ECONOMIC AFFAIRS: by Patrick J. ByrneNews Weekly
Leadership needed to overcome global slump
, March 2, 2013
The world is struggling to find leaders capable of solving the global economic crisis that has left many nations with huge debts, high unemployment and vast inequalities.
Before the 2008 global financial crisis (GFC), the captains of finance and industry could use the annual Davos economic summit to trumpet the virtues of “deep” economic globalisation, technological change and financial liberalisation. They argued that these policies would create a new era of relentless growth.
Following the 2008 GFC, the advanced economies have lost the moral authority that once allowed them to give leadership to the emerging economies.
Big exporters, such as Germany and China, generated huge trade surpluses that fuelled the hot money flows that destabilised the global financial system. Those global imbalances that helped create that crisis remain.
Conversely, big importing nations, such as the United States and the southern European nations, remain depressed by the heavy debt they incurred by consuming imported goods they no longer produced.
Currency wars have started, with many nations trying to gain a trade advantage at the expense of their competitors by pushing down the value of their respective currencies in order to make their exports cheaper and their imports dearer.
There is a further worldwide crisis resulting from rising inequality.
Professor Jeffrey Sachs of Columbia University says that America has gone from being a middle-class society to one increasingly divided between rich and poor. He writes: “CEOs who were once paid around 30 times what their average workers earned now make around 230 times that amount.” (Project Syndicate, January 31, 2013).
Joseph Stiglitz, former chief economist of the World Bank and a winner of the Nobel Prize for economics, says that in the US equality of opportunity has been exposed as a myth. He argues that “growing inequality is one of the reasons for the economic slowdown, and is partly a consequence of the global economy’s deep, ongoing structural changes”.
He warns: “An economic and political system that does not deliver for most citizens is one that is not sustainable in the long run. Eventually, faith in democracy and the market economy will erode, and the legitimacy of existing institutions and arrangements will be called into question.”
Furthermore, across the world, robots are replacing relatively high-paying jobs in manufacturing.
Professor Stiglitz says that, at the time of the 1930s Great Depression, the US and Europe had major structural unemployment problems as they were making the transition from largely rural, agrarian-based societies to urban, manufacturing-based economies.
Today, new jobs are needed to replace jobs that have disappeared in manufacturing.
At the recent Davos summit, the Associated Press conducted a sobering session that asked the question facing today’s manufacturing workers: can countries (particularly in the developed world) create new jobs — especially good jobs — as robots and other machines replace workers in any routine task?
Stiglitz says that, although new firms must be created, “modern financial markets are better at speculation and exploitation than they are at providing funds for new enterprises, especially small and medium-size companies”.
He adds: “Moreover, making the transition requires investments in human capital that individuals often cannot afford. Among the services that people want are health and education, two sectors in which government naturally plays an important role (owing to inherent market imperfections in these sectors and concerns about equity).” (Project Syndicate, January 7, 2013).
Japan’s new prime minister, Shinzo Abe, has announced a radical plan to pull his country out of a quarter-century of economic stagnation. Whether this plan — modelled as it is on policies that rapidly pulled Japan out of the 1930s Great Depression — will work remains to be seen.
President Obama, flush from a strong win in the US presidential elections, said in his inauguration address that he intended the US government to play a more prominent role in the economy, echoing F.D. Roosevelt’s New Deal approach in the 1930s.
If this eventuates, it will be an end to the deregulationist free-market economics of President Ronald Reagan, which for 32 years has dominated US and global economic thinking.
Reagan, on coming to power in 1981, famously declared: “Government is not the solution to our problem. Government is the problem.”
He ushered in what came to be known as the “Reagan Revolution”, which, according to Professor Sachs, consisted chiefly of “tax cuts for the rich; spending cuts on education, infrastructure, energy … and job training; massive growth in the defence budget; and economic deregulation, including privatisation of core government functions”.
Arthur Schlesinger, Jr., once documented roughly 30-year intervals between periods when the focus of government was on the public interest, followed by equally long periods of economic policy being “free market”, focused on private interests.
Whether Obama can overcome the power of wealthy vested interests to shift the focus of economic policy to the pubic interest, is uncertain.
If he succeeds, then Republicans, who have remained loyal to Reagan-era economic policies, may find themselves in the political wilderness for many years.
Patrick J. Byrne is national vice-president of the National Civic Council.
Joseph E. Stiglitz, “The post-crisis crises”, Project Syndicate, January 7, 2013.
Jeffrey D. Sachs, “America’s new Progressive Era?”, Project Syndicate, January 31, 2013.