Econoclasts

There are many economists and non-economists that predicted the crisis; that have correctly analysed the flaws in the financial system, proposed new policies, and developed strategies for a new, more economically and ecologically stable global financial architecture. Thanks to the dominant orthodoxy, their work is often overlooked or ignored.   In this space we welcome them to Debtonation and are pleased to share their ideas with you, our readers. The issues they cover will be varied and broad.

Above all they will be -  Econoclastic.

(If you’re an Econoclast and would like to submit a piece to Debtonation, please contact us at info@debtonation.org)

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Only Political Struggle Can Forge Next Social Contract

By Charles and Steve Clark

Charles and Steve Clark, brothers, are social and environmental activists in the United States.  Their blog is GlobalTalk and their email address is: clark.gcc@globalcitizencenter.net.

It has been said that our world’s financial crisis is a manifestation of the collapse of the old social contract – known here in the U.S. as the New Deal – and its international cousin, Bretton Woods.

The evidence for this assessment is ample, and we accept the conclusion.  What is startling, however, is the poverty of viewpoints about the nature of the next social contract and how it will be brought about.  Does everyone think the only answer is breathing new life into the old deal?

As the title of our recently complete manuscript says, This Ain’t Your Granddaddy’s Depression.  The next social contract will not resemble the New Deal.

The salient feature of today’s crisis – and opportunity – is the paramount role that the global, service-based economy plays in world affairs.  Unlike 1944, when the final elements of the postwar social contract were put in place at Bretton Woods, in today’s markets of human exchange, the whole is greater than the sum of the parts.  The fallacy in today’s political thinking is the unquestioned assumption that reviving national economies is the key to restoring stability in global affairs. In fact, only a sustained program to save the global economy can restore stability to nations and states.

So far, there are no indications that neo-Keynesianism is working, and, as the fractious G-20 gathers this week in London, its fissures are widening.  Yet, a return to the failed policies of the go-go, “free market” is politically infeasible, as well it should be.  The problem for progressives is our lack of a political agenda that surmounts neoliberalism with an effective attack both on today’s financial crisis and the broader socioecological crisis that threatens civilization and the planet.

The postwar social contract was rooted in the industrial mode of production and its system of international commodity exchange.  The oligarchs of this system were the energy monopolies that exerted dominate influence in the postwar, consumption oriented governments of the United States and Western Europe.  Their allies, finance capital, ran the banking system.  When the crises of the Great Depression and World War II threatened their order, these two allies brought industrial labor into their domestic social contracts while they continued to manage international exchange.

In the postwar era, however, the nature of the economy itself began a transformation from commodity- to service-based production and exchange.  Although, initially, ownership patterns and the relations of production retained traditional forms, in fact, the new mode of production began a steady transformation of class structures and, thus, a shift in the basis of political power away from industrialists (and, by extension, union labor) and toward service-providers.  At the same time that long-established, hegemonic policies of the industrial era were losing effect and popular respect in the West, finance capital – at the head of the global, service-based economy – demanded more latitude for its own expansion.  In the 1980s, with Friedman as their guide, Thatcher and Reagan complied.  Labor was squeezed out of domestic social contracts, industrial capital moved overseas in a mind-bogglingly quick shift and what we now know as financial speculation was given full leash to manage itself in a globally unregulated economy.

In retrospect, the lack of social accountability in this process was remarkable, and, over the last several decades, it intensified economic polarization and broadened social destabilization across the global economy.  At the same time, no sustained, realistic efforts were made to address the widening ecological crisis, and it has worsened exponentially.  Now, a full-scale, global depression is finally calling the question on both counts.

To have hope of effectively addressing this general crisis, the next social contract must be global in scope, and it must rely on the better values of service-based production, not the rabid instincts of financial hustlers – that is, the financial, banking and insurance services industry which goads savers and investors with fear to promote the greatest private hoarding regime in human history.  The next social contract must create global social security of a sort that dissipates that hoarding impulse.

