Brexiting it Down: The Rise of Right-wing Populism, the Continuing Crisis of Globalization, and the Need to Stop the Unfettered Flow of Global Capital

Despite all rationality, the UK decided to exit (Brexit) the EU today, and in the process may not have only embarked on a painful self-immolation and eventual dissolution of its own Union, but also sent signals to the world that the 30-year crisis caused by unfettered capitalism and globalization may finally start to reach its final breaking point.  OK, well, that was sort of dark.  Let's start with the optimistic view.  Despite today's market turmoil, it's possible that global capital markets will rebound rather quickly.  It's also quite possible that this is just a momentary blip in the great EU experiment and things will continue on as normal there - well, if by normal, you mean narrowly averting crisis after crisis.  It's also possible that even if the Brexit event causes Europe to suffer, the effects will be contained and the beast that is our global economy will continue to roar on. Taking the optimistic view, one could also point out that Britain leaving the EU really shouldn't be that be of a surprise.  After all, Britain was always a peripheral figure within the EU and is not really a "core" member of the Union.  In addition, there's reason to believe that whatever their reasons for leaving the EU, this is just the "British being the British."  After all Great Britain, particularly England, has never really considered themselves "European" and there's massive social, political, and economic differences between Great Britain and the rest of Europe.  For one, it, the Brits have never gotten over the loss of their self-esteem as the world's greatest power and unlike Europe, they have a unique political history over the past 70 years that has seen the dismantlement, rather than the maintenance, of its social safety net and a relentless attempts by their political elites to disempower their working and middle classes that is very very foreign to the Continent.  So, in essence, this could just be the effects of 70 years of political and economic decline and an atavistic hope of a return to a strong and independent Britain, and not as I will argue, below, an important and powerful blow to globalization and the move towards greater world integration of our trade, labor, and capital markets.  This may all be the case and if so, we shouldn't read too much into today's events.

However, the problem with this analysis is that as unique is Britain is, the forces that causes the British to vote to Leave the EU are not contained within Europe.  In fact, in an even scarier turn of events, and my guess as to why the world's global titans of finance are panicking, it's a sign that the masses of voters in the West, and particularly and most importantly the voters in the world's biggest economy, the US of A, have finally reached the point where they can no longer be reasoned with.  For example, if the British are stupid enough to shoot themselves in the foot and angrily leave the EU despite the obvious economic and political repurcussions of such a decision, what's to stop the Americans from doing the same and electing Trump.  Of course, in the US, the stakes are higher, because not only would America be shooting itself in the foot if they elect Trump, but they would be taking an AR-15 rifle and firing indiscriminately into the crowd that is the global economy.   So what are these forces and why have we reached a new stage in the current global economic crisis?  Quite simply, to put it in Marxist terms, they are the dialetical responses to the three great prongs of globalization and the Great Neo-Liberal project: free movement of goods (free trade), free movement of labor (immigration), and the most important (and least understood and discussed prong) the free movement of capital (completely integrated financial markets).

I obviously can't reach inside the head of the British voters who voted to Leave, but I can fathom that it has lot to do not only with frustration with integration with the rest of Europe, but also with the forces of globalization that have been decimating its middle and working classes for thirty years.  Economic and political integration, whether it be regional (the EU) or global (globalization) is a messy process that creates a whole lot of "losers" as well as a few very very lucky "winners."  The British see free trade and open borders and see jobs leaving their shores and going to cheaper places in Eastern Europe, and at that same time, those same Eastern European are coming over to THEIR shores to take their jobs (those furriners comin' to take our jobs away! sounds familiar?)  They also may have noticed that economic integration with a tottering Europe presents them with the never-ending prospect that because their financial systems are somewhat linked (Britain is somewhat of an anomaly here because it itself is a global financial hub) and maybe they don't want any part of that.  These are all solid, if somewhat misguided reasons to want to delink from Europe and again,  while Britain delinking from Europe is unlikely to really help them their economy, (and will certainly cause problems for the EU economy), these facts alone don't necessarily mean we are heading for a full-scale world economic meltdown.  The British would probably muddle through (and likely come to their senses) and the EU, with its core intact, would continue on trying to put out the fire that the 2008 US financial collapse exported to their shores, but wouldn't collapse by itself.  The problem, however, is that it appears that voters in very, very important countries in the West are starting to throw off their shackles and embrace a short of right-wing populism that is extremely dangerous to the continuing stability of the global economy,  In essence, the tripod of globalization, free trade, free movement of labor, and free movement of capital may be coming under a new sort of attack: one, unfortunately, that is not going to offer the solutions we need, but one that may have the effect of burning the entire thing to ground.   TAnd, of course, if Americans elect Trump, which the British vote seems to demonstrate really could happen, that fire is likely to spin out of control unless the powers that be do something to stop it.  To explain my thesis better, let's take the three foundations of globalization one by one and explain how they are causing such resentment, instability, and political turmoil. In particularly, we need to understand why the third tripod, the free movement of capital is causing most of these problems, and yet, is the only tripod of globalization that is not under intense attack.

