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The Resources Super Profits Tax and Decoupling: Is Australia Still Coupled to America?

The proposed Resources Super Profits Tax has consumed the nation. Most of the focus has been directed toward the affects, real or imagined, that the proposed tax would have on resource corporations.

Less critical attention has been devoted to the government’s proposals for how the proceeds of the tax are to be spent, critical to any moral arguments that invoke “mutual obligation,” and the underlying economic idea behind the whole thing. That idea is that we are about to have another commodity price driven resources boom, Boom Mark II, to match or even surpass the boom that we experienced in the noughties.

It’s assumed that Australia will benefit from a sustained boost to the terms of trade on the back of industrial production in China and India out to 2050, according to Ken Henry. The deputy head of the Reserve Bank, Phillip Lowe, argues that Australia is now “decoupled” from the United States. The old saying, when Wall Street sneezes Australia catches a cold, no longer applies. If America experiences a Japan style “lost decade” this won’t matter much. We’ll have China and India to save us. Lowe even is of the view that the Chinese and Indian booms have “decades to run.”

Decoupling is the critical idea underpinning the government’s economic strategy.

The RSPT is needed because we need to avoid all the problems associated with the “two speed” economy that we had during Resources Boom Mark I. For example, our resources were being exported to industry in China that was crowding out Australian manufactures in global markets.

Geelong and Elizabeth were losing because Tom Price and Broken Hill were winning.

Canberra, sensibly enough, wants to avoid such distorting effects during Resources Boom Mark II. The RSPT is a part of the government’s strategy to ease our way through the inevitable big boom.

Australia, however, has not decoupled from the United States. Despite the growing economies of China and India, what happens in America is still far more important for Australia. China and India are just transmission belts. The real game is still played in America.

I myself have been guilty of falling for the decoupling argument, but I see now that the case for decoupling was always pretty weak. Let me explain why.

Industrial production in Asia has depended upon exports to the United States and Europe, but especially to America. What has allowed this to happen is globalisation. Because of the globalisation of production industrial corporations have increasingly shifted factories, and even call centres, to low wage countries such as China and India. But, crucially, this is done with the objective of selling goods and services back to the US.

The strategy of export led industrialisation that the Asian based economies have pursued has thereby relied on demand from the US consumer.

The first resources boom, so the party line goes, happened because of the booming Chinese economy. On the face of it that’s true. But China was going gang busters because of the asset price bubble fuelled economic growth in the United States. Australia’s terms of trade was boosted, during Boom Mark I, by the US consumer purchasing cheap Chinese products. To export goods to the US market Chinese factories needed our raw materials. Even the construction boom in China, ultimately, owed its origins to America.

Our mining boom was therefore based in the United States, not China. But, one might well say, look at what has happened since. China has stayed up while the US went down. Commodity prices had picked up following big falls in 2008-2009. Australia has been riding on Red China’s back and thereby avoided recession.

It is true that China has been growing at an impressive click while the US has been stuck in the doldrums following the bust up on Wall Street and the collapse of the property bubble. However, when the crisis erupted on Wall Street in 2008 growth in China declined sharply. Since then the Chinese economy has picked up on the back of a massive fiscal stimulus, the ability of Chinese authorities to stimulate the economy by command rather than through indirect incentives and an asset price bubble, especially in the property sector, fuelled by cheap money.

In many respects this is similar to what has happened in Australia. We have avoided a recession because of the Rudd government’s stimulus spending and a deliberate strategy to prop up our own property market bubble.

However, the Chinese cannot stimulate their economy forever. In Australia we hope to keep the economy going by government stimulus until private demand picks up again. If it doesn’t then we are in trouble.

The same applies in China, except in this case Beijing is hoping that private demand from the US kick starts export led industrialisation again. If it doesn’t then China is in trouble. Likewise the property bubble in China has been stoking inflation. Beijing has moved to dampen the economy and global commodity prices have fallen in recent months as a result. Many analysts even go so far as to say that Resources Boom Mark II has now come to a close, well before 2050 it might be added.

The measures that Beijing has put in place since 2008 are temporary band aids. So long as China, and the rest of Asia, rely upon export led industrialisation then a stagnating US economy will prevent a long run resources boom in Australia. The debt crisis in the Euro zone does not help matters.

Should the US consumer continue to rely upon debt to fuel consumption, and the US financial system is not reformed to prevent further financial crises, then continued global economic instability will be difficult to avoid. This would prevent something akin to a multi decade long resources boom of the type commonly forecast to come about. We might add that US consumers now have little option but to deleverage. Cheap labour in China will dampen wages growth in America. There is something fundamentally amiss in the current makeup of the global economic order.