Fortunately, in the six decades since the last social contract was formed, two new forces have arisen, worldwide, that can reset the social contract in the course of mapping a new political agenda for the world’s people.

The first of these is the people, ourselves.  In 1944, we barely knew of each other, but today, after decades of global, mass communication, we deeply understand that, despite our unique situations, we are all in this mess together.  While the bulk of the world’s people are peasants or factory workers, a growing and increasingly powerful sector are service-providers of various sorts.  Of these, only a handful provide financial services.  The bulk provide health, education, communications, research, design, management, entertainment and all kinds of other services that, nowadays, bind our global economy into an integrated whole.  It is this class that needs to assert itself, rein in its troubled financial sector, set new ethical standards, establish practical controls for global exchange and rally the world’s peasants and proletarians to a new system of global problem-solving.

The second of the world’s critical new forces is civil society, that private array of problem-solving, non-governmental organizations (NGOs) that work in the vast and growing gaps between the world’ mounting, interconnected problems and the inability of nation-states to adequately address them.  In 1944, civil society hardly existed.  Today, it is an essential but unappreciated element of the global market and world affairs.

The next social contract must enshrine civil society and the service class, alongside nation-states and financial elites, as the leaders of a sustained, global, problem-solving endeavor designed to address the socioecological crisis.

The key to such a social contract is making the banking system transparent and accountable to global, human interest.  The formula to accomplish this was first sketched in the 1980s by the visionary economist James Tobin and can be updated to current realities.  The global banking system should be compelled to collect a small fee on every electronic commercial transaction – everything from your credit card to interbank transfers to corporate transactions to currency buys – and make those vast revenues available to a new, popularly-managed, global authority whose mission is the forging and implementation of NGO-corporate-community, problem-solving partnerships.  Working along the global-local nexus of human exchange, these partnerships would attack the key problems of the socioecological crisis.

As part of the collection of this commercial transaction fee (CTF), the banking system should also be compelled to maintain and publish real-time records of all transactions.  While the identities of the transacting entities can be masked, the flows of money – and, particularly, speculation – must be revealed for analysis.  Transparency will provide the data that enables trained analysts to assess market conditions in a qualitatively more objective fashion, and it will set the conditions for everyone to come to understand the general nature of money, capital and economics.

Even a tiny fee of 0.25 percent on each transaction will generate a trillion dollar revenue stream for global, socioecological problem-solving.  In effect, a global problem-solving authority will boost the world’s service economy by putting people to work helping each other, their communities and their bioregions solve the key issues that threaten humanity.  This is the kind of “new deal” that the world needs.

The creation of a proper mechanism to oversee the allocation of these funds is the revolutionary, political dimension of the struggle ahead.  In effect, a new global social contract must be forged and institutionalized.  Although nation-states and financial elites will be – and must be – players in the new contract, they cannot be allowed domination.  Civil society must be permanently empowered and popular will must manage the process.

By collecting the CTF on every transaction, this proposal avoids any overall distortion in the marketplace.  All participants in the global economy pay fees exactly in proportion to the extent of their participation.

The proposal is fair, practical, transparent, socially accountable and adequate to attack our world’s great problems.  As such, it should be at the forefront of political agendas advanced at the G-20 summit.  Unfortunately, however, that will not be the case.  For now, neoliberalism holds sway, despite its faltering prognosis.

Ahead, however, a wider search for a real solution is bound to develop.  Fundamentally, that will be a political solution, one that codifies a new social contract.  That contract, looking forward, will break the domination of speculative financial capital and uproot rear-looking vision of the energy oligarchs that, together, define the present world order.  It will empower the world’s people and civil society to take the lead and attack our problems.

Our problem is the lack of a global political movement to advance this cause.  Until the progressive elements of the service economy see the necessity to unite in our own class and social interests, a new, global social contract cannot be codified.  The fight for transparency and accountability from the financial services industry – manifest in an institutionalized global revenue stream for civil society – is the way to gel a global consciousness movement and win the battle for a new world order.

