Wheat from the Chaff

An analysis of the US economy by Robert Reich

I would encourage you to download this speech by Robert Reich. [Right-click on the link and choose "Save Link As" or "Save Target as".] It's a cogent Keynesian analysis of America's current economic situation, except that it's also a near-perfect Marxian analysis, too, aside from the Keynesian interventionist strategies. Reich's key argument is that inequality is bad for business, and unless America can address this fundamental challenge, all of the secondary problems will be insoluble. The irony is that, in the end, Reich copies much of David Harvey's Marxist analysis of the fundamental contradictions of capital accumulation. The only real difference is that Reich wants to save capitalism, while Harvey has no such allegiance.

One interesting contribution by Reich is his discussion of the "three coping mechanisms" that the average American household has been using over the past 30 years to compensate for the effective decline in wages:

1. moving women into the workforce
2. making men work more overtime (a great source of "improved" US productivity)
3. borrowing money against home equity

Reich asserts that these mechanisms have, up to now, allowed Americans to ignore the problems of inequality. However, these mechanisms are now spent, and it's time American politicians own up to the fundamental problem: the engine of the American economy - the average consumer - is no longer capable of spending the money that makes economic growth possible.

A Choice of Words

Here's an interesting exercise. Replace one word in the Vancouver Sun headline below, and ask how the meaning of the headline has changed. Let's replace "admits" with "argues". Such a change makes the revealed "truth" more a matter of debate and interpretation. Yet I'd argue that this is a reasonable change in wording, given that the article itself never says "admit", and that Angela Merkel has made a fairly dramatic, and probably strategic, change in her own position on German "multiculturalism".

A Review of John Gray's False Dawn

John Gray’s popular critique of globalization and laissez-faire capitalism, False Dawn*, was originally published in 1998. It has enjoyed a resurgence as a “prophetic” account of our current global economic problems, but I think the book is better viewed as an incomplete analysis, and one that is riven with contradictions and equivocations.

Gray’s clearest and most consistent argument is that capitalism, and especially the sort of global laissez-faire capitalism promoted by the United States (i.e. the so-called “Washington consensus”) is not a natural state of being, and did not evolve naturally. On the contrary, laissez-faire capitalism is a politically constructed product, quite unnatural in most human societies and rarely long-lasting. Thus, the free market “that developed in Britain in the mid-nineteenth century did not occur by chance. Nor, contrary to the mythic history propagated by the New Right, did it emerge from a long process of unplanned evolution. It was an artefact of power and statecraft” (p.7). The system was contingent on an extensive and efficient colonial system, a government-led enclosure movement that enshrined private property, and a long-standing (but relatively unique) culture of individualism. On top of these elements, the British government engineered a laissez-faire economy through a number of extraordinary government measures: “The removal of agricultural protection and the establishment of free trade, the reform of the poor laws with the aim of constraining the poor to take work, and the removal of any remaining controls on wages were the three decisive steps in the construction of the free market in mid-nineteenth-century Britain” (p. 11). Indeed, only in mid-nineteenth century Britain, and in Anglo-American countries since the 1980’s, has laissez-faire capitalism been sustained in any meaningful manner. Gray concludes that the promotion of laissez-faire capitalism - an Enlightenment “universal civilization”, according to Gray – is as utopic as Soviet Bolshevism. The promoters of “neo-conservative” capitalism [now called neoliberal] are “as much captivated by the illusion that the historic sources of human conflict can be transcended as the most vulgar Marxist” (p. 102).

So what form of global economic system is likely to develop in the near future? According to Gray, it will be an eclectic mixture of different forms of capitalism, forms which respect local cultures and traditions, and which meet the primary needs of social cohesion and a baseline level of sustenance. Gray believes that the most successful economies will be the mixed economies in Asia. [Can Germany emerge as a successful and pragmatic member of the global economy? His answer (in Chp. 4) is a tortuous yes and no.] Though Gray wants to avoid generalizations about Asiatic economies, he nevertheless generalizes about Asiatic economies: “One of the appeals of ‘Asian values’ is that by adopting a thoroughly instrumental view of economic life they avoid the western obsessions that make economic policy an arena of doctrinal conflict” (p. 192). In comparison to Asian pragmatism, ideologically narrow laissez-faire economies are at a disadvantage: “In the contest between the American free market and the guided capitalisms of East Asia it is the free market that belongs to the past” (p. 131). The United States will continue to advocate for the Washington consensus, but its long-term prospects are dim. Indeed, evidence “of the superior economic growth, savings rates, educational standards and family stability of countries that have repudiated the American model will be repressed, denied and resisted indefatigably. To admit this evidence would be to confront the social costs of the American free market” (p. 131). America, in other words, will retard the successful acceptance of a framework “in which governments can protect what is distinctive and valuable in their economic cultures” (p. 204). Because of this, Gray is enormously pessimistic about the future of the global economy.