Free Trade:
Every economist worth his salt is going to tell that global free trade is good and protectionism is baaaad.  And, in the abstract at least, they are totally right.  I'm not going to sit here and argue with people a thousand times smarter than myself like Paul Krugman that we need to reject free trade and embrace protectionism.  For one, free trade is great because it leads to greater efficiency and cheaper consumer goods.  It also has a tremendous effect in terms of lifting millions of people out of poverty in the developing world.  On a political level, there is strong empirical evidence to support the notion that a world in which free trade flourishes is a much more peaceful world.  Just as you much less likely to go kill your neighbor (who may some really cool stuff you could take!) when it's easier just to trade something for his cool stuff, it's also much less likely that a country will go to war with another country that is its important trading partner (probably why it's likely that despite their antagonistic relationship, China will never go to war to the US: they need our people to buy their cheap stuff.  So, I am not here to argue that free trade is bad and that, as per Trump and Sanders, we need to put up massive tarriffs to keep foreign goods out.  I am, however, going to argue that free trade has a dark side to it that makes it extraordinarily dangerous.  Most obviously, the effects of free trade are not felt evenly - there are clear winners and there are clear "losers".  In the US, those "losers" have so far been our manufacturing workers who have seen their jobs disappear - eventually globalization and the free trade of services will hit our middle and even the upper-middle classes and jobs like accountants and lawyers will also disappear.   Of course, free trade champions will say that the lose of all those jobs will be fine in the long run because not only will we get cheaper stuff (how are we going to buy them without jobs though...hmmm) and because a fully functioning and healthy free trade global economy will create new jobs that will replace those old jobs (assuming the machines don't take those jobs).  Protectionism won't help, they argue, because that will just lead to self-destructive trade wars so, all you little people out there, just suck it up, accept that those jobs are gone forever, and carry on.  Except that people, these "losers", don't seem to want to "suck it up" anymore.  In fact, they are downright angry: angry enough to lite the whole damn house on fire (see e.g. Trumpism). Now, traditionally, in the West, at least in Europe where they don't have to rely on race-baiting and the so-called "culture wars" to keep the working class dazed and confused, the way to deal with this situation was through the strenghtening of the welfare state as epitomized by Tony Blair's Third Way.  Yes, free trade will create some losers and a whole lot of job loss, but we'll ameliorate all those problems through job training, a strong social safety net, and government healthcare, etc. It seemed to be a workable solution and most of Europe, particularly the smaller, more homogenous countries of Europe seem to be doing fine on that path.  However, even this solution runs into problems, particularly because as we all know, this solution relies on a very  progressive tax structure that takes taxes one social class on behalf of the benefit of another.  This is particularly a problem where you have a heterogenous population.  As any astute follower of American politics will tell you, it is incredibly different to tell one social class (mostly made of a traditional dominant racial ethnic group) that they need to pay high taxes so as to support the development of another social class (that happens to be made up of another racial and ethnic group).  So, long story short, we're never going to have a third way type solution in America.  Despite the fact that there are more whites than minorities on welfare, Whites have been trained for way too long to believe that welfare is for "those people" to ever come over to a Sanders' type solution.  It's just not going to happen.  The problem was "contained" in America for a long time as the Republican elites were able to use race-baiting, dog whistles, and the "culture wars" to keep the working class whites so dazed and confused that they stayed in line.  However, as the rise of Trumpism shows, that's no longer the case.