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How Bad is US unemployment?

Radhika Desai and Alan Freeman: University of Manitoba

15th February, 2009

On February 8, as the Bureau of Labour Statistics released dismal statistics on US employment, markets experienced a Damascene moment. Its conversion to Keynesian stimuli drove the Dow up apparently because the bad news would hasten the bailout package through Congress. Then the index slid in agreement with recent Keynesian converts like Paul Krugman that the package would not do enough..

However, die-hard neoliberals were mounting a rearguard action.

As comparisons of the current downturn with the Great Depression multiplied – UK Treasury ex-chief Ed Balls called it the ‘worst for 100 years’ – neoliberals countered that 1929 was a lot worse, and state actions justified by such comparisons were really unnecessary.

‘A year into the Great Depression, payrolls had plummeted 10 per cent’ said the Toronto Globe and Mail’s Barrie McKenna, citing the University of Michigan’s Mark Perry (see his pro-free-market blog)  ‘and by 1933, the collapse had reached 35 per cent. And not even the most bearish of Wall Street economists is predicting anything close to that’. (February 7, 2008, B5).

History demands more respect. Four years into the Great Depression, the US government remained captive of laissez faire views. Only after 1933 did FDR attempt counter-cyclical policy. This time around, government response was immediate. Like is not being compared with like.

The difference is owed to the neoliberals’ nemesis, J.M. Keynes. As John Kenneth Galbraith pointed out, Keynes and his science of national economic aggregates, macroeconomics, made state intervention inescapable after the war. Not even neoliberals could overturn it. During the Great Depression the U.S. had no useful figures on the level or distribution of employment. Unemployment was not considered a problem. After the war, macroeconomic statistics:

“…showed the value of the total production of goods and services of all kinds, public and private.  The Gross National Product. And in companion tables, they showed the income derived therefrom by kind and source. National income. That the latter needed to be sufficient to buy the former was a thought that no one could henceforth escape. Nor, more specifically, the thought that savings from the income now shown might not all be used – that they might not be absorbed by the spending for investment goods also shown in the tables. And it was evident how serviceably an increment of income, as from government expenditure, would make up any shortfall investment spending or consumer borrowing and add to the purchase and production of goods.” (A History of Economics, p. 245-6.)

The severity of the Great Depression was compounded by failures not repeated in any downturn since.

The neoliberals are like the sailor who, when his ship confronts a huge wave, shouts, “Fear not! Long ago there was a bigger one that sank everybody.” The issue is not whether the present crisis is as bad as the Great Depression. If it is worse than any downturn that followed, 1929 becomes an important comparator for deducing the scale of the remedies required. FT analyst John Authers ‘Non-farm Payrolls and Stocks’ 6 February 2009’, recently compared absolute and percent drops in employment over the past year with the years preceding the troughs of 9 post-war recessions.

Using National Bureau of Economic Research data on recessions we compare the drop in employment from January 2008 to January 2009 with the drop in the 12 months preceding the troughs of the 10 previous postwar recessions. Greater than any previous recession by at least 25% – the absolute drop may reflect merely the growth of the labour force.

But the percentage drop in employment (bottom axis) one year into the downturn – i.e. without having run its course – is also comparable to, or greater than, five of ten previous downturns, and the fifth worst since the war – and worse than each year leading to the troughs of the ‘w’ shaped recession of the early 1980s.

And the US economy has not hit bottom yet. There is no guarantee that when it does, the unemployment levels will not outstrip all postwar recessions, leaving the Great Depression as the only one of comparable magnitude. Neoliberals and Keynesians alike can draw their final conclusions in due time. Meanwhile, we note only the contrast between continued neoliberal attempts to understate the gravity of the situation while drawing no lessons at all from their abject failure to see it coming.

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How much is enough?

