7    When Half-empty Is Not Half-full

William Krehm

“Half-empty” is the equivalent of “half-full” only when you are talking about glasses of water. It does not apply to a society where scams and corruption are making daily headlines, and information is severely rationed. Case of government heads and corporate CEOs coming clean on half the evidence must be seen as a failed 100% cover-up.

To illustrate this important principle, we are offering a cluster of seemingly unrelated items. However, in this era of stock-market-driven Globalization and Deregulation (G&D) few things that matter are unrelated.

It all began with a blast of certainty. Respectable academics assured the public that “There was no alternative” – TINA. The assumption was that they had really analyzed the alternatives to G&D including those that had given us our best years. And now it is increasingly apparent that they had taken it all on not wholly disinterested faith. Today, the more conscientious of these teachers, having learned their painful lesson, hang their heads in shame.

The Globe and Mail (21/02, “NAFTA takes it on the road” by Doug Saunders) is still a believer: “With job losses rampant, this year’s US economy may end up turning on the issue of free trade. Before they map out their positions, politicians would be wise to follow [us] down the route of the controversial 1-69 superhighway being built from Canada to Mexico.

“When the construction of the final stretch – Indianapolis to Nuevo Laredo, Mexico – begins as early as this year, it will meet fierce resistance in the Midwest. But it will be heralded in other communities for its promise of trade-driven growth, or at very least a flood of low-pay jobs in places where there were no jobs at all.

“The upcoming presidential vote is very likely to become the NAFTA election. In Bloomington, Indiana, in the rust belt, Democratic candidate John Edwards has won strong support for promising to cancel the deal outright. “He wouldn’t need ads,’ Democratic strategist Greg Hass said of Mr. Edwards, ‘just the word NAFTA is a red cape in the face of a bull. John Kerry, the front-runner, has promised to renegotiate the deal if he becomes president (though he voted for it as senator). And even George W. Bush has started making protectionist noises.

“Back in 1994, when NAFTA came into effect, most US residents paid it little attention. Years earlier, it already had been the subject of a great debate in a hard-fought Canadian election, and the object of passionate hopes and fears in Mexico. But a poll at the time showed that 49 percent had never even heard of it.

“Ten years later, the world has changed dramatically. At the north end of the NAFTA highway, Canadians have largely made peace with NAFTA. It has brought an era of export-driven prosperity. benefiting many regions and sectors, albeit with an even mix of very good information-economy jobs and so-so service-sector jobs.

“At the south end, Mexicans aren’t as pleased. The deal has quadrupled exports and raised wages in manufacturing, badly hurt many parts of the agricultural sector by flooding markets with government-subsidized US crops, and left Mexicans, on average, only slightly better off than before.”

The trouble with such appraisals is that “average Canadian,” “average American” and “average Mexican” are statistical fictions that have never drawn breath. And the welfare of living folks can’t be gauged by their jobs alone. The gap between the earnings of stockbrokers, bankers, CEOs and the factory workers and farmers has widened vastly. The insecurity of most people has increased, as government assets are privatized, and their livelihoods have become mere chips in the games of the mighty. To maintain those average earnings constant, you can decrease the money earnings of the lower 80% of the population provided that the income of the upper 20% pushes up much, much faster. If that happens, the “average” will stay the same. But that does not mean the result is neutral. Or even sustainable. Add to that the heightened pollution of the environment that the multiplication of highway, air and, city traffic brings; the breakdown of public health quickens at the very time that new diseases develop and old ones believed controlled reappear.

The truth is that throughout the world society is becoming increasingly a double-deck affair. At the lower level many workers are losing their newly found unskilled manufacturing jobs to still more miserable countries in Asia and Latin America. At the top, deregulated, the transnational financial industries have flourished by means fair and foul. Corporation books have been cooked by the very auditors in collusion with the audited. A variety of dodges couched in irrelevant similes or misapplied mathematics are used to hide reality. Much of the super-prosperity on high is based on wiping out the historic defences of the underprivileged. The pricing system of securities is in fact based on the capitalization of achieved rates of growth of the disparity between the winnings of financial corporations and the increasing misery of the actual producers.

The Fiction of a Flat Price Level

Another fiction is the notion of a flat price level as a valid goal in a society that is becoming increasingly urbanized and high tech. Without the institutions that large cities alone can provide, a modern society would be unthinkable. And attempting to enforce a flat price level with the “one blunt tool” of interest rates vests power with those who control money creation. For today there is no money but credit – neither gold nor silver is legal tender any more. Those who rule over credit hold the world at ransom.

