The End of Globalization?

When the North American Free Trade Agreement became law in the 1990s, a very strange thing happened. Millions of Mexican peasants were made homeless, and they flooded north of the border. The essential principle of US-dominated “free trade” has been the globalization of capital at the expense of labor. This has been US policy since the end of WWII. But only within the last generation has the contradiction of this policy really come back to nullify any advantage achieved through the free movement of capital across America’s southern boundary.

What does any of this have to do with Israel and its Sunni Arab neighbors? The answer is now perfectly clear — everything. US policy, in the aftermath of the 20th century’s two world wars and a devastating economic depression, had been built upon the assumption that only through global economic integration could the world’s political problems be mitigated. In order to accomplish this goal the US had to guarantee the security of all its allies, real and potential, worldwide. This, of course, included the Middle East. But the economic and geopolitical hegemony desired through the spread of US dollars, as the essential lubricant to this policy, was flawed from the beginning.

Many of the allies of the US had originally been its WWI and WWII former enemies. In the aftermath of these global wars, the industrial base of both Asia and Europe had been destroyed. This left the US not only as the key market for the 1950s rehabilitation of the world economy, but also as its primary banker. In the process, two very important developments occurred. First, the US economy boomed, and with it the price of labor skyrocketed. And second, the removal of national capital controls on the global expansion of the US dollar sowed the seeds of a massive currency instability.

Within a generation, inflation began to soar as US dollar’s linkage to a gold standard was abandoned. From 1945 on, a new age of global capitalism — free of national constraints on currency and eventually tied to nothing but the “good faith” of the US Treasury — had been born. The US dollar became the world’s primary trading and reserve currency.

Enter the crisis of the 1970s. With its former enemies back on their industrial feet (and now important allies against the Soviet and Chinese communist governments), the US became embroiled in a real competition against products from the friendly abroad. Japanese and European manufacturing looked to the US as the essential market for their products. But at the same time, US products were being manufactured by a labor force whose essential character and income had become (through two decades without any real competition) middle class. This created a powerful cost discrepancy, which in turn squeezed the myriad of US corporations of their profit margin. As foreign competition began to flood in, the American worker was punished through lay-offs and domestic stagnation.

But stagnation wasn’t the only problem. Inflation, as mentioned earlier, had also become a serious structural problem. Add to the higher price of American labor the cost of domestic programs for the poor, huge subsidies to the farmers, middle-class medical payments for the aged, a worldwide expansion of the US military, an ever-increasing imbalance of international payments, and a major foreign war in Vietnam. Is it any wonder that the decade of the 1970s produced the worst crisis of economics since the Great Depression?

Known as “stagflation” (inflation in combination with stagnant job growth), the US government in the 1970s (under three failed presidents — Nixon, Ford and Carter) was forced to change course dramatically with the election of 1980. The era of liberalism was superseded by the American conservative revolution. This revolution even encompassed millions of working-class ex-Democrats who had turned toward the Republicans out of economic frustration.

Ronald Reagan came to power with four major goals in mind. First and foremost, he wanted to discipline labor and decrease the power of unions. Second, he wanted to dismantle, as best he could, the social programs of the liberal welfare state in order to cut taxes on the corporations and to ease the squeeze on their profit margins. Third, he wanted to limit oil inflation through a continued tilt toward Saudi Arabia and America’s friendly Sunni Arab-state allies. And fourth, he wanted to increase the military budget so that the Soviet Union would have a very hard time keeping up with US advances in military technology.

Reagan succeeded for the most part in nearly all his goals. Although he couldn’t dismantle the major social welfare programs, he did manage a massive military budget which eventually aided in bringing down the Soviet Union. This accomplishment was dramatically enforced by Saudi Arabia and the friendly oil-producing Arab states of the Middle East. By keeping oil production high, the price of oil plummeted. The Soviet economy was primarily oil-based. Reagan and Saudi Arabia essentially devastated the Soviet economy.

Also, the Saudis and other Gulf nations became very large and important buyers of US treasury bonds. This helped to tame the interest rates and inflation problem of the crisis, which in turn allowed the US to increase both its foreign and domestic deficits. Without Saudi support for a lower price of oil and as a buyer of last resort for US treasury bonds, Reagan would have encountered the exact same problem as Nixon, Ford and Carter — inflation.

The taming of inflation became dramatically apparent after the stock market crash of 1987. The market then was still operating under the assumptions of the crisis of the 1970s, i.e. that inflation would accompany lower interest rates. The crash was caused by the expectation of an inflationary necessity for higher interest rates. But in the aftermath of the 1987 crash (one of the worst in history), the US central bank (the Federal Reserve) dramatically cut interest rates and, amazingly, inflation didn’t return. Could it be that the worst crisis since the Great Depression ended without a problem?

Inflation had been tamed, but with a very high cost. US manufacturing production began the long process of shifting toward cheap labor overseas. This phenomenon has been going on since the late 1980s. US labor had indeed been disciplined, and disciplined severely. This shift in the price of oil, and then the massive outsourcing of US manufacturing, had so tamed inflation (through a stagnation in wage growth) that eventually oil could rise again without any serious inflationary problem. An entire new era had been ushered in with low-wage Asian (including communist China) manufacturing and minimal domestic interest rates.

As globalization proceeded through a worldwide market network of capital expansion without national control, the ebb and flow of money created not only jobs for cheap labor in manufacturing markets abroad but also a series of cascading financial crises. It happened in Mexico in the early 1990s. US dollars and grain flooded in, and Mexican peasants unable to compete with subsidized US corn and mechanized Mexican agribusiness flocked to the US illegally in search of jobs. There were winners and losers. The peasants (millions of them) depended on three-dollar-a-bushel corn as their domestic cash crop. Subsidized US corn went for only two dollars a bushel. The Mexican peasant could simply not compete.