By Alan Freeman, University of Manitoba

7th February, 2009

How much is needed to get us out of the crisis? From the historical evidence, a lot more than we’ve seen so far.

Obama’s stimulus, at five per cent of GDP, outstrips all others in the Western world – which on its own sheds doubt on them. Yet even this may not be enough.

All but the willfully stupid now know this is no ‘ordinary’ recession. Downturns like 1974 pale into insignificance beside it.  Only two crises in modern history  – 1929 and 1893 – compare with it. With few exceptions, economists in Bush’s inimitable words ‘misunderestimated’ this from day one.

It is driven, like those of ’29 and ’93, by a failure of investment, in turn caused by a system-wide crisis of profitability. When the return on capital sinks to present levels, investors simply retreat from productive investment into ever more irrational speculation.

This occurs rarely, but when it does, the conventional belief that ‘the market always works’ is worse than useless. One must be guided not by doctrine but the facts. It is an open secret that Obama has expressed more interest in the 1933 US ‘New Deal’ than in the views of his closest economic advisors. So let’s take a look at it.

Who blessed America?

By 1933, US unemployment reached the unprecedented level of 25%. It’s not hard to see why: capital stopped investing. By 1932, private investment of all types had fallen to the all-time low of 2.2 per cent of GDP, from 15.9 per cent only three years earlier.

An investment failure goes beyond lack of demand. You can cut taxes and interest rates as far as you like, but unless investors put their money where their large mouths are, the economy goes nowhere fast. The state has to step in directly. In words used by Keynes but conveniently ignored by his recent converts, it must ‘socialise investment’. But on what scale? Like Obama – but two years too late – the New Deal hiked state spending by five per cent of GDP, cutting unemployment to 16 per cent until the mini-recession of 1937-38.

Cool – but not a recovery. The ‘golden age’ boom of 1942-1968 finally saw the back of the depression. It dates not from the New Deal, but the War. Between 1938 and 1944, government spending trebled, approaching half of GDP – compared with a miserable three per cent from private investors. And when the war was over, state investment stayed at double its prewar level despite repeated foolish attempts to cut it back. This was what it took, economically, to ‘solve’ the crisis.

It’s common to speak as if the war was ‘economically abnormal’. Well, so is the present situation. So here’s an ‘uncomfortable truth’: before the US economy saw a meaningful recovery, the state took over half its economy, supplanting private investment for three years, and following that, retained both investments and spending which were double their prewar levels.

And it happened in wartime, when private investors accepted measures they would not tolerate in peacetime. That’s food for thought. It means the way out of the crisis involves something never seen before – wartime state involvement on a peacetime basis.

In simultaneous polls in the USA and Canada, two-thirds of those interviewed said that they wanted direct state spending instead of tax cuts – a historic shift of opinion. North American economists haven’t caught up and, according to the Wall Street Journal, are still arguing for tax cuts – which just means they want the poor to pay. This is so last Millenium. As France and Iceland show, it won’t play in Peoria.

Maybe it’s time the politicians stopped listening to their economic ill-advisors, and started listening to their own people – and the lessons of history. Capital, move over. Public, move in.

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IMF applies double standard for it’s ‘more equal’ members

By Kunibert Raffer, Associate Professor at the Department of Economics, University of Vienna

16th December, 2008

The IMF “is urging countries to stimulate their economies in the face of a bigger-than-expected slowdown in the global economy triggered by recent financial turmoil”, arguing for a further global fiscal expansion of 2%. Its Chief Economist told a news conference that “global fiscal expansion is very much needed“. Is the Fund reconsidering its ideology? Not really, this advice is exclusively addressed to its “more equal” members.