But back to the NAFTA Highway. “In the US, it often seems as if half the population has woken screaming from a ten-year nap. Here in the middle of America, NAFTA has become the hottest word in the political vocabulary. This year’s election will be won or lost in the deeply undecided states in America’s industrial middle.

“Yet once you’ve driven a few more miles down this road, it becomes clear that the politics of trade are as complex and layered as a highway interchange. The road is not as straight as it seems.

“If you want to know why NAFTA has suddenly leaped into the political menu here, it’s worth following the highway’s path into the industrial west end of Bloomington. For decades, this city of 60,000 has been known for the stark town-and-gown division between the comfortable lawns of its state university campus in the east and the trailer homes and the tiny bungalows of its sprawling industrial district to the west. The past five years, however, have nearly wiped out the blue-collar side.

“Jackie Yenna has worked at the General Electric refrigerator factory in Bloomington, for 34 of his 51 years. It employed 3,000 people, including his mother, at decent union wages. Not far away, the RCA TV plant had 8,000 employees, and a dozen other manufacturing plants made this a boom town.

“The closings began about five years ago. The GE plant was among the first hit, cutting 1,400 jobs as it moved its operations to other countries, mostly Mexico. Then the RCA factory moved to Mexico, eliminating its last 1,100 jobs in 1998. Mr. Yenna was one of the lucky few to keep their jobs. He and his fellow survivors spend their days nervously awaiting the next bad news, counting the years to retirement and settling for mediocre pay raises.

“Across the central US, the story has been the same, with an estimated three million jobs lost since 1999. And now they’re building a six-lane highway to Mexico through the center of the town. The town has risen against it – city councillors have won multiple terms on anti-highway platforms. The jobs of many went down south, and now they have to line up to get jobs
helping build a road that’ll make it easier to move things to Mexico.

“The angry and hollowed-out American Midwest is packed with unemployed voters venting their disappointment with the Republicans.

“Yet Bloomington has not turned into a squalid ghost town of soup lines. Mr. Yenna says most of the guys laid off in his factory have taken advantage of training to find work in cleaner, better-paying industries, or they have started their own businesses. The unemployment rate in Bloomington is under 3.5%, and the main question is whether you have a good full-time job or a bad one.

“The NAFTA superhighway’s route passes through Memphis, and then enters the cotton fields of Northern Mississippi’s Delta, one of the very poorest places in the US. Nobody here worries about the NAFTA Highway taking jobs away. Jobs are scarce enough already. The prospect of a burger-grilling job at a roadside fast-food is a real opportunity. The low wages, the lack of business taxes and Mississippi’s anti-union laws could make the Delta a competitor for companies that want to be cheap and flexible, but aren’t quite up to moving south of the border, perhaps because of the increasing political stigma of such a move. All they need is a decent highway. This is the implication: ‘We want what the guys in Nuevo Laredo have got. We want to be the end of the road.’”

Hope Dies at the Road’s End

“But Mexico isn’t quite what you’d expect either. The stretch of ramshackle cities that hug the Texas border are famously known as maquiladoras, low-wage manufacturing centers created in the 1980s as a tax-free, regulation-proof stateless netherworld that has attracted thousands of poor Mexicans seeking any steady work, even for $2 an hour with no benefits.

“The NAFTA Highway ends in Nuevo Laredo, a muddy enclave of high-security industry parks and cinder-block housing across the border from the Texas town of Laredo. Here you will find a Sony DVD factory, a Caterpillar engine-parts plant, and dozens of other small and medium-sized factories. It is one of the more successful towns in one of the three northern Mexican provinces that have experienced wage growth and increased employment from NAFTA. The rest of the country has seen little benefit. A million new jobs have been created in this region since 1994, at average wages 37% higher than in Mexican domestic industries.

“But the past few years haven’t been good. Many Mexicans are now finding themselves in much the same position as Bloomington’s layoff-plagued workers. NAFTA has put them up against the rest of Mexico and G&D has put them in competition with the rest of the world. Since 2001, more than 240,000 jobs have been lost to Mexican towns deep in the heartland where people will work even cheaper, or to China or southeast Asia. In Nuevo Laredo, a third of the jobs have disappeared, turning it into Mexico’s rust belt.

