Miloš Pick: Can Obama lead the world out of the crisis?
23. 3. 2009 / Miloš Pick
It is now quite obvious that, unlike the initial misapprehensions suggesting the turmoil was limited to mortgages in the US, this was only the tip of the iceberg. Today another creeping illusion, that what we are faced with is “just” a global financial crisis typified by plummeting capital and money markets, dragging prominent banks down with them, and by the freezing of cash and confidence, is fading away. In addition, and in particular, the crisis of the real economy and its "icing-up" are emerging. In the USA and certain other countries, notably in Europe, the economic descent has already sunk into the icy waters of negative growth. Is this a consequence or cause of the financial crisis?
It was also in the US that the epicentre of the economic crisis originated, and a long time ago at that. Since the 1990s, the US external economic balance – the balance of payments current account – has consistently reported a growing deficit, which in this decade has climbed above the critical threshold of more than 5% of the gross domestic product. This has led to a deep downturn in the US dollar’s exchange rate – by a third up to 2007, to a level where, with fluctuations, it more or less stayed in 2008. The US has thus started to follow a course where it can compete with cheaper labour; in 2007, labour costs per unit of national economic productivity, and thus per product unit, in the US were a third lower than in the EU-15, whereas until now, through its specific formulae - the Washington Consensus, the US had been forcing less developed countries to compete with cheap labour. Even so, notwithstanding all legitimate expectations, the US current account deficit has hardly shrunk. On one hand, this suggests that the US dollar has not yet bottomed out, and on the other it is a sign that the root causes may run deeper.
The crisis was triggered by internal and external causes.
Lack of competitiveness and low savings
On the one hand, the growth of the key long-term factor underpinning competitiveness, labour productivity, is slowing down in the US. While, following the arrival of the knowledge economy as of the second half of the 1990s, productivity growth doubled to around two per cent per annum over a decade, in the last few years it has dwindled to approximately one per cent, i.e. reverting to the level in the 1980s, and is thus once more at its lowest ebb in almost 140 years. In the post-war period productivity levels in the US were twice those in the developed heart of Europe (the EU-15); now they are less than 10 per cent ahead. Further to my analyses of how well the European welfare state models perform compared to the US (Politická ekonomie 5/2006), I consider the root cause to be the USA’s delay in developing qualitative, knowledge-based productivity factors. This is borne out by the steadily contracting share of sophisticated (high-tech and medium- high-tech) roducts in exports as the decade has worn on. It is also underscored by the World Competitiveness Yearbooks. Even in terms of product sophistication and excellence, the primacy enjoyed by the US has diminished to the extent that it is now lagging behind developed countries, including the EU-15, in the export prices it achieves.
Although the US was the trailblazer in the development of the information and knowledge economy, its purely market approach based primarily on private funding even for education and training has proved less effective than solidarity based on education funded almost exclusively from the public purse. Tuition fees act as a social screen dictating which brains get access to education. Furthermore, behind the façade of the prestigious, elite universities, the largely marketified education has a quality profoundly different from that of other colleges. The US is diminishing its lead in qualitative competitiveness versus developed countries that have successfully adopted knowledge-based productivity factors by keeping to a road of solidarity, such as Scandinavia, and is still far from being able to offer prices that can compete with developing countries capitalizing on much cheaper labour, such as China.
The partial “deindustrialization” of the US, where simple production is relocated to less developed countries with cheap labour, could compound the effects of inadequate competitiveness. Demand for these products must be met by increased imports, which are not fully offset by higher exports of sophisticated products.
On the other hand, the US dollar is driven by the high influx of foreign investments sucked in by the long-standing extremely low level of net domestic savings. In the post-war period, the savings rate was more than 10% of GDP; from the 1980s it gradually fell to two per cent, and as of 2005 the household saving rate has actually been negative, a development not experienced since the Great Depression of the 1930s. In my view, this is the result not only of a slowdown in the growth of real wages linked to slowing growth of productivity, but can mainly be attributed to capital savings for pensions, which squeezes out other savings and is conducive to high levels of debt incurred by the population, especially in respect of mortgages and education. This is the other side of the coin when public services are marketified. Lower economic growth combined with low productivity growth and low savings was increasingly maintained by indebtedness abroad, largely in relation to developing countries, with China accounting for about half.
