Mass Destruction Of Capital

Trump has been taken to task for his trade policies. A look at the Wall St Journal on any given day will have articles, editorials and op-ed piece about why Trump is an idiot and that we need freer trade and not more tariffs. But the various journalist are making a mistake. They are not taking into account the massive destruction of American capitol that has gone on since the late 1980’s and the fact that the chickens have finally come home to roost.

Here’s a blog that I have followed for a long time, Carpe Diem as an example.
The problem is that Professor Perry talks about the trade of things and loses the issues of the trade in capitol and ideas. As such he and most of the experts miss what is really going on. This piece by Kevin Williamson is all too typical.

The United States was a manufacturing powerhouse during that era, the other great making nations — Germany, the United Kingdom, Japan — having been bombed to smithereens and their work forces literally (literally, Mr. Vice President!) decimated in some cases. The numbers are horrifying: 9 million dead Germans, 3 million dead Japanese, more than 20 million dead Soviets. There were only — “only” — a half million dead Britons, but the country’s industrial infrastructure was ruined. Without failing to appreciate the sacrifice of those who gave their lives, the position of the United States — its cities unscathed, its dead amounting to less than three-tenths of 1 percent of the population — was enviable.

One can look back at the immediate postwar era and cherry-pick whatever policy one likes, crediting it with the generally satisfactory state of affairs in those years: the relatively high tax rates and strong unions of the Eisenhower years if you’re a progressive, the relatively small public-sector footprint and stable families if you’re a conservative. The desire to return to that state of affairs is alluring for some. Writing in Salon this week, Conor Lynch is positively wistful: “The mass destruction of capital around the world created a much more even playing field than before, while also placing the United States at the forefront of the world economy.” “Destruction of capital” is a cute way of describing the slaughter of some 80 million people and the burning of their cities. There were good policy decisions and bad policy decisions in the postwar era, but the fundamental fact of economic life on this planet during that time was that humanity was rebuilding after the single worst event in its history, a conflagration that killed more people than the Mongol conquests and the Chinese civil war combined. When our old friend Frédéric Bastiat described the broken-window fallacy — the nonsensical belief that we can make ourselves richer by destroying wealth and thereby providing ourselves with the opportunity to replace it — he could not have imagined how many windows would be broken less than a century later. American involvement in that war was necessary, but it did not make us any better off in real terms, despite the persistent myth that the war led us out of the Depression. (Solve unemployment now — draft everybody!) Nobody understood this better than the commander of the Allied forces in Europe, General Dwight D. Eisenhower, whose subsequent presidency would be buoyed by the postwar boom. Wars do not create real wealth — they destroy it, a fact that he lamented in his famous “Cross of Iron” speech:…

The 28-year postwar boom is long gone. The Germans and the Japanese reminded the world that they are very good at building things, and the Chinese, the Indians, the Koreans, and many others have shown themselves to be capable producers. And though there is a tension in writing it while ISIS and al-Qaeda continue their depredations around the world, this has been an era of remarkable peace among nations. The result is that the world — including our little corner of it — is in material terms better off than it ever has been. The United States has not fallen behind — our manufacturing output is in real terms much higher today than it was in 1950 or 1960 — but the rest of the world has caught up. Only a monster could resent that, given the alternative — hunger, privation, misery, disease, human stagnation, and their inevitable companion: war….

TPP is not the beginning or the end of globalization, a word that is in slightly bad odor but simply denotes increasing worldwide cooperation in the production of goods and services as supply chains and markets transcend national boundaries like T. H. White’s freewheeling libertarian geese. But it is nonetheless an interesting episode. The anti-capitalist progressives have made clear what they do not want: free trade, free exchange, nasty foreigners and their nasty cheap goods, international exchange with fewer bosses declaring who may buy and sell and under what conditions, etc. What is it they do want? You cannot have 1953 without 1943, President Eisenhower without General Eisenhower. There is only one precedent to a postwar order. And despite the shocking ineptitude of the American ruling class of the postwar years — in government, in the labor unions, in the corporate boardrooms, and in intellectual life — neither the United States nor any other nation is entitled to wallow in multi-generational, consequence-free stagnation just because we liked things the way they were. The postwar economy was deeply abnormal, and our great national failure was to put off preparing ourselves for what would come next, a dereliction of duty for which we are still paying the price.

