Theoclassical Economists’ Dogmatic Hate for Only One Form of Unfair Competition

By William K. Black
November 2, 2016     Kansas City, MO

The uber-right wing economist Tyler Cowen, has written a column entitled “TPP Is Exciting. Let’s Make the Case for It.”  Cowen’s column is remarkable for his inability to even get himself excited about TPP, much less his readers.  He begins with what should be an important warning – there will be a major effort by President Obama and the largest corporations to pass the Trans-Pacific Partnership (TPP) during the lame duck session after the election.

Cowen’s effort to excite his readers to support TPP is so weak that I will comment on only a few points.  First, he says that Americans should be overjoyed that TPP would produce 18,000 tax cuts – for corporations!

[A] good argument for TPP is that it will bring 18,000 tax cuts to job-creating exporters.

18,000 corporate tax cuts are an excellent reason to reject the TPP.

Second, Cowen he is reduced to citing Pete Peterson’s infamous institute for his assertion that TPP will produce huge gains.  But in the last clause even Cowen admits it’s likely a typical Pete Peterson scam.

­­­A Peterson Institute estimate suggests global yearly gains from TPP of $295 billion, with $78 billion of that going to the U.S. That is an abstract number to most voters; it doesn’t feel like money in their pockets and it’s hard to be sure it’s accurate anyway.

If the huge job and GDP gains Peterson always claims these deals were real, we would have had – for three decades – a booming economy with huge gains for the working and middle-classes.  The promised gains of these deals to American workers have always proved to be false.

Cowen then relies on the familiar claim by economists that we should ignore the reality of TPP – it is not a “trade” deal much less a “free trade” deal.  The actual corporate goal of TPP – corporate lobbyists largely drafted TPP in secret – is to extort nations not to effectively regulate corporations and protect consumers and investors.  Cowen urges his readers to ignore that fact.

Other parts of TPP are simply hard to understand. There’s a mechanism to resolve disputes that has been criticized for giving companies the upper hand in conflicts with governments; it’s a common part of trade deals that shouldn’t be a major problem, but has become one.

Who is the expert that Cowen is citing for the proposition that the kangaroo non-court Investor-State Dispute Settlement (ISDS) panels “shouldn’t be a major problem?”  That’s Cowen citing Cowen as if Cowen were an authority on law and regulation.  Yes, ISDS provisions are “common” – that’s the problem.  ISDS should be a fatal problem – the panels are exceptionally pernicious, one-sided, and biased.  That one-sided, pro-corporate and anti-public, nature of ISDS can be seen from the ISDS acronym and from a legally-sophisticated reading of the deal.  Cowen, inadvertently, gives an example of the deliberately one-sided nature of ISDS.

Hardly anyone even mentions that TPP will make it harder for Asian economies to compete unfairly against U.S. companies through state-owned enterprises. The Obama administration touts the labor and environmental standards in the deal to progressives, but those provisions, appropriately or not, leave many of the traditional supporters of free trade under-enthused.

Notice first the ISDS title – only “investors” get a right to have their disputes decided by these kangaroo, non-judicial panels.  Indeed, only some “investors” count as “investors” under ISDS provisions.  Shareholders, the actual “investors,” cannot bring a complaint against the managers of the corporation under ISDS.  Shareholders cannot sue on behalf of the corporation under ISDS, e.g., in a shareholder “derivative” action.

Second, customers, workers, and other people who are victims of corporate misconduct – no matter how illegal or how catastrophic the injury – cannot bring an action under ISDS.  TPP, as with all these deals, provides that customers, workers, and other victims have no “private right of action” under any provision of TPP, including ISDS.  Businesses, in their capacity as “investors,” in any nation that signs on to TPP get this unique right to a private right of action under ISDS.

Third, note that Cowen admits that theoclassical economists like him are delighted that TPP will allow businesses to bring actions under ISDS to try to impose fines so large that they will destroy state-owned enterprises (SOEs) because he claims that unique private right of action is essential to make it harder for SOEs “to compete unfairly against U.S. companies.”   He also admits that theoclassical economists are hostile (“under-enthused” is his euphemism) to clauses in the TPP that supposedly make it harder for foreign firms “to compete unfairly against U.S. firms” by using production methods that endanger workers and non-workers lives and health and ruin the environment.  That logical inconsistency reveals that theoclassical economists’ praise for deals like the TPP is the product of logically incoherent theoclassical dogma.

Theoclassical economists hate SOEs – passionately – and their worst nightmare is successful SOEs because that success falsifies their dogmas.  SOEs = socialism.  If an SOE succeeds, therefore, a theoclassical economist is certain that its success must be due to the SOE’s ability “to compete unfairly.”  Theoclassical economists, and private businesses, want to destroy SOEs.  Business lobbyists have increasingly used these international deals’ ISDS provisions as their means to destroy SOEs.  Business lobbyists secretly draft the key ISDS language in each of these international deals and the language keeps ratcheting up in its hostility to SOEs.  SOEs and governments cannot bring actions under ISDS against privately-owned foreign firms that “compete unfairly” against SOEs or domestic firms.  But privately-owned foreign firms can bring actions against governments that have SOEs, and the kangaroo-non-judicial ISDS panel can impose unlimited, fatal fines on any government that dares to have a competitively-successful SOE.

