I contributed the following to a book – THE RETURN OF THE STATE – published by the Progressive Economy Forum (PEF) and launched on 19 May, 2021.
The Covid-19 crisis has demonstrated one important truth. The international financial system is designed on terms that suit the owners of capital, not on terms that suit nation states, or the majority of the population – as Geoff Tily explains elsewhere in this compendium. “Globalisation”, he writes, “is a system amounting to internationalism on the terms of capital” whereas inter-nationalism should be set on terms that benefit the majority – the people that labour by hand and brain. In this contribution I will contend that no reform of the state “for the common good” is possible under terms governed by the current international system of deregulated, globalised capital, constructed on the foundation of vast debts, costly credit and tax evasion.
During the Covid-19 crisis world leaders proved unable to convene an international summit to prevent the spread of the pandemic and to collaborate on a vaccine for the world’s people. Some deliberately attacked the system of multilateral coordination to defeat pandemics, organised under the umbrella of the World Health Organisation. Central bank governors, however, led by the Federal Reserve, did work together and coordinate to save globalised capital markets from the economic consequences of the pandemic. Even while the governments of Trump, Bolsonaro, Modi and Johnson clowned around, grievously mishandling the crisis and causing thousands to die unnecessarily, technocrats at the Federal Reserve, the Bank of England and the Bank of Japan engaged in decisive, expansive and internationally coordinated action to save rentier capitalism. Big Wall St. and City of London financial institutions, corporations like Apple and the world’s airlines quickly became beneficiaries of central bank largesse.
As the Brookings Institution has carefully documented, while ordinary Americans faced unemployment and income loss, the Federal Reserve effectively nationalised Wall St. – and with it other financial entrepots. It did so by cutting its target for the federal funds rate, the rate banks pay to borrow from each other overnight, to a range of 0 percent to 0.25 percent and by purchasing securities. Between mid-March and mid-June 2020, the Fed’s portfolio of private assets grew from $3.9 trillion to $6.1 trillion. It re-launched the Money Market Mutual Fund Liquidity Facility (MMLF), which backstopped money market mutual funds and massively expanded its repurchase agreement (repo) operations to channel cash into the money markets. As well as relaxing regulatory requirements, the Fed lent directly to banks from its discount window at rates lower than those charged during the Great Financial Crisis. On March 23 it established two new facilities to support highly rated U.S. corporations. The Primary Market Corporate Credit Facility (PMCCF) allowed the Fed to lend directly to corporations like Apple by buying new bond issuances and providing loans. And, under its new Secondary Market Corporate Credit Facility (SMCCF), the Fed was freed-up to purchase corporate bonds as well as exchange-traded funds investing in investment-grade corporate bonds.
Trevor Jackson argued in Dissent (April 2020) that the Fed’s spectacular and unprecedented interventions in March, 2020, were intended “to flood financial markets with cash as quickly as possible, so banks could keep lending, buyers of stocks could keep buying, and institutions could keep making their debt payments” (Emphasis added). Far from deflating the by then global debt bubble, the Fed was intent on keeping debt and international creditors buoyant and solvent.
Covid-19 made utterly transparent the power and protection granted above all to private, globalised capital markets, creditors, investors and speculators. Such internationally coordinated protection was not granted to the world’s people or to the world’s threatened ecosystems. By refusing to internationally coordinate to deal with the threat of pandemics, their impact on economies and the risks of climate change, world leaders abandoned their citizens, and effectively delegated leadership of the global economy to central bank technocrats and their clients in capital markets.
The temporary suspension of globalisation
The pandemic arose in the first instance because of capitalism’s destruction of Nature to make way for profitable farming, mining and housing activities. These activities have stripped wildlife of habitats and brought societies into conflict with the animal world. The virus leapt from animal to human and was then spread worldwide by the very hallmarks of globalisation: connectivity and integration. A single, globally interconnected and integrated market economy, governed effectively by the private authority of invisible financial markets and based on population growth and urbanization, dangerously escalates threats to human health. Professor Ian Goldin and Mike Mariathasan in their book The Butterfly Defect (2015) explain that more than thirty new disease-causing organisms have appeared in just the last two decades. Coronavirus confirmed the threat and taught us that globalisation acts as a passport for pandemics, turning airlines and international journeys into disease vectors. That is why the system of globalisation had to be suspended for the duration of the pandemic.
The tragedy is that it took a pandemic, not civil society, to halt globalisation in its tracks.
The left’s blind spot
The failure to check financial globalisation can be explained in part by the failure of progressive economists, politicians and activists to engage with the international sphere, where globalisation, capital mobility and Wall St.–friendly central bank policies are promoted and defended. Instead, social democrats in Europe and the United States prefer to confine debates to the nation state and domestic policy priorities. Hence the focus on affordable housing, nationalisation of the railways, poverty and homelessness – and, inevitably, the local environment. A classic example of the narrow focus of most progressives can be found in debates about taxation. Discussion and campaigns aimed at the tax-dodging of Silicon Valley platforms like Amazon or Facebook, or of companies like Richard Branson’s Virgin, are conducted as if these companies can be coerced into obeying domestic tax law. Such hopes are utopian in a world system based on capital mobility; one specifically designed to enable Richard Branson of Virgin or Tim Cook of Apple to shift profits effortlessly across borders and into tax havens. This fact was starkly exposed recently when the EU General Court rejected the European Commission’s attempt to recover €13 billion in back taxes from Apple whose profits are protected by the tax haven that is Ireland, an EU Member State.