Australia would be truly decoupled from the US only if Asia proceeds to engage in regional integration, which is occurring to a limited extent, of the type gradually being implemented in Latin America and Beijing rejigs its economy towards domestic consumption. In the absence of these two changes Australia’s prospects will continue to be ultimately coupled to the economy of the United States.

The Rudd government’s economic strategy seems to be based on a complete misreading of the global economy and Australia’s role within it. Of course, this has no bearing on moral arguments for the resources tax which appear sound. When it comes to the poor “moral obligation” is accepted without demur. The rich insist, naturally enough given Adam Smith’s “vile maxim”, that they be exempt from mutual obligation.

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Categories: Aus Economy, Globalisation

Reading Neoliberalism and the Global Financial Crisis Politically

Although it has become more common to hear criticism of neoclassical economics, and neoliberal ideology more broadly, the anti corporate social movements need to guard themselves against the coming reaffirmation, perhaps even reconstruction, of these ideas. This will require first dispensing with a few illusions.

It would be false to suppose that the great recession, precipitated by a global financial crisis, has now rendered neoliberal ideology and its underlying justification in free market economics illegitimate. It never had any intellectual legitimacy to start off with. The Savings and Loans collapses of the 1980s, the global debt crisis, the Asian financial crisis, the collapse of Long Term Capital Management and so on demonstrated that neoliberalism had no real intellectual justification. Despite this the reigning free market orthodoxies continued to carry the day both in academia, the media and government.

This is not even to go into what should be seen as the first chapter of the unipolar era; the disaster that neoliberalism occasioned in Eastern Europe, especially Russia.

There are important institutional reasons why this was so. The past 30 odd years has seen a quite conscious one sided class war being waged by the rich, the purpose, not the affect, of which was to skew wealth and power towards the few at the top. In 2006 the top 1% of the US population had 22.6% of national wealth, the same level as in 1929. To get that level back to the level on the eve of the Great Depression took some work. During the neoliberal era there has been a marked shift in the wages-profit share towards corporate profits. This was enabled by stagnating real wages for non-supervisory workers, partly obtained through what Alan Greenspan called “increasing worker insecurity.” This was developed through the threat of job transfer following the globalisation of production.

It should be stressed that this shift towards profits occurred in the context of increasing labour productivity in the United States. Though workers were working harder and smarter nonetheless wages, for the most part, stagnated. The proceeds of greater productivity went to big business and, thereby, the rich. Living standards and wealth were increasingly maintained by way of high household debt levels and rising real estate prices. During the boom in asset prices this gave Americans a feeling of prosperity, but as the Nazi’s infamously exclaimed during the Weimar Republic that was very much a type of “sham prosperity.” Prosperity built on the back of stagnating wages and highly leveraged exposure to asset prices in a speculative bubble is illusory.

It has been pointed out that in the United States during the neoliberal era policy really was not wholly dominated by free market ideology at all. A better description would be “socialism for the rich and free markets for the poor.” The US has always relied on a dynamic state sector, like all advanced industrial economies, to socialise cost and risk. For example much of the development of high technology industry has come by way of the Pentagon. Military Keynesianism has also typically been the preferred method of demand management in the United States. This is because with this type of economic pump priming various assorted nasties, such as spending on the needy and the somewhat greater equitable distribution of national income, occasioned by orthodox Keynesianism are avoided.

Even in the financial sector where doctrines such as rational expectations and the efficient markets hypothesis were dominant free market dogma does not fully account for policy. To be sure such free market dogma was used to justify deregulation, which enabled financial corporations to act with greater degrees of freedom in the pursuit of profit, nonetheless risk has always been socialised. The bail out of Wall Street in the wake of the current crisis has brought this to relief. However as stated risk has been socialised throughout the neoliberal era as the Saving and Loans and LTCM bailouts demonstrate. The affect of neoliberalism is to socialise risk without financial institutions at the same time being required to be mindful of the wider social affects of their activities. The latter, of course, follows on from deregulation.

A good description of the mechanics of neoliberalism can be found in the writings of Adam Smith. In his “The Wealth of Nations”, the supposed sacred text for neoliberals, Smith speaks of what he calls the vile maxim; “ All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.” That is what neoliberalism is; it is the vile maxim as currently adopted by the masters of mankind. Given the shift against wages in the wages-profit share it is also worth taking on board another quote from the supposed master of neoliberal thought; “The liberal reward of labour, therefore, as it is the affect of increasing wealth, so it is the cause of increasing population. To complain of it, is to lament over the necessary effect and cause of the greatest public prosperity.” When you put the two quotes together, when it comes to neoliberalism, all is revealed.