“‘Mexico is becoming less competitive in the world,’ Jeffrey Davidow, the former US ambassador to Mexico, said in a recent panel discussion. ‘Mexico’s advantage in the world has gone to China. He was referring to India’s recent growth, driven by a highly educated work force and high-tech industries a step beyond mere assembly. But it’s not about to happen in these northern towns. Universities, training programs and incentives to move workers above the bottom rung don’t exist. [Our italics.] And the commitment of Mexican authorities to keep taxes low guarantees they’ll never be created. At the end of the long road, the Mexican border is proving to be not so much a source of fear as a subject of pity.”

At this point, however, the writer, Doug Saunders, gets carried away with his highway-ladder analogy, mistaking it for a runway which will allow the economy to become airborne:

“The question that Mexico is now beginning to ask itself – how to move beyond the prison of assembly-line labour – has already been answered, it turns out, by the people of Bloomington. The Indiana residents may not know it yet, but they have followed the path of their Canadian neighbours, out of industrial labour into a service economy.

“A decade ago, Bloomington’s largest employers were General Electric and RCA. Today, they are the state university, followed by a major hospital and then a large number of new high-tech industries, most of them in biomedical and computer-related fields that have made Bloomington’s east side a boom town.

“While a few of the industrial workers may be upset about the danger of more jobs disappearing to Mexico, most of the opponents say the biggest threat is the prospect of more heavy industry. They see that economy as a thing of the past. Bloomington offers a cultural, educated, natural environment that attracts companies in the knowledge-based economy. Put an interstate through here, and you’re just going to homogenize it.

“Bloomington is, in truth, a place much like the areas of Ontario perched at the top of the road. In much of Canada, the growth is in the service industries – an equal mix of really good jobs, requiring education and skill and offering better pay than the old blue-collar work; and bad but plentiful jobs, requiring little skill and providing rudimentary salaries and little security.”

“The new economy, with or without NAFTA, has taken us down a strange and winding road, where Mississippi wants to be Mexico, Mexico is turning into Indiana and Indiana is trying to be more like Canada. Meanwhile, Canada is struggling to stay aloft at the top of the highway.”

However, it is an illusion that Canada is anywhere near the top of that highway. The head offices of many of its great corporations have long since gone south. As have entire industries. So let us note what is afoot in those countries in a position to creep up on the current economic mega-powers. They may end up with glasses that are really full for only their dominant social groups. Or perish in the attempt to do so.

On the Use and Misuse of Mathematics by Economists

But first a word on the misuse of mathematics by economists, and how we can know whether our glasses are half-full or whether there in fact there is any water in them at all.

It all has to do with how banks and others in the financial sector have come to incorporate into the market price of their shares their supposed knowledge of the future. This they manage by dealing less and less in existing goods and services essential to human life, than in the rates of growth of the market values of securities, real or manipulated, on claims to such items. The “rate of growth” of the market value of a security to some chosen variable is known as its “first derivative”; and the rate of growth of that rate of growth, as the “second derivative.” The term “derivative” is borrowed from differential calculus: it means “rate of growth” of one variable with respect to another. Thus a derivative to the 10th power, is the rate of growth of the rate of growth of one variable with respect to another – the same process being repeated ten times.

Market operators can manipulate the stock market these days by buying from their friendly bank just the future of the rate of growth in the value of any stock or bond, or of the yield on a given bond in a foreign currency. In doing so and investing in a bet on the future increase in the value of such an abstracted aspect of a bond or a share rather than in the security itself, they can achieve spectacular results:

1. It can give them far greater leverage for their plays. They can place their bets indirectly on an aspect of a far larger number of shares or bonds than if they had to buy the actual security. In this way small groups of very wealthy gamblers have managed to outgun central banks and bring down a whole series of currencies like the British pound and the Italian lira. Hedge funds, open only to those prepared to put up many millions of dollars, have been a feature of the financial world for at least two decades.

2. Once their view of the future growth rates (derivatives) is incorporated into the market price of a corporation share, the slightest shortfall from that forecast market value of the share will bring down the whole house of cards.

