by Ann Pettifor This is a short piece that appears in the Guardian today, 27 March 2009.
“Next week, at the G20 summit, G8 leaders will work very hard to defend and fortify globalisation – an economic system that has brought about the first flly synchronised global economic failure.
Even as they plan the meeting, the G8 seem to have run out of steam. There are suggestions that enough has been done to defend globalisation and steer the global economy back to stability. The remedies considered adequate are: unfettered capital mobility (with limited regulation); inflation targeting; substantial bail-outs of the finance sector; the bolstering of the IMF and its policies: free trade in the face of global trade imbalances, and partial, if inadequate, fiscal stimuli.
In other words, the tried-and-failed policies that prolonged the Great Depression and that will inevitably fail again.
It is painful to watch. As banks become insolvent, G8 governments recklessly invest billions in taxpayer funds to prop them up, while refusing to dislodge incompetent managements. Martin Wolf in the Financial Times suggests that governments like that of the US administration seem to want “to convince ordinary Americans that their government is a racket run for the benefit of Wall Street”?
As countries such as Ukraine are bankrupted, G8 leaders strengthen the IMF and its failed, 19th-century austerity economics. Is this because they want to return Ukraine to the Russian fold?
As trade deficits rise and currencies fall, G8 leaders strive hard to leave imbalances to be unwound by “the invisible hand”. Don’t they worry about the uncontrollable reaction of protectionism, nationalism and trade wars?
As borrowing costs remain stubbornly high, central bankers such as Mervyn King and Claude Trichet fail in their duty to act decisively to lower bond yields and interest rates. They appear less concerned about the catastrophe of rising bankruptcies and unemployment, than about fiscal deficits that will be corrected by economic recovery, and by non-existent inflation.
As the private sector stops spending, some G8 governments decline to step in to fill the vacuum. Is this because, like Britain’s Conservative party, they are still obsessed with 19th-century economics? Or do they wish their economies to collapse?
This much is clear. G8 leaders and their advisers have not learnt the lessons of the Great Depression: namely that in a debt-deflationary crisis, governments and central banks must intervene first, to lower borrowing costs and ease the colossal burden of debt on companies and households. Second, governments must intervene and spend to compensate for the private sector’s failure to do so. They must intervene to restore confidence, revive the private sector and create jobs.
When the economy recovers governments will recoup taxpayer losses – as sure as night follows day.
However such policies cannot be implemented within a framework of international capital mobility – the centrepiece of globalisation.
John Maynard Keynes at the height of the Great Depression offered a way forward – in his brilliant essay National Self-Sufficiency (June 1933). In it he seeded the localisation theory of today’s “new economics”: that all goods and services, including finance, that can reasonably be provided locally should be. It is an essay that provides a sound basis for economic recovery and environmental stability.
But these ideas can only be implemented within a new framework: one that encourages co-operation, not competition, between nation states. One that restores autonomy to governments – or groups of governments – to work together to manage the interests of their people and their share of the ecosystem. Such a framework is fundamental to international co-operation and stability, but also to the maintenance of democracy.
Central to domestic management of the economy was Keynes’s proposal for capital controls, so that governments could manage the most important levers of the economy: interest rates and exchange rates, and use these to stabilise a collapsing economy – and international imbalances.
Next he proposed an International Clearing Union – a global central bank that would clear cheques between trading nations, and would set up a framework of variable exchange rates, protected from speculators. Its remit would be to discourage both huge national “overdrafts” and surpluses. The bank would be independent of any national interest. It would issue a currency – an international reserve currency – much along the lines proposed by Zhou Xiaochuan, governor of the Central Bank of China this week.
But Keynes’s ideas are anathema to ideologues in G8 Treasuries – and to the finance sector, who are in a desperate race to prop up the collapsing architecture of globalisation. As they remain dominant, the “masters of the universe” will prevail, and the G20 summit, I confidently predict, will fail.
Ann,
While I agree with your economic prescriptions, I’d also suggest that
the international political system itself is a big part of the problem.
The “masters of the universe” exercise decisive control of G8
states, and it seems farfetched to think that will change without unprecented pressure…and by that I don’t mean the pressure of fair-minded
voters within these states. The established social/political culture within each is part of what perpetuates these states; the tendency to
national interest is fundamental to each state. While I’d never eschew progressive political action within the G8, I think we’d be limiting
ourselves as a worldwide progressive movement if we relied only on such nationally-specific tactics.
Rather, while we pursue progressive
politics within these nations, we should mobilize a global consciousness movement against the self-interested practices of finance capital. For
instance, global progressive forces, recognizing the futility of efforts to roll back globalization, should figure out how to tap it for the
genuine interest of the world’s people.
In this regard, I’d like to suggest that we galvanize a movement to demand that the global
banking industry collect a small fee on ALL electronic commercial transactions and make that revenue stream available to a new global-local
problem-solving authority that would catalyze NGO-corporate-community partnerships to attack our world’s great socioecological problems. Such a
program would be a massive public investment in service-based production (jobs worldwide), it would open real-time global fiancial transactions to
public scrutiny (transparency to inhibit bubble blowing and dampen speculation) and, by “taxing” all transactions equally, it would not distort the
market.
The revolutionary quality is the struggle to ensure that the revenue stream really and permanently endows civil society rather than
nation-states.
I know winning a global political battle seems a daunting task, but the time for a revolutionary transformation seems to have
arrived. None of the old ways will work any more, and we can’t suvive if things don’t change.
