I'm not going to mention any names, because telling the truth about right wing economists brings you, no joke, death threats and slander. No group of people who are otherwise respectable members of the academic sphere have so many unsavory friends as right wing economists. One right wing economist, who like many of them is a very smart guy who is paid to say very stupid things, told people in his book that labor arbitrage is the same thing economically as a new technology. This isn't correct in any major paradigm of open currency macro-economics, though it does get back to the Solow-Binder thesis and several interesting questions of economics, there isn't any way to make the statement defensible. This is because labor arbitrage always comes to an end. At a certain point, the wages equalize and the job exporting country is no longer making absolute gains by exporting its higher wage jobs, but is now in a pareto optimal situation. Individual economic actors will gain by exporting a particular job, say x-ray technician, but the result will be incrementally higher prices for everyone else and lower national income.

It has been clear for some time that in more and more categories of export that the moment where labor arbitrage was no longer a net good for the US economy, and only a way of shuffling around money from some people to others was being reached. It has been noted by Alan Greenspan, who is a far right wing economist right now trying to tell everyone that his monetary policies were not responsible for the housing bubble - a fantastic and desperate lie from someone who didn't quit early enough to save his reputation after backing Bush almost to the hilt. It has hit the New York Times as well. It's been obvious to anyone who pays 3 Bush Bucks for a gallon of gasoline. That's Bush Bucks, not dollars. A dollar buys a gallon of gasoline. What they give us now for our labors are Bush Bucks.

Let's go over what this means in light of the push for a so called Free Trade agreement with Columbia.

We aren't going to be exporting many jobs to Columbia soon, except one kind. Coal mining. What the high price of oil means in the short run is that the world is going to shift from conventional oil to heavy oil and liquified coal. Coal. Coal. Coal. Coal. Coal. Why for example is the right wing President of the Czech Republic so against carbon restrictions. Check out the proven coal reserves of his tiny country. With Coal having gone to 130 dollars a ton, from around 30 at it's low, that is a huge incentive to not believe. While Columbia's reserves and production are tiny compared to the US, they are also pre-peak production of high energy density coal. That means cheaper.

But this is a digression. The real point is that labor arbitrage is not the same thing as technology economically. This is because labor arbitrage, like all other kinds of arbitrage, equalizes out. While, in theory, the country receiving jobs will eventually have a market for more good sfrom the country exporting them, it never works out this way in practice, because the less developed country always protects its internal markets for the higher up the chain goods until it is able to compete in those markets. China isn't buying that many more cars from the US, but instead from South Korea, and is hoping to produce its own cars. The reason this works in theory and in practice is that the country exporting jobs ought, but does not, to demand real open markets from the job importer. But why should the people pressing to open those markets? They are profiting now from labor arbitrage, and the companies that are losing jobs are losing money now. The companies that stand the most to gain from future imports are the ones that stand the most to lose from present job losses. Hence, the political coalition that wants to engage in labor arbitrage also has no incentive to force export and labor mobility. Only capital mobility. Which is why this happens again and again: the winners have no reason, if they can force the issue, to put their present profits at risk for other people's future profits.

A technology, on the other hand, continues to produce gains, because new advances follow on old ones.

This and many other follies come from the confusion of free trade, which is a general concept, with capital mobility and labor arbitrage, which are merely effects. Free trade is a gift that keeps on giving, labor arbitrage is an interference in the market on behalf of some people and against others.

Labor arbitrage is the candy that opens up free trade, but the real work of free trade is the commitment to creating new technologies in the home economy. If all you do is lay off, say, x-ray technicians, and hire them back as burger flippers, then yes, in the short run the economy is better off because it both has its x-rays read, and it has really smart burger flippers. However, over the long term, the devaluation of the labor force in the exporting economy will lead to a situation where there will be an increasing demand to use military force or other forms of capital rents to maintain the standard of living.

This we have seen in the United States.

One form of this is Iraq. Iraq is the attempt to use the capital advantage of the US military to acquire the bottleneck resource of oil. It is bottleneck resources, those things which it is more expensive to shift the supply curve downward, than others. The capital advantage is not essentially American, but is the result of the leaving to the US the monopoly of global super power status. As such, it is an asset which is intrinsically linked to the position of the dollar.

The economic theory of the Bush was that the US would sell mortgage backed paper, and acquire the oil to expand the supply of this mortgage backed paper by invading Iraq and keeping the supply of oil at the point where expansion of mortgage backed paper, an exportable form of capital, was sufficient to pay the continuing trade deficit. It was not a good idea, but it was the best idea that stupid people could execute on. The coalition of the stupid was just large enough to dominate government, and since they knew that they would not do well in a smart economy, they were willing to break any law, destroy any principle, and make others pay any cost to make the Dumbconomy going. The linkage between cheap money, cheap oil and cheap land, on one hand, and invasion of Iraq on the other hand cannot be clearer. The invasion allowed both a huge spigot of government money to be poured into very specific sectors, and allowed setting interest rates far below what they could have been. These combined to prop up demand for sprawling outwards.

