Wednesday, November 30, 2016

ANS -- The Secret Agenda of a Facebook Quiz

This is a scary thought.  That ads and articles on social media are targeted individually to sway your opinion, especially how to vote.  Well, folks, this is what they are doing with all that data they have on you nowadays.  

CreditYoshi Sodeoka

Do you panic easily? Do you often feel blue? Do you have a sharp tongue? Do you get chores done right away? Do you believe in the importance of art?

If ever you've answered questions like these on one of the free personality quizzes floating around Facebook, you'll have learned what's known as your Ocean score: How you rate according to the big five psychological traits of Openness, Conscientiousness, Extraversion, Agreeableness and Neuroticism. You may also be responsible the next time America is shocked by an election upset.

For several years, a data firm eventually hired by the Trump campaign, Cambridge Analytica, has been using Facebook as a tool to build psychological profiles that represent some 230 million adult Americans. A spinoff of a British consulting company and sometime-defense contractor known for its counterterrorism "psy ops" work in Afghanistan, the firm does so by seeding the social network with personality quizzes. Respondents — by now hundreds of thousands of us, mostly female and mostly young but enough male and older for the firm to make inferences about others with similar behaviors and demographics — get a free look at their Ocean scores. Cambridge Analytica also gets a look at their scores and, thanks to Facebook, gains access to their profiles and real names.

Cambridge Analytica worked on the "Leave" side of the Brexit campaign. In the United States it takes only Republicans as clients: Senator Ted Cruz in the primaries, Mr. Trump in the general election. Cambridge is reportedly backed by Robert Mercer, a hedge fund billionaire and a major Republican donor; a key board member is Stephen K. Bannon, the head of Breitbart News who became Mr. Trump's campaign chairman and is set to be his chief strategist in the White House.

Continue reading the main story

In the age of Facebook, it has become far easier for campaigners or marketers to combine our online personas with our offline selves, a process that was once controversial but is now so commonplace that there's a term for it, "onboarding." Cambridge Analytica says it has as many as 3,000 to 5,000 data points on each of us, be it voting histories or full-spectrum demographics — age, income, debt, hobbies, criminal histories, purchase histories, religious leanings, health concerns, gun ownership, car ownership, homeownership — from consumer-data giants.

No data point is very informative on its own, but profiling voters, says Cambridge Analytica, is like baking a cake. "It's the sum of the ingredients," its chief executive officer, Alexander Nix, told NBC News. Because the United States lacks European-style restrictions on second- or thirdhand use of our data, and because our freedom-of-information laws give data brokers broad access to the intimate records kept by local and state governments, our lives are open books even without social media or personality quizzes.

Ever since the advertising executive Lester Wunderman coined the term "direct marketing" in 1961, the ability to target specific consumers with ads — rather than blanketing the airwaves with mass appeals and hoping the right people will hear them — has been the marketer's holy grail. What's new is the efficiency with which individually tailored digital ads can be tested and matched to our personalities. Facebook is the microtargeter's ultimate weapon.

The explosive growth of Facebook's ad business has been overshadowed by its increasing role in how we get our news, real or fake. In July, the social network posted record earnings: quarterly sales were up 59 percent from the previous year, and profits almost tripled to $2.06 billion. While active users of Facebook — now 1.71 billion monthly active users — were up 15 percent, the real story was how much each individual user was worth. The company makes $3.82 a year from each global user, up from $2.76 a year ago, and an average of $14.34 per user in the United States, up from $9.30 a year ago. Much of this growth comes from the fact that advertisers not only have an enormous audience in Facebook but an audience they can slice into the tranches they hope to reach.

One recent advertising product on Facebook is the so-called "dark post": A newsfeed message seen by no one aside from the users being targeted. With the help of Cambridge Analytica, Mr. Trump's digital team used dark posts to serve different ads to different potential voters, aiming to push the exact right buttons for the exact right people at the exact right times.

Imagine the full capability of this kind of "psychographic" advertising. In future Republican campaigns, a pro-gun voter whose Ocean score ranks him high on neuroticism could see storm clouds and a threat: The Democrat wants to take his guns away. A separate pro-gun voter deemed agreeable and introverted might see an ad emphasizing tradition and community values, a father and son hunting together.

In this election, dark posts were used to try to suppress the African-American vote. According to Bloomberg, the Trump campaign sent ads reminding certain selected black voters of Hillary Clinton's infamous "super predator" line. It targeted Miami's Little Haiti neighborhood with messages about the Clinton Foundation's troubles in Haiti after the 2010 earthquake. Federal Election Commission rules are unclear when it comes to Facebook posts, but even if they do apply and the facts are skewed and the dog whistles loud, the already weakening power of social opprobrium is gone when no one else sees the ad you see — and no one else sees "I'm Donald Trump, and I approved this message."

