Since the financial crash of 2008, followers of mainstream economic dogma haven't changed their tune much. But an ever-growing legion of dissenting economists are challenging these cherished myths, as summarised by the New Internationalist in a classic edition of the magazine from December 2015.
Myth 1: Austerity will lead to ‘jobs and growth’
Myth 2: Deficit reduction is the only way out of a slump
Myth 3: Taxing the rich scares off investors and stalls economic performance
Myth 4: Economic migrants are a drain on rich world economies
Myth 5: The private sector is more efficient than the public sector
Myth 6: Fossil fuels are more economically viable than renewables
Myth 7: Financial regulation will destroy a profitable banking sector
Myth 8: Organized labour is regressive
Myth 9: Everyone has to pay their debts
Myth 10: Growth is the only way
Never underestimate the power of cherished ideas. They are clung to ever tighter when we are suffering reality’s harshest knocks. When it comes to economics, today’s over-riding article of faith is of the rule of the market. If only it were completely free and global, with notions of governance and workers’ rights out of the way, then the good capitalists would usher in an era of plenty with pickings for everyone, from top to bottom. Regulation, social provision, public ownership are all getting in the way, believers claim. Down with the public good, up with individual responsibility. You get what you deserve.
This economic orthodoxy is called neoliberalism – ‘neo’ because it is a 20th/21st-century revival of the 18th-century school of liberal economics which called for the abolition of government intervention in manufacturing and trade. It finds particular favour when elites govern. But it has no solutions for the economic crashes we have seen in recent years. We need a more social, ‘real world’ vision of the economic sphere. Demands for this change are on the street and also in the academy with students protesting against the orthodoxy they are taught. It’s in this spirit that we present 10 of the most damaging economic myths that we urgently need to ditch.
Austerity as a cure for economic woes is a confidence trick. As a response to an off-the-rails financial system and the deep recession caused by the risky and often fraudulent behaviour of private banks, it defies belief. Not only is the buccaneering of the banks rewarded by huge sums of public money, but the suffering public must submit to their elected leaders sadistically tightening belts to gut-squishing proportions.
The con is of the steady hand on the tiller. Conservative politicians start to talk in what economist Paul Krugman calls ‘hard choices boilerplate’. Times are hard so hard choices must be made; austerity is presented as the bitter pill that must be swallowed to return the economy to health. There will be increasing business confidence in the prudence of the government and this, along with tax breaks for corporations, will provide the incentive for the business sector to invest more and create jobs.
However, the desired result has yet to materialize. According to Krugman: ‘Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity.’1
The reason is clear. In a depressed economy with increased job insecurity and worsening welfare provision, people will want to hang on to their savings and not spend, prolonging the stagnation. The super-rich also see little reason to invest productively, preferring instead to build their asset portfolios and blow up property bubbles. If the government truly wants to restore confidence (there’s that word again) then it needs to spend, not cut, creating jobs in the public sector, offering the security of a more social state. If deficits are run, that’s not the horror it has been made out to be, as interest rates are rock bottom anyway and the money being borrowed is being used productively rather than gathering dust.
However, the early adopters of austerity clearly thought this sounded too much like common sense and relied instead on off-beat economic theories of ‘expansionist austerity’ (which relied on statistical research that has been proven plain wrong since). The IMF, notorious for (along with the World Bank) imposing austerity on the Majority World during the 1980s debt crises, undertook a wide-ranging study of austerity measures after the 2007/08 financial crisis and declared that austerity has a negative impact on growth. One only has to look at Greece and Spain, undergoing harsh austerity despite the contrary desires of their people and where over 50 per cent of young people today cannot find a job, for the clearest demonstration of that negative impact.
The US establishment has since become openly critical of austerity, and was itself being urged by financial analysts Bloomberg earlier this year to increase public spending and hiring to give a boost to the economy.2 In Britain, meanwhile, the Conservatives never miss a turn to declare that their austerity policies are paying off. But Cambridge economist Ha-Joon Chang reveals another picture. The official narrative of a higher national income breaks down thus – real wages have fallen by 10 per cent since 2008, while the wealthiest increased their share of wealth. As for job creation – he finds that the proportion of underemployed workers forced to accept fewer hours due to a lack of work has shot up fourfold. Self-employment, too, has jumped – a sign of desperation rather than ‘a sudden burst of entrepreneurial energy’, he finds.3The Institute for Fiscal Studies believes that by 2020, an additional 800,000, or one in four, British children will be living in poverty.4
No wonder Nobel-prize winning economist Joseph Stiglitz described austerity plans in 2012 as a ‘suicide pact’ that would lead countries into a ‘vicious cycle of spending cuts and slumping growth’. But here’s another smokescreen – the austerity agenda has little to do with strong governance, but is entirely ideological. As the alternative policy group Transnational Institute commented at the start of 2013: ‘Corporate and political elites, rather than learning from the crisis, are using it as a pretext to deepen neoliberalism and remove obstacles, including workers’ rights and much of the welfare state, which hinder greater corporate domination.’5 Austerity is being used as a tool for ever-increasing privatization, either with the collusion of a moneyed elite in government (as in Britain), or by the imposition of it on crisis-hit countries (as in the loan conditions attached by the ‘Troika’ of the European Commission, the European Central Bank and the IMF to European countries).