According to contemporary theoretical and analytical knowledge, each of the two causes above – the lack of competitiveness and the low savings rate – is sufficient in itself to cause the sustained imbalance of the balance of payments current account. However, the overlapping of these two causes also creates a "lock" against overcoming this imbalance – they are in a tug of war with the US dollar in the middle. The first cause compresses it and the other lifts it, not allowing it to reach a balanced level. In these conditions, the market-determined (floating) exchange rate can be neither competitive – it does not provide enough protection for inadequately competitive productivity – nor equilibrium-inducing. On the contrary, it steadily deepens the current account deficits.
Unbalanced liberalization of world trade
This is compounded by an external and even stronger "lock": the contemporary neo-liberal, unbalanced, neo-colonial liberalization of world trade. Under the above-mentioned Washington Doctrine, even the least advanced developing countries are forced to liberalize their foreign trade prematurely. Instead of individualized traditional tariff and non-tariff protection – which, in the 19th century, protected the industrialization of continental Europe and the US from the century’s head-start gained by the English industrial revolution, and similarly, after the Second World War, from the catch-up industrialization of the Asian Tigers – it offers non-advanced countries blanket protection of their development phase only by means of the “competitive”, state-controlled, extremely low exchange rates of their currencies. This forces them into much deeper undercutting via cheap labour, because the exchange rate is set in proportion to the lagging productivity of their most profoundly backward, only just adopted, and usually more composite output. Even in relation to a weakened US dollar, the exchange rate of the Chinese currency, for example, is less than half what would be expected given the purchasing power parity of China’s currency.
This undercutting is very expensive for China - in fact, in this respect it subsidizes more advanced countries in a range corresponding to about 18 per cent of its gross domestic product, while the developed countries do not even comply with their commitment to support developing countries with a contribution of 0.7 per cent of their GDP. Marx’s concept of exploitation, derived from the relationship between capital and labour in the conditions of nineteenth-century capitalism, is transmitted also and especially into the relationship between developed and rich countries and developing and poor countries at a time of neo-liberally deformed globalization.
Despite US pressure, however, China, unless it returns to individualized tariff and non-tariff protection, cannot significantly strengthen its currency because the protective role of the exchange rate would then be lost. Conversely, nevertheless, it is losing its original equilibrium-inducing role and consistently creating the high export surplus of China’s current account, which in 2007 came to 11% of GDP, and is largely being achieved through the relationship with the United States.
In the middle of these two poles are developed countries competing with the United States in terms of quality, such as the advanced core of the EU, and in particular its main exporter, Germany. Its current account surplus gradually increased to more than 7% of GDP. In relation to the US, like China it has high export surpluses, and in relation to developing countries, such as China, like the US it has deep deficits. Japan, another major exporter, is in a similar position to Germany. A further "interstage" comprises the "cheaper" EU Member States, including the Czech Republic, which have high export surpluses in relation to developed EU countries and large deficits in relation to developing countries such as China.
Theory and policy interpret these circumstances in a different light. The US has passed off its deficits as a benevolent act even for the rest of the world, creating the opportunity for the steady creation of export surpluses. However, this would be a good investment for them only if it were more profitable than investing in their domestic economy, or elsewhere. Any return on these investments, however, is macerated in the excessive foreign-currency, predominantly dollar reserves of these export countries. The reserves in China alone, for example, at around two trillion US dollars, account for more than a quarter of global reserves and are eight times greater than the “norm”, recommending reserves that cover three or four months’ imports. Their main, dollar component is shrinking as the exchange rate depreciates. All this rather suggests, conversely, that the US was living beyond its means at the expense of export countries.
This situation is unsustainable. It could result, unlike the slow decline we have witnessed, in a headlong slump in the US dollar’s status as the premier global reserve currency, which would trigger much rougher turbulence in the global economy. In fact, the privileged position of the US dollar as the world’s reserve currency and as the currency in which commodity prices are expressed, starting with oil and gas, combined with strong speculative effects on the financial markets, is another significant factor dragging the US dollar above the equilibrium level. It is a vicious circle. The overvalued US dollar leads to these unsustainable imbalances, but its rapid fall to the equilibrium level would probably be the final factor triggering a plunging, hard landing in the loss of the US dollar’s privileged status.