While Hillary Clinton spent more than $140 million on television spots, old-media experts scoffed at Trump's lack of old-media ad buys. Instead, his campaign pumped its money into digital, especially Facebook. One day in August, it flooded the social network with 100,000 ad variations, so-called A/B testing on a biblical scale, surely more ads than could easily be vetted by human eyes for compliance with Facebook's "community standards."

Perhaps out of necessity, the Trump team was embracing a new-media lesson: It didn't have to build everything from scratch. Mark Zuckerberg and others had already built the infrastructure the campaign needed to reach voters directly. When "Trump TV" went live on Facebook before and after the second debate it raked in $9 million in donations in 120 minutes.

In the immediate wake of Mr. Trump's surprise election, so many polls and experts were so wrong that it became fashionable to declare that big data was dead. But it isn't, not when its most obvious avatar, Facebook, was so crucial to victory.

On Monday, after a similar announcement from Google, Facebook said it would no longer allow fake-news websites to show ads, on their own sites, from Facebook's ad network — a half-step that neither blocks what appears on your newsfeed nor affects how advertisers can microtarget users on the social network.

There are surely more changes to come. Mr. Zuckerberg is young, still skeptical that his radiant transparency machine could be anything but a force for good, rightly wary of policing what the world's diverse citizens say and share on his network, so far mostly dismissive of Facebook's role in the election. If Mr. Zuckerberg takes seriously his oft-stated commitments to diversity and openness, he must grapple honestly with the fact that Facebook is no longer just a social network. It's an advertising medium that's now dangerously easy to weaponize.

A Trump administration is unlikely to enforce transparency about who is targeted by dark posts and other hidden political ads — or to ensure that politicians take meaningful ownership of what the ads say. But Facebook can.

Tuesday, November 29, 2016

ANS -- Why do people forget that Donald Trump is a successful businessman? [He's not.]

You've heard bits and pieces of this, but here is the whole story all together, with a summary at the end.  It's about Trump and his businesses, which mostly are NOT successful.  He's terrible at business.  
This was written before the election, but it shows that we tend to believe what people say instead of the evidence.  

Why do you think he's a successful businessman? Because he says so?

Here's how Donald Trump made his money: he got a $1 million loan from his father, and then borrowed an additional $19 million against his future inheritance from banks. So his father's wealth allowed him to start with $20 million in capital that Trump himself had done nothing to earn (he'd eventually inherit $200 million from his father.)

So he took that money and invested in commercial real estate, mainly in New York City… hotels, office buildings, apartments, etc. At the time he began making these investments, the value of commercial real estate in NYC was fairly depressed, so prices were low.

Trump then had to manage the properties he purchased. But here's the thing: he proved to be really bad at it. His properties — all of them — were losing money. He couldn't turn a profit! Brilliant businessman. But he was saved by one thing: the depressed commercial real estate market of the 1970s underwent a boom in the 1980s. The value of his properties skyrocketed, even though they were not profitable, because commercial real estate values all over the city were rising dramatically. So Trump was able to cover his losses by borrowing against the equity in his properties. And as those properties continued to rise in value, he borrowed more and more and more. And he used some of the money he borrowed against the value of his properties to get into real estate developing, building some properties of his own around the city; he also expanded into other markets, including Atlantic City, where he began building casinos. He also began his lifelong interest in owning golf courses.

Along the way, he began to engage in unethical and highly questionable business practices, including refusing to pay contractors he hired the agreed-upon amounts for their work. He would sign a contract requiring him to pay them a certain amount, and then he'd actually pay them a fraction of that amount, and dare them to sue him to enforce the contract. Some did, and some did not; Trump has been sued more than 3,200 times. And before you say, "That's good business, he saved money!" it's never good business to violate a contract without cause. It's never good business to routinely break your word. Good businesspeople keep their agreements because they understand the value of a good reputation. Good businesspeople run a business well enough that they can afford to pay their workers what they promised and still turn a profit.

In any event, all of this was financed with debt. He was borrowing against the steadily-rising value of his commercial properties. He was behaving like a homeowner who kept running up charges on their credit card, and kept paying off the credit card by taking out home equity loans against the rising value of his house. As long as the value kept going up, there was always more equity to tap into.

But the commercial real estate boom was a bubble, and it burst in the late 1980s. Trump was stuck with a bunch of properties with negative cash flow and a massive overhang of debt, to the tune of some $5 billion. In 1990, he declared his first and biggest bankruptcy. And this one nearly destroyed him.

To survive, Trump had to work out a deal with 70 different banks, under which they would agree to defer a portion of the debt and write down an additional portion, agreeing to be repaid less than the full amount they were owed.