However, stupid people die stupid deaths. Iraq has been run by very stupid people. While not at the level of World War I bad generalship, an essential economic reality eluded them. That reality is that since the fight was over oil, the cost of that oil in military conflict would rise, inevitably, to the cost of buying the oil in the first place. Instead of seeking real military victory, the coalition sought a fake one, and used bribes to present a better face on the progress of occupation of Iraq than was the case. As we have seen from the recent Basra uprising, the shia militias understand that their acceptance of the current state of affairs is a very valuable thing, and they can, and will, at any time those bribes ebb in value, be able to attack critical points of the government. The United States, has, in effect, surrendered to the rebel forces, and pays them tribute to keep the situation in Iraq politically viable here at home - billions for tribute, but not one cent for victory. Since the children of the people who made Vietnam a disaster are now in charge of the US government, for however long it lasts, they are willing to do whatever it takes to remain in denial about their own catastrophic incompetence. Since it is more important for the current opposition party to be able to eat small greasy hors d'œvres than to govern the country - the believe if they back into power they can do less for everyone and have more freedom to just hand money to their friends - this current status will not be challenged. A few hundred dead soldiers, two hundred billion dollars of direct expenses and half a trillion in bail out costs are all to be paid by someone else.

The failure of Iraq was inevitable then, because it was a no brainer theory, and that meant it had to be run by people without brains. And so it was.

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With the failure of Iraq comes a global inflation. This global inflation is more dangerous than people realize, because it is striking at the food supply. One reason for the "Great Complacency" of the Nixon-Reagan-Bush era is that food has been globally cheap. Starving people don't rebel, well fed people don't rebel. People who are used to being fat and happy and have missed a few meals, are grouchy and have a reserve of energy to rebel. The nominal rise in food prices in the US has been 5% - but this is not the story. Looking at staples, the inflation rate of food has been double digits. Let them Eat Cake.

In the late 1990's I noticed that there was an increased volatility of commodity prices, which, given the policies of the time not in improve investment in commodities supply, was bound to lead to a more general volatility. This has translated into increase volatility of US GDP. I noted in 2003, where I predicted the end of the era of complacency, that rising GDP volatility meant increased risk for wage earners, and that this would produce a growing body of urgency in the global body politic. We have now reached the point where these two forces converge - higher food prices, lower wages, and higher risks.

However, these things take time to boil over. This is message that has been in several warnings up until now. While that which can't go on won't, the market can still stay irrational longer than you can stay solvent. That is to say, the moment when leading edge people realize something is unsustainable creates cognitive dissonance - they expect things to fall apart faster than they will, because things don't fall apart when they become unsustainable, they fall apart when everything that people to do keep them going becomes unsustainable. Robbing Peter to pay Paul is unsustainable, it stops when Peter can't be robbed any more.

This is why many of these features, such as peak oil, take time to play out, but happen with a dramatic speed when they do. The complacency about terrorism which was a feature of the 1990's, despite clear warnings, ended with burning clarity in 2001. The complacency about the housing bubble ended with a crunching sound. As will the complacency about the housing bubble, which has not really ended yet, because what Bernanke, now effectively the co-president of the United States, has done is bail everyone out and let the game continue as before.

What is crucial to measure in such circumstances is the burn rate - at what point do reserves get depleted by a particular economic circle? Measuring the burn rate gives a better idea of how long before something becomes untenable. For example, global warming is tenable for at least the next generation. Now when it gives out, the results will be catastrophic and lead to a series of global dislocations which will be likened to the dark ages. But people who don't plan on being here in a generation don't need to care. And they aren't inclined to do more than charge people who will be here in a generation very high death rents.

A death rent is when a group of people who are making the death bet charge for the present future value of that death bet in order not to make it. So over priced corn fuels are a death rent. So is charging high rates not to off shoring from carbon efficient economies to carbon inefficient economies.

The key point here is that labor arbitrage is also atmospheric arbitrage - that is to say, taking advantage of the fact that air is underpriced, and therefore over consumed, and it is water arbitrage, taking advantage of potable water being underpriced, and therefore overconsumed. Recently NOAA and NASA have concluded that water temperatures around the globe are cooling, but ocean levels are rising. This indicates something simple: ice is melting, cooling the ocean temperature, colder deep waters are being disturbed by more downward movement of water. While the exact details of the mechanism have to be worked out, this is a decrease in net fresh water in the world, and a net increase of salt water. It means that there is a temporary respite from the rise in surface temperatures, as ice melts and a new equilibrium is reached. Once this equilibrium is near saturated, atmospheric temperatures should show a sharp drop as ice melts more rapidly, and only then resume their rise.

Trade deals like the current fast tracked Columbia deal do not engage in real free trade, which should be allocating production to the most efficient places of bottleneck usage. Instead, the current trade regime is pessimalizing both petroleum and atmospheric usage. This indicates something that is very important about markets. Markets are incentive driven, they answer the question of what the most efficient way to answer the incentive question is. However, if the incentive question is badly phrased, the answer will not be the one which makes people happiest. The incentive situation in the US was how fast a building boom could be managed and how it could most efficiently be paid for with borrowing. This is not the question we needed, or need, an answer to.

In the short term Congress can simply place a moritorium on so called free trade deals until such time as global economic restructuring, lead by the IMF and the G-8, has time to alter the incentive basis of trade. More trade is good, only when the incentives to trade are good.

Incentives matter, incentives are broken, therefore trade deals will be coalitions of those who profit most from doing the least attempting to persuade others to act against their own best interests. And this does not even touch the failure of neo-conservatism and neo-liberalism to provide frameworks for stability and political growth in the world.