Austerity’s harvest has been of growing inequality, as governments have ditched social spending to reduce poverty and sought to incentivize the idle rich rather than small businesses. Large corporations today divert increasingly large amounts of their profits to CEOs and shareholders with the share for their workforce continually shrinking. Meanwhile, the political discourse remains of tough measures for tough times which will reward hard workers and come down hard on shirkers. It’s a confidence trick with an emotional appeal to a significant number of voters, who see it as unfair but necessary, even while there is no evidence that it actually works.
In April 2009 I was invited to appear on the BBC News Channel. The G20 group of rich countries was staging a Summit in London. World leaders were in a state of ill-concealed panic about the financial crisis. None seemed to have the faintest idea what was going on. I was asked by the BBC presenter: ‘Is this the end of capitalism as we know it, then?’ It did for once seem like a reasonable question to be asked, even by the makers of BBC News. At the time, limitless quantities of public treasure were being poured into the collapsed financial ‘architecture’. Yet more public treasure was being lavished on a ‘fiscal stimulus’ to salvage the ‘real’ economy. Old cars were bought up and scrapped so that more new ones might be sold, and fewer jobs lost. General Motors – once the biggest corporation in the world – was to be saved from bankruptcy.
At the time, no-one dared suggest anything else. Not even neoliberal economists. For a generation it was they who had been directing government policies, secure in the knowledge that markets always ‘self-correct’. None of this was supposed to be happening. For once, they were lost for words. Where had all that money come from? Where had it gone? Why had no-one seen it coming? What next? No-one could say. You did not need to be an economic genius to sense that private debts were once more being dumped on the public, just as they had been by an escalating series of financial crises around the world, starting with the ‘Third World’ financial crises of the 1980s.
But you would have had to live through the experience of ‘structural adjustment’ in the Majority World to foresee that by the end of that same year, 2009, the neoliberals would be back in the saddle, brazenly suggesting that the calamity had been caused by ‘too much government spending’. As soon as financial markets had been bailed out, fiscal stimulus for the real economy was stopped. Instead, supposedly independent central banks – in reality the creatures of governments – started handing free ‘helicopter’ money to private banks and financial markets, leaving them to decide what to do with it. In other words, the very institutions that had caused the Great Recession would be relied on to end it. With interest rates now lower and for longer than in recorded economic history, quantitative easing* has risen to $5 trillion worldwide, and counting. It was, and remains, little more than an ingenious accounting trick. Quantitative easing features in the accounts of central banks, not governments. Now that the banks no longer needed government funds, the priority was to cut government budget deficits, public employment and services – indeed, to cut the very notion of ‘too much government spending’ to ‘too much government, full stop’.
All of this because of one quite blatant falsehood – the claim that governments had been ‘borrowing too much’. In fact, research by the International Monetary Fund shows the opposite to be true (see graph). Before the ‘credit crunch’ in 2007, public debt and budget deficits were in fact falling quite sharply. Both had been higher and rising faster towards the end of the 1980s, when the impact of neoliberal economic policies was first being felt. Both were very much higher during the two World Wars, the second of which cost just about as much treasure as the Great Recession has thus far. The difference was that huge government borrowing and budget deficits during the Second World War had to be spent on the real economy and employment, even though that often meant real guns, tanks, death and destruction. This finally brought an end to the protracted Depression of the 1930s. A ‘Golden Age’ of capitalist prosperity followed in the 1950s and 1960s, reducing both the debts and the budget deficits of governments.
Since 2008, by contrast, public funds have been given to financial markets, not to the real economy and employment. So the Great Recession has continued, just like the Depression. We might well be left to conclude that it would take even bigger wars to put an end to the Great Recession. The world as a whole is never in debt or deficit: for every debtor there is always a creditor, for every deficit a surplus. As the chief economist of none other than Goldman Sachs – the financial ‘vampire squid’ at the heart of the financial crisis – has pointed out, public debts are always matched by private savings.3 Crises happen, as in 2007, when private savings rise, withdrawn from the real economy. Public debt rises at the same time. If it isn’t spent on the real economy to replace private saving, the crisis continues.