My father worked for one of the banks that Trump owed money to. He was present in a meeting when Trump met with his bosses to try and negotiate the write-down of his debt. He told me this story many years before Trump ran for president. What he said was that Trump was unrepentant for his losses and basically told the banks that they could either bail him out and write down a portion of his debt or he'd go completely out of business and lose everything, but if that happened they'd never get any of the money he owed them. He basically gave the banks a choice between a partial loss and a total loss, so they took the partial loss. My father said his bosses were sure Trump would be back in a few years asking for more help, because none of them believed he actually knew what he was doing.

Trump would declare bankruptcy 5 more times over the next 20 years. And today, American banks will not loan money to him. So he has to go to foreign lenders, like German-owned Deutsche Bank or (ironically) the Bank of China.

When Donald Trump Needs a Loan, He Chooses Deutsche Bank

Trump's Empire: A Maze of Debts and Opaque Ties

Several of his bankruptcies have involved his casino company, Trump Hotels and Casinos, which he created and took public in 1995, attracting thousands of investors.

Trump took the money he got from the sale of stock in Trump Hotels and Casinos (his only publicly traded company) and used it to have the company buy the casinos he already owned, like the Trump Taj Mahal and Trump Castle. Trump owned these properties personally, and they were massively in debt. He used his shareholders' money to buy these indebted, unprofitable casinos from himself, transferring the debt to his casino company while earning a nice payout for himself. Trump transferred $1.7 billion in debt from himself to his shareholders in this way. And the Casino company, which Trump continued to run, floundered; shares in the company were selling for $35 per share in 1995, but the price fell to $12 a share just a year later. Trump Hotels and Casinos would be in and out of bankruptcy for the next 15 years. Eventually, his board of directors made the brilliant businessman resign as chairman of the company because they had no confidence in his ability to turn it around. He remained as a member of the board (though not the chairman) until 2009, when the company entered yet another bankruptcy and he resigned. According to published reports, a $100 investment in Trump Hotels and Casinos in 1995 would have been worth $4 a decade later.

The Trump Files: How Donald Made a Fortune by Dumping His Debt on Other People

And then there are the businesses that Trump invested in and lent his name to:

Trump Steaks (failed)

Trump Ice bottled water (failed)

Trump Mortgage (failed)

Trump Airline (failed)

Trump University (failed, and he's currently being investigated for fraud and racketeering in connection to this one)

Trump Wine (failed)

Trump estimates his worth at anywhere from $8 billion to $10 billion. But in 2005, he sued a journalist named Tim O'Brien who wrote a book called Trump Nation alleging that he was really worth only $250 million.

Trump made a mistake in suing O'Brien, however. To prove his libel charge, he'd have to prove that he really was worth more than O'Brien said. He was questioned in a sworn deposition regarding his own estimation of his worth, which he said was based on his "feelings":

"You said that the net worth goes up and down based upon your own feelings?" he was asked in the deposition.

"Yes, even my own feelings, as to where the world is going, and that can change rapidly from day to day," Trump responded.

In the deposition, the attorney presented estimates of his net worth by two banks where Trump had applied for lines of credit. Both concluded Trump was worth about a third of the $3.5 billion he claimed in 2005.

In lawsuit deposition, Trump repeatedly called out for exaggerating wealth

Trump's suit was eventually thrown out of court.

Many financial experts and publications have estimated that if Trump took the money he got from his father and invested it in a simple index fund he'd be worth a lot more than he is today. Here's a report from Fortune magazine, which says Trump would be worth about 3 times as much as he is today if he had just invested in index funds: What's More Lucrative: "The Apprentice" or the S&P 500?

So…Trump's a great businessman, who financed his rise with money from his father and massive amounts of debt borrowed against the value of his properties. He has filed six bankruptcies, and is still in business only because his banks could not afford to let him go under, and had to accept a partial write-down of his debts. He routinely refuses to pay his workers and contractors his agreed-upon rates, and has been sued more than 3,200 times as a result. He routinely lies about how much money he is actually worth, dumped loads of his own debt on his shareholders, tanking the value of his own company in the process, and would have made a lot more money if he invested in index funds, which doesn't mean index funds are so great; it means Trump hasn't managed his money well enough to beat the returns on a conservative investment. American banks won't loan him any more money, and he remains massively in debt to foreign banks, while estimating his own net worth based on his day-to-day "feelings". Oh, and most of the businesses to which he has lent his name in the last 10 to 15 years have failed.

Trump is a wealthy man. He owns a lot of properties, and is still involved in some development deals (though he leases out his name to other developers far more often than he actually develops new properties today) despite all his debts. He will continue to be far richer than most of us will ever be long after the presidential campaign is over.