So back to free trade, which as I mentioned above is the backbone of our global economy (and quite likely one of the biggest reasons we are living in an age of global peace - yes, despite what you read in the media, the world has gotten a lot less dangerous in the past 35 years.)  That backbone, if not starting to break, is starting to develop some serious scoliosis. For one, voters seem to be rejecting it en masse.  Secondly, one of the other byproducts of free trade (and the free movement of capital) is that it creates some really big "winners' i.e dramatically increasing inequality.  Rising inequality, though not only caused by globalization (it's also a product of regressive tax policies) is bad for a number of reasons, most importantly because it tears away at the social fabric and creates anger and resentment (see again, Trump).  In addition, as I will get into more below, free trade and the free movement of capital are entirely different things and policies that we may try to put in place to ameliorate the problems of free trade are often going to be completely undone by global markets.  Want to elect a Leftist government that's going to heavily tax the rich and massively invest in education and infrastructure?  You aren't going to make a lot of friends in the global financial world.  In fact, you will probably get severely punished for it as capital drains from your economy in search of other places that will get higher returns.  Want to say "screw it, we'll do it our way anyway" - you don't need to look far to see what happened to Greece and Argentina.  I could deeper and deeper into this, but the sake of this essay, let's just say that the bastion of free trade is on shaky ground and it's not unlikely we will see the return of protectionism in some form or another quite soon.  In the meantime, voters, particularly in the US, are starting to realize that none of their politicians have any answers to the problems posed by free trade and out of anger, and since the Left can't do much about it (due to the free movement of capital), they are going to increasingly turn to right wing populism and the rejection of trade integration, regardless of the powers that be telling them that "no, you don't understand, free trade is goooood for you."

Free Movement of Labor:
The second prong of globalization is closely linked with the first: the free (or semi-free) movement of labor.  In essence, the two are like peas in a pod because while free trade takes jobs to places that are cheaper to produce things, open or semi-open borders takes people (who are cheaper in terms of wages) to places where the jobs are to be found.  Just as with free trade, the free movement of labor is also a "good" thing in the abstract.  We want people to be able to move to places where the jobs are.  It's more efficient to have a Mexican undocumented worker pick our vegetables for $2/hour than hire an American to do that.  It's more efficient for a pub in London to hire a Polish immigrant to serve beers rather than hire an Englishmen to do the same thing.  In general, immigration to a country is a positive public good - any country that is gaining immigrant workers is also gaining new consumers, new tax payers, and new people to support of teetering social safety net.  However, unlike with free trade, the dark side to the free movement of labor is much easier to spot, particularly for the people who are losing jobs to immigrants.  It doesn't take a hard core Marxian analyst to see that having people from different social and ethnic groups enter into rich countries with dominant and established groups from very different racial and ethnic groups is going to breed a lot of racial and ethnic strife.  While I disagree with the Marxists when they argue that "capitalism created racism" (racism is something completely and totally embedded in the human psyche and the product of hundreds of thousands of years of evolution), it's not hard to see how unfettered capitalism breeds more ethnic strife as, for lack of a better word, the bourgeosis is able to use racial and ethnic differences to keep the working class divided and at its each other's throats.  The European example is interesting because technically, the Polish people coming into England to take those pub jobs are of the same race....but they are certainly not of the same cultural background.  In America, of course, this struggle plays out in our endless war over "illegal" immigration.  The powers that be have generally been able to keep a lid on this boiling pot of resentment through immigration laws.  No one but the craziest of right wingers is going to argue for full and total open borders.  We try, well, at least make an attempt to limit immigration through laws that keep a whole lot of people out and deport a whole bunch of people who came here 'illegally." In Europe, well in Western Europe, at least, they do have open borders but it hasn't been a huge problem because of the simliar racial and ethnic makeup of say, an Austrian and an Northern Italian.  However, as our borders begin to become more and more pourous and immigrants continue to stream in from places like Africa, the Muslim world, and Latin America, the tension is beginning to mount.  Now, if the above solutions to the problems of globalization were working (stronger welfare state), the tension could probably be contained.  However, even that solution breeds its own problems as it becomes easier to argue that immigrants are just coming here to take advantage of our generous welfare benefits (they're not, for the most part - they are here to work).   Add to this mix a very volatile situation in the Middle East and some very difficult problems with assimiliation in Europe in particular with immigrants from the Muslim word, and you have a recipe for disaster.  Long story short, expect a lot more ethnic strife, particularly in America, where a declining white majority doesn't seem to be taking the "takeover" of their country very lightly.  While I'm not predicting a race war, I think you will see a lot of right wing populism playing on fears of immigrants to their advantage.  Trumpism, in that sense, is not going away.  Racial and ethnic strife is, of course, bad for everyone, but it's particular bad for the global elite who have a lot to lose if the world descends into a quasi race war.  It's also a big problem for them because business, particular, in the US, depends on semi-open borders. It's no coincidence that the Open Borders Project is a right-wing funded project.  A radical shift towards completely closed borders is bad for business, and even Paul Ryan knows this.  While Trump's idea of a wall is absurd, it's a big possibility that if he gets elected, there will be mass deportations on a scale that make Obama's look like child's play (and Obama has deported a LOT of people).  The same thing is likely to happen in Europe, as not only do Europeans have to fear the loss of jobs, but there is the added dimension of the terrorist threat.  In short, the second prong of globalization is nearing collapse as well.

