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As nearly as I can tell, the neolibs (neocons here, Chicago School) have advocated free flow of capital on efficiency grounds.

Let's get this out of the realm of health and crime for a second.  Farawaystan is swimming in cash from the gas reserves it's sitting on.  Beyond that it doesn't have much of an economy traditional agriculture, mostly herding.  The US has regularly milked this cash cow to finance its deficits.  Neolibs would argue that this is a correct result because it is more efficient for Farawaystan to invest in the US than at home (Let's set aside for the time being the obvious bias for developed markets.  It isn't as though I were advocating that position.).

Now the people of Farawaystan decide they want to keep more of their money at home for domestic projects (Pick any element of the Farawaystan economy, and you'll find it at a competitive disadvantage because of inadequate education, transportation, communication, etc.  Even the gas industry fears that, if there were a decrease in demand, Farawaystan's fields would be the first ones shut down.).  So they cut back the amount that can be loaned to the US.

The US now can't sell as much of its product (Treasury securities) as it could, so capital in the US decreases as surely as it would if we were talking about manufactured goods.  As the capital shrinks, the plants start cutting back just as surely as if Farawaystan had slapped a tariff on US products, because none of the plants operates on current accounts.  Then there will be the inevitable noise in the media and Congress for retaliation against Farawaystan, just as though it had imposed a tariff or embargo.  As I have said elsewhere, if it quacks like a duck....

Concerning your last paragraph, you've raised a couple of points that don't apply very well in the US.  The financial industry is very political, but all industry is very political here.  Charles Wilson, then president of General Motors, once said that what was good for GM was good for the US.  While the auto industry may not have that kind of pull any more, the defense industry (which is ubiquitous here) doesn't even have to ask; it has the government on a leash.  As for utilities and railroads, they're largely private industries here.

Returning to the main point, I think the restriction of capital flows to the US will be imposed at least in part for protectionist reasons (It will be couched in health, safety, and national security terms, but all protectionist policies are.), will trigger protectionist reactions, and will cause protectionist results.  If for whatever reason you don't like "protectionist", then it must be viewed as "quasi-protectionist".

by rifek on Tue Jan 13th, 2009 at 09:58:59 AM EST
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