But as far as "why do people forget Trump is a successful businessman," well, perhaps Trump is an example of how it is possible to continue to be rich without actually being successful at running a business. Let me put it this way: it's very hard to imagine someone starting out in the real estate business today trying to imitate Trump's business "model" or "strategies" such as they are, to become successful.

ANS -- Americans keep looking away from the election’s most alarming story

I've seen this one in a couple of different places, so I hope you have already seen it, but just in case you haven't -- I'm sending it on because he makes an important point.  Should the Russian leader have a say in our elections for President?
I had to cut out the pictures, including the picture of a tweet, because I couldn't get it to quit overlapping the text, so if you want to see the pictures, go to the site.

This op-ed piece is a special To The Washington Post from Eric Chenoweth, the co-director of the Institute for Democracy in Eastern Europe.

In assessing Donald Trump's presidential victory, Americans continue to look away from this election's most alarming story: the successful effort by a hostile foreign power to manipulate public opinion before the vote.

U.S. intelligence agencies determined that the Russian government actively interfered in our elections. Russian state propaganda gave little doubt that this was done to support President-elect Trump, who repeatedly praised Vladimir Putin and excused the Russian president's foreign aggression and domestic repression. Most significantly, U.S. intelligence agencies have affirmed that the Russian government directed the illegal hacking of private email accounts of the Democratic National Committee and prominent individuals. The emails were then released by WikiLeaks, which has benefited financially from a Russian state propaganda arm, used Russian operatives for security and made clear an intent to harm the candidacy of Hillary Clinton.

From the Russian perspective, the success of this operation can hardly be overstated. News stories on the DNC emails released in July served to disrupt the Democratic National Convention, instigate political infighting and suggest for some supporters of Sen. Bernie Sanders (I-Vt.) - without any real proof - that the Democratic primary had been "rigged" against their candidate. On Oct. 7, WikiLeaks began near daily dumps from Clinton campaign chairman John Podesta's email account, generating a month of largely negative reporting on Clinton, her campaign staff, her husband and their foundation. With some exceptions, there was little news in the email beyond political gossip and things the media had covered before, now revisited from a seemingly "hidden" viewpoint.

Russian (and former communist) propaganda has traditionally worked exactly this way: The more you "report" something negatively, the more the negative is true. Trump and supportive media outlets adopted the technique and reveled in information gained from the illegal Russian hacking (as well as many "fake news" stories that evidencesuggests were generated by Russian intelligence operations) to make exaggerated claims ("Hillary wants to open borders to 600 million people!") or to accuse Clinton of illegality, corruption and, ironically, treasonous behavior.

Part of the Russian operation's success is that we cannot measure the effect. Did the DNC emails depress the Sanders vote for Clinton? Did the Podesta emails turn off independents? Would voters have responded differently if major media had reported the email releases not as legitimate news but as an intelligence operation by a hostile foreign power aimed at undermining the integrity of U.S. elections? There are no clear answers. But there are certainties: The email operation increased negative stories about Clinton, fueled an immense propaganda attack and diminished coverage of actual issues. The large polling lead Clinton gained after the debates slipped significantly under this barrage of negativity - even before FBI Director James B. Comey's bombshell.

Again, was there coordination with this foreign intervention? Russia's deputy foreign minister, Sergei A. Ryabkov,boasted that government representatives maintained multiple "contacts" during the campaign with Trump's "immediate entourage." (Campaign spokeswoman Hope Hicks issued a denial.) This is on top of reported U.S. government suspicions that a Trump adviser met with the intelligence operative directing the hacking. Where are the committee chairmen in Congress demanding an investigation? How is it that Republican Party leaders accept the intervention of a foreign power in the election of their party's presidential candidate?

Putin is pursuing large strategic goals: recognition of the annexation of Crimea and international acceptance of foreign aggression to change state borders; Russian control of Ukraine; weakening or even dissolution of the European Union and NATO; restoration of Russia as a great power; and restored dominance over the former Soviet bloc and its environs. In pursuing these aims, Putin is engaged in a disciplined effort to influence democratic politics in the West, including financial and propaganda support for the narrow Brexit victory and for a network of far-right (and pro-Russian) nationalist political parties and groups throughout Europe. Now he has achieved what had to have been his most improbable goal: helping elect a sympathetic U.S. president who wants to form an alliance against terrorism. What will Trump give in exchange? He has already reaffirmed his intention to end support for pro-Western rebels in Syria, which effectively gives Russia a free hand to make President Bashar al-Assad its satrap. The greater danger is Trump's attitude toward NATO as a "soft" alliance that, like the Western powers in 1939, won't "die for Danzig." It would mean the alliance's end.