It is ironic that this development initially collapsed in the most advanced country, which was benefiting from it, rather than in large developing countries, which, while bearing the brunt of it, still managed to finance it. This was made possible mainly by their size, because despite the full liberalization of foreign trade its share in GDP is relatively low – in China exports account for only about a third of GDP. In some smaller liberalized developing countries, this degree of openness is much higher and therefore the consequences of undercutting are much crueller, even genocidal, contributing to the starvation of millions of people (18-20 million a year in all). However, they were not capable of engendering the collapse because they were helpless.
Bush's consumer “package”
If these assumptions hold true, the opposite sequence of the cause and effect behind the development of the crisis emerges. From the start of the Bush administration, from the start of the decade, the US dampened the ramifications of these imbalanced, braking tendencies by pursuing the macroeconomic expansive policy of a “twin deficit” – a current account deficit and a public budget deficit. Through this pseudo-Keynesian policy, a shift from balanced public budgets to public budgets with high deficits running to 4% - 5% per cent of gross domestic product, it stimulated demand. But it did so in a deformed, "non-Keynesian" structure. Instead of the most effective path of a faster increase in demand for public investment, it promoted higher private demand, especially in consumption, by cutting taxes. This was assisted by an expansive monetary and credit policy of very low interest rates. Household indebtedness degenerated into risky, speculative forms, symbolized by sub-prime mortgages and other high-risk financial products – in particular derivatives and derivatives of derivatives of securities – as well as institutions, mainly hedge funds. These processes were made possible by extreme deregulation; externally the tension in the real economy and the resulting expansive credit policy exerted pressure on the application of softened regulation, which found fertile ground among the greedy within the financial sector.
The main driving force of continued growth was the pumping of growth in private consumption growth constantly outrunning the growth in wages. This cancer morphed into financial crisis, which subsequently, last year, became a crisis of the real economy even before this could be caused by the above-mentioned root causes, resulting in the inflation of current account deficits.
Here, however, a vicious circle is formed on an even higher level. Although the crisis of the real economy was the primary cause and the financial crisis was a subsequent phenomenon, the crisis of the real economy is responding by escalating further and deepening into an unprecedented, mutually intertwined threat.
A crisis of anti-reforms
In the background of the current economic crisis, there is an even deeper primordial cause – a social crisis on a par with the crisis of the 1930s. At that time, in an age of monopolized markets, the unregulated capitalism of the 19th century failed, paving the way for Nazism and the Second World War. After paying a heavy price for this experience, the world – not only here, but also in the West – refused to return to pre-war capitalism. Europe started successfully developing its welfare state, based on the interplay of the invisible hand of the market with the visible hand of the State – in market regulation, plurality of capital ownership and the social redistribution of income, which was also the focus of efforts to introduce market socialism in the Prague Spring reforms.
However, these reform processes were cut off and inverted, becoming anti-reform processes. Not only here and in other Soviet Bloc countries, on the basis of the Brezhnev Doctrine from the 1960s, but also in the West, on the basis of the Washington Doctrine of the shock restoration of capitalism in Latin America from the 1970s and in post-Communist Europe from the 1990s by means of shock liberalization, total privatization and the macroeconomic restriction of demand. With time, this even seeped into the European Union by means of the curtailment and (partial) privatization of the welfare state. Since the 1980s, with the onset of globalization, there have been efforts aimed at the total deregulation of the world markets not only in goods and services, but also labour and capital. As a result, the post-war reforms, designed to overcome pre-war capitalism, were countered by efforts to restore it under the mantra of the pure market. These anti-reforms were made attractive in a covert manner – they were passed off as reforms.
However, although people, voters, can be foxed, at least temporarily, the markets cannot, especially in the long term. In this system, the markets behave much as they did in the 1930s, and perhaps in an even worse manner in an even more deregulated system, against a background of even higher monopolization of the markets in the grip of a few hundred multinational companies.
Ramifications and ways out
The causes of the current crisis are rooted more deeply than those of the Great Depression in the 1930s. This is not just a crisis of overproduction, a blanket freeze in demand. It is also a crisis of global imbalances; to overcome this crisis, the Keynesian inflation of public investment demand is not enough – we also (and in particular) need to iron out these imbalances.