The IMF explicitly approves Northern bail-outs, state guarantees and de facto socialisation of banks and other enterprises. Money on a scale dwarfing Southern debts is immediately available. Guarantees, purchases, capital infusions to which the US authorities committed themselves are US$ 8 trillion, over half the nation’s GDP. Obama is thinking about tax cuts and public investments of $1.85 trillion. Keynesian demand push policies are considered necessary. The sacred cow “Maastricht criteria” was slaughtered. Governments discuss how big cheques to taxpayers would stimulate consumption. Large infrastructure expenditures are envisaged, large scale bank closures or selling off firms to foreigners are not, let alone denying people access to their own bank accounts as in Argentina (“corralito”). Banks (or at least their risks) are taken over by taxpayers. When the first bail-out package of US$ 70 billion arrived, Wall Street was about to distribute bonus payments equivalent to over 10% of this package.

In other parts of the globe the IMF still sticks to its traditional and failed recipe when it comes to fight the present crisis. In the South belts have to be tightened, enterprises are sold to foreigners, and privatisation is enforced. Socialisation waves comparable to the North are anathema. Consumption must be cut back to adjust economies. While the first generations of adjustment measures had no cushion, NGO-pressure has meanwhile produced anti-poverty programmes. It is no longer argued that doing nothing to protect the poor would ultimately protect them best as the crisis would be overcome more rapidly. Present Northern stimulus packages are dimensions away from anything ever spent on anti-poverty measures in poor countries, even if one includes those resources the IMF forces countries to pile up as forex reserves instead of spending them.

True to form, the IMF’s first Exogenous Shocks Facility arrangement with Malawi requests “fiscal and monetary tightening”, reduction in domestic borrowing, fiscal discipline, stressing the “need” to resist spending pressures.

The IMF argues that such difference is purely economic and logical: those able to afford expansionary policies should do so, those unable must not. Optimists may see this as a change. In 1997-8 the IMF did not allow Asian tigers to finance expansionary policies, although they could have done so. Quickly most did, shedding off IMF-restrictions. Under the term “global imbalances” the IMF started to ask surplus Southern countries to import more from the one big deficit country or to contribute in other ways to help it. Malawi, however, must tighten her own belt. A general policy of asking surplus countries to help still cannot be discerned. However, what emerges clearly is an unjustified and unfair double standard.

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The Long Detour of Financialization

By Radhika Desai
University of Manitoba

What caused the crisis? Current wisdom that ‘Wall Street hit Main Street’ puts the financial cart before the real economy horse. It implies that bank-bailouts and regulation can fix things. The depth of the recession we face and the gargantuan task of fixing the economy arise, however, from the real economic roots of the present crisis.

The 2008 financial crisis is the final instance of a series of financial bubbles originating in the US. The stock market and emerging market bubbles burst in 2000 and 1998; a South-North (reverse) capital flows-fed stock market bubble burst in 1987; and the 1970s third world debt bubble ended in catastrophic 1982 Debt Crisis. Altogether the US led the world a 30-year-long detour of financialization as it attempted to postpone, manage and delay the consequences of what economic historian Robert Brenner called the Long Downturn for its world hegemony.

By the 1970s European and Japanese recovery led to over-competition and over-capacity in world manufacturing lowered profit rates and ate into the US’s great share of the world economy on which its world hegemony rested. The US now parlayed a waning hegemony into increased financial power. The 2008 crisis marks the end of the detour because no further strategies can increase US profitability or extend US hegemony without even more severe damage to its economy than this crisis already promises to inflict.

Now the world cannot postpone the underlying problem of overcapacity. Two ways lead out: massively destroying productive capacity – flinging millions into unemployment and poverty – or by a New New Deal – using state money retain and, where real need requires, extend, capacity while creating new income streams among the less well off who are more likely to spend, whether in the first world or, more urgently, in the third world.

This will accelerate the spread of productive capacity around the world, and diminish income inequalities between classes and nations, not to mention, diminishing the relative economic weight of the US and the West. But that would hardly be a bad thing. The bonus-bandits and financial fakers will be busy finding a million reasons not to do quite this. They made their fortunes creating the mess that we are now in. and they are not going to let go easily. Egalitarian solutions are never popular with the rich. But actually, they are the only answer.