In his book "Putinism," Soviet and Russian historian Walter Laqueur describes the varied ideological strains that animate the former KGB agent. The "Russian national idea" that has emerged is to defend Russia, Eurasia and the world from the anti- civilizational corruption of Western liberal democracy. Frighteningly, Putin's worldview has resonance in the populist and nationalist fixations of Stephen K. Bannon, the president-elect's senior counselor, whose stated mission is to "destroy" the "establishment" and end the domination of the "donor class." Bannon's "closing argument" ad for Trump, redolent of Russian propaganda, described the United States as a corrupt and failing state because of nefarious "global special interests." It all points to grave danger for democracy and a world order that has kept the peace for 70 years. Is this what America voted for?

- - -

Chenoweth is co-director of the Institute for Democracy in Eastern Europe.

ANS -- The Free Trade Fallacy

This one is on economics, but it's good and easy to understand.  I've included some of the comments because they're pretty good, and one of them mentions that "growth is over", an interesting view.  The article describes why free trade always leads to vast income disparity and a crashing speculative bubble.  He has a wonderful metaphor about the economy being like a plant -- consumer spending and capital investment are like sunlight and water -- you can't substitute one for the other and you need both.  
Growth is over.    

The Free Trade Fallacy

As longtime readers of this blog know, it's not uncommon for the essays I post here to go veering off on an assortment of tangents, and this week's post is going to be an addition to that already well-stocked list. Late last week, as the aftermath of the recent election was still spewing all over the media, I was mulling over one likely consequence of the way things turned out—the end of at least some of the free trade agreements that have played so large and dubious a role in recent economic history

One of the major currents underlying 2016's political turmoil in Europe and the United States, in fact, has been a sharp disagreement about the value of free trade. The political establishment throughout the modern industrial world insists that free trade policies, backed up by an ever-increasing network of trade agreements, are both inevitable and inevitably good. The movements that have risen up against the status quo—the Brexit campaign in Britain, the populist surge that just made Donald Trump the next US president, and an assortment of similar movements elsewhere—reject both these claims, and argue that free trade is an unwise policy that has a cascade of negative consequences.

It's important to be clear about what's under discussion here, since conversations about free trade very often get wrapped up in warm but vague generalities about open borders and the like. Under a system of free trade, goods and capital can pass freely across national borders; there are no tariffs to pay, no quotas to satisfy, no capital restrictions to keep money in one country or out of another. The so-called global economy, in which the consumer goods sold in a nation might be manufactured anywhere on the planet, with funds flowing freely to build a factory here and funnel profits back there, depends on free trade, and the promoters of free trade theory like to insist that this is always a good thing: abolishing trade barriers of all kinds, and allowing the free movement of goods and capital across national boundaries, is supposed to create prosperity for everyone.

That's the theory, at least. In practice? Well, not so much. It's not always remembered that there have been two great eras of free trade in modern history—the first from the 1860s to the beginning of the Great Depression, in which the United States never fully participated; the second from the 1980s to the present, with the United States at dead center—and neither one of them has ushered in a world of universal prosperity. Quite the contrary, both of them have yielded identical results: staggering profits for the rich, impoverishment and immiseration for the working classes, and cascading economic crises. The first such era ended in the Great Depression; the second, just at the moment, looks as though it could end the same way.

Economists—more precisely, the minority of economists who compare their theories to the evidence provided by the real world—like to insist that these unwelcome outcomes aren't the fault of free trade. As I hope to show, they're quite mistaken. An important factor has been left out of their analysis, and once that factor has been included, it becomes clear that free trade is bad policy that inevitably produces poverty and economic instability, not prosperity.

To see how this works, let's imagine a continent with many independent nations, all of which trade with one another. Some of the nations are richer than others; some have valuable natural resources, while others don't; standards of living and prevailing wages differ from country to country. Under normal conditions, trade barriers of various kinds limit the flow of goods and capital from one nation to another. Each nation adjusts its trade policy to further its own economic interests. One nation that's trying to build up a domestic steel industry, say, may use tariffs, quotas, and the like to shelter that industry from foreign competition. Another nation with an agricultural surplus may find it necessary to lower tariffs on other products to get neighboring countries to buy its grain.

Outside the two eras of free trade mentioned above, this has been the normal state of affairs, and it has had two reliable results. The first is that the movement of goods and capital between the nations tends toward a rough balance, because every nation uses its trade barriers to police hostile trade policy on the part of its neighbors. Imagine, for example, a nation that tries to monopolize steel production by "dumping"—that is, selling steel on the international market at rock-bottom prices to try to force all other nations' steel mills into bankruptcy. The other nations respond by slapping tariffs, quotas, or outright bans on imported steel from the dumping country, bringing the project to a screeching halt. Thus trade barriers tend to produce a relative equilibrium between national economies.