Socialising the risk of financial institutions by exposing the rest of society to risk externalities, whilst privatising profits, is an example of the vile maxim par excellence.

Neoliberalism should not be confused with classical liberalism, after all for Smith the argument for liberty was based on the supposition that it would lead to equality. The “neo” in neoliberalism comes from the economic thought of the mid-to-late 19th century, which represents a bastardisation of Smith.

So what is neoliberalism really all about then? The past 30 years has seen relatively stagnant economic growth and a greater transfer of wealth and power to the few, even though workers were more productive. A large scale social, economic and political process such as this cannot simply happen. It is not possible that the broader population would consent to such robbery in the absence of some compelling set of justifications manufactured for this very purpose, especially in a democracy. Large scale social processes, including thievery on a grand scale, requires some type of ideological justification. This is the main purpose of neoliberal ideology. The ideology serves to justify the application of the vile maxim. That the ideology had no intellectual justification and was framed in a misplaced pseudo-scientific framework does not really matter. The ideology was highly functional for the corporate institutions that dominate society.

The libertarian Marxist thinker Harry Cleaver has argued that the way to read Marx is “politically.” Cleaver argues that “Das Kapital” was meant to serve as a “weapon” for the working class in order to facilitate the self-emancipation of the working classes. We should read neoliberalism “politically” also. Hayek et al have furnished a weapon for the rich to use against the poor and the working class. Neoliberalism, as such, is a form of Marxism for the rich.

So long as corporations continue to dominate society then the reigning ideology will be reaffirmed or reconstructed in one form or another. The current focus on neoliberalism by the the anti-corporate global justice movements is both appropriate and corrosive. It is appropriate because this is how the great social robbery of the past 30 years has been justified. It is corrosive because policy never really has been motivated by free market dogma and undue focus on neoliberalism tends to obscure the institutional framework that underlies the current crisis. This is especially the case for behavioural critiques of neoclassical economics.

In a real sense the great recession is really a political, rather than an economic, crisis. Corporations have acquired far too much power and because they are motivated by profit it is to be expected that they would like to maintain their privileged position in society. To the extent that neoliberal dogma is increasingly challenged in the mainstream it is because of the consequences that financialisation has had on the broader real economy; it has hurt the rich too, especially of the manufacturing sector.

What this means is that free markets for the poor and socialism for the rich will continue to dominant policy. This will be so irrespective of the fate of neoliberal ideology. So long as corporations are able to ensure that their preferences are attended to by the state and society this must be so. It might be that the next phase of the current crisis is a reconstruction of neoliberal ideology in one guise or another. The proper response to any such reconstruction is to bring to relief the underlying institutional causes of the crisis in order for us to achieve the social constraint of the corporation. Such constraint would be achieved in hope of the eventual supplanting of this particularly crass form of economic and social organisation all together.

One way in which this neoliberal counteroffensive will proceed is through concern over budget deficits. This is how the first neoliberal offensive kicked off. At the time of stagflation neoclassical economists argued that budget deficits would, and did, lead to all sorts of bad effects, especially a so-called “crowding out” of private investment and hence economic growth. Crowding out was justified by an application of rational expectations, the same underlying idea behind the efficient markets hypothesis. In fact, however, the largest economic expansion in US history followed on after the massive World War Two era deficit. Fiscal deficits lead to economic expansion and they pay for themselves as a result.

Society will come under further attack using budget deficits as a pretext. This will happen all over the western world and will be a classic play coming right out of the neoliberal play book. This play will be enacted by both conservative and social democratic and labour based governments.

Social democratic and labour parties everywhere have fallen into line with neoliberal dogma, for reasons first articulated by libertarian socialist and Marxist thinkers during the height of the revisionist controversy of yesteryear. The industrial labour movement everywhere must now reconsider what are the appropriate forms of political action for it to adopt, given that their preferred political parties have everywhere facilitated the 30 year long assault on the working class.

Social democracy has been a grand failure. Slowly trade unionists are recognising this. Now is the time for the industrial labour movement to show courage and rethink the political sphere. One way this can be achieved is by unions and social movements working together from the grass roots up to attack the immense power of the corporation. Neoliberalism represents a fundamental assault on democracy. A powerful affirmation and extension of democracy is the most useful antidote to corporate power. There is nothing the corporation fears more than an aroused citizenry fighting for its rights.

Global Externalities and the Future of World Order

March 12, 2010 1 comment

Market failure has now become one of the world’s hottest topics, much to the chagrin of neoclassical economists.