Furthermore the international system is designed to oblige nations to prioritise exports and to compete for foreign direct investment from global, private corporations – as part of what Keynes described as a “desperate expedient to maintain employment at home”.
Social democracy’s blind spot for the international financial architecture and its power over domestic policy-making has had other consequences. Not only does neglect of the international system let globalised capital markets off the regulatory hook, but globalisation has also led to the rise of economic nationalisms. Globalisation represents the tragic reversal of all that Keynes hoped to achieve at Bretton woods: an international framework that would end nationalisms, international trade competition, high levels of domestic unemployment, low levels of aggregate demand and the consequent debt-deflation. It was an attempt by Keynes and other economists to prevent the return of nationalisms and fascism by developing policies that increased domestic demand not by boosting exports and raising demand externally, but by raising living standards at home. An inter-national system that would restore policy autonomy to democratic states and stability to the world’s economies. Bretton Woods was an incomplete framework and in some respects unsatisfactory. Nevertheless its ambitions were to be promptly and forcefully undermined by private European and American financial institutions.
The reality is that today all states are embedded in, governed by, and subject to the international system of mobile, volatile, private financial markets – a system that has indebted and impoverished the many, and raised political tensions as reflected in the rise of nationalism. Millions of voters understand the nature of globalisation, even while dimly aware of the monetary, fiscal or trade theories on which the system is built. This public awareness explains why some electorates have backed the election of ‘strong men’ – politicians that offer ‘protection’ from the very global markets that have stripped economies of jobs and income, while enriching rentier capitalists. Demands to ‘take back control’ from these private markets by ‘building walls’ and intensifying protectionism is what catapulted the governments of Trump, Bolsonaro, Modi, Dutuerte and Johnson to power.
It will not be possible for progressives to reverse nationalism, or reform or restructure the domestic state ‘for the common good’ without a transformation of the governance of the international system. Such a transformation would require the restoration of public authority over private, deregulated, globalised capital markets and the restoration of policy autonomy to governments and their electorates. In other words, the restoration of economic democracy to the international system.
Progressive governments cannot mitigate and manage climate breakdown, energy insecurity and biodiversity loss in a world of global capital mobility and tax evasion. They cannot ensure ‘medicare for all’ or restore public health systems like the NHS, for example, if global, mobile, tax-avoiding private equity firms are freed-up by the international system (including its investor-biased trade rules) to compete with, and loot local and central governments by imposing large debts and demanding high rates of return. And governments cannot overcome financial globalisation’s system of generating vast debts, until the bias, effective subsidies and protections enjoyed by global, mobile financial corporations – and ‘regulated’ by private authority – are once again managed by democratic, public authority. Management of taxation systems, exchange rates, interest rates and cross-border flows in the interests of the domestic economy are vital if democratic governments are to serve ‘the common good’ by reducing indebtedness, stabilising the public finances, increasing domestic demand, achieving full, skilled, well-paid employment, and urgently tackling earth systems breakdown.
States cannot afford to borrow to stabilise the economy if they do not simultaneously generate sufficient revenues through taxation to repay the sums borrowed and to stabilise the monetary system. To be clear, this does not imply that governments need tax revenues to pay for necessary, initial investment. As demonstrated in 2020, governments in possession of a central bank and sovereign currency, with sound tax collection institutions and policies can, when necessary, raise vast sums – not just from their own central banks, but also from pension funds and insurance companies. But to maintain and stabilise a nation’s monetary system, and to ensure pension fund savings are protected, governments need ultimately to raise tax revenues to repay the initial finance. That is nigh impossible if states are obliged to operate within an international system of mobile, tax-avoiding capital.
Transformation of the state?
How to achieve such a transformation? First and foremost we need greater societal, academic and political understanding of the centrality – and negative impact – of the international financial system (disguised as ‘globalisation’) on domestic policymaking. The system is discussed in elite, niche circles, but not sufficiently understood by progressive political parties, trades unions, student groups, religious or community organisations. It can only be changed if there is greater public understanding of the real forces shaping globalisation. Societies cannot transform that which they do not know of or understand. Spreading awareness of the way in which the globalised financial system exercises power over domestic policy-making, is a vital first task for progressive forces. A task that must be undertaken with little help from an economics profession that remains aloof from such debates.