In truth, at the root of the Great Recession lies a ‘liquidity trap’ – too many people with too little income to make the real economy healthy enough for private savings to be invested in it.4 So long as this has continued, so has the Great Recession. If you’re more interested in a certain brand of politics, the exercise has been a great success. An economic myth has prevailed over the truth. Reactionary policies verging on the deranged have become the hallmark of sound economic management. Neoliberals like to ask how a crisis caused by debt can be resolved by more debt. The rest of us might ask how a catastrophe caused by financial markets can be resolved by financial markets.
* Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. The aim is to increase private-sector spending in the economy.
An economic myth of neoliberalism is that private enterprise creates prosperity; taxation destroys it. So the less taxation there is, the more prosperous we’ll become. Competition between societies to cut tax attracts investment and encourages the creation of wealth. In reality, without publicly funded education, healthcare, infrastructure and employment (let alone bailouts), private enterprise would be unable to function at all. Taxation creates prosperity every bit as much as private enterprise. Tax ‘wars’ that promote a ‘race to the bottom’ for tax levels, a ‘race to the top’ for cheating, threaten to impoverish, even destroy, societies. Shrewd investors – and even rich individuals – know this better than most. The idea that they only invest productively in the places with the most ‘competitive’ levels of tax is nonsense.
What, then, is the right level or kind of taxation? That is a political rather than economic question. In a democracy, basic principles of fairness are more likely to apply. ‘Progressive’ tax means the broadest shoulders carry the greatest burden. ‘Regressive’ tax, such as consumption taxes (VAT, GST and the like) paid at the same level by everyone, works the other way about. Famously, the Nordic countries of Sweden, Norway and Denmark have among the highest and most progressive tax regimes in the world – yet they also feature regularly among the most prosperous and successful societies. When taxes in Sweden were increased to 60 per cent during the financial crisis in 2008, opinion polls reported that most Swedes were happy to pay them.1 You don’t have to want to live in Sweden to know that progressive taxation does not stall economic performance.
Neoliberalism has spawned regressive taxation and cheating. Funding an enormous industry of consultants, and weaving an elaborate web of havens, has become far more lucrative for wealthy corporations and individuals than paying the tax collector. The very wealthiest have ended up paying no tax at all. In effect, they are being subsidized by everyone else, including more rooted and numerous local enterprises. All of this has been thrown into sharp relief by the Great Recession. Government borrowing and budget deficits only happen because tax receipts are insufficient to cover spending commitments. During a recession, tax revenues fall. On the face of it, increasing them threatens to make things worse – but then, so does cutting public expenditure. Another essentially political choice.
In Britain – a notorious shelter for tax havens – taxes on corporations and rich individuals have actually been cut, while VAT has increased sharply. Tax wars and regressive taxation have become defining features of ‘austerity’. But they’ve done nothing to stimulate investment. At the end of 2014, investment fell further than at any time since 2009;2 already lower than in the rest of the European Union, it has fallen consistently since 2009.3 Neoliberal tax regimes are not a given. There are other ways of seeing. Suppose, for example, we look at private wealth – corporate as well as personal – rather than income. Thomas Piketty estimates that governments on average now have no wealth at all. Their debts are roughly equal to their assets. Private assets, however, are six times greater than private debts. A one-off ‘flat’ tax of just 15 per cent on private assets, he suggests, ‘would yield nearly a year’s worth of national income and thus allow for immediate reimbursement of all outstanding public debt’.4
Piketty is not hopeful that such a tax will be raised any time soon, at least while neoliberalism prevails. The same might well apply to ‘transaction’ taxes on financial speculation, such as a ‘Tobin’ tax on currency dealing – which would have the added beneficial effect of discouraging financial mayhem. Both would help to solve persistent economic problems.
One kind of realism suggests that the prospects for better, fairer tax regimes are, well, not very realistic. Another kind of realism tells us that neoliberal tax regimes rely on myths and propaganda. In reality, quite modest taxes on wealth would produce more than enough resources to turn the Great Recession on its head. That might even please shrewd investors.
There’s a special opprobrium reserved for those who move to a wealthier country to work and try to improve their lot. They are ‘undeserving’, unlike refugees fleeing violence who can gain a certain grudging acceptance if they have been victimized enough (although usually accompanied with cries of ‘but we have our own problems’ and ‘we can’t cope’). In the Netherlands, where I live, economic migrants are often referred to pejoratively as gelukszoekers or chancers. One literal translation of the word – ‘happiness seekers’ – is supremely ironic considering the disgust with which it is deployed. A recent poll of 2,000 people found 75 per cent agreeing that there should be fewer immigrants in this category as opposed to a much smaller 26 per cent who wanted fewer war refugees.1
In the public mind, inflamed by the rhetoric of both mainstream media and politicians seeking to distract the electorate from the ravages of austerity, economic migrants are perceived as guzzling public services when not stealing jobs and lowering wages. But looked at more soberly, in the light of research, such imagined impacts are wide of the mark. On average across the 34 wealthy nations of the OECD, immigrant households made a net annual contribution of €2,500 ($2,800) each – that’s how much more they contributed in taxes than they received in public provision.2
In a 2014 study, researchers at University College London found that non-European immigrants to Britain (the most maligned group) were less likely to be on state benefits than natives and had contributed a net £5 billion in taxes between 2000 and 2011.3 Rather than draining public services, they were providing a much needed infusion that would benefit the rest of the population. As for social housing, new migrants made up less than two per cent of users.4 That battle lies elsewhere – in a government that sells off social housing while doing nothing to ease housing shortages in an overheated property market that benefits only the well-to-do.