But it was this ebb and flow of global money that caused one financial panic after another. It happened in Mexico in the early 1990s. Nervous investors would withdraw from any market at the first sign of trouble. Making money through foreign investment or the manipulation of financial markets became the alternative to the manufacture of real products within the borders of the US.

Bubbles occurred, bubbles burst. The financial crisis of 1998 devastated Korea and Russia. A US hedge fund went bust, and the US Federal Reserve was forced to drop interest rates for fear of a banking collapse. This pattern — financial crisis soothed by low interest rates and cheap debt — was repeated again and again without inflationary repercussion. Meanwhile, cheap products from very low-wage markets abroad continued to flood into the US, as low-wage illegal immigrants (mostly landless ex-peasants) poured into US cities.

As the price of labor continued to plummet, a two-tier US economy was created — a very high technological end and a low-paying service end. Meanwhile, US-based manufacturing sank. Wealthy investors ceased to aspire toward production at home, but rather borrowed with low-interest rates and thereby secured profits through bubbling financial markets at home and abroad. Meanwhile the financial sector of the US economy doubled in size, as the income security of the American manufacturing worker shrank.

From an industrial powerhouse in the 1950s, the US economy had become a casino of cheap debt and bubbling financial assets. Something had to give, and it did in the global banking crisis of 2008. Eventually the banks were bailed out, interest rates plummeted to zero, the US national debt doubled and a depression was avoided through an anemic recovery. But workers’ wages continued to stagnate.

Global deflation, negative interest rates, and a fifteen-year wage recession has now created a political revolution within the US. The American working class is now in a complete revolt against the internal structure of both US political parties, Republican and Democratic alike. On the right, we have Donald Trump. His appeal is astounding, considering his immense character flaws. The man appears to be pure Teflon to his many working class and small business followers. In any other era, Trump’s obvious narcissistic personality disorder would have been easily exposed, and any chance for his political success nullified almost instantly. His followers, however, have been so victimized by the financial billionaire class that they fail to see the glaring contradictions within Trump’s own business career.

On the left, the US now has its first serious socialist candidate for president since Eugene V. Debs in 1912. Bernie Sanders, a seventy-five year old Jewish-American Marxist, has captured the imagination of nearly an entire generation under the age of thirty. Sanders appears psychologically healthy, but his proposal for excessive taxation on Wall Street could shock an already fragile system into total panic. Without cheap goods from abroad and massive infusions of debt, Bernie would be faced (like the French socialist Francois Mitterrand in the 1980s) with a buyers’ strike and potential liquidity crisis on US treasuries. Bernie’s cure might be worse than the disease itself. As President and Mrs. Clinton found out in the early 1990s, you simply cannot fight the international bond market and come out on top.

The same appears true for a trade war. But that is exactly what Donald Trump is promising his millions of followers. Trump would install two very high walls — one on the Mexican border to stop the flow of illegal immigrants, and another invisible wall in the form of a strong tariff regime. Conventional economic theory would suggest that such a policy could cause a depression. In fact, the Economist magazine claims that the election of Donald Trump to the presidency of the US would be a major threat to the health of the world economy.

But for two generations of contemporary Americans, the world economy is hardly healthy now. Globalization and its effect on the US working class has had serious repercussions for US foreign policy. Simply put: The price tag for the historic US role as policeman to the world has become far too high. Even some of the strongest supporters of Israel, within the working-class evangelical right-wing of the Republican Party, have little stomach for further US involvement to stop the spread of Iranian advancement. Americans are becoming ambivalent to the security problems of central and eastern Europe, the Middle East and even East Asia. A recent study found that over half the US population has less than one thousand dollars in savings. Is it any wonder that both Trump and Sanders have both called for a rollback of US security involvement overseas?

Although most politicians claim otherwise, there are no simple solutions to the complex contradictions of global capitalism. Globalization affects everyone in the world today. Socialism has so many historic models and failures that it, too, appears impotent as an alternative. Will China have a hard landing to its binge of communist government credit? Can the EU survive its massive socialist budget deficits? Will the world economy repeat its financial crisis of 2008? And how will America’s allies — within the security umbrella it has created since 1945 — react to the political revolution now transpiring within the US election cycle of 2016? Is this the end of globalization? If it is, then where will its economic and geopolitical demise lead us?

No one can really answer these questions. Yet the political events of 2016 have given nearly every American Jew, and Jews the world over, pause to reflect on the rise of authoritarian leaders and the deep social problems of the 1930s. The same is true for millions of freedom-loving American non-Jews. Candidates can bluster and spout slogans, but in a republic as old as the US, rationality and logic are far too ingrained not to trump fear and fear-mongering. At least this is our great hope. Let us approach the future with a sense of guarded, yet optimistic anticipation that this current era of roiling economic crisis will NOT (once again) lead toward irrationality, hatred and war.

Let us believe forthrightly that the nations of the world can find their way toward peace. As the Jewish prophet Habakkuk said: “The stone will cry out from the wall,… Woe to him who builds a town with blood, and founds a city on iniquity!” (2:11-12)

About the Author
Steven Horowitz has been a farmer, journalist and teacher spanning the last 45 years. He resides in Milwaukee, Wisconsin, USA. During the 1970's, he lived on kibbutz in Israel, where he worked as a shepherd and construction worker. In 1985, he was the winner of the Christian Science Monitor's Peace 2010 international essay contest. He was a contributing author to the book "How Peace came to the World" (MIT Press).