There are two profound problems with Gray’s analysis. The first is that inequality is only briefly discussed (see pp. 32, 108 and 114 ff.). For Gray, inequality is a social problem that leads to legitimacy issues for Western governments. Yet, as we’ve seen from the analyses of David Harvey, inequality is more than merely a political steering problem. Inequality is at the core of the housing bubble and the exotic debt instruments that have been used to create demand where real wealth does not exist. The wealth and income inequalities within states, and the growing trade imbalances between states, are simply not a major part of Gray's Tory worldview. In this manner, Gray’s book is not prophetic as one reviewer has stated.

The second major problem with Gray’s book is that he has two meanings of “anarchic” economies. The first meaning is clear enough: laissez-faire capitalism is enormously destructive of both political intervention (via Keynesianism and social democracy) and traditional social structures (so revered by conservatives). There is no longer any job security when global capital and trade flow freely across borders. And, ironically, the” free market seems set to achieve what socialism was never able to accomplish – a euthanasia of bourgeois life” (p. 72). In addition to social destruction, laissez-faire capitalism hollows out “the business corporation as a social institution” (ibid). Pensions and other long-term guarantees are no longer the responsibility of corporations, and the prospect of a life-long career seems an archaic relic. Finally, the ascendancy of financial capitalism in the West has meant that the “inherent instability of anarchic [emphasis added] global markets has been enhanced by the growth of an enormous, highly leveraged virtual economy in which currencies are traded for short-term profits” (ibid). In short, the laissez-faire project of reducing all relationships to self-interested monetary transactions seems at hand.

On the other hand, Gray also uses “anarchic” to refer to a period of globalization when the laissez-faire experiment has failed: “Every economy is being transformed as technologies are imitated, absorbed and adapted. No country can insulate itself from this wave of creative destruction. And the result is not a universal free market but an anarchy [emphases added] of sovereign states, rival capitalisms and stateless zones” (p. 194). Technological interdependence, environmental degradation and resource scarcity will render the current set of national and international institutions powerless to stop increased strategic conflict.

It’s unclear whether Gray is aware of the two meanings of anarchy, but he occasionally offers a synthesis: “Worldwide mobility of capital and production triggers a ‘race to the bottom’, in which more humane capitalist economies are compelled to deregulate and trim back taxes and welfare provision. In this new rivalry all the varieties of capitalism that competed during the post-war period are mutating and metamorphosing” (p. 218). Gray appears to be arguing that laissez-faire capitalism causes its successor (post- laissez-faire capitalism). This might actually make sense, but the transition is never fully explained, and it does not reflect his other argument that the Asian and German economies will resist laissez-faire capitalism. To the extent that they are successful in resisting the transformative nature of capitalism, then neither form of anarchy appears inevitable. Of course, it could be that the second meaning - of technology and resource-driven global anarchy - is really just moving the laissez-faire project to its most extreme form. The two anarchies are not conceptually distinct nor successive stages; they are part of the same process. In his original conclusion, Gray seems to be pointing that way, even if it contradicts his earlier discussions:

“The spread of new technologies throughout the world [Gray’s second form of global anarchy] is not working to advance human freedom. Instead it has resulted in the emancipation of market forces from social and political control [laissez-faire capitalism]. By allowing that freedom to world markets we ensure that the age of globalization will be remembered as another turn in the history of servitude.” (p. 208)

This confusion and equivocation is seen throughout the book, and particularly in its conclusions. To be sure, Gray’s book does have some strong elements. The arguments about the artificiality of market capitalism and America’s fateful intransigence are consistent and well argued. Nevertheless, the inconsistencies betray his argument. Does laissez-faire capitalism cause or succumb to a new form of global anarchy? Are they really the same thing? Will the Asian economies resist the demands of laissez-faire capitalism? Gray believes they will, but Asia (as Gray admits) seems weakened compared to the West after 1997. And, finally, if the Asian countries do resist laissez-faire capitalism, isn’t their pragmatism likely to overcome global anarchy? If so, Gray’s Hobbesian pessimism may derive from the wrong problems.

..................

*Gray, John. False Dawn, 2009 Edition ed. London: Granta, 2009. Print.

Measuring our Debt

One of the most important but confusing economic benchmarks is the level of debt carried by a nation. Is it in constant or inflated dollars? How do we account for population growth and inflation? Adding to the complexity is the different levels of government in a country like Canada. Probably the best way of measuring debt is as a percentage of gross national product. In an indirect way, it accommodates natural growth (like population and inflation), the health of our economy, and the capacity to carry debt at any given time.