The evident truth is that migration follows a demand for labour. And while politicians may talk tough, immigration policies have actually become somewhat less restrictive for high-skilled migrants and, sometimes, even for low-wage earners.5 Meanwhile, a double standard persists – when individuals from wealthy countries set off to more lucrative jobs in foreign lands this is viewed as entirely normal or ‘following a dream’. Economic migrants tend to be young, enterprising and often bring skills that are in demand in recipient countries. They can ease pressures on an ageing workforce, pay into the pension pot and bring a dynamism to the economy. Over the longer term, as they themselves age, this positive impact evens out. Nonetheless, in Britain, the Office for Budget Responsibility predicted that if the country were to follow a high net-migration trajectory, government debt could be halved over 50 years through the input of working migrants.
A curious extreme is worth noting. Libertarian economists – the kind who worship market forces and demand the removal of all trade barriers – are avid advocates of mass economic migration, believing that this influx of labour would make world GDP shoot sky high.6They see the imposition of immigration restrictions as a missed opportunity equivalent to leaving trillion-dollar bills lying on the sidewalk. Of course, the scale of immigration that would be required to achieve the ‘results’ suggested by their models would depopulate the Global South and is not going to happen.
Meanwhile, back in the real world and sticking to the evidence at hand, the more pressing issues are whether economic migrants take jobs and depress wages. Studies in this area show that if anyone is crowded out of the jobs market it tends to be the most recent former migrants. Where migrants have depressed wages in lower-income groups, it is on a very small scale and is usually temporary – one survey of OECD countries found it to be in the region of 0.12 per cent for a one-per-cent increase in immigrants.4
And there are studies that demonstrate the opposite. One study by economists Mette Foged and Giovanni Peri covered every single worker in Denmark from 1991 to 2008 and tracked how they responded to immigration, including large influxes of refugees from Somalia and Afghanistan. People who lived in communities which received the migrants saw their wages grow more rapidly than communities without migrants.7 The battle against low wages is also elsewhere – to be waged against political policies that favour the rich and create job insecurity. The ILO proposes that the way to strengthen growth and employment is to address inequality (the declining labour income share), minimum wages, collective labour bargaining and better social protections. According to migration economist Michael Clemens: ‘Low-skill immigrants end up both taking jobs and creating jobs. The balance has been positive even in places where politicians and activists say that it must be negative. Communicating that fact will be a permanent challenge, because the ways that immigrants fill jobs are direct and visible; the ways they create jobs are indirect and invisible.’8
Finally, a splash of cold water. Whereas migration can bring positive economic results in the short term, in the long term the fiscal impact of migration over the last 50 years to the wealthy OECD countries has been, on average, close to zero – rarely going beyond 0.5 per cent of GDP either in the positive or negative direction.2 Migrants over this longer time frame can no longer be distinguished from other citizens. So why all the fuss and bother?
The abiding myth of mainstream economics is that governments should minimize their role in the economy – or, put another way, get out of the way of the accumulative drive of the rich. It’s an ideological position that suits governing elites and has led, among other things, to a fire sale of public assets and the increasing privatization of what were once public goods and services. The magic of the market and the vigour of private enterprise will make the cream of cost-effectiveness and efficiency rise to the top. At least, that’s how it’s spun.
Increasingly also, sell-offs are seen as a way for governments to ‘cut debt and plug budget deficits’, regardless of common-sense doubts that this may not be for the best as, usually, you can’t sell the same thing twice. Thus The Wall Street Journal applauded Australia and New Zealand/Aotearoa’s record privatizations in 2013, by gushing: ‘Their privatization sprees have injected needed cash into government coffers and freed the governments to focus on their core missions while injecting life into both markets.’1 It’s a view probably shared by George Osborne, Britain’s Chancellor of the Exchequer, who complained, in a 2010 budget speech, of the public sector ‘crowding out’ the private sector, pinning his hopes on the private sector providing ‘a genuine and long-lasting economic recovery’.