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The big problem with the way Progressives deal with economics is the way they seem unable to understand realities. They have this tendency believe that you can make a change in the tax or regulatory structure and nothing else will change. This tendency is shared by most of our elites.
They also don’t really see the devastation that they cause, whether it’s in Fork’s Washington or Bridgeport Connecticut.

Ever considered opening a restaurant?  Looking for a great location?

Check out this this opportunity in Forks, Washington. The former Vagabond Restaurant, all 8,100 square feet of it, is priced to move at $100,000 (or basically, make an offer).

That’s about $12 a square foot.  Not to lease it, mind you. To buy it!

Think of the advantages:  Forks is set in one of the most beautiful areas in the U.S., just a few miles south of the northwestermost point in the lower 48. The snow-capped Olympic Mountains form the backdrop to the town. The beaches a few miles to the west are world-famous.

And, to a certain degree, Forks is a tourist destination.  Most importantly, it’s the real-life home to the fictional crew in Stephenie Meyer’s “Twilight,” the mega-successful series of vampires-and-werewolves books – and the even more successful movie series based on the books.  Even today, three years after the release of the final movie, the “Welcome to Forks” sign that greets visitors to town is a popular spot for photos, particularly among teenage girls.

In fact there’s only one problem with Forks:  The local economy is a certified disaster, a gift to the people of this remote village from the U.S. government.

A little history

Before Twilight, Forks was famous for another reason: The surrounding mountains provided billions of board-feet of prime northwestern timber, turning Forks into a remarkably prosperous little town. In the late 1970s, for example, Bank of America built in Forks a 12,500-square-foot facility. The bosses were banking on Forks’ continued growth, which at the time was remarkable: the town grew by 82 percent during the 70s, from 1,682 to 3,060.

But then something terrible happened:  The U. S. Forest Service and the Bureau of Land Management discovered the spotted owls that live in the area, and began the first efforts to preserve the old-growth forests that are home to the owls.

Over the next 30 years the feds kept expanding their reach.

1981:  The Oregon-Washington Interagency Wildlife Committee proposed a thousand-acre buffer zone for each owl.

1986:  The U.S. Forest Service adjusted its forest-management plan by proposing to set aside up to 690,000 acres of national forest for owl habitat.

1990: The U.S. Fish and Wildlife Service officially declared the owl “threatened” under the Endangered Species Act, and government biologists proposed dedicating 3 million acres for owl habitat.

1991:  Fish and Wildlife upped the number to 11.6 million acres across three states.

1994:  The courts upheld a forest-management plan established by President Clinton and Vice President Gore to reduce logging to one billion board feet per year. That’s less than one-quarter of the annual harvest in the 1980s.

1995: The U.S. Supreme Court declared that spotted-owl protection rules also apply to owners of private land.

Taken altogether, the effort to save the spotted owl was massive, and proved to be economically catastrophic for communities from northern California to the Canadian border. And, oh yes, there was one other problem.  It didn’t work.

In 2000 wildlife biologists admitted the spotted owl population was declining more rapidly than they had anticipated.

The results of the effort are now indisputable. A July 2014 article in National Geographic quotes U.S. Forest Service biologist Eric Forsman, who admitted, “Protecting habitat hasn’t stopped the spotted owl’s decline.”

“We thought that if we did a good job of protecting habitat, the spotted owl population would eventually reach equilibrium or even increase, and everything would be fine.”

Nope. Instead the spotted owl population is dropping by about 3.9 percent a year. In Washington the decline is even more rapid, at “7 or 8 percent a year,” according to National Geographic.

A bit of irony

Wildlife biologists place much of the blame for the decline on the barred owl, a recently arrived species that is bigger, stronger and meaner than the docile spotted owl. They are decimating the native population.

That’s why Fish and Wildlife has started a new program to save the spotted owl. As we speak, they are in the process of killing as many as 3,600 barred owls in “about 2 percent of spotted owl habitat in Washington, Oregon and northern California.”

If it works, they’ll ramp up the program.

But let’s get back to Forks.  Thirty-five years after the spotted owl was spotted in the local forests, the town’s economy remains stagnant, its downtown a shell of its former vibrant self.

It’s a tragedy, because the people who have stuck it out are wonderful.  They are fun and social, and the town has a stick-togetherness that most other towns can only envy. And the natural beauty of the place is simply incomparable.

