As for a solution (creating demand abroad) consider the Marshall Plan:

- Post-War European countries effectively bankrupt/destroyed infrastructure and economy (akin to many 3rd world countires today)
- credit extended for reconstruction effort
- meant job creation, and reviving demand among consumers in Europe (i.e. creating buying power)
- meant a stimulous for US companies who exported captial goods to Europe
- meant much of the US supplied funds never went overseas, but instead extended as credit to US companies on behalf of Europeans. (thereby avoiding concerns of corruption

Thinking about this issue reminds me of your previous post about Jack Welch’s barge. An interesting exercise is to turn it around; instead of a barge carrying modern production equipment to underdeveloped nations, think of a barge bringing poor workers here. The net effect is the same–low wage labor mated with modern production equipment and expertise owned by US corporations–but it paints quite a different picture regarding US labor.

Would the effect be the same if the plant and equipment were owned by foreigners? If the foreign owners spent their profits on imports perhaps there would be no net loss in wages and employment by US workers–only a shift into export industries. When you think of it this way it isn’t so hard to see why our “trade deficit globalization” redistributes income away from workers. Indeed, it seems to me it depresses wages here *and* in the surplus nations.

I try to understand what “the real challenge of creating mass consumption markets in developing countries” means in policy terms.

If it is about allowing for a little bit more of the Chinese surplus trickle down a bit more into Chinese consumption then I am all for it, though we must find a way for China to refrain from following the US path of buying so many cars. They consume more… they buy more cars… demand for oil goes up… up goes the price of oil… up goes the trade deficits… and up goes the carbon in our air. Also, if more consumption in developing countries is going to be generated the American way… by the consumer taking on more debts… instead of those funds going to projects, infrastructure and other growth generating areas that lead to decent jobs… well count me out.

When Pailey writes “The challenge is getting corporations to invest in developing countries, but for purposes of producing for local consumers. That requires expanding markets in developing countries, which means tackling income inequities and getting income into the right hands.”, he has a point, but only if we feel that this is the role that corporations should play, and want to live with the long term consequences of such role allotment. Myself, having seen the big paychecks that are still paid out in a financial crisis, I harbor my serious doubts that the corporations are the optimum income inequality tacklers.

“Labor standards, minimum wages, and unions are part of the solution” Absolutely! Though, let us be frank, that unions will “engage in decentralized wage bargaining that tie wages to firm productivity” might be stretching our argument a little too much.

“Government spending can also help, but its role is limited” Not at all that sure, when it is primarily governments that are building up so much foreign reserves… instead of…

Finally I would not denigrate Humpty Dumpty too much. We all, when we choose a word, choose what it means.

One cannot look with disfavor upon businesses who have gone abroad to leech upon the funds of U.S. consumers. I think that over the last few weeks it has become clearer that this umbilical cord is drying up. Multinationals are stuck out there and having a fine old time of it.

We should rather focus, when speaking of saving, that it results from having income greater than expenditure; a definition of poverty flowing from Gregory King through Ernst Engel. Yes, the poor have expenses greater than income in every social survey I have ever looked at. Presumably it is unremarkable. However, this week I had occasion to walk my students through calculating out of the Consumer Expenditure Survey, using of course the 2006. In 1996, expenses > income below 22,000 (hh inc). By 2006, astonishingly, the crossover was above 40,000! I’m afraid that this phenomenon, rather than the level of wages, is primarily responsible for the insufficiency of global demand you refer to, Solving this poor borrowing problem of parasitic lending, wholesale, here in the U.S. seems equally important to worldwide demand. As things stand, financial “services” are a much more of a pandemic than fair labor standards could ever become.

In a review of Krugman’s (otherwise well presented) introductory text on trade theory, I attempted to convince Krugman that there was something essentially bizarre about this well-circulated hypothesis.

I think Thomas Palley has caputred the core concept in arguing that the use of national income accounting concepts confuses mathematical categories with economic analysis. And further, there is a confusion between movements in the sphere of ciruclation and those occuring in the sphere of production. Conventional trade theory grasps only the circulationist arguments/concepts while failing to analyze the, normally, primary productionist processes.

Which is to say, once again, that neoclassical economics has little to offer, particuarly at the macro level–and that conventional neoclassical trade theory, at best, simply clouds thinking on trade, production and absolute advantage.

I’m not an economist, but this is first logically sensible thing I’ve read on this subject in a year.

The accounting consequence can’t be denied – although even that gets muddled. From this perspective, there obviously can’t be a global savings glut as a consequence of deficient US saving that is offset by non-US excess saving.

Yet Bernanke persists with the global savings glut paradigm.

This is not only false from an accounting outcome perspective, but inadequate from a causal perspective, as suggested in your article.