The market and the welfare state
Overcoming the root causes, deep imbalances in the level and competitiveness of productivity, is not only a technical and economic challenge, but also requires fundamental reform of the social system.
Whereas since the 1960s, pseudo-socialist systems of a “pure” state, based on the nearly exclusive role of the state almost devoid of market forces, have failed, today, as in the crisis of the 1930s, we are seeing the collapse of capitalism, based on the nearly exclusive role of the market almost devoid of the regulatory role of the state. On the wreckage of these two extremes, the invisible hand of the market should finally shake the visible, more effective (compared to the present situation) hand of the developed knowledge-based welfare state, apparent primarily in the creation of rules for fair market procedures, in macroeconomic and microeconomic intervention policy, including intervention to protect the environment, in the co-existence of various forms of capital ownership, in a predominantly solidarity-based form of public services, starting with education, health and pension insurance, and in the social redistribution of income to an extent that will tackle the poverty trap and yet not weaken – but reinforce – the performance stimulus.
This is not the mere return of the welfare state to its original reform structure, before it was curtailed by anti-reforms. Ironically, the crisis itself is necessitating further advancement along this path.
If plurality of ownership in the original welfare state was expressed, in particular, by public solidarity systems in education, health and social protection, and in the market sector generally only selected strategic enterprises were in public hands, today the crisis is unlikely to be resolved without control of the major banks falling into public ownership. And in the future, there is the question of public ownership control in extensively monopolized industries, such as energy and public transport – including from the perspective of energy and transport security. The ownership control wielded by the few hundred largest transnational corporations that now dominate the world economy and policy has long been an outstanding issue.
Whereas the microeconomic intervention policy was initially focused mainly on industrial and agricultural policy, in the future there will be a shift towards science and education policy. Current efforts to save the automotive industry, however, are also rehabilitating industrial policy. This gives rise to a more fundamental question - is this crisis also an opportunity not only to modernize and green our cars, but also, in the longer term, to stop the orgy of personal automobilism, so that cars, while remaining a mode of convenient recreational transport, will be a very limited luxury means of commuting to work?
A key step in maintaining employment, or at least partial employment, and production capacity should include the rescue of endangered but viable enterprises, which could temporarily operate just for part of the week, by contributing public funds to partially make up the wages. Potential emergency work for a shorter working week with lower wages, productivity and production at a time of reduced demand may be the precursor of a post-crisis gradual transition to a four-day working week on the opposite principle – with no reduction in wages, productivity and output – as was once the case with the five-day working week in the 1930s under the New Deal in the USA.
In the original welfare state, a highest wage less than ten times the average was enough for effective wage motivation; twenty years ago, pure capitalism polarized these differences (according to Samuelson) to forty times the average, rising to four hundred times the average today even in developed countries (the United States), which has little to do with any performance incentive. For the indignant public of developed countries, the current salaries of top bankers are only a symbol of the unsustainability of this hardly merited extreme polarization. Fables of equal, non-progressive tax are becoming inflammatory junk.
Another important, though limited, step, albeit less effective in overcoming the economic crisis, should be the lessening of the social consequences for the most vulnerable population groups, starting with the unemployed, to a level acceptable to them.
This reform process will be largely long term, even if the programme were to be adopted today by at least the main players in the emerging multi-polar global world. The world is only just – to different extents – tending to recognize this, although the crisis is speeding up this recognition. However, there must at least be an immediate stop to existing anti-reform processes seeking the reduction and privatization of the welfare state and extreme deregulation, which are what led to this crisis; instead, gradual reform must be introduced. The post-crisis world will not return to the pre-crisis state, but will take the reforms further.
Pumping and re-routing
What to do in the meantime? For the time being, can we make do with the "packages" introduced by governments all over the world to pump trillions of US dollars into the revival of domestic demand while expecting that the market, thus revived, will itself "somehow" overcome the imbalances, as unsuccessfully tried by Bush? Can Obama afford to "pump up" the US economy with a demand-generating package equal to six per cent of GDP, i.e. even more than Bush did, although now in a different structure and without speculative excesses – and, along with further trillions injected into the banks, create a double-figure public budget deficit – and just wait to see to what extent this inflates import deficits? Can the world simply expect Obama to lead the whole world – besides the US – out of the crisis? Why so much ado about protectionism when, in relation to public procurement, Obama wants to change the current rule that says half of public contracts should be covered by domestic supply, tightening it so that all public contracts are fully covered by domestic supply? Rather, it is questionable whether such a protective step would be sufficient, because if not it would provide short-term relief to the rest of the world, before evidently triggering a new round of crisis.
