran up huge trade deficits, $800 b., that lasted for 25 years, borrowing heavily from Asia, mainly. This is known as “living beyond your means”. Why? Americans enjoyed living beyond their means, and Asian countries got a growth engine, from American spending financed by Asian loans. This is globalization gone awry. Why? Because it cannot be sustained. Eventually trade must be balanced. The system failed, because it did not include ‘balancing mechanisms’ that J. M. Keynes envisioned.
Here is what Prestowitz envisions for the near term, after the Trump administration begins to change U.S. trade policies:
“The results of the election seem to indicate that-the views of economists and foreign-policy experts notwithstanding-America is about to change course on trade policy. That doesn’t necessarily mean a return to pre-World War II protectionism. It could instead simply mean a revival of the spirit that inspired the foundations of the postwar economic order. That spirit, articulated by the economist John Maynard Keynes, focused on assuring balanced trade-the avoidance of chronic surpluses on the part of some trading partners and chronic deficits on the part of others.”
So, what will this New Order look like, might look like, in the Age of Trump? Here is Prestowitz’s take:
“Thus a new order might operate to prevent the misalignment of currency valuations, to abolish or offset the impact of tax subsidies, and to mitigate the implicit subsidization of state-owned enterprises. It has been largely forgotten that one of the key objectives of postwar free-trade policy was to maintain a roughly balanced trade account-a goal that the country is likely about to pursue anew and that will likely affect its policies touching on not just trade, but investments, currency, technology, and labor as well.”
Could this story of the ‘restart of globalization’ have a happy end, not just for America but for the world? An end, without a major crisis?
Restart for Globalization? What It All Means for Us
By Shlomo Maital
The rise of rightist leaders and governments worldwide (UK, Europe, US) who oppose globalization (free unhampered movement of goods, services, people, information, money and technology) has brought a great deal of new thinking. Trump wins, Brexit, Renzi resigns, Austria’s far right barely loses, Merkel turns right, LePen is on the rise, Putin makes trouble everywhere… Globalization seeks win-win. Nationalism seeks “we win/you lose”… which can turn into lose/lose easily.
Global world trade and finance seem headed for some sort of restart: What are the main implications for people everywhere? What form will this restart of globalization take? Will the free movement of goods, services, people, information, money and technology be impaired? Amidst the enormous fog of uncertainty shrouding the world economy at present, can we make some reasonable predictions? This and several following blogs tackle this daunting task.
Background: Globalization really began on July 1-10, 1944, at a resort called Bretton Woods, New Hampshire, U.S. at Hotel Mt. Washington. The U.S. convened world economic and financial leaders and in 10 short days redesigned the architecture of the world economy, even as World War II raged. Here globalization was born: the General Agreement on Tariffs and Trade, which in negotiated rounds lowered trade barriers; the World Bank, which funded infrastructure in poor countries; IMF, the financial fireman; and others. The goal: first, lower tariffs and trade barriers, to make trade an engine of growth. America opened its markets, and emerging nations benefited greatly. So did the U.S., in part, by gaining a flood of low-price consumer goods; while losing manufacturing jobs. The world gained, with trade becoming the engine of growth; trade grew twice as fast as world GDP.
The gains for the US from globalization are amorphous, the losses are tangible and identified with specific people and groups. Globalization brought enormous inequality, with a few big winners and a lot of small losers. Nobody found a way to compensate the losers, or even to try. It was a ticking time bomb. (The illustration above mentions ‘inequality’..nowhere). Wealth concentrated in very few hands. And inevitably it exploded. The losers, blue collar workers, low-to-middle class wage-earners, now take their revenge at the polls. Hence: Trump. And that revenge has just begun.
Who gets it? Which of the experts has begun to figure this ‘restart’ out? Start with Larry Summers, Bill Clinton’s Treasury Secretary, former Harvard President, and the nephew of two Nobel Economics Laureates, Paul Samuelson (MIT) and Kenneth Arrow (Harvard). In the New York Times, Summers make these observations:
“This renaissance of nationalism and resistance to globalization appears to be universal, and not the exclusive preserve of either the left or right. It seems to stem from a profound sense on the part of many groups that their lives are buffeted by forces beyond their control. As people’s distance increases in a geographic sense, in a cultural sense, and in the sense of a lack of shared identity, they lose confidence in their leaders’ abilities to protect them. Insecurity is begetting atavism (the reappearance of bad traits that we thought had disappeared). These trends pose dangers. For all the problems and challenges, the past 70 years have been a period of unprecedented progress in increasing human emancipation, prosperity, life expectancy and in reducing violence. All of this would be at risk. We need to redirect the global economic dialogue to the promotion of “responsible nationalism” rather than on international integration for its own sake. … These and other statistics indicate that the United States and Europe are just one recessionary shock away from being caught in a deflationary trap. Japan has been stuck in one for more than a decade, with expectations of decreasing prices prompting consumers to delay spending and save money. Assuring adequate pressure for stimulus needs to become a priority for the Group of 20, to precaution against deflation. The events of 2016 will be remembered either as a point at which we began to turn away from globalization or the one at which the strategies of globalization began to be reoriented away from elite and toward mass interests. As we make our choices over the next few years, the stakes are very high.”