Steve
Ann, you say “When the economy recovers…” But it’s not going to recover. The best that can be hoped is that it’ll be patched up and sent on
its wobbly way again for a limited time.
Sooner or later our growth-dependent economy will run into the brick wall of finite resources and
finite sinks. In the current recession growth has been slowed down, so we now have the opportunity to re-engineer the economy into something more
sustainable before we find ourselves in the middle of the worst economic car crash of all time. We have to design a system that isn’t reliant on
using things up before those things run out, otherwise the economy will be brought to an abrupt halt and there’ll be no alternative in place.
Steve, Thanks for this comment, and we have posted the piece by the Clarks on our Econoclast section, for which
thanks….Yes, the Tobin Tax treatment is long overdue…more about this from Avinash Persaud and others….Not sure though about a global
movement…I am more into localisation, believing that its easier to hold politicians/institutions to account the closer they are to home….
A E Pfeiffer..the point I am making is that governments cannot be passive in the face of this crisis…they have to do
something to get economic activity going..economic activity rather than economic growth….Work is fundamental to our social cohesion, and there is
plenty of work to be done..insulating our homes; renewable energies; caring for our elderly…but of course it has to be productive work within the
finite limits of the ecosystem…
The Quiet Coup
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former
chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that
more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the
U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking
essential reform. And if we are to prevent a true depression, we’re running out of time.
by Simon Johnson
http://www.theatlantic.com/doc/200905/imf-advice
Good post.
While agreeing with you in general about King’s indecisiveness, is it not possible that King’s recent public
statement about there being no more money in the kitty is the stark statement it is because Brown is deaf to anything else, so committed is he to
supporting the banks and related institutions – that is, he listens but does not hear.
What I mean to suggest is that King may be coming to
see that putting more money into insolvent banks would be like putting money into a black hole from which no return is possible. According to
physics, a black hole emits a little radiation, but it doesn’t go very far and it is toxic. Ditto the toxic bank.
Of course, King may be
unable to imagine putting money directly into works projects like Roosevelt’s WPA, even though such projects will bring tax revenue in their train,
as you have argued before. Roosevelt’s projects were less successful than they might have been for many reasons, some of which are in the air
around us today. The rich fought Roosevelt every step of the way, even to the extent of trying to organize a military putsch, which failed in the
end because of the democratic ideals of Brigadier General Smedley Butler whom they believed they could suborn to their ends.
As an
aside, Blanchflower being the only member of the MPC to advocate lowered interest rates when they might have done some good: does anyone know why
he is being replaced at the MPC?
As a revision, I may be being too kind to King, as he has said nothing very much about what the Bank could do to tackle unemployment,
the current figures being almost half a million a month and rising, to me a very scary prospect.
I am concerned about the lack of general
cohesion among the various protest groups, though some have gotten together, and the seemingly testosterone-fueled attitude of the police – who
appear to be looking for a fight. Given the likely dismal prospects of any significant inroads into many of the problems facing the world today
being made by the G20, and the go-ahead given to the police by the government to rely on terrorist legislation procedures even on peaceful
protesters make the summit look like a disaster even before it has begun. And Boris Johnson flippantly referring to the summit as a Jamboree does
nothing to defuse tensions surrounding the event.
They don’t want to save the economies of nation states – they want to bankrupt them and make them
easy prey to global capital. This is all about saving the globalization agenda – nothing else.
Our enormous trade deficit is rightly of growing concern to Americans. Since
leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed
from the wealthiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to
keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.1
trillion. What will happen when those assets are depleted? Today’s recession is the answer.
Why? The American work force is the most
productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored
tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt
has soared.
Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative
advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On
the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?
At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in
Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption
begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many
products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising
unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy)
and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density –
rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much
more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more
densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per
capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look
no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita
trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more
densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S.
had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the
median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per
capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other
nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit
with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven
failure around the world to a country with one fifth of the world’s population.
Ricardo’s principle of comparative advantage is overly
simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly
disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured
goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to
trade freely in manufactured goods with a nation with an excessive population density.
If you‘re interested in learning more about this
important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where
you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)
Pete
Murphy
Author, “Five Short Blasts”
I think that one of the problems is that none of the major players (and they really are only playing!) wants to have to admit that they
have been following the wrong policies all these years. We all know they have got us into this mess, but they are not about to say sorry and really
mean it, any more than the bankers who brought down Northern Rock, RBS, etc! They cannot allow themselves to be seen as wrong, and thus as unworthy
of our respect, and the large salaries they currently receive!
Duke, thanks for the comment. You might be right…but there is no sign of King condemning the bail-out of e.g.
Dunfermline Building Society – was it £1.6 billion dumped on us taxpayers?
So yes, the balance is really important. Bailing out banks is
not government spending in the productive and income generating sense that Keynes intended it….So you may be right on that one…
Brian Smith, you’re right…they cannot allow themselves to be depicted as having got it wrong…but also; they
don’t honestly believe they were wrong….they’re tryiing to put humpty together again, thinking he never was fragile, it was just a very strong
wind that blew him over!
We know better….Which is why we have to get in there and have the argument, publicly, and put the
alternative…so many people are awestruck by the words of ‘oracles’ like Greenspan and Mervyn King…We have to encourage them – that is, our
fellow citizens – to be a little less respectful, and a little more confident of the alternatives.
Andy Murray – I agree with you wholeheartedly. The reason that this G20 will fail, is that the leaders are
trying to defend globalisation – and its indefensible.
So there’s hope yet!