Notice that this is an equilibrium, not an equality. When trade barriers exist, it's usual for some nations to be rich and others to be poor, for a galaxy of reasons having nothing to do with international trade. At the same time, the difficulties this imposes on poor nations are balanced by a relative equilibrium, within nations, between wages and prices.

When the movement of goods and capital across national borders is restricted, the prices of consumer products in each nation will be linked via the law of supply and demand to the purchasing power of consumers in that nation, and thus to the wages paid by employers in that nation. Of course the usual cautions apply; wages and prices fluctuate for a galaxy of reasons, many of which have nothing to do with international trade. Even so, since the wages paid out by employers form the principal income stream that allows consumers to buy the employers' products, and consumers can have recourse to the political sphere if employers' attempts to drive down wages get out of hand, there's a significant pressure toward balance.

Given trade barriers, as a result, people who live in countries that pay low wages generally pay low prices for goods and services, while people who live in countries with high wages face correspondingly high prices when they go shopping. The low prices make life considerably easier for working people in poor countries, just as the tendency of wages to match prices makes life easier for working people in rich countries. Does this always work? Of course not—again, wages and prices fluctuate for countless reasons, and national economies are inherently unstable things—but the factors just enumerated push the economy in the direction of a rough balance between the needs and wants of consumers, on the one hand, and their ability to pay, on the other.

Now let's imagine that all of the nations we've imagined are convinced by a gaggle of neoliberal economists to enact a free trade zone, in which there are no barriers at all to the free movement of goods and capital. What happens?

When there are no trade barriers, the nation that can produce a given good or service at the lowest price will end up with the lion's share of the market for that good or service. Since labor costs make up so large a portion of the cost of producing goods, those nations with low wages will outbid those with high wages, resulting in high unemployment and decreasing wages in the formerly high-wage countries. The result is a race to the bottom in which wages everywhere decline toward those of the worst-paid labor force in the free trade zone.

When this happens in a single country, as already noted, the labor force can often respond to the economic downdraft by turning to the political sphere. In a free trade zone, though, employers faced with a political challenge to falling wages in one country can simply move elsewhere. It's the mismatch between economic union and political division that makes free trade unbalanced, and leads to problems we'll discuss shortly.

Now of course free trade advocates like to insist that jobs lost by wealthier nations to poorer ones will inevitably be replaced by new jobs. History doesn't support that claim—quite the contrary—and there are good reasons why the jobs that disappear will never be replaced. In a free trade system, it's more economical for startups in any labor-intensive industry to go straight to one of the countries with low wages; only those industries that are capital-intensive and thus employ comparatively few people have any reason to get under way in the high-wage countries. The computer industry is a classic example—and you'll notice, I trust, that just as soon as that industry started to become labor-intensive, it moved offshore. Still, there's another factor at work.

Since wages are a very large fraction of the cost of producing goods, the overall decrease in wages brings about an increase in profits. Thus one result of free trade is a transfer of wealth from the laboring majority, whose income comes from wages, to the affluent minority, whose income comes directly or indirectly from profits. That's the factor that's been left out of the picture by the proponents of free trade—its effect on income distribution. Free trade makes the rich richer and the poor poorer, by increasing profits while driving wages down. This no doubt explains why free trade is so popular among the affluent these days, just as it was in the Victorian era.

There's a worm in the bud, though, because a skewed income distribution imposes costs of its own, and those costs mount up over time in painfully familiar ways. The difficulty with making the rich richer and the poor poorer, as Henry Ford pointed out a long time ago, is that the wages you pay your employees are also the income stream they use to buy your products. As wages decline, purchasing power declines, and begins to exert downward pressure on returns on investment in every industry that relies on consumer purchases for its income.

Doesn't the increasing wealth of investors counterbalance the declining wealth of the wage-earning masses? No, because the rich spend a smaller proportion of their incomes on consumer goods than the poor, and divert the rest to investments. Divide a million dollars between a thousand working class family, and the money's going to be spent to improve the families' standard of living: better food, a bigger apartment, an extra toy or two around the Christmas tree, and so on. Give the same million to one rich family and it's a safe bet that much of it's going to be invested.

This, incidentally, is why the trickle-down economics beloved of Republican politicians of an earlier era simply doesn't work, and why the Obama administration's massive handouts of government money to banks in the wake of the 2008-9 financial panic did so little to improve the financial condition of most of the country. When it comes to consumption, the rich simply aren't as efficient as the poor. If you want to kickstart an economy with consumer expenditures, as a result, you need to make sure that poor and working class people have plenty of money to spend.

