What kind of leadership does the world need now? US President Franklin Delano Roosevelt’s leadership was undoubtedly extraordinary. His New Deal flew in the face of the contemporary economic orthodoxy, begun even before Keynes’ General Theory was published in 1936.
Roosevelt’s legacy also includes creating the United Nations in 1945, after acknowledging the failure of the League of Nations to prevent the Second World War. He also insisted on ‘inclusive multilateralism’ – which Churchill opposed, preferring a bilateral US-UK deal instead – by convening the 1944 United Nations Conference on Monetary and Financial Affairs at Bretton Woods with many developing countries and the Soviet Union.
The international financial institutions created at Bretton Woods were set up to ensure, not only international monetary and financial stability, but also the conditions for sustained growth, employment generation, post-war reconstruction and post-colonial development.
In resisting painfully obvious measures, the current favourite bogey is public debt. Debt has been the pretext for the ongoing fiscal austerity in Europe, which effectively reversed earlier recovery efforts in 2009. With private sector demand weak, budgetary austerity is slowing, not accelerating recovery.
Much has been made of sovereign debt on both sides of the north Atlantic and in Japan. In fact, US debt interest payments come to only 1.4 percent of annual output, while Japan’s very high debt-GDP ratio is not considered a serious problem as its debt is largely domestically held. And, as is now well known, the major problems of European debt are due to the specific problems of different national economies integrated sub-optimally into the Eurozone.
The international community has, so far, failed to develop effective and equitable debt workout, including restructuring arrangements, despite the clearly dysfunctional and problematic international consequences of past sovereign debt crises. The failure to agree to sovereign debt workout arrangements will continue to prevent timely debt workouts when needed, thus effectively impeding recovery as well.
Meanwhile, earlier international, including US tolerance of the Argentine debt workout of a decade and a half ago had given hope of making progress on this front. However, this has now been undermined by the Macri government’s recent concession, on worse terms and conditions than previously negotiated, to ‘vulture capitalists’.
Golden cages of the mind
Most major deficits now are due to the collapse of tax revenues following the growth downturn and costly financial bailouts. Slower growth means less revenue, and a faster downward spiral. While insisting on fiscal deficit reduction, financial markets also recognize the adverse growth implications of such ‘fiscal consolidation’.
Many policymakers are now insisting on immediate actions to rectify various imbalances, pointing not only to fiscal deficits, but also to trade and bank imbalances. While these undoubtedly need to be addressed in the longer term, prioritizing them now effectively blocks stronger, sustained recovery efforts.
Recent recessionary financial crises have been caused by bursting credit and asset bubbles. Recessions have also been deliberately induced by public policy, such as the US Fed raising real interest rates from 1980. Internationally, this contributed not only to sovereign debt and fiscal crises, but also to protracted stagnation outside East Asia, including Latin America’s ‘lost decade’ and Africa’s ‘quarter century retreat’.
Yet another distraction is exaggerating the threat of inflation. Much recent inflation in many countries has been due to higher international commodity, especially fuel and food prices. Domestic deflationary policies in response only slowed growth while failing to stem imported inflation. In any case, the collapse of most commodity prices since 2014 has rendered this bogey irrelevant.
Market vs recovery
Strident recent calls for structural reforms mainly target labour markets, rather than product markets. Labour market liberalization in such circumstances not only undermines worker protections, but is also likely to diminish real incomes, aggregate demand and, hence, recovery prospects. Nevertheless, these have become today’s priorities, detracting from the urgent need to coordinate and implement strong and sustained efforts to raise and sustain growth and job creation.
Meanwhile, cuts in social and welfare spending are only making things worse – as employment and consumer demand fall further. In recent decades, profits and rents have risen at the expense of wages, but also with much more accruing to finance, insurance and real estate (FIRE) compared to other sectors.
The outrageous increases in financial executive remuneration in recent years, which cannot be attributed to increased productivity by any stretch of the imagination, have exacerbated problems of financial sector short-termism. Regulations are urgently needed to limit short-termism, including the ability of corporations to reap greater profits in the short-term while worsening risk exposure in the longer term, thus exacerbating systemic macro-financial vulnerability.
Growing income inequality in most countries before the Great Recession has only made things worse, by reducing consumer demand and household savings, and increasing credit for consumption and asset purchases – instead of augmenting investments in new economic capacities and capabilities.
Current policy is justified in terms of ‘pro-market’ – effectively pro-cyclical – choices when counter-cyclical efforts, institutions and instruments are sorely needed instead. Unfortunately, global leadership today seems held to ransom by financial interests, and associated media, ideology and ‘oligarchs’ whose political influence enables them to secure more rents and pay less taxes in what must truly be the most vicious of circles.
John Hobson – the English liberal economist in the tradition of John Stuart Mill – noted that ‘economic imperialism’ emerged from the inherent tendency for economic power to concentrate and the related influence of oligopolistic rentiers on public policy. Selective state interventions to bail out and protect such interests nationally and internationally, while not subjecting them to regulation in the national interest, must surely remind us of the dangers of powerful, but unaccountable oligarchies in a systemically unstable market economy and politically volatile societies.
(This article was originally published in Inter Press service (IPS) news on August 9, 2017)