But what does privatization in its varied forms – outright sales of companies, public-private partnerships, outsourcing – deliver? Does it lead to greater technical efficiency or effectiveness in providing a service? That privatized businesses will aim for cost efficiencies is a given, but that usually means a lower level of service or pay cuts for workers, job insecurity and job losses, which all have their deadening effects on the wider economy if one is willing to look that far. By now privatization has been thoroughly scrutinized – there are numerous studies, surveys and, indeed, surveys of surveys of its effects. The consistent conclusion: there is no evidence of greater efficiency.2 So, the best outcome one can hope for is that private-sector ownership or involvement is no worse than what the public sector provides – hardly a turn-up for the books. The largest study of the efficiency of privatized companies looked at all European companies privatized during 1980-2009. It compared their performance with companies that remained public and with their own past performance as public companies. The result? The privatized companies performed worse than those that remained public and continued to do so for up to 10 years after privatization.2
Even in the super-competitive telecoms sector, where customers have benefited from lower costs and increasing variety of services over the years, this result holds. A global survey found that ‘privatized sectors perform significantly worse’ than telecom companies remaining in state hands.2 Healthcare is where this myth is really given the lie. In the US, where healthcare spending is at its peak, with private spending on healthcare exceeding public spending, basic health outcomes are worse than in Cuba – which spends a fraction of the US amount per person in a totally public healthcare system (see table).
A 2012 report by the US Institute of Medicine was damning: ‘30 cents of every medical dollar goes to unnecessary healthcare, deceitful paperwork, fraud and other waste. The $750 billion in annual waste is more than the Pentagon budget and more than enough to care for every American who lacks health insurance… Most of the waste came from unnecessary services ($210 billion annually), excess administrative costs ($190 billion) and inefficient delivery of care ($130 billion).’2 That same year government had to step in with the Affordable Care Act (also known as ObamaCare) to try to rectify a bloated system that was clearly failing poor citizens.
In Britain, creeping part-privatization of the National Health Service through outsourcing has led to similar ‘penny wise, pound foolish’ outcomes. One example: in Cornwall, the private contractor Serco, which provided call-centre cover for out-of-hours GP services, decided to economize by replacing clinicians with call-handlers without medical training, who followed a set of computerized cues to make decisions about ambulance call-outs. This resulted in a very expensive four-fold increase in ambulance call-outs with the cost to be borne, of course, by the taxpayer.3
Public healthcare systems are more efficient partly because they provide universal coverage and can benefit from economies of scale. They require proper funding. The very opposite was proposed by the IMF and World Bank for many Majority World countries during the devastating structural-adjustment programmes of the 1980s. Then the mantra was that the state must withdraw, and let patients pay at the point of use. The result has been: the poorest people have been effectively stripped of healthcare while superior services are available, but only to those who can afford them.
To say that the public sector can perform just as well as, and often better than, the private sector is not to argue that it does not need reform in many instances. The public sector can be equally blighted with problems of corruption at the higher levels of management. But active unions and engaged service users can provide a check, and public consultation has a democratic advantage, as in the case of South Africa, where municipal unions have formed alliances with communities in order both to fight the privatization of water and sanitation services and to get greater accountability within the organizations they work for.4
Fossil fuels have reached an emperor’s new clothes moment – the reflection in the mirror is not looking good and there’s nary a fig leaf to hand. For years the industry has played up the high costs of renewables and painted a gloomy picture of the technological advancements required. But the technology has caught up – and both installation and generation costs of renewables have dived. So even with oil prices at a historic low and coal still plentiful, renewables are giving fossil fuels a run for their money. In 2013 in Australia, the price of energy from wind power had fallen below that from new build coal- and gas-fired power stations. This is comparing like with like – energy from Australia’s old coal-fired power stations dating from the 1970s and 80s is cheaper, but only because their construction costs have been recouped.