Free Movement of Capital
Unlike the first two prongs of globalization, the third prong, the unfettered flow of capital throughout the world is doing just fine, thank you.  As technology progresses and more economies integrate themselves financially into the global financial system, global capital continues to move around the world at a dizzying pace.  Unless you are in North Korea, it is impossible to escape the power of the global capital markets.  Considering that the free flow of capital and the unregulated nature of our financial markets pretty much caused the 2008 collapse, it's really head-scratching why this prong of globalization continues to march on without a missing a beat.  Now, there were a few post 2008 attempts to stem the tide:  Dodd-Frank did some things really well but it was really just a patch on a larger problem - an important patch that is probably Obama's second greatest legacy and a law that will likely limit the effects of our next financial crisis (yes, Virginia, we are going to have another financial crisis) as it does nothing to stop the free flow of capital across borders.  It's likely that one of the reason there's been no reaction to the free movement of capital (outside of some people railing against the IMF and some Europeans angry about the collapse of their economies) is because it's an abstruse topic and not many people either understand it or have the political power to change it.  I mentioned Dodd-Frank - despite it's weakness, Wall Street absolutely hates Dodd-Frank and wants it immediately repealed.  Not something you see in the news a lot, right?  Certainly, not as visceral and tangible as the effects of free trade and more immigration.   There's not a lot of political will to fight the power of Wall Street either, particularly when many of the center-left parties in the West, are in essence captured by the financial sectors they are supposed to be controlling.  Bernie Sanders was one of the few politicians who railed against Wall Street (for the right reasons) but even he didn't seem to fully grasp the problem.  He talked a lot about reinstating Glass Steagall and breaking up the big banks - important policy solutions of course, but kind of small potatoes and sort of like closing the barn door after the horse has left.  That horse, by the way, is the unfettered movement of capital across borders and another part of the reason that this problem is so difficult to solve is that it's going to take massive international cooperation to put an end to this cancer.

Now, a lot of economist like to argue that the free flow of capital is just like free trade - it promotes efficiencies as capital has the right to move wherever the returns are the greatest and this in turn, means (in a rational world), investment capital is going to the all the right places rather than being squandered by government waste.  But the free flow of capital is a different beast altogether and creates some very serious problems for the health of our global economy.  For one, as I noted above, the free movement of capital essentially means that any of the long-term solutions to the problems cause by the globalization of trade aren't really that sustainable.  You want to make massive investments in education and infrastructure and job training - that's expensive stuff and it's going to take a huge tax increase and a lot of time to see benefits of those investments.  Global capital, to put it mildly, isn't going to like that and yes, they will punish you.  Let's say you can't get the tax law changes necessary to make sure investments - you're going to have to borrow a whole lot of money and the financial system has a lot of very, let's put it mildly, effective ways of making sure not only that you pay it ALL back but also that that money goes into a direction they like (namely into their pockets).  Want to say screw it and say we'll do it ourselves without the financial markets?  Good luck with that.  Don't want to pay back the banks?  Just look at Argentina - they're STILL recovering from the 2001 crisis and in addition, funnily enough, court systems around the world have the strangest habit of always siding with the banks.  So, do, by the way, the IMF, the World Bank, the US Treasury, and the Fed. No ONE wants to cross the banks.  Bottom line, any attempt at a Left-based approach to stem the losses of global trade is going to run into some serious roadblocks.