Top priority, for Summers: Prevent a global recession, as Trump pushes interest rates higher (helps the rich make even more money) and this spreads worldwide, and as trade stops growing and with it, GDP.
Implication: In your planning, think about a scenario in which there is renewed global recession. Have you set aside enough? For those who know history: In 1932 the U.S. imposed a tariff on foreign imports, the Smoot-Hawley tariff, bringing retaliation, shrinkage of trade…and ultimately, the Great Recession.
Pontypool: We Forgot Them & We Will Pay a Heavy Price
By Shlomo Maital
Journalist Aditya Chakrabortty has been covering the “post industrial” depressed areas of Britain for The Guardian. These are the people who once had good jobs in factories and mines, who have been forgotten and neglected by governments in Britain, the rest of Europe and the U.S. They became invisible.
Now, after Trump and Brexit, perhaps we are waking up. Perhaps we are beginning to see them. Here are parts of Chakrabortty’s vivid description of a once-wealthy Wales town. If Brexit and Trump act to truncate globalization, it will be because we forgot those who lost because of it, and celebrated only those who gained. Post industrial? “Post” implies something came after ‘industrial’. But what? Poverty? Hardship?
“The story of Pontypool is a story of riches squandered, of dynamism blocked, of an entire community slung on the slagheap. Sat atop vast deposits of iron ore and coal, it was probably the first industrial town in Wales. For a time, under Victoria, it was richer than Cardiff. Even now, to look along its skyline is to see traces of wealth: the park with its Italian gardens and bandstand; the covered market with its olde price list for snipes or a brace of pheasants; the 25 listed buildings that make this one of the most sumptuous small town centres in Britain.
“Then look down. On a typical weekday, the indoor market is a desert. Those bits of the high street that aren’t to let are betting parlours, vaping dens and charity shops: the standard parade for hollowed-out towns across Britain. The reason isn’t hard to fathom: the mines shut down decades back; the factories have pretty much disappeared. Those big employers still left aren’t big employers any more. One of the staff at BAE tells me that when he joined in 1982, it had 2,500 workers on its shopfloor; now, he reckons, it has 120.
“Swaths of Pontypool and the surrounding region of Torfaen now rank among the poorest in all Britain. On part of one of its housing estates in Trevethin, 75% of all children under four are raised in poverty. Over half – 53% – of all households who live on that stretch are below the poverty line. With that come all the usual problems: families that can’t pay the rent, that are more likely to fall prey to a whole range of sicknesses, from mental health to cancer. Those people can expect to die 20 years before their near-neighbours in some of the better-off areas in Pontypool. First the economy died out, now its people are too.
“Pontypool is like the rest of south Wales, like many other parts of Britain I have reported from. It’s what politicians and economists call “post-industrial”. That term, though, implies something coming after; here, hardly anything has come after. A few years ago Pontypool town centre was declared on the verge of death by a local councillor, who bore a coffin lid in a mock funeral procession.”
What We Don’t Know…Is Hurting Us!
By Shlomo Maital
“What you don’t know can’t hurt you!” I wonder if anyone ever said anything dumber. What you don’t know will hurt you and always does. And what is worse, what you don’t know that you don’t know, THAT will do you in for sure.
I am an economist. We pretend that we understand how the world’s economy works. Do we really? Didn’t the 2008 global crisis, and aftermath, prove anything? That we did not know enough to predict it, and worse, did not know enough to know how to dig the world out of the mess it was in (the ‘austerity’ camp fought the ‘spend/spend’ camp, confusing the world totally).
So the first step in dealing with this problem, is to try to KNOW and define what we don’t know. Here is a partial list:
* Globalization: Globalization is the process in which nations of the world together moved toward freer movement of goods and services, people, information, technology and capital across borders. It has generated unprecedented wealth for those individuals, businesses and nations clever enough to become globally competitive and join the globalized ecosystem — $150 trillion worth, according to McKinsey Global Institute. This is mainly true of Asia, including China but not solely. It also left left out individuals, businesses and nations not able or willing to become part of the global system. Some have thrived in the globalized world; many have suffered. Economists say opaquely, it’s “Pareto-optimal” (winners can compensate losers, with lots left over). I say, economic borders are being restored because those losers are finally revolting, after being ignored and neglected.
In the era of Trump and his Wall and anti-globalization backlash: How can the benefits of globalization be distributed more fairly and how can the inevitable losers to globalization be compensated, without ruining the energy and freedom that drive globalization and without seriously disrupting its benefits?