One form of market failure is due to what economists call “externalities”. These arise when the rational, profit driven, actions of economic agents have deleterious and uncompensated impacts on third parties. When externalities are present market outcomes are not socially optimal.

Two of the most important global crises today, the financial crisis and the ecological crisis, can be described as market failures where the presence of externalities are pervasive.

As we increasingly move towards a global economy, which includes the development of more globally integrated markets, we would expect externality effects to become increasingly global. Although much has been written about both crises, little attention has been directed towards this broader issue.

Milton Friedman, the noted free market economist, had surmised that externalities are small and not that much of a problem. Boy was he wrong!

Globalisation now means that externalities will become larger than even the wildest imaginations of heterodox economists could conjure, as they correspondingly become global. The bigger markets get the bigger would be any resulting market failures due to externalities, assuming markets are not as efficient as neoclassical economic theory asserts.

If markets are indeed efficient then any anomalies in global markets need not led to global systemic effects. We would expect any anomalies to be still small in scale even should markets develop truly global dimensions.

The repudiation of the efficient market hypothesis, empirically well supported by the great crash of 2008, means global markets can lead to global externalities.

That, in turn, poses a global macroeconomic stability problem that challenges our international political architecture.

The global financial crisis, to a very significant extent, can be seen as a global externality because crucial to its development was the under pricing of risk by financial institutions. That is to say, risk was under priced from the point of view of society. From our perspective consummately rational financial market entities took on far too much risk, enabled by both deregulation and lax regulation, in the pursuit of dazzling short term profits.

It was the under pricing of risk that paved the way for the rise of systemic risk, the crucial impost on society. That the under pricing of risk in financial markets could lead to systemic instability, which then impacts the real economy through liquidity and solvency crises, was in fact an important, though ignored, staple of Post Keynesian economics.

What has made this crisis decidedly global is that the financial system created in the wake of the “Nixon shocks” of the early 1970s, the crucial acts that enabled financial liberalisation, has led to the development of a global financial market characterised by tight coupling between its constituent parts. Even relatively well regulated and sound domestic markets can be impacted by financial shocks originating from elsewhere through global feedback loops.

Recognising the presence of an externaility does not necessarily tell us much about its underlying cause. The best causal explanation that accounts for the global financial crisis is the Post Keynesian Financial Instability Hypothesis of Hyman Minsky.

According to complexity theory small perturbations in highly integrated complex systems can reverberate and lead to systemic collapse. Events such as the Long Term Capital Management collapse, Doha and Greek debt crises and the like can touch off a system wide cascade. The global financial crisis was a “normal accident.” Normal accidents in finance are consistent with Minsky’s theory.

Greater economic integration also means that the impact of financial instability upon the real economy that Post Keynesians warned us about will also become increasingly global. In the wake of the financial crash in 2008 the Baltic Dry Index, which provides an insight into global trade and production trends, went into a downward spiral much like the US real estate market. Perhaps Japan illustrates this point best. The Japanese financial system was relatively insulated from the worst excesses of Wall Street, but Japan’s dependence upon exports to the US to drive economic growth had seen Tokyo take an almighty hit.

When two of the world’s leading economies, at the very least, go down into deep simultaneous recessions a global recession becomes difficult to avoid. It would appear that we were indeed headed for a Great Depression like contraction, but for a coordinated global Keynesian stimulus of great force.

Globalisation now requires that Keynesian demand management needs to shift upwards and become internationalised. This will require greater global economic institutionalisation.

Sir Nicholas Stern, upon handing down his influential report on the economics of climate change, described it as the “greatest market failure the world has ever seen.” This failure is also due to an externality. This is of the familiar type arising from pollution, in this case the emission of greenhouse gases. Here the externality is global, but not because of a global economy. The problem arises as a result of the emission by many individual firms and householders of greenhouse gases into a globally integrated climate system. This integration also results in global feedback loops and other knock on effects; as such the externality becomes global.

It should be stressed that climate change is not the leading global ecological problem. Far more important is the loss of biodiversity, towards which climate change contributes but it is by no means the only factor. Some biologists, such as Edward Wilson, argue that the background rate of extinction might be reaching levels consistent with a sixth mass extinction of life on Earth. The emphasis on climate change has obscured the existence of an integrated global ecological crisis, encompassing biodiversity, desertification, defosterisation and so on.

Economists have identified three main ways of mitigating externalities. The strategy is to internalise the external effects of individual actions upon others either through taxes, market based schemes that try and develop price signals, and regulation. It is the purpose of our political institutions to craft and enforce these remedies.