Michael Liebrich of Bloomberg, the financial data giant, observed: ‘The fact that wind power is now cheaper than coal and gas in a country with some of the best fossil fuel resources shows that clean energy is a game changer which promises to turn the economics of power systems on its head.’1 It’s a similar picture elsewhere. In 2014 in the US, both wind- and solar-generated energy came in lower – and even went one better. Emily Williams of the American Wind Energy Association told The New York Times: ‘We’re finding that in certain regions with certain wind projects, these are competing or coming in below the cost of even existing generation sources.’2 And this year onshore wind power in Britain also beat its competitors. According to Bloomberg: ‘The world is now adding more capacity for renewable power each year than coal, natural gas and oil combined.’3
It’s blindingly obvious – with improved technology pushing costs down, there is no escaping the fact that the fuels concerned, wind and air, are absolutely free. Even water resources for wave power do not need to get ‘used up’. All the more reason to call for greater government subsidies and investment in technologies to crack the problems that so far can’t be dealt with by renewables – such as fuelling heavy transport – and upscaling output. Because the news on the oil front is not as rosy as the low prices at the pump suggest. The US, currently producing the world’s largest oil surplus, is going for bust. But large parts of the industry are in trouble trying to maintain the low prices. Around 75,000 jobs have already been lost.4
Meanwhile, the frackers are deep in debt – they have spent faster than they made money, even when oil prices were high. In the first quarter of this year they were spending $4.15 for every dollar earned selling oil and gas.5 It’s anyone’s guess how much longer this situation will continue. But what is truly unsustainable is the environmental damage of fossil fuels. If one were to try and monetize it, as the IMF did earlier this year, then not asking fossil-fuel producers to pay up amounts to an eye-watering subsidy. The IMF calculated it as a global subsidy to fossil-fuel companies of $5.3 trillion a year – or $10 million every single minute – equivalent to 6.5 per cent of the world’s GDP. Of this just six per cent was direct subsidies on fuel; the rest was the estimated cost of environmental damage (including the health bill caused by air pollution) paid for by all of us. This the IMF terms ‘post-tax subsidies’ and refers to their ‘perverse environmental, fiscal, macroeconomic and social consequences’.6 Of course, such calculations cannot cover everything. It would be obscene, for example, to put a monetary cost on a life cut short due to fossil fuel-related air pollution.
It’s not the principle of financial regulation that can be in dispute, but the practice. By and large, regulation has been pretty good for bankers. Among other things, they need protection from each other. Without some form of regulation – and weak regulators to carry the can when things go awry – they would be unable to function at all. In the 1950s and 1960s, higher levels of financial regulation accompanied relatively rapid increases in general prosperity, and almost no financial crises. Banks did as well out of that as anyone else.
When financial deregulation began in the 1980s, general prosperity stagnated and financial crises multiplied. Banks became more profitable than any other economic sector, accounting for as much as 40 per cent of all corporate profits in the US.1 This might have resembled banking bliss, had the story stopped there. But of course it didn’t. ‘I have found a flaw,’ a shocked Alan Greenspan – the Great Deregulator while he was boss of the US Federal Reserve – revealed in October 2008.2 The theory of self-regulating financial markets that had justified deregulation turned out to be completely wrong. So wrong, in fact, that the meltdown caused by the banks had wiped out – among other things – their own mega-profits from the years before.
Deregulation had not been an unqualified success, then, even for the banks. It would have been a terminal disaster, had it not been for just one thing. Banks can blackmail entire societies by threatening to halt the flow of money altogether. So their losses were hastily bailed out by governments, and ‘austerity’ was imposed on the general public instead. The central bankers’ bank, the Bank for International Settlements, has been overseeing a slow ‘recapitalization’ of banks, due to be completed some time around 2019. The theory is that the more of their own money they are required to hold in reserve, the less likely banks are to need bailing out. But they would also have less money to lend, and would make less profit. So the banks are stalling as hard as they can, which is pretty hard. Chances are that, by 2019, recapitalization will be nowhere near sufficient to make banks truly safe, so the public will remain exposed to the growing risk of another failure into the indefinite future.3
‘Regulations put in place so far would not suffice to prevent another collapse of the financial system,’ concludes one well-informed group of independent analysts.4 The causes of the 2008 financial crash remain largely unaltered. Big banks are still ‘too big to fail’. They have not been broken up, nor their retail (high-street) and investment (casino) functions separated completely. Banks are still gambling at their depositors’ expense. ‘The scale of misconduct in some financial institutions has risen to a level that has the potential to create systemic risks,’ laments Mark Carney, boss of the new Financial Stability Board (FSB), as well as the Bank of England.5 The FSB can observe the financial weather, but not change it. By the end of 2013 the world’s top 1,000 banks were back in business, making close to $1 trillion ($1,000 billion) in pre-tax profits; an all-time record, up 24 per cent on the year before.6
The historical record suggests that financial crises happen on average every 10-15 years, and that spiralling bank profits are a forewarning. So the next one is due any time soon. Yet, with interest rates close to zero, none of the current means of ‘recovery’ from financial crisis – lower interest rates, bailouts – is available. Regulation has its limitations. Just as it takes a criminal to catch one, so it takes a banker to regulate one – an inside job. Regulation is not an alternative to the criminal law on fraud and the like. It is arguable that taxes on financial transactions, or speculation, are simpler and more effective means to similar ends. Governments are by no means infallible. But they are, notionally at least, accountable to the public. Financial markets are accountable only to themselves.