* Global aging: Large parts of the world are aging demographically. Yet the issue of how to set aside adequate resources for the retired and elderly has barely begun to be addressed. How can we ensure that the retired and the elderly live in dignity without imposing an unfair or unbearable economic burden on working people and the young, and prevent a war between the generations?
* Global Capitalism: History shows that socialism, based on state ownership of key assets, has failed. But it also shows that capitalism, the system of free open markets, has not fully succeeded and continues to endanger our fragile global ecosystem. The fundamental causes of the 2008 financial crisis and ensuing recession have not been remedied. What new, basic economic architecture can create a system that is good at both generating new wealth and ensuring its distribution is fair and equitable, within a system that is not prone to repeated, frequent collapse?
* Global Social capital: Social capital is the summed present value of the bonds of love and friendship among family, friends, neighbors and communities, that generate mutual support and security. Financial capital is tracked to the last dollar; social capital is hugely important, gigantic in size, yet is not measured, tracked or fostered. Growing urbanization has begun to diminish social capital and hamper its formation. How can we reverse the decline of social capital, measure it and expand it, in a world where urbanization and the anonymity it creates are destroying the crucial social bonds that once enhanced lives everywhere?
* Global Search for Meaning: How can better-off individuals, businesses and nations the world over find new meaning and purpose in life, other than acquiring more and more goods and services — proven to be ultimately disappointing, unable to bring true happiness? How can we rebalance present-future choice and make the future what it once was, without crashing the borrow-and-spend system?
Economists and politicians lack viable answers. They’re hopeless. Can social entrepreneurs can come up with some initial answers and find ways to try them out? At the least, we will know what we don’t know, before it kills us. Let entrepreneurs everywhere work on these global life-or-death dilemmas, rather than invent another app that will show how far we’ve jogged.
Pittsburgh: Rises from the Ashes
By Shlomo Maital
In today’s International New York Times (July 3), David Brooks makes an important observation. The political battleground in the U.S. and other countries has until now been: big government? Or small? Too much government? Or too little? This is changing, in the wake of Trump and right-wing nationalist parties in Europe.
The core issue, he says, in the coming decade, will be: open or closed? Open society, to trade, ideas, immigrants, information? Or closed society, with a big wall, protectionism, tariffs, and ‘immigrants not welcome’ signs?
Globalization began with the fall of the Berlin Wall, Nov. 9 1989. The unification of the two Germanys accelerated the European Single Market and boosted global trade. But the benefits of free open trade, which have been enormous for Asia, accrued mainly to the wealthy and better off, who make money from money. Blue collar workers in the West lost their jobs, as manufacturing migrated. This silent majority is no longer silent. And their pain has become a central issue in politics, in the post-Trump era.
Brooks, like all good columnists, leaves his office and goes out into the field, to see first-hand. He visited Pittsburgh. My sister lives in Pittsburgh, and I’ve been visiting her regularly since her marriage to Chuck, my late brother-in-law, a Pittsburgh optometrist, in 1952. I saw first-hand the smoky steel mills along the Monongahela River and saw the terrible pollution that coated Pittsburgh with a layer of dust. I saw them disappear, as Pittsburgh reinvented itself to become today’s modern high-tech city, financial center, healthcare center and home to a great university, Carnegie-Mellon. As Brooks observes, Pittsburgh today is amazing, with sparkling clean air, great restaurants, cultural events, an old train station rezoned into restaurants and shops… a stark contrast to many other rust-belt cities, like Cleveland, OH and Gary, IN, which have not done the same.
But nonetheless, Pittsburgh too has its community of losers, those who lost high-paying steel jobs in the heyday of U.S. Steel. Globalization may have produced net gains for Asia, and even for the U.S., but those gains were very very unevenly distributed, and the winners did not in the least compensate the losers. After a long delay, the losers are now generating a political reaction and near-counter-revolution.
It would be a shame if the benefits of globalization were reversed, simply because our political system was too lazy, stupid and short-sighted to realize that somehow, we have to find a way to help those who lose from it. Maybe a good place to start is Pittsburgh, as Brooks notes, which lost thousands of steel jobs and eventually created thousands more of service jobs.
I think we should recall China and its amazing Great Wall, stretching for some 13,000 miles (21,000 kilometers), completed around 1400-1600. The Great Wall kept out the Manchus and kept China whole and safe, at least in part. But it also kept out the world and led to 500 years of stagnation in China’s economy. Modern China has been a huge winner from globalization, because it has been smart enough to know how to reap the benefits. We should challenge other countries, especially the U.S. and Europe, to state: What is your strategy for evening the playing field, NOT globally but WITHIN your own country, to help those who have lost well-paying jobs to free global trade? Because if you don’t shape such a strategy quickly, you may find that politically globalization is no longer viable and is replaced by protectionism and modern Great Walls. Trump’s “build a wall and make them pay for it” will replicate itself elsewhere, if we do not act soon and wisely.
TIMnovate 