By Sameer Dossani, an advocacy coordinator at ActionAid International, a development NGO dedicated to ending poverty. Cross posted from Triple Crisis
While much of the media coverage around the G20 leaders summit has been about the failure of international diplomacy in Syria, the formal agenda was around one issue: growth. Growth through jobs, growth through transparency, and growth through effective regulation—these were the three themes the Russian government prioritized for this year’s summit.
One could perhaps argue that the obsession with growth is appropriate. The US economy—the source of the largest financial crisis since the Great Depression—is again growing, but when compared with previous economic recoveries the pace of growth has been extremely sluggish. Economists estimate that at current rates of growth and job creation, the US will not achieve anything close to full employment before 2022. Most G8 economies—especially in Europe—are in worse shape and even China and India are seeing growth expectations slow down.
But focusing on growth is a bit like treating strep throat with asprin. You may alleviate some of the symptoms, but you’re not treating the source of the problem.
Whatever cure the global economy needs must address the structural problems which have led to the current crisis. Diverse as they may be, those structural problems all have the same root—an economic system that prioritizes the interests of global capital over the needs and rights of ordinary people.
Despite the overemphasis on growth, G20 governments have considered reforms—such as ending “too big to fail,” substantial reform of the international monetary system, and cracking down on corporate tax dodgers—that could address the root causes of crisis. But to date, there has been little or no implementation of those reforms.
The Bubble Casino’s Latest Bust
In the absence of any change in the underlying structure, investors have been playing a game with free money, largely provide by governments engaged in monetary stimulus (Quantitative Easing or QE in the United States). Instead of passing on the gains from free money to consumers, investors have been looking for bets that will ensure both security (investors know that another crisis could be around the corner) and high returns. When they thought that commodity markets fit the bill in 2008-2010, the inflow of money caused havoc for consumers, especially poor consumers who found themselves paying more for food without any increase in wages. Bread riots not seen for a generation returned.
When that bubble deflated in 2010, money flowed out of commodities and towards the emerging markets of Brazil, South Africa, India, China, Indonesia, Turkey, and a few others. But now that QE is winding down, money has already started moving back to Northern markets where investments can again be profitable without the risks involved in developing countries.
We don’t yet know the full effect of this latest shift. Currency markets in South Africa, Brazil, India, Turkey and Indonesia seem to be stabilizing after losing as much as 25% of their value against the U.S. dollar over the past year. A replay of the 1997 Asian financial crisis is unlikely. Many countries are in a good situation because they have stockpiled foreign-currency reserves and taken out few foreign-currency-denominated loans. But in an integrated global market, falling currency values mean rising prices; in some countries, food, fuel and other essential items are already more expensive than they were a few weeks ago.
If the G20 really were a “board of directors” of the global economy, they would have left St. Petersburg with a solution to this latest crisis, if not the underlying trend. But the G20 isn’t that. It’s a forum for discussions, not a rapid-response mechanism (nor even, really, a slow response mechanism most of the time). Except in times of deep crisis, it requests studies, deliberates through its finance ministries, and sometimes reaches sufficient consensus to recommend policy changes or new processes to get agreement on policy changes. Instead of decisive change, the St. Petersburg communiqué refers to a perceived need to “carefully calibrate and clearly communicate” economic policy between countries. The outcome is particularly unsatisfactory given that the G20 has been obsessed with this issue—sometimes under the misleading label “currency wars”—since 2010.
And there are solutions on the table. From the UN Conference on Trade and Development (UNCTAD) proposal to peg exchange rates to inflation, to proposals related to use of a neutral currency, such as International Monetary Fund (IMF) Special Drawing Rights, there are a range of options which would address at least one aspect of this problem—namely, the global over-reliance on the U.S. dollar.
While these solutions would not stop the bubble casino from operating, they might at least slow it down a little.
Taxation and Ending the Reign of the Robber Banker
Over the past few years, our economic system has punished the innocent and rewarded the guilty. But believe it or not, that’s not its most troubling feature.
Globally the richest 0.6% of the population controls a little less than 40% of global wealth, meaning that the Occupy Wall Street movement was being optimistic when they coined the slogan “We Are The 99%.”
Of the reforms on the table, there are a few that might actually work in terms of taking power away from the tiny elite who continue to profit from this unsustainable system. Many of these relate to taxation.
Taxation gets a bad name for obvious reasons, but at its core, it is one idea that might get us out of our global predicament. It goes after wealth—in a progressive system, the wealthy pay a greater share—and uses it to pay for “public goods” or things that everybody needs. Bridges, highways, airports, not to mention schools, hospitals, clean water—there’s no limit to what taxes can pay for. And politicians who don’t use taxpayer money to fund better infrastructure, social services, and jobs are likely to find themselves out of work after the next election cycle. A little bit in increased tax revenue can go a long way to addressing a lack of social services and an inability to implement a strong strategy for universal and good-quality employment..