There is, in neoliberal economic theory, no justifiable limit to the profits of banks. In any other economic theory there is no justification for banks to be more profitable than anything else, nor for bankers to pay themselves as they do. They have proved quite capable of destroying themselves, and much else besides. Deregulation, not regulation, destroys their profits. In an even halfway saner world, and in the interests of self-preservation if nothing else, bankers would surely be among the most avid of all advocates of regulation.
Labour union members have always been subjected to more or less constant assault from the wealthy on the grounds that they interfere with free markets and therefore with the creation of wealth. In Britain, the Daily Mail hails a renewed round of legal restrictions on union ‘militants’ as ‘war on the trade unions’.1 In the US, the National Right to Work Foundation suggests that labour unions indulge in ‘unreported campaign operations to elect and control congressional majorities dedicated to higher taxes and increased government spending’.2 But the idea that labour unions prevent the creation of wealth is simply wrong. If anything, the evidence from the rich Minority World shows the opposite to be true.
There are two related features of this evidence. First, at the heart of the Great Recession is what’s known as a ‘liquidity trap’ – crudely speaking, the stagnation of real wages since the 1980s. The result has been a lack of ‘effective demand’ – the inability of most people to buy enough of the things that are being produced. That, in turn, has led to a reluctance to invest in producing any more things, and a glut of savings. Second, inequality has spiralled, with astonishing accumulations of private wealth among a tiny band of individuals. This is bad for an economy as a whole, because the more wealth you have the less of it you need to spend, rather than accumulate, and the less there is for everyone else to spend. The ‘liquidity trap’ is opened wider. You create a society where the rich struggle to make productive – as opposed to profitable – use of their wealth, while the rest struggle just to get by from one day to the next.
These two features have been accompanied by three related trends. The first is a sharp decline in the density of labour unions – the proportion of all employees who are members. In ‘advanced economies’, this fell from over 45 per cent in 1980 to not much more than 30 per cent by 2010 (see graph above). Since the main task of labour unions is to improve wages and conditions, it is reasonable to associate this decline with the stagnation of real wages. But, second, there’s more than just a reasonable association. Recent research by the International Monetary Fund has found that ‘the decline in unionization is related to the rise of top income shares and less redistribution, while the erosion of minimum wages is correlated with considerable increases in overall inequality.’3 So the ‘liquidity trap’ is set, in large part, by the rise in inequality, the stagnation of real wages and the decline in organized labour that contribute to it.
Finally, the economic performance of ‘advanced economies’ – at least in the conventional terms of Gross Domestic Product (GDP) per head of the population – has fallen in parallel with union membership. In the 1960s GDP grew much faster than in subsequent decades, when its decline has continued along a steady downward trend (see table). The idea that by removing the regressive effect of labour unions you create more economic prosperity is patently false.
So, say what you like about labour unions, they don’t prevent the creation of wealth. With a lot more reason, you might say that they actually promote economic growth, if that’s what you’re after. But that’s not all that labour unions have ever been after. They have, historically, played a vital part in democracy, in the struggle against unemployment and injustice, and in international solidarity. Dispense with organized labour and you dispense with much of that as well. It may be that the decline of large factories, the rise of corporate globalization, the erosion of union rights and the relentless push for ‘flexible labour markets’ – as well, to be sure, as unions’ own shortcomings – have made it harder for them to organize effectively in wealthy countries. But none of that gives any more substance to the economic myth.
I once met a man from an Indian village who had spent his entire childhood and youth as a slave because a landlord had to be paid back for a blanket given on credit to the man’s father. The ‘debt’ still was not repaid when he was rescued in his middle years by a civil-society group. This extreme example illustrates that debt is just as much about inequality as it is about lending and borrowing. Now here is another extreme. This year the share of the world’s wealth held by the one per cent of top ‘high net worth’ individuals rose to 50 per cent. Meanwhile 71 per cent of the world’s poorest people – all 3,386 million of them – could only lay claim to three per cent of total wealth.1 Gives a whole new spin to living within your means.
On a global scale this concentration of wealth not only makes people and countries more dependent on debt, it also channels huge sums of money into completely unproductive and risky financial speculation – high risk, high return. And it creates a tiny rentier class whose sole function is to extract yet more wealth from the rest of us through the instrument of debt. In such an extractive vision of the world the obscenity of odious debts of the past seems perfectly logical. From the 1970s on, Western banks flush with oil money encouraged some of the most corrupt regimes in the Majority World to take out huge loans. They had full knowledge that the dictators involved and their immediate circle would pocket the money and that the people of those countries would be chained to horrific debt service as a result – on a scale where the original loan was sometimes repaid many times over and which further ruined those countries’ economies.