There is a very simple but extremely elegant mathematical function that incorporates future increases of growth rates into higher powers to infinity. Its principle is simple: the rate of growth moves up in tandem with the value already attained by the underlying function, as does the growth rate to the second order, and thus on and on to infinity. It is in fact the mathematics of the atom bomb: in the bomb the rate of growth was of unstable isotopes of uranium released which triggered further increases in the growth rates of such releases until the whole blew up over Hiroshima.1

The deregulation of our banks that allows them to engage in just about every aspect of the stock market – including notably brokerages and underwriting and merchant banking – has had tremendous implications on the “Is the glass half full or half empty” problem.

To begin with in a price-model that strives towards exponential growth, it is impossible to define what a glass “half-full” might be. It is of the nature of an infinite series in general and of the exponential function in particular, that you can cut it in two and each half will have the identical value as the whole, since by definition there is no greater or lesser infinity.2 Thus the very concept of “half” ceases to exist. And secondly, whatever the approach to market valuations of shares or GDP or whatever that incorporate endless future growth into present prices, the exercise becomes increasingly unstable for the same reason as the bomb dropped on Hiroshima in 1945.

The Wall Street Journal (26/02, “China’s Price for Market Entry: Give Us Your Technology, Too” by Kathryn Khanhold) lifts a corner of the curtain on the negotiations setting the patterns of world trade – and much else.

“Beijing – In his two decades pursuing contracts in China for General Electric Co. Delbert Williamson’s strategy was always simple: Sell the most power equipment at the best price.

“But by the time Mr. Williamson sat down at a banquet at the historic Dioyutai State Guesthouse in Beijing last March, to celebrate the award of a $900 million contract for high-tech electricity turbines, the formula for GE’s success in China had changed drastically.

“In addition to offering a competitive price, Mr. Williamson had to agree to share sophisticated GE technology with two Chinese companies that wanted to eventually make the equipment themselves.

“To be considered in the bidding for equipment contracts totalling several billion dollars, GE and its competitors were required to form joint ventures with the state-owned Chinese power companies. GE was also required to transfer to their new partners technology and advanced manufacturing guidelines for its ‘9F’ turbine, which GE had spent more than a half billion dollars to develop.

“‘It was a difficult negotiation,’ said Mr. Williamson, 65 years old, who retired this month after 45 years with GE. ‘They’re interested in having total access to technology and we’re interested in protecting our investment in that technology.’”

China’s Immense Gravitational Pull

“Chinese call it [exchanging] ‘technology for market.’ China’s leverage is that with its 1.3 billion population, it is – along with India – the greatest potential market and producer in the world.” And those two things – the gravitational pull of its potential market, and the equally great menace as a potential supplier competing to fill the high-technological needs of the rest of the world may determine the survival of the human race. The immense populations of a few countries like China, India, and Brazil with what are becoming open-ended societies provide the platforms for challenging the United States.

“Such demands of sharing advanced technology as a condition for present purchases fall into a gray area of international trade law. China officially agreed to phase out many tariffs and technology-transfer requirements as part of its entry in December 2001 to the World Trade Organization. But she didn’t sign a key piece of the WTO agreement that would have prohibited such demands. Its government negotiators have continued to ask foreign negotiators to transfer technology and set up research centers to train local engineers.

“That’s the trade-off they have to deal with – short-term sales for long-term competition.

“In an effort to gain easier access to markets in China, Motorola Inc. has poured more than $300 million into 19 technology-research centers. A Microsoft Corp. center in Beijing now employs more than 200 researchers. Siemens AG has spent more than $200 million since 1998 working with a Chinese academic institute to develop a mobile phone technology compatible only with the phone systems in China.”

In this, China is to an extent following the example set by Japan in the 1960s and 1970s. The difference is in the overwhelming population mass represented by China today, and the cheapness of its labour. Occasionally the US government bans the licensing of technology on defense grounds.

This is playing a key role in China’s efforts to step up its power generation, at a time when the market within the US itself for power generation equipment is unusually weak.

“In simple terms, a turbine is any motor in which air, wind or steam spins blades on a shaft to create energy or perform a task – from windmills to pump water to hydroelectric generators that use the force of water behind a dam to make electricity. Modern turbines are highly complex – 40-ton devices capable of generating enormous amounts of electricity using
super-heated natural gas to spin the shafts. The precise shape of three rows of blades inside a turbine, temperatures reach¬ed by the fuel powering them, and the strength and composition of the materials used to make them dramatically affect the level of power each design produces.

“The small gas turbines produced by a partnership between GE and a Chinese government-owned company in the 1980s were capable of generating enough to power 40,000 homes. By contrast the GE gas turbines sold to China today, while cheaper to install and cleaner for the environment, generate enough power to serve about 300,000 homes.