But hey, it’s not as though Forks is desolate end-to-end.  And that’s the subject (finally!) of this essay.  In what may be a glimpse of the future in over-regulated America, where birds take precedence over people and where the government can’t learn from its past hubristic efforts (or say “oops” and then stop!), there is one industry that is growing and glowing in Forks.

A drive through town makes it unmistakeable.  Just off main street there’s a gleaming new high school, built at a cost of $11 million. The school’s state-of-the-art biomass-burning heating system, largely built with federal grants, cost an additional $2.5 million.

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Government stimulus for a dead town. I’ve seen that over and over. The problem is that the town just becomes a zombie, feeding off the rest of the country. That might work if it were just a few towns and the rest of the country was growing. The evidence is that we, as a country are not growing. We may not be even replacing our existing capitol, the legacy our forefathers bequeathed to us.
The chart on top of the following post in American Thinker is a bit chilling in its implications because rather than showing a steady growth, the capitol purchases, machinery and what not, are oscillating which says that, at best, the capitol stock of machinery and what not is replacing itself. Actually, I suspect that it’s worse than that. The capitol stock is being depleted and not replaced.

Among other things, this chart is the opioid epidemic – the despair created by permanent unemployment.  The lack of capital investment is what has created the regions where people have dropped out of the workforce and thus are no longer counted as being in it.

The chart is a picture of the consequences of our defeat in the trade war.  Only Trump – and American Thinker readers of this piece – know that we have experienced this defeat.

What happened that has resulted in no growth in capital spending in the U.S. for the last 18 years?

George W. Bush – and I voted for him twice – agreed, with other world leaders, to admit China to the World Trade Organization (WTO) in December 2001.  This gave China access to world markets and particularly to the American market.  Since our system is heir to the English Common Law tradition, when we sign an agreement, we carry it out.  No other culture takes this view, certainly not China.  The Chinese have practiced mercantilism after signing the WTO agreement and getting access to our market, while the whole point of the WTO is to keep mercantilism out of world trade.

Economists think mercantilism can never work, thus Trump attacking it as practiced by China is a fool’s errand or worse.  This is based on the early 19th-century Theory of Comparative Advantage developed by David Ricardo.  It states that among trading parties, even if one party’s production costs are greater in all goods than the other party’s, the first party should focus on those goods where it has a comparative advantage – i.e., where its own cost of production is lower.  If the two countries then trade, both will improve their welfare.  If, under these conditions, a country practices mercantilism, it impoverishes itself.  This is a substantial insight.

But it depends on a key assumption: that capital is fixed.  Ricardo’s example was that the British should raise sheep and the French should make wine, and they should trade these goods with each other.  The example was based on climate, the ultimate in fixed capital.

With capital mobile, as it is now, mercantilism works.  By forcing a trading partner to move its assets, technology, know-how, intellectual property, and R&D to the mercantilist country in order to participate in its market, a country can build itself up at the expense of its trading partner.  Following its accession to the WTO, China has been strip-mining the U.S. economy of high value-added industries and high-wage jobs by doing this.

This is not due to any hatred of the U.S., but rather to advancing its own interests.  It is a double loss for us because what happens is that as industry moves to China, we end up buying goods from China on borrowed money.  The goods wear out, but the debt still needs to be repaid, and we have less of a production base to repay it.

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The fact is that the free traders and the global economy types have had the opportunity to make their case. The United States has followe the prescriptions of the free traders and the globalists for decades now. The elite s promised us a new prosperity if the country did so. The chart above and all the others that go with it tell a different story, a story of capital destruction and dead towns.
The fact is that the policies pursued by the elites have squandered our intellectual and financial capital resources. The computer that I am using is a case in point. Most of the technologies used in the computer and the monito were developed here in the US, yet almost none of the machine is made here. For decades I’ve have watched the intellectual and manufacturing capitol of the country, capitol that took a century to create be sent overseas one way or another.
The usual platitudes about the ‘transitioning economy’ and the such like mask the horrible truth. The truth that is visible in the dead factories and empty lots littering the landscape.


  1. David Foster · August 5

    Warren Buffett had some interesting thoughts about trade, in 2003 and reinforced in 2016.

    …however, some of his more recent comments seem to back off from this and more toward a more conventional free-trade position: possibly due to a desire to disassociate himself from Trump.


  2. Dale Snyder · August 31

    I contend that this whole mess started when we broke Bretton Woods and the last nail was when we repealed Glass-Steagall.


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