However in international relations governance is weak. The international political order has been characterised, it is easy to overstate this, by the “Westphalian” system that places state sovereignty at its core. This means that the amelioration of global externalities becomes decidedly problematical, as the international negotiations over both financial market regulation and a global emissions trading regime demonstrate.

In the case of financial markets we have the added problem that financial instability is endogenous to capitalism. An implication of the Financial Instability Hypothesis in the context of globalisation would be the need for a global financial authority to enforce systemic stability at the international level.

So, what are the prospects for reform?

Two developments in the evolution of world order are of first importance here. Firstly, the global economic order, from 1945 to the early 1970s, had gradually moved from unipolarity, based on the US, to tripolarity, based on the US, Europe and Japan. The development of tripolarity was a key motivating factor behind the Nixon shocks. Now we are slowly starting to see the emergence of a classically multipolar economic order, where the major poles are not allied states moreover, given the rise of the BRIC economies. Multipolar orders are the most difficult to manage if the major powers within that order are not allied. The US, Europe and Japan were and are allied powers.

Secondly, there exists an important fissure within this emergent multipolar economic order, namely between developed and developing economies which makes matters worse. Some see this cleavage as constituting an “international division of labour”. This division means that the polar powers of the economic system have structurally divergent interests, one of the reasons for the lack of progress in the Doha round of world trade talks.

The world’s polar economies are not all strategic allies and they are not all structurally of the same class. That’s a double whammy. An added spice is the relative decline of Washington’s ability to coerce economically. The system of world order constructed after the end of World War Two greatly depended upon US hegemony. In the study of international relations this is called “hegemonic stability theory.” According to this theory we are now in for a rocky ride.

The G20 summit on the global financial crisis and the significant differences between the developed and the developing states post Copenhagen can be invoked as evidence supporting the case for pessimism.

Regulatory reforms to the financial system have not gone far enough (barely even started), another financial shock is still possible, whilst China and India have been digging their heels on climate change. The developed states, for their part, do not show much interest in helping either India or China adequately overcome the very large opportunity costs that retooling their energy systems poses. This cleavage was a very important factor accounting for the failure of the Copenhagen summit.

The global political economy can be described as a type of state enabled corporate mercantilism, which poses another important barrier against international coordination in response to global market failure. Globalisation has been hitherto concerned with dismantling state based regulations over corporations. We now see, however, that global market failure will require extending global regulations over corporations. The economists John Eatwell and Lance Taylor have called for a world financial authority to regulate the global financial system and the head of the UK Financial Services Authority has made a case for the introduction of a global Tobin tax.

It is doubtful that such measures will be enacted through elite coordination at the international level.

The banks are furiously lobbying governments to water down reforms. Kevin Rudd placed great store on Australia’s involvement in the G20, but it appears that he is falling in line with the big four banks’ campaign, supported by the Reserve Bank, for Australia to reject any stringent G20 coordinated reforms. This will lead to regulatory arbitrage. When it comes to border protection regulatory arbitrage is to be avoided, but welcomed when the interests of the big banks are concerned.

For the Liberal Party a “giant big tax” is to be avoided when it hits polluters, but welcomed, the GST, when it slugs the poor. Tony Abbott actually likes a “giant big tax” that “redistributes income” so long as the direction of redistribution goes from poor to rich.

It is interesting to reflect that states and markets, both based on rational utility maximisation, can so badly reinforce each other at the global level. On the one hand rational self regarding actions within markets may not be socially optimal. On the other rational amoral states that tend to be geared toward relative gains are not terribly well disposed towards achieving socially optimal outcomes internationally.

The reforms required to remedy this reinforcing contradiction will not be easy to achieve. If we want to deal with global externalities properly the reform of the current system of international relations will be required. The same applies to the current corporate dominated form of globalisation. The role of social movements within and across states will be critical.

Democratic theory has not properly addressed the challenges that global governance poses to our notions of democracy. Global governance, as with any type of governance, is not exempt from democracy’s moral scope. The ethical argument for democracy does not stop at state borders, at least not for those who adhere to moral rationalism (a small group).

Externalities are not just features of market based economies. For instance the Soviet Union, a command economy, was a polluter paradise. During the Soviet era externalities were a function of dictatorial political processes. Globalisation has led to the development of a “democratic deficit.” The mitigation of global externalities will also require the development of more democratic forms of global governance. How this is to be achieved is a major task for both democratic theory and practice.

There appears to be a profound link between global justice and the major challenges facing mankind.

Categories: Globalisation