However, the major catch confronting states is this: Policy autonomy over exchange rates, interest rates and cross-border capital flows can only be achieved by building a framework of international cooperation and coordination that prioritises the domestic policy autonomy of all states. Such a system would be one ‘amounting to internationalism on the terms of labour’ as Tily argues. Many will argue that in today’s world, generating international cooperation and managing global capital mobility is impossible. That the globalisation ‘genie cannot be put back in the bottle.’ Such arguments are just a form of defeatism. They are contradicted by the worldwide rise of trade protectionism and strident anti-immigrant nationalisms – evidence that globalisation can indeed be reversed, albeit in ways that are both harmful and reactionary.
For the international system to be managed in the interests of ‘the common good’ would require progressive coordination and cooperation at the international level between state actors. Such cooperation is anathema to the virulent nationalisms of Modi’s India or Bolsanaro’s Brazil. But nationalisms must be overcome, and a spirit of internationalism fostered, if the international financial system, future pandemics and climate change are to be stabilised.
Building public and political confidence
There is a widespread sense of powerlessness in the face of global finance’s great power. But societies would feel less powerless if there was greater understanding of the private financial system’s utter dependence on the nation state: on public, taxpayer-backed resources for the accumulation of wealth. The crisis of Covid-19 proved decisively that global capital markets are slavishly dependent on the largesse of publicly backed central banks, and in particular on the US Fed.
Important institutions of the state, including central banks like the Fed and the Bank of England are only able to undertake bailouts and the nationalisation of capital markets because they derive their power to create new money (‘liquidity’, money market operations, or QE) from a nation’s taxpayers. Taxpayer power sustains and finances the public institutions that underpin the private monetary system. These include the nation state’s legal institutions that uphold and enforce contracts; the tax collection system that regularly generates revenues – and will do so into the future; the currency-issuing central bank; the publicly regulated accounting system; and the taxpayer-financed legal system for the enforcement of contracts. No private financier can make capital gains in the absence of subsidies from these publicly financed institutions.
There are now an estimated 30.3 million taxpayers in the UK. In 2017, and according to the Tax Foundation, there were 143.3 million US taxpayers. In addition, governments impose property and sales taxes together with tariffs or custom duties on imports. Those regular tax collections (both current and future tax revenues) constitute the collateral that back up the UK , EU and US Treasuries. It is public collateral that gives authority to the actions of central bank technocrats, and effectively determines the value of currencies. Countries (like many in Africa) that lack a well-developed tax collection system and publicly financed institutions for managing the private monetary system, lack the public collateral needed for a strong central bank and sound currency.
In light of this knowledge, what is needed is first, greater understanding of taxpayers’ potential power and leverage over the private finance sector. Such understanding should lead to the formation of a new international union of workers, political parties, people and enterprises that regularly pay their taxes; a union that would spread understanding of the private global financial system’s dependence on public resources – resources made possible by regular, law-abiding taxpayers. Such a union would empower citizens to impose conditions on the provision of a nation’s public resources to the private finance sector, on terms and conditions that ensure that the private finance system is transformed from its role as master of both the global and national economies, to the role of domesticated servant to nation states.
Fostering such awareness and cooperation will, in turn, require international leadership – the kind of progressive leadership that has hitherto been hollowed out by the dominance of globalised finance, the rise in unemployment and the collapse of skilled, secure and well-paid work. As noted above, these outcomes of globalisation have alienated electorates and demoralised progressives.
In the United States and Britain, both the Tea Party and the Brexit Party, respectively, succeeded in placing intense upward pressure on right-wing political parties, transforming them. Those activists organised, seized and deployed political power, then demanded and achieved real, if harmful change. But many activists and protesters, including the French gilets jaunes actively resist political power, preferring to ‘remain unsullied by electoral politics, finding a community, an identity and a sense of purity in eternal protest’ as Simon Kuper of the Financial Times writes (22 August, 2020). The UK’s Peoples’ Vote alliance disintegrated, he explains, largely because ‘thrilled by the narcissism of small differences’ its leaders spent their energy infighting.
Some social democratic parties have been compromised by their perceived support of financial globalisation. As a result of this apparent collusion with global capital, combined with the deliberate weakening of trade union power and rising private indebtedness, collective grass roots political activism and pressure has withered away. For, despite a record increase in the number of social protests worldwide, ‘the strongmen are (often literally) beating the protesters’ writes Simon Kuper. As a consequence, social democratic parties have failed to organize effectively to seize and deploy political power. That can only change if pressure for radical change is applied on these parties by organised, progressive, internationalist forces and protests.
The coronavirus pandemic is a moment of reckoning for globalisation and our international financial system. It could also be a moment of transformation of the nation state. But only if forces on the left of society wake up to a fuller understanding of globalisation as ‘internationalism on the terms of capital’ and begin to build the political will to transform the international system into one based on terms set by democratic states and their people – broadly defined as labour.
Further Readings
Klein, Matthew and Michael Pettis.(2020) Trade Wars are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace. New Haven, Connecticut: Yale University Press.
Pettifor, Ann (2019) The Case for the Green New Deal. New York: Verso .
Pixley, Jocelyn and Helena Flam (eds.) (2018) Critical Junctures in Mobile Capital. Cambridge: Cambridge Universi