The second problem with unfettered and totally integrated financial markets is that they breed instability and global financial disorder.  This might seem counter-intuitive since economist like to argue that the freer the market, the more efficient and orderly it is.  However, that assumes that people, and in particular investors are always rational.  They are not.  Herd-mentality among investors is a common occurence and just a rumour of a financial collapse is enough to send investors running for the hills, despite what the actual numbers may say.  Just ask South Korea and the rest of Asia about that in 1998.  Our global financial system is also highly unstable because a lot of the capital flowing around the world is not investment capital (capital going into things like building factories) but short-term capital, so called fast money.  In fact, most of our financial system, as we know from 2008, is built on speculation.  And speculation, while yielding short term gains in many cases, is almost always doomed to lead to some sort of crisis.  Another source of instability is the failure of the IMF to do its job (and orginal mandate) and actually regulate the global financial system.  Since the IMF has adopted the Neo-Liberal consensus of free markets and the free movement of capital, they are not going to step in to help any country in the throes of being tortured by the financial markets.  In fact, they are more likely to create even more instability by continuing to encourage financial markets to engage in rampant speculation without facing any consequences - something economists call moral hazard.  Finally, and of course, the thing that most Americans understand, is the fact that our financial system is unstable because the free flow of capital has encouraged banks to consolidate to enormous sizes (too big to fail) so as to fully take advantage of the very lucrative business of speculation.   While I'm not a huge fan of breaking up the banks, it's certainly a moral hazard when the banks can engage in global speculation and then be expected to be bailed out when those speculative investments don't work out as planned.

But perhaps the biggest problem with the free movement of capital is contagion.  The unfettered flow of capital is perhaps the viral DNA that can carry problems in the banking system in say, Iceland, all the way to the rest of the world. It's also part of the reason why today's Brexit caused the US stock market to drop 600 points today.  My other theory is that the financial world finally realized that a Trump presidency was a distinct possiblity and while, I'm sure they are pleased as punch about his plan to repeal Dodd-Frank, they also probably shat their pants at the thought of all the global geo-political and global economic chaos that maniac could cause.  The total integration of global capital markets is why a crisis in any part of the world always contains the possiblity of taking the rest of the world down with them.  Add to this the herd effect, our entire global financial system is essentially the equivalent of a nuclear bomb (not a hyperbole).


Now, for a while, we had solved these problems.  In fact, after the devastation of world war II, the powers that be in the West sat down and said "hey, you know, the Great Depression caused this war, so maybe we should stop another from happening." They created the Bretton Woods institutions and instituted a long standing policy of having the countries of the West work very closely together to coordinate their monetary and financial regulatory policies.  That's all gone now.  The IMF now mainly works as the collection agents for the banks.  The World Bank is there but it's role is minimal, at least in terms of regulating global financial stability.  Once in a while, you'll hear some crank economist talk about capital controls and the need to put a halt to "fast money" - put a tax on global capital flows so as to slow it down, but they are dismissed as insane and unworkable ideas.  In many ways those that laugh at any attempt to slow down financial capital are right.  It is an extraordinary difficult problem to address  that requires intense international cooperation.  In essence, we would need to get all the major economies of the world to say "ok, we are going to sit down and coordinate ALL of our monetary policies, financial regulatory policies, return the IMF to its original mandate, coordinate our currency rates so as to stop rampant currency speculation, and oh yeah, while we are at it, we're going to break up all our big banks and introduce a highly controversial tax on the movement of capital.  No problem - we can do this!"""- we probably only dealt with it in 1945 because we saw what devastation could occur and the world was probably in the exact right point where a new financial global order could be created.  2008 certainly wasn't a big enough crisis.  The next one might be different because not only will it bring another global recession/depression but it also has the ominous sounds of fascist boots marching in tune with it.  For our sake, let's hope that the powers that be recognize what is happening and get their asses in gear towards having that second Bretton Woods conferences.

The solution is clear: globalzation, while not a bad thing in itself, needs to be contained. The negative effects that it has in terms of job loss (free trade), ethnic strife (immigration), and financial crisis (the free flow of capital) can, in fact, be contained and brought to order.  While I am a Leftist to the end, I understand that the solution lies in the people that have the power to make the changes necessary: that is, the global elite.  They need to realize that we have to come to a point where we where need a Bretton Woods Part II: one which  has the power and will to control global capital towards the greater good.