But too many avoid paying taxes. Through a complex network of treaties, companies list income generated in one country as income generated in another, thereby allowing themselves to pay taxes (or not) in places that have little or no corporate taxation and where they don’t have to disclose financial information.
To its credit, this year’s G20 summit endorsed a plan drafted by the Organization for Economic Cooperation and Development (OECD) to address the issue of Base Erosion and Profit Shifting (BEPS). The summit communiqué includes strong language on the need to address the interests of developing countries in the next steps. But developing countries need to be at the table and it’s not clear whether or not they will be.
Potentially, BEPS is a once-in-a-lifetime opportunity. A single process could alter thousands of tax treaties, and political pressure to adhere to stronger regulations could become the norm. Together with new initiatives on “automatic exchange of tax information,” these measures could finally compel companies to pay what they owe in countries that they work in, and everyone could at last reap some benefit (not just the banksters).
But even these measures do not go far enough, considering the extremes of poverty and wealth that pervade the global economy. Another proposal that’s gotten a lot of attention over the past few years is the Robin Hood Tax. A re-branding of what was once called the Tobin Tax or the Financial Transactions Tax, the Robin Hood Tax would impose a small fee on the international transactions that make up the vast majority of commerce in today’s world. The money generated would be significant—hundreds of billions of dollars. Eleven European Union (EU) countries are considering going forward with such a tax, despite recent controversy regarding the legality of such a move. If those countries are bold, they will suggest a higher rate—at least the 0.5% that economist James Tobin originally suggested. At lower rates, the tax would still generate a lot of revenue, but it’s not clear that it would do anything to slow down the casino.
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The disparities of wealth and power are so vast today that it’s hard to conceive of any limitation at all to the criminal acquisitiveness of those at the top.
Earlier at Naked Capitalism there was an interview with Philip Mirowski, who argued that the neoliberal thought collective was far ahead of its competitors in every respect. Perahps the coming alternative to neoliberalism, which I have previously dubbed “postcapitalism,” needs a thought collective of its own. At any rate, I do not see an alternative to capitalism-in-decline, sluggish growth at best, and kleptocratic rule by the .6%, without such an alternative thought collective.
I’m curious as to why everyone continues to call that defunct philosophy “neoliberalism.” A more accurate name would be “neofuedalism” (sans the chivalric code of honor).
Not my neologism, alas.
It is moving towards neofeudalism but, as a system, is not there yet. But good point.
Can you tell us all why Philip Mirowski’s use of the term is inappropriate?
While the diagnosis is accurate and the solution of taxing the wealthy has positive redistributive effects, it’s important to remember that MMT has shown that taxation is not necessary to enable government spending on public goods, or on anything else that will promote greater growth.
The exception is the Eurozone, whose individual member countries don’t have a sovereign fiat currency–but that’s the real problem, not the lack of sufficient taxation, and spending only from increased taxes will not help growth much. There, the solution (regardless of tax increases) is simply to authorize big (printed-Euro) loans from the ECB (bounded by some substantive but uniform percentage of GDP) to any countries that want them, at extremely low interest rates, which can then be spent (by any equivalent of helicopter dropping necessary) to encourage growth.
There are other good reasons for taxation than raising money, which, as the MMTers and history (eg, ‘finding’ the money for WWII) have shown. Those reasons are, IMO, more important and include income redistribution (eg, from private to public, from rich to poor), breaking the chain of hereditary wealth through estate taxes, and policy implementation by taxing unwanted behaviours and rewarding desired ones.
I agree.
I don’t how to describe Michael Hudson’s relationship with the MMTers, other than to say he seems to be connected at the hip with them. But he often talks about taxes. To wit:
And what about Joe Firestone? I think he identifies himself fully in the MMT camp. Here’s what he had to say:
Taxes are also what gives a national currency its value and prevents it from being more than just worthless pieces of paper. The key feature is that the national currency is the only acceptable currency for settling a tax debt, and that prevents it from dropping below a certain minimum value.
Is the lack of aggregate demand perchance a result of income disparity? I would like to know how much of a factor it is relative to other causes.
“…MMT has shown that taxation is not necessary to enable government spending on public goods,…” etc. Yet we know that most money flows to the 0.6%, so how does MMT avoid aggravating the problem by promoting government spending without more progressive taxation as well?
While tax changes would effect the corporate contribution to sustainable economies I still say that changes to inheritance are needed to resolve the ongoing Gordian knot of control the global plutocrats have on all economies. I also think the salutary effects of a Tobin tax would be very short lived, i.e., quickly gamed.