“GE has formed a separate joint venture with Shenyang Liming Aero-Engine Group Corp., under which GE is permitting the Shenyang venture to manufacture the second and third rows of blades inside the turbine, technology that GE initially did not want to give up, according to people familiar with the negotiations. Included in the transfer are technical drawings of a key cooling system and the highly advanced technology of the blades.

“But the Chinese negotiators eventually accepted that they wouldn’t get the most secret system for the first row of blades and the technology behind a thermal protective coating for those blades. US export rules prohibited GE from sharing that, because it is used both in the power turbine and aircraft engines. Instead, GE will manufacture the first stage blades in South Carolina and then ship them to the Harbin factory for final assembly.

“Mr. Immelt says that China won’t be able to fully exploit what it learns from foreign bidders until its engineers are able to replicate or build upon the advanced technology they do obtain. ‘That’s going to take some time,’ he says. By the time the Chinese companies accomplish that, GE will have developed significantly more complex new designs.” [Our italics.]

How then are we to classify this trading of short-term market for longer-term strategic security, both commercial and military? Is it a case of a half-empty and half-full glass? Or is it an example of an economic system ensnared in a compulsion towards exponential growth that must expand ever anew to avoid collapse. And transplanting that model to countries with the vast populations of China or India on those terms can lead to disastrous consequences that we don’t even dare spell out. And yet we must, because a model launched on greed-powered gambles can lead the world to a catastrophe that we simply are not facing. It could leave our half-empty glasses not half-full, but shattered, with much blood rather than water spilled over the landscape.

William Krehm

1. The expression is not hard to understand:

Differentiating (i.e., taking the first rate of growth): the first term 1 as a constant doesn’t grow hence it becomes 0, the second simply x grows as x grows and becomes 1 to replace the original first term that has vanished, likewise all succeeding terms move to the left if we take their growth rates, as will the second power growth rates, and since it is an infinite series, there is an endless number of terms on the right to replace those that disappear on the left as we move by single steps to higher derivatives. of the power of x. [The way of differentiating powers of x to x itself is taught in high schools these days.]

As time marches on, the growth derivatives embodied in the present price are put to the proof. If the market price in any year does not live up to the prediction already embodied in its price, the price collapses, and you have a major sell-off of the stock market and the economy. That is particularly so since most securities in one way or another already serve as collateral for further deals and are incorporated in the price of other stocks valuated in the same way. Derivatives have long been recognized as the instruments of explosive power, but banks and governments have resisted all recommendations that they be regulated. Since they are not regulated, one of the most common scams in which Canadian banks were involved in the Enron scandal in the US was seemingly retaining their interest in common shares while in effect selling unregistered derivatives that allowed them a secret exit with their loot from the deal. Derivatives are in fact. amongst much else, the secret revolving doors in high finance. The resulting hazard is increased for banks loaded up with government bonds bought entirely on the cuff.

2. To handle the problems of infinity George Cantor during the years 1871-84 created a completely new mathematical discipline, the theory of sets, in which was founded for the first time in a thousand years of arguments, back and forth, a theory of infinity with all the incisiveness of modern mathematics. When we equate two sets of things, we mean nothing more than this, that between the members of the first set and those of the second a one-to-one correspondence exists. First Cantor discovered denumerably infinite sets (Infinity by Hans Hahn, The world of Mathematics, edited by James R. Newman, Simon & Schuster, NY, Vol. 3, p. 1594). In the case of this type of infinity there are as many numbers in the set of all cardinal numbers as in that of all even cardinal numbers. You equate 1 in the first set to 2 in the second set, 2 in the first to 4 in the second, 3 in the first to six in the second and so on to infinity. You have established the correspondence and since the second set will not run out of even numbers since we are talking of two infinite series, the equivalence is perfect.

But then he discovered other types of infinity and had to distinguish them. So he called his first type Aleph Null.

This other type of infinity lurks in the spaces between cardinal integers. The space between any two cardinals by infinite decimal factors proves that it is not denumerably infinite, i.e., has a one-to-one correspondence with the cardinal numbers. This infinity is called the continuum and designated by c. C infinity is greater than Aleph-Null infinity. In this article we are talking about Aleph-Null infinity, and we should always at least try to know what we are talking about.

— (shortened) from Economic Reform, April 2004