The following are two interesting graphs that help explain Canada's debt, as reported by The Globe and Mail on Aug. 3, 2010:

One interesting thing to note from the second graph is that Canada's total debt load looks as bad as the United States. In a certain sense it's true; debt is debt, after all, and all citizens must eventually pay up. But constitutionally speaking, Canada's federal government is not responsible for provincial debt, while most of the 50 states in the United States cannot run long-term deficits. So, the American federal government owns most of America's debt, while Canada's federal government is, as of 2006, only responsible for 63% of Canada's overall government debt. Our federal government, in other words, doesn't have the same debt burden as the American national government, or even the British government (given its unitary structure). Of course, the current federal government in Canada is also benefiting from Paul Martin's reign as Finance Minister during which he passed "the buck (but not the bucks) on to lower levels of government".

Their woes are our gain

The current economic problems in Europe and elsewhere have become, at least for the time being, a moment of opportunity for Canada. Canada's relatively stable financial sector, low debt ratios and healthy consumer demand are attracting a great deal of attention from international investors. As a result, Canadian government bonds do not cost as much to repay, and our overall borrowing costs are therefore reduced.

... “The rest of the world loves Canada and thinks it’s a safe place to invest, and May was a month of panic, generally speaking, of deteriorating European prospects, and of flight to safety,” Eric Lascelles, a top strategist at TD Securities in Toronto, said in an interview.

“Risk-aversion ultimately resulted in extra demand for bonds backed by a strong fiscal position, credible central bank and healthy banking sector.”

The surging foreign demand means Canadian federal and provincial governments issuing debt can pay less to the investors buying it when the securities mature, a dynamic that is also helped by the rather limited amount of Canadian debt for sale.

While both Canada and the U.S. are running large deficits, Canada’s is substantially smaller even on a per-capita basis, less than 4 per cent as a share of gross domestic product, compared with almost 11 per cent in the U.S.

According to the debt-management strategy Ottawa released earlier this year with the budget, the Finance Department will sell $95-billion of bonds in the current fiscal year, less than the $102-billion in the previous year.

“The more appetite there is, the easier it is to issue bonds, and the less the Department of Finance needs to fret over the deficits that are being run right now,” Mr. Lascelles said....

Foreigners’ total net purchase of Canadian securities for the first five months of the year was $53.9-billion, slightly more than the $52.1-billion bought by overseas investors from January through May of 2009.

From The Globe and Mail: http://www.theglobeandmail.com/globe-investor/foreign-investors-eye-canada-as-haven/article1644569/

Interesting trade stats from British Columbia

British Columbia's long standing push to diversify its trade, and move away from a reliance on exports to America, appears to be gathering steam. Of course, as we found out in the late 1990's, a growing dependence on emerging industrialized countries - particularly when we're mostly selling raw resources - may also be perilous:

... Almost 12 per cent of B.C.'s exports went to BRIC [Brazil, Russia, India, China] last year. That outpaces all the other provinces, with Saskatchewan and Manitoba the closest contenders at 11 per cent and eight per cent, respectively.

"British Columbia has got a bit of a jump start, if you will, on some of the other provinces," [Warren] Lovely said.

"I think you'll continue to see the country as a whole and British Columbia, perhaps in particular, orientate itself towards the part of the world where demand is the strongest -- and that's across the Pacific."

The other side of B.C.'s export rainbow is a reduced reliance on the troubled U.S. economy. With 50 per cent of its 2009 exports headed to the U.S., B.C. has the country's lightest reliance on the U.S. as a trading partner.

Runners-up in the U.S. lite trade category are, again, Saskatchewan at 61 per cent and Manitoba at 67 per cent. Nationally, 75 per cent of exports flow to the U.S....

Lovely cites B.C.'s considerable progress in weaning itself off the U.S. In 2001, almost 70 per cent of the province's trade headed to the U.S., he said....

Elizabeth Warren: The Coming Collapse of the Middle Class

The following lecture features Elizabeth Warren speaking about the current crisis in (and looming collapse of) the American middle class.

This presentation is almost 58 minutes, but I highly recommend it for anyone interested in long term social and economic trends and the future of the middle class. Warren is a Harvard law professor who is a well-known commentator on debt and family issues. (She's even appeared in Michael Moore's Capitalism: A Love Story.) In this lecture, her basic thesis is that the typical American family (two parents, two kids) does indeed earn more income - even adjusted for inflation - than its counterpart in the early 1970's. This is mainly due to the addition of a second income, usually from the wife. On the other hand, there have been many extraordinary increases in costs (mostly inelastic) that have overtaken this increase in income, to the point that the 1970's family actually has more disposable income and more financial flexibility.