I fear that inaction on reigning in the global plutocrats is tantamount to rearranging deck chairs on the Titanic.
As Hayecksheelbiter said above we are really in a neofeudal system or moving in that direction and key to that is inheritance taxes–if you can stop the transfer of wealth towards family members you will put a wrench in the whole system. There is not one tiny chance that this idea will fly in today’s political arrangements. I have known people in those ruling elites and one of the chief motivations for acquiring great wealth is to hand it to their children and continue the dynasty. These people have power now and will not give it up for “the people” who most of them either hate or are indifferent to.
“…there are a few [reforms] that might actually work in terms of taking power away from the tiny elite who continue to profit…”
Let’s start by changing the name back to Leningrad.
I don’t believe reform is politically possible. Your underlying idea is that there is an intention on the part of the G-20 and other international organizations to seriously argue for reform. Yes, the people who sit down and right up the policies in finance and even the IMF often care somewhat that the system help prosper greater number of people–most are, after all, utilitarians of some kind. But those people don’t count–some of their input is seriously considered if and only if it doesn’t pose any threat to the power-elite.
Obviously, using logic, the dollar should not be at the center of global finance the SDR system is an already established “currency” that could be the basis of a stable global currency. But there is a reason for dollar hegemony–the fact the USG has the military muscle both in conventional and non-conventional terms to enforce its will globally through persuasion or coercion (offers you can’t refuse). As Dick Cheney said “the American Way of Life is non-negotiable” and by that he meant not just cheap carbon energy but dollar hegemony which enables the U.S. to borrow money without having to pay it back necessarily. Most countries are happy to have dollar and U.S. hegemony because the U.S. has assured the ruling elites in most countries that cooperation means U.S. security guarantees, i.e., open trade routes, relatively free trade, and the maintenance of a global system that guarantees power remains in the hands of those that have them.
I do not believe in “economics” or arguing about economic systems these things are very secondary to politics–it is political power we are talking about at the G-20 though it may be couched in economic parlance Machiavellin kicks Adam Smith’s ass every day of the week and twice on Sundays.
Politics may be the means, but economics explains the goals. As in, it’s lways about the benjamins.
I actually disagree with you here–if by economics you mean the drive to accumulate wealth (which isn’t really economics) then I think we need to understand that wealth is accumulated in order to have power and status not, usually, for hedonistic reasons. Economics is just the study of the technical way resources are allocated politics and psychology are the studies of those who allocate resources.
There was a school of politics that said that we had achieved a kind of end of history and now we just had technical questions on how the resources will be allocated to everyone equitably. This was a notion current before Fukuyama became famous for his assertion.
In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.
Written around 1925
“Laborers knowing that science and invention have increased enormously the power of labor, cannot understand why they do not receive more of the increased product, and accuse capital of withholding it. The employer, finding it increasingly difficult to make both ends meet, accuses labor of shirking. Thus suspicion is aroused, distrust follows, and soon both are angry and struggling for mastery.
It is not the man who gives employment to labor that does harm. The mischief comes from the man who does not give employment. Every factory, every store, every building, every bit of wealth in any shape requires labor in its creation. The more wealth created the more labor employed, the higher wages and lower prices.
But while some men employ labor and produce wealth, others speculate in lands and resources required for production, and without employing labor or producing wealth they secure a large part of the wealth others produce. What they get without producing, labor and capital produce without getting. That is why labor and capital quarrel. But the quarrel should not be between labor and capital, but between the non-producing speculator on the one hand and labor and capital on the other.
Co-operation between employer and employee will lead to more friendly relations and a better understanding, and will hasten the day when they will see that their interests are mutual. As long as they stand apart and permit the non-producing, non-employing exploiter to make each think the other is his enemy, the speculator will prey upon both.
Co-operating friends, when they fully realize the source of their troubles will find at hand a simple and effective cure: The removal of taxes from industry, and the taxing of privilege and monopoly. Remove the heavy burdens of government from those who employ labor and produce wealth, and lay them upon those who enrich themselves without employing labor or producing wealth.”
Written around 1925
Just saw a you tube presentation by Joseph Tainter (The Collapse of Complex Societies”) and all that stuff about the descent of Rome into feudalism looks awfully familiar: a predatory and dysfunctional elite that won’t accept any limits on its power sucking the life out of the civilization.
“It goes after wealth—in a progressive system, the wealthy pay a greater share”
most taxation is on income, not wealth.
Grow, for heavens sake where and how. Have they looked around them recently. It is all becoming denser, more frequent and violent.
We have no evidence that the structural problem is plural, the evidence seems clear there is a single structural problem, since the ten year yield has taken a nearly monotonic decrease over the past thirty years.