If you believe enthusiastically that these global deals should make it harder for foreign (from the U.S. perspective) firms “to compete unfairly with U.S. firms,” as Cowen pretends to believe, then you logically must be an enthusiastic supporter of provisions that it would make it harder for those foreign firms to compete unfairly with U.S. firms by endangering their workers, the public, and the environment.

“Asian” firms, the example Cowen uses of firms that “compete unfairly with U.S. firms,” can compete unfairly with U.S. firms through a host of means.  They can pay their workers unduly low wages in violation of local labor law and the labor contract.  They can achieve very large “cost-savings” – from the firm’s perspective, rather than societies’ perspective – by not providing a safe workplace for the workers.  It was cheaper in Bangladesh for a huge clothing manufacturing firm to illegally and corruptly take control of former swamp land that was not supposed to be built on due to subsidence danger.  It was cheaper for the firm to build the factory unsafely.  It was cheaper for the firm not to repair the cracks in the structure and try to stabilize the foundations.  It was cheaper for the firm to add heavy equipment in a manner that exacerbated the danger of a catastrophic collapse.  It was cheaper for the firm not to provide safe exits or train the employees how to exit.  It was cheaper for the firm when the cracks grew suddenly and the risk of catastrophic collapse became acute to demand that the employees continue working rather than evacuate the factors.  1,129 workers died at Rana Plaza and hundreds were maimed, but Bangladesh has no workers’ compensation system so the cost was born not by the Bangladeshi businesses or even the government but by the workers.  None of these practices or results are cheaper for society, and that is how economic decisions are supposed to be made.

Firms should bear the economic cost of running their enterprise in a manner that provides superb safety to workers, the environment, and the public.  It is much cheaper from a societal perspective for firms to provide a safe work environment and make the prevention of all material injury a top priority.  Similarly, it is far cheaper from a societal perspective to minimize efficiently polluting emissions from the firms rather than to try to clean up the cost after-the-fact.  Pollution harms not only the workers, but the general public.  A foreign (again, from the U.S. perspective) firm “competes unfairly” when it can push the costs of its pollution off onto the public while the rival U.S. firms (appropriately) have to bear the costs of preventing that same pollution.

The discussion immediately above is all straight-forward neoclassical economics, so Cowen is well aware of it and should be an enthusiastic supporter of demands that deals like the TPP end these far broader and more harmful forms of unfair competition than his fears that SOEs might engage in unfair competition against U.S. firms.  Cowen is honest enough to admit (to be precise, he implies) that he actually wants foreign firms to be able to compete unfairly – and with absolute impunity – against U.S. firms through means such as wage theft, illegal child labor, production in firms that are death traps for workers, and massive and often illegal releases of pollution that maim and kill millions of people.  Theoclassical economists cheer anti-regulatory races to the bottom.  They openly called for it in the UK banking context in the run up to the fraud epidemics that drove the financial crisis and the Great Recession.

But Cowen does not reveal to his reader something critical about the limits of his clause: “The Obama administration touts the labor and environmental standards in the [TPP] deal to progressives….”  There are two things essential to understand about those “labor and environmental standards” that Cowen correctly notes that the Obama administration “touts” (endlessly) to progressives.  First, no one can use ISDS to enforce those so-called “standards.”  No one can use ISDS to enforce those standards because corporate lobbyists drafted the ISDS language and TPP in secret to ensure that no one could do so.  TPP explicitly denies any private right of action to victims of firms violating TPP’s “labor and environmental standards.”  Even a U.S. firm, despite being an “investor” under ISDS, cannot bring a claim under ISDS to fine a nation that signs TPP on the basis that the nation failed to enforce those labor and environmental standards on its domestic firms, thereby allowing them to compete unfairly with the rival U.S. firm that bear the costs of meeting those standards.

Second, the non-ISDS TPP provisions that allow a country like the U.S. to complain about a TPP-signatory nation not enforcing the labor and environmental standards applicable to its firms are convoluted, time-consuming, and useless.  In the great majority of cases the nations that signed the TPP have been subject to those same standards for many years, often decades, and have studiously refused to enforce those standards.  The Asian signatory nations that the Obama administration and American TPP supporters cite to progressives as the places where business practices will be cleaned up under TPP’s “labor and environmental standards” are precisely the nations that have refused to enforce those standards.  No one rational expects that to change under TPP.  TPP was secretly drafted by the lobbyists to ensure that these standards could be used to con progressives while ensuring that the standards would remain unenforceable and routinely violated in the countries that allow their firms to compete unfairly with U.S. firms.

My second column in this series responds to Cowen’s unintentionally hilarious metaphorical claim that the largest corporations’ lobbyists secretly drafted a deal in which ISDS panels were designed to act as impartial “referees” when those corporations’ violations of “foreign” law led them to ask the kangaroo panels to impose hundreds of millions or billions of dollars in fines on “foreign” governments.  The fines, of course, go the corporations that violated the law and endangered public health and safety.