There are many impressive aspects to her presentation. First, it shows the relevance and usefulness of good statistical data. It is culturally fashionable to dismiss statistics, but the evidence Warren uses is illuminating and provocative. It confirms some things I felt were true, but have never been able to confirm or quantify. Second, her conclusions seem difficult to ignore or refute, and they are plainly scary if one thinks about them for too long. Warren's point about the move from a three-class society to a two-class society is particularly chilling. Third, while certain cost challenges are clearly American in nature (e.g. health insurance), many others, like housing and education, pertain to middle class Canadians like myself. Finally, her insights into the declining costs of food and clothing, as opposed to the increasing costs of electronics and child care, provide a sense of fairness and balance that is often missing in popular political discourse. Generally speaking, this is a thought-provoking use of an hour.

David Harvey: Getting to the Heart of the Matter

For all of the discussion about the causes of the latest economic meltdown, it's mystified me why inequality has been largely ignored.

The blame is almost always laid at the feet of proximate factors like negative savings rates, ponzi-like housing bubbles, exotic debt instruments, deregulation and a neo-liberal faith in the corrective nature of unbridled capitalism. But none of these explanations really get to the heart of why the crisis occurred. These explanations aren't irrelevant, to be sure, but they seem to be intermediate factors at best, factors which themselves are the consequences of deeper and longer-term problems. Just like the assassination of Archduke Ferdinand was merely the spark that ignited a host of issues that built up before 1914, this current economic downturn has longer and more serious causal antecedents.

To me, the key issue is inequality. I don't mean inequality in moral terms, which is often how it is cast. I mean inequality in terms of a functional problem for capitalism. In economies where consumer spending predominates (the USA, 67% of GDP; in Canada, 56%), the prime concern is getting money (back) into the hands of those who will immediately reintroduce it into our communities. Spending is the life-blood of our western economies. Without a doubt, saving and investment are important for long-term growth, but consumption is the key to economic circulation and moving savings to investment. Yet this has been a problem since the 1970's, when real income and wealth, adjusted for inflation, started to stagnate or decline for all but the richest quintile of North American citizens.

In this context, policies and programs designed to encourage people to spend have had to encourage debt, because the money isn't otherwise there. Debt, in other words, is the inevitable by-product of pro-consumption policies that ignore systemic inequality. This is where David Harvey comes in. His analysis is unabashedly Marxian, but, to the extent that his explanation strives to uncover the root issues, it's clear that such an analysis can't be ignored. Of course, I'm not really mystified why we are silent with regard to inequality. Once you admit that inequality is a central explanation, then a Marxian analysis is almost unavoidable. And capitalists and capitalist societies simply don't want to open that debate. (Well, not always.)

The following is a succinct and visually arresting summary of David Harvey's argument:

America's Housing Crisis - A Moral Dilemma?

The following video from 60 Minutes is a sobering look at America's continuing housing crisis.

It's also an interesting discussion of a central contradiction in capitalism. On one hand, business people and corporate entities often make bloody-minded decisions that leave individuals jobless and homeless. As "rational actors" pursuing "the bottom line", these capitalists are rarely condemned by our elites. Indeed, their "tough minded" decisions are often lauded as good business. On the other hand, the very same economic decisions by individual citizens and unions are almost always assessed (and condemned) in moral terms, terms which North Americans have historically internalized against their own interests.

Yet it now appears that this ideological double-standard is being exposed by the mortgage problems faced by millions of Americans. As a result, we can catch a glimpse of the political underpinnings inherent in the supposedly amoral world of economics.

Chinese Labour Costs are Going Up

A number of recent newspaper articles (for example, here and here) have been published regarding the climbing costs of labour in China. For some, this is a worrisome trend that foreshadows lower profits and higher consumer prices, and a shift in manufacturing to even lower cost (!) countries. Others note that this is a typical trend for any industrializing country, particularly one that wants to make the shift from an economy that is export dependent to an economy that relies on domestic consumption. [In Canada, consumer spending accounts for about 57% of GDP; it's 67% in the USA.] What better country than China to rely on domestic consumption!

Of course, these articles generally avoid the painful truth for capitalists: greater relative equality (created largely by a stronger union movement) will be necessary before a mature consumer society can develop. Too bad the neo-liberals in the West have forgotten this historical verity.

China's evolution is similar to what the West faced 100 to 200 years ago, and provides us with some perspective on the de-industrialization that North America has faced: perhaps we are not alone!

I'm also reminded of Karl Marx's intriguing (and mistaken?) endorsement of free trade, and by extension the global spread of capitalism: [T]he protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade.