In the second part of our final pre-election discussion, US economist Robin Hahnel gives a global perspective on the economic crisis, outlining the two key measures needed for economic stability and progress, in response to the following question:
“The mainstream consensus is that the national debt is the main economic issue facing the country, and that this must be tackled primarily through cuts to public services. Is this assumption correct? Or is banking reform of more fundamental importance to our national economic well-being? And can national debt be cut less hastily, and in other, fairer ways?”
Nothing is more important right now to stabilize the global economic system than financial reform. Unfortunately, this is unlikely to happen in the foreseeable future.
As much as anything else, the triumph of neoliberalism has been the triumph of the financial sector over everyone else. In 1982 the financial industry received 12% of all domestic corporate profits in the US. In 2002 the financial industry received 45% of domestic corporate profits. When an industry that literally produces nothing you can touch is gobbling up almost half of corporate profits something has gone very, very wrong. So the first problem is that a ridiculous amount of US human capital that could be employed producing something useful is being siphoned off by the financial sector to produce nothing.
The second problem is that the “financial services” the industry provides have deteriorated dramatically in quality as it has gobbled up more and more human resources and corporate profits. Financial services are useful if they steer society’s savings into productive investments, i.e. investments in more and better machines that help us work more effectively. If a financial institution helps an enterprise borrow other people’s savings so it can better equip its workers to become more productive sooner than had the company needed to accumulate enough retained earnings to pay for the investment on its own, the financial institution has provided a useful service. But the US financial sector provided less and less of this kind of useful financial service as neoliberalism progressed. Instead, what an ever more bloated financial sector did was steer savings away from productive investments into speculative financial investments— corporate mergers and takeovers, and one risky asset bubble after another.
And of course the third problem was that while taking more resources to do less useful things, Wall Street was also building a financial house of cards that was an accident waiting to happen. More leverage plus less regulation sooner or later spells financial disaster, and financial disaster spells an even bigger disaster for residents of Main Street. With decades of swollen profits the industry was able to buy enough politicians (and professors of finance) so by the mid-1990s it was operating outside any effective regulation whatsoever.
We are now witnessing the kind of political maneuvering you would expect under these circumstances from the Obama Administration and the US Congress. Speeches designed to assuage a furious public, followed by legislation designed to please their paymasters on Wall Street. When all is said and done the big holding banks will be even bigger and therefore less likely to be permitted to fail. Commercial and investment banking will still be tied at the hip. Trading in highly profitable, esoteric financial products, that have no social value whatsoever but put the financial system at great risk, will continue. And regulatory powers will be more concentrated in the hands of the Federal Reserve Bank, which Wall Street captured long ago. In short, financial reform will be a fig leaf in the US, leaving the financial system just as prone to crisis as it was before September 2008. The only question will be what the next asset bubble looks like, and how long it will take to grow and burst.
The inability of the European Bank, IMF, and political leaders in Germany and France to prevent global financial markets and private credit rating agencies from forcing interest rates through the roof for Greek, and now Portuguese and Spanish government bonds as they try to refinance their debt is the newest sign that nothing has changed for the better in the international financial system.
Nothing is more counterproductive right now than waging a war against government budget deficits. Unfortunately, this is likely to continue for the foreseeable future.
Besides regulating, or better yet, nationalizing finance once and for all, nothing would be more helpful than strong fiscal stimulus from governments to pull the global economy out of the “Great Recession.” Since fiscal stimulus and budget deficit are two different names for the same thing, this means we need particularly governments in the larger economies like the US, Germany, and Japan to run larger temporary budget deficits. Deficit spending, particularly on education, greening infrastructure, and healthcare which generate the most jobs per dollar, is good. Tax cuts, particularly for the poor and lower middle class who are more likely to spend a tax cut, is good. Fighting to reduce government budget deficits during the worst recession in over 80 years is not only bad, it is insane—unless you are an opposition political party trying to prolong the recession for partisan political gain. Reducing government deficits today is not even good policy if your goal is to have a lower national debt 5 years from now. Failing to provide fiscal stimulus today will prolong the recession, continue to depress tax revenues indefinitely, and increase the national debt over the long-run. The conservative government in Germany is tragically committed to a penny wise and pound foolish notion of “fiscal responsibility” for itself and for others. The Republican opposition in the US is fanning the flames of concern over the national debt in a deliberate and cynical attempt to prolong the recession to reap short-run political gain in the Congressional elections of 2010 and the Presidential election of 2012. Obama’s economic advisors, Laurence Summers and Timothy Geithner, have also stirred up deficit fears, and are responsible for preventing the Administration from shooting for a larger fiscal stimulus in 2009, and killing a second stimulus in 2010. The Japanese government has done better on this score but cannot sufficiently stimulate the global economy on its own. Meanwhile, governments of smaller economies like Greece, Ireland, Portugal, Spain, Latvia, and all the smaller third world countries have no choice but to practice fiscal austerity because instead of protecting their ability to borrow on reasonable terms, those running the neoliberal international financial system have thrown the smaller economies to speculator dogs who jack up the interest premiums on their borrowing whenever their budget deficits increase.
In a global economy where new business investment may follow, but certainly will not lead us out of recession, and where consumers in all the advanced economies are tapped out, there is nobody left except governments to prime the proverbial pump. Unfortunately, more than 18 months into the recession the needed fiscal stimulus is still not forthcoming, and consequently we are headed for a jobless recovery at best, but more likely for a double dip as recessionary dynamics take root again.