There's a broader principle here as well. Consumer expenditures and capital for investment are to an economy what sunlight and water are to a plant: you can't substitute one for the other. You need both. Since free trade policies funnel money away from expenditure toward investment by skewing the income distribution, it causes a shortage of the one and a surplus of the other. As the imbalance builds, it becomes harder for businesses to make a profit because consumers don't have the cash to buy their products; meanwhile the amount of money available for investment increases steadily. The result is a steady erosion in return on investment, as more and more money chases fewer and fewer worthwhile investment vehicles.

The history of free-trade eras is thus marked by frantic attempts to prop up returns on investment by any means necessary. The offshoring fad that stripped the United States of its manufacturing economy in the 1970s had its exact equivalent in the offshoring of fabric mills from Britain to India in the late Victorian era; in both cases, the move capitalized on remaining disparities in wages and prices between rich and poor areas in a free trade zone. In both cases, offshoring worsened the problem it was meant to fix, by increasing the downward pressure on wages in the richer countries and further decreasing returns on investment across the entire spectrum of consumer industries—then as now, the largest single share of the economy.

A gambit that as far as I know wasn't tried in the first era of free trade was the attempt to turn capital into ersatz income by convincing consumers to make purchases with borrowed money. That's been the keystone of economic policy in the United States for most of two decades now. The housing bubble was only the most exorbitant manifestation of a frantic attempt to get people to spend money they don't have, and then find some way to pay it all back with interest. It hasn't worked well, not least because all those interest payments put an additional downward pressure on consumer expenditures.

A variety of other, mostly self-defeating gimmicks have been put in play in both of the modern free trade eras to try to keep consumer expenditures high while wages decline. None of them work, because they don't address the actual problem—the fact that under free trade, the downward pressure on wages means that consumers can't afford to spend enough to keep the economy running at a level that will absorb the available investment capital—and so the final solution to the problem of declining returns on investment arrives on schedule: the diversion of capital from productive investment into speculation.

Any of my readers who don't know how this story ends should get up right now, and go find a copy of John Kenneth Galbraith's classic The Great Crash 1929. Speculative bubbles, while they last, produce abundant returns; when free trade has driven down wages, forced the consumer economy into stagnation or contraction, and decreased the returns on investment in productive industries to the point of "why bother," a speculative bubble is very often the only profitable game in town. What's more, since there are so few investments with decent returns in the late stages of a free trade scheme, there's a vast amount of money ready to flow into any investment vehicle that can show a decent return, and that's exactly the environment in which speculative bubbles breed most readily.

So the great free trade era that began tentatively with the repeal of the Corn Laws in 1846, and came into full flower with Gladstone's abolition of tariffs in 1869, ended in the stock market debacle of 1929 and the Great Depression. The road there was littered with plenty of other crises, too. The economic history of the late nineteenth and early twentieth centuries is a cratered moonscape of speculative busts and stock market crashes, culminating in the Big One in 1929. It resembles, in fact, nothing so much as the economic history of the late twentieth and early twenty-first centuries, which have had their own sequence of busts and crashes: the stock market crash of 1987, the emerging markets crash of 1994, the tech-stock debacle of 2000, the housing bust of 2008, and the beat goes on.

Thus free trade causes the impoverishment and immiseration of the labor force, and a cascading series of economic busts driven by the mismatch between insufficent consumption and excess investment. Those problems aren't accidental—they're hardwired into any free trade system—and the only way to stop them in their tracks is to abandon free trade as bad policy, and replace it with sensible trade barriers that ensure that most of the products consumed in each nation are made there.

It's probably necessary to stop here and point out a couple of things. First of all, the fact that free trade is bad policy doesn't mean that every kind of trade barrier is good policy. The habit of insisting that the only possible points along a spectrum are its two ends, common as it is, is an effective way to make really bad decisions; as in most things, there's a middle ground that yields better results than either of the two extremes. Finding that middle ground isn't necessarily easy, but the same thing's true of most economic and political issues.

Second, free trade isn't the only cause of economic dysfunction, nor is it the only thing that can cause skewed income distribution and the attendant problems that this brings with it. Plenty of factors can cause a national or global economy to run off the rails. What history shows with painful clarity is that free trade inevitably makes this happen. Getting rid of free trade and returning to a normal state of affairs, in which nations provide most of their own needs from within their own borders and trade with other nations to exchange surpluses or get products that aren't available at home readily, or at all, gets rid of one reliable cause of serious economic dysfunction. That's all, but arguably it's enough to make a movement away from free trade a good idea.