And the rest of the world, starting with the EU, should not be content with their "packages" of smart and green investments generating anticipated numerous effects, i.e. multipliers, but should also say goodbye to the existing sustained export surpluses achieved long term in the US. They should seek ways to divert these export surpluses to domestic markets, as China is doing, or to other, especially dynamically emerging, markets of developing countries. Yet this other way is not without its limits. Another extreme alternative, where all developed countries, including the EU, would transfer their surpluses to the last-mentioned countries, such as China, which would ,then be able to drag the entire world out of the crisis sparked by the US, does not seem likely.
The question is how far this can be achieved within the existing rules of the asymmetric liberalization of world trade, or whether it is necessary to accede to at least a partial "settlement", for example by shifting from floating to controlled exchange rates, as sought by UNCTAD (the United Nations Conference on Trade and Development). This approach should be steered by key players from the emerging multi-polar world, probably represented by the G20 – and should be reconciled all the more within the EU. The question is whether coordination can be carried out by the International Monetary Fund, which would have to be reformed on a credible multi-polar basis, or within the United Nations by a newly created Economic Security Council, as long sought by the Socialist International. A coordinated approach to such re-routing offers a more hopeful way of avoiding protectionist trade "wars" than vain appeals.
The underlying requirement in overcoming the economic crisis, however, is to overcome the financial crisis and introduce more effective regulation of financial markets. In particular, it is necessary to restore lending. Despite the trillions poured by governments into banks to guarantee deposits and loans, and to purchase toxic credit, little headway has been made. This begs the question of whether the banks, which set their sights back on the prudence they had lost sight of during their period of gambling speculation, have started speculating this time that there are no limits to state aid, and whether, to correct the situation, it might be necessary to capitalize state funds invested in banks more thoroughly by assuming ownership control.
In relation to the Czech Republic, I will point out another two key requirements: the Czech government should no longer be afraid to accept the truth, and it should at least stop fanning the crisis with its anti-reform policy.
This game of blind man's buff as they stumble around trying to grasp the crisis is no laughing matter because in this absurd theatre we are not audience: we are all on the floor of the stage that they are stomping on. We already know the consequences of lacking the courage to see reality, reminiscent of the previous regime’s solution of pretending that the plummeting aircraft is not going to crash. Timely recognition of the facts is the first necessary condition if we are to seek the action needed to change course.
The anti-reform policy lies mainly in further reducing the overall level of taxes and contributions, already among the lowest in the EU. Further cuts would strangle resources needed for pro-growth public investment, particularly in transport and water infrastructure, the construction and reconstruction of housing, and science and education. Reducing corporate taxes – apart from the acceleration of amortization – is the least effective way to support investments by businesses, and in Czech conditions, due to the high participation of foreign capital, this leads to the increasing outflow of profits to other countries, which last year reached the dangerous level of five per cent of GDP and payment thereof is crucially dependent on a volatile influx of financial capital. Reducing insurance contributions poses a threat to the systems of social security and health protection and is aimed especially at the curtailing and privatizing pensions based on solidarity.
This braking policy also consists of refusing to disseminate these resources via the main channel identified during the Great Depression by Keynes – budget deficits, even beyond the Maastricht limit of three per cent relative to GDP. The government is thus out of step with the majority of EU countries, which this year anticipate an average deficit of 4 or 5 per cent, although the degree of indebtedness of public budgets here is already 67 per cent, while in the Czech Republic it is less than 30 per cent and as such is among the lowest in the EU.
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These steps cannot usually be fully effective within a few quarters, but require several years to return results. This is all the more reason to begin them immediately. In part, so that new Hitlers are not given an opportunity. The whole world should contribute – neither the market nor any saviour can deal with this alone.
The crisis not only gives rise to threats, but also the opportunity to steer the current trend of restoring history back to the path of reforms.
(I thank M. Myant, J. Navrátil, I. Švihlíková, O. Turek, J. Ungermann, and R. Vintrová for their comments and suggestions. However, I bear all responsibility for the text myself)Vytisknout
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