Such debts are described as ‘odious’ and the lenders should have been punished. Instead, for many indebted countries, the only relief came in the new millennium as a result of active campaigning for debt cancellation. Today there are signs that a new debt trap is being sprung on some of the most impoverished nations of the world. And while odious debts have been pursued with some vigour, rightwing Western governments are now refusing to incur legitimate debts their countries need following the financial crisis created by their elite friends. Debt is talked up as the bogey to justify cuts in public investment and privatization sell-offs. But the opposite is needed to boost public confidence and get economies moving; we need debt-management rather than the constant focus on reduction. Post-World War Two, many European nations ran large debts and invested in public provision in order to kick-start their economies, after which they could bring debt down to manageable levels again.
Foreign-owed debt can be dangerous if levels rise too high and the debtor country is economically weak, but the behaviour of the creditors must be held as much to account as that of the debtors. Greece today is the most prominent horror story of extractive debt. Greece borrowed too much in deals mired in corruption. Today the country’s economy is broken, ‘bailouts’ have been channelled straight to the creditors rather than to help the Greek people, and the need of the hour – massive debt restructuring and the write-off of illegitimate debt – is not being addressed. US economist Jeffrey Sachs describes the situation thus: ‘Debt servicing is a shell game; give Greece tens of billions of euros every couple of years so that Greece can repay the debt that it owes. Professionals call this policy “pretend and extend”. The problem is that the debt grows; the Greek banks die; and the Greek small and medium enterprises collapse. It is death by debt.’
Peering into the rubble of the great financial crash of 2008, economists, politicians, the media and the public have been looking for signs of recovery in terms of lasting growth. Not so much stability, mind, but growth – an expanding economy is a living economy, goes the logic, bringing its munificence as jobs and prosperity. Thus every flicker of growth is seized upon with hopeful optimism – ‘Are things finally on the mend?’ But here’s the thing – between 1900 and 2008 world population quadrupled and the economy more than kept up, with GDP per capita increasing sixfold. If one looks at GDP increase for the world as a whole (factoring in the population increase and adjusting for inflation), it has leapt up more than 25-fold.1
The question that begs is whether the rising tide has lifted all boats. Apart from some success in the very basics, such as literacy and maternal-mortality rates, the picture remains familiar: rewards for the very few and stasis or worse for the vast majority. After this century of growth, 925 million people do not have enough to eat, and just under half the world’s population lives in absolute poverty – despite more than enough created wealth to abolish such evils.2 Yet traditional economists keep repeating the mantra of growth. Anne Krueger, who has worked for both the World Bank and the IMF, claims: ‘Poverty reduction is best achieved through making the cake bigger, not by trying to cut it up in a different way.’1 No surprise then, that economic growth hasn’t affected inequality.
Employment levels have fluctuated rather than grown steadily as one would expect. Indeed, new technologies that increase productivity lead to greater profits but fewer jobs rather than more. The emphasis on GDP growth at all costs has led to wasteful resource use, particularly by the wealthier countries, on an unparalleled scale and without a backward glance. It is often noted that the economy is a subset of the ecological system, but equally there seems to be a belief that nature can cope with anything we throw at it.
However, an assessment by the Global Footprint Network indicates we are running a dangerous ecological debt. Currently the global use of resources and amounts of waste generated per year would require one and a half planet Earths to be sustainable (see graph). The price to be paid for this overshoot is ecological crises (think forests, fisheries, freshwater and the climatic system), a price that is again paid disproportionately by the poor.3 Moreover, as resources get more difficult to extract, it becomes increasingly difficult to maintain the fictions of unbounded growth that traditional economic thinking relies on.
However, arguments to tackle our obsession with growth and work towards building a more sustainable economy often get derided as a desire to be mired in recession. But a steady-state economy is about meeting needs without environmental breakdown and brings benefits unknown to the proponents of consumer culture. The focus would be on greater equality, redistribution and quality of life – job shares and meaningful work, the value of leisure and human engagement, housing security rather than castles and tenements. Balance, in other words – an economy of having enough, where no resource is squandered and recycling is optimized.
This requires such a huge paradigm shift away from all we are led to believe is sound, that ecological economic thinking on how to achieve a steady-state economy remains woefully sidelined. In the wealthier nations we have a fear that reducing our mountains of things means we are losing the race, even if it’s a rat race. We acquiesce to a ridiculous level of housing insecurity because ‘that’s the way the market is’, even if it’s being played for all its worth. And we cheer on debt-led consumer spending as evidence of that increasingly elusive growth.4
If the three-per-cent growth rate aspired to by many wealthy countries were achieved, their economies would double every 23 years – consuming in 23 years as much as all previous periods combined. Sustainable? Yet questioning the pursuit of growth is viewed as death at the polls by politicians, with only a few brave Greens going there. So in the current climate, growth it is – like there’s no tomorrow.
Original source: New Internationalist Magazine
See original source for references.
Photo credit: griseldangelo1, flickr creative commons