Finally, the points I've just made suggest that there may be unexpected benefits, even today, to a nation that extracts itself from free trade agreements and puts a well-planned set of trade restrictions in place. There are plenty of factors putting downward pressure on prosperity just now, but the reasoning I've just sketched out suggests that the destitution and immiseration so common in the world right now may have been made considerably worse than they would otherwise be by the mania for free trade that's been so pervasive in recent decades. A country that withdraws from free trade agreements and reorients its economy for the production of goods for domestic consumption might thus expect to see some improvement, not only in the prosperity of its working people, but in rates of return on investment.

That's the theory I propose. Given the stated policies of the incoming US administration, it's about to be put to the test—and the results should be apparent over the next few years.


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    Two points. First of all, let's note that agreements like TPP and TTIP are not free trade agreements. Very little in them is about trade barriers; most of the countries involved already have agreements keeping tariffs low or absent. Much of what they cover is in fact protectionism: extensions of copyrights for Hollywood and publishers and drug companies, so smaller companies can't compete with them. The US has the most extreme copyright protections and is attempting to force that model on the other countries. Then there are the ISDS provisions in both agreements, that is, Investor State Dispute Settlement tribunals, in which three corporate lawyers act as the judges when corporations in one signatory country can sue governments in another if they pay any law that could affect their profits--raising the minimum wage, buy local deals, environmental or worker safety protections...they can make the proceedings secret, there are no conflict of interest provisions for these highly paid judges...only corporations have the right to sue, not unions or environmental groups or local governments. In other words, a kangaroo court and one hell of a sweet deal for CEOs. So--what Trump is (probably erroneously) given credit for shooting down is really not a free trade deal at all.
    Secondly, if we ARE talking about protectionism and relocalizing economies versus globalization, there are a couple of other HUGE factors Greer has surprisingly not mentioned, of which resilience readers should be well aware: the environment, especially in terms of climate, and resource depletion. Relocalized economies with minimized trade are likely all that will be possible before too many decades pass, and the sooner we move in this direction the less damage we will do.
    Why do people assume that protectionism leads to war? It seems to be implied that if country A won't sell product Z to country B at favorable prices, then of course Country B will declare war to seize the resource in question. Is that what we humans are about? I'd rather think not.

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        "Getting rid of free trade and returning to a normal state of affairs, in which nations provide most of their own needs from within their own borders and trade with other nations to exchange surpluses or get products that aren't available at home readily, or at all, gets rid of one reliable cause of serious economic dysfunction. "

        JMG just described, in a rather confusing way, that the history of our economy over the last two centuries is the exact opposite of what he describes above as the normal state of affairs. The economy described above would be a highly planned economy run for the benefit of workers with trade limited to a few luxury products and with the desires of international corporations and speculators completely cut out. It would be an economy closer to what I would like to see, but it's laughable to think the Republicans in Congress are going to embrace that vision just because Trump (and I doubt he embraces it either) showed up. They still worship St. Ronnie and the Golden Rule of Deregulation of All Things--which amounts to leaving corporations and the rich individuals who own them to dominate society.


            Great article by JMG. Post Trump US and post Brexit UK should provide evidence to test this thesis. In the UK referendum, free trade was not as high profile as in the US election. A related big issue in both votes was movement of people across borders. How about an article on the movement of people (as opposed to movement of capital or trade) between economies?

            People moving from a lower productivity economy (LPE) to a higher productivity economy (HPE), provide more cheap labour in their new country. They increase their personal wages but depress wages generally in the new country. They also tend to send money home to relatives in the old country, resulting in a net flow of capital from the HPE to the LPE.

            When resources are plentiful and ripe for exploitation and growth is in full swing, as in the case of early immigration to the US, everyone's a winner.

            However when growth is low, this produces resentment in the working population of the HPE who see immigration as holding down wages and taking their jobs. A big factor in victory for both Brexit and Trump was the call to control borders. Generally mixed motives of racism (bad), patriotism (good?), localism (good?) and economic self interest (good/bad?) were at play here. I personally cast my vote for Brexit to restrict unsustainable population growth on a small island.


                Maybe the biggest 'Free Trade Fallacy' is that you can have 'Free Trade' without every adult having access to the land and tools they need to support themselves.


                    Another interesting piece on the same subject a little more in-depth .


                    "Tons of smart and less smart folks are breaking their heads over where Trump and Brexit and Le Pen and all these 'new' and scary things and people and parties originate, and they come up with little but shaky theories about how it's all about older people, and poorer and racist and bigoted people, stupid people, people who never voted, you name it.

                    "But nobody seems to really know or understand. Which is odd, because it's not that hard. That is, this all happens because growth is over. And if growth is over, so are expansion and centralization in all the myriad of shapes and forms they come in."
                    There ya have it , we have entered a new paradigm , the old political parties have no answer , the new are not yet in power ,Trump is the forerunner , if he can't make life better for those that voted for him ( and he / no one can ) more radical politics will ensue