The biggest issue no one wants to discuss

Financial Times pronounced the recent Davos conference the gloomiest in its history. The "global agenda" of world leaders has crumbled. With the Doha round of trade liberalization in shambles, "protectionism" is seen on the rise. This is one thing that happens during historic economic collapses: old arrangements, particularly unsustainable ones, crash down. This is what happens when an old order enters an pivot point of discontinuity, where the future will be profoundly different from the recent past.

Dangerous destabilization is headed our way. This is why Dennis Blair, the national intelligence director, said this week that the global economic collapse is the biggest threat to the United States, bigger than al Qaeda. The more we try to deny the current reality, or return to the bubbles of the past decade, the worse the reckoning. This is also true of trade. The "free trade" regime that has coalesced since 2000 has hugely benefited the swells and oligarchs that attend Davos, especially by increasing their personal wealth thanks to cheap labor in developing countries.

But the millions of Americans who have lost well-paid manufacturing jobs as a result, with nothing to replace them but a collapsed housing bubble, don't do Davos. They are not all blameless, to be sure. Like all Americans, they are blissfully unaware of the consequences of their consumer decisions. So they happily shopped at Wal-Mart as their jobs went away. No matter. Beware the meme that facing this, as in an abortive House attempt to put a "buy American" provision in the stim package, is "protectionism." Going forward, a new world trade arrangement is essential. It is the biggest issue facing the country that no one in power wants to discuss.

As with tax cuts, we have actual real-life experience with "free trade." As with tax cuts, it creates a minority of winners that do spectacularly well. But in America is has also created a growing majority of net losers — from the auto complex of the Midwest to the furniture, textile and apparel plants of the Southeast. Being able to buy SUV-loads of cheap stuff from China doesn't offset the loss of a job paying a rising, middle-class wage and offering benefits and a pension.

We were had. Trade liberalization was sold in the 1980s and 1990s — including by me, meamaxima culpa — as a general win for America. We were the world's largest trading nation, and back then had a diverse and robust manufacturing sector. In addition, we were the world's leader in everything from software to agriculture. Trade was good; we knew from pre-World War II history how bad protectionism could be. But here's the catch: the promise of the old GATT and its successor World Trade Organization was to lower trade barriers so everyone played by the same rules. What has actually happened is quite different.

What happened, as in so many other economic spheres, was a gaming of the system that resulted in rigged trade, not free trade. A stealth protectionism of its own resulted, every bit as distorting and damaging as tariffs. It was Ross Perot's "giant sucking sound," the race to the bottom for low-wage labor. American business leaders embraced and led this race, sending jobs and investment offshore. (Germany, by contrast, retains a robust manufacturing sector and is the world's largest exporter of finished goods — yes, you read that right).

Everyone is not playing by the same rules. Developing nations are not required to provide the same labor and environmental protections as advanced nations. China plays games with its currency to give it an advantage in exports, while allowing a booming black market that devastates the American software and entertainment businesses. China, like Japan before it, eschews buying American goods, except for things like Boeing jets purchased under pressure from American trade reps (this is managed, not free trade) — all the while building its own industries to someday take over. Much de facto protectionism still exists (it's how America went from a developing country into the world's largest economy by 1900) The advanced research and manufacturing that we were assured would be America's future are moving overseas, too. Meanwhile, America and China embraced in the dangerous debt-for-stuff trade regime that is now sputtering, with ominous consequences for both countries.

Perot was speaking of NAFTA, and he was wrong — we sucked in jobs, of immigrants to make our housing bubble possible. But NAFTA is also a failure. It was sold as a way of building Mexico's economy so illegal immigration and narco enterprises would be reduced. What happened was classic "shock doctrine" capitalism, destabilizing Mexico's old economy, enriching oligarchs, hurting the poor and sending millions to el norte. Meanwhile, addicted Americans, many helped along by a low-wage blue-collar economy, are powering a lethal drug trade.

This is not a comic-strip issue. It's highly complex. Few could fully understand the rapid destabilizing effect of China entering the World Trade Organization. It's difficult to address the wage differential. Americans have hurt themselves by allowing too many of their schools to become inferior and their infrastructure to be stuck in the 1960s and aging badly (all to serve tax cuts). But the current trade arrangement is not working for us. As our nation becomes increasingly insolvent — and already, with maxed-out Americans buying less stuff — it is not sustainable for China, either. The only ones who can't see it are the guardians of economic orthodoxy who still control the debate.

But the old regime is over. The trade house-of-cards is so precarious that it's no wonder President Obama is saying little about it. But we must find a different path to gingerly make new arrangements, avoiding the worst of true protectionism or, even worse, a default-driven American Depression. Or we can keep trying to prop up the Zombie Ponzi Economy. Then the cascade of unsustainability will correct things on its own, doing it rough, as Tina Turner would say.