destabilizing stable economics

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State of the Unions in the US Economy

State of the Unions in the US Economy

Debates about the disappearance of the middle class and the lack of opportunities for the majority of Americans have been at the forefront of the 2016 presidential election. However, discourse surrounding unions and ways to increase the bargaining power of workers are often overlooked in these discussions.These are integral components of the […]

The Trans-Pacific Partnership, Trade Deals and Income Inequality

The Trans-Pacific Partnership, Trade Deals and Income Inequality

When Oxfam’s 2016 Davos Report revealed that 62 people own half of the global wealth many were shocked by this finding and attributed it to high poverty levels in low-income countries. However, wealth inequality is also a problem in rich countries like the US. The OECD found that the wealthiest 10% of […]

Class Interests & Discordant Politics: Brexit & the Trump Campaign

Class Interests & Discordant Politics: Brexit & the Trump Campaign

The shortcomings and false promises of mainstream economics are impossible to ignore in the context of the Brexit vote and Trump’s success in the Republican primaries, with working and middle class individuals in both the UK and the US clinging to some promise of socio-economic salvation. Lately, we’ve seen an especially pronounced disconnect between political parties and the social classes they respectively govern. These instances of political manipulation have similar dynamics: the key is to cultivate an image of the far right’s intentions that suggest they are aligned with class interests, only to pursue methods that further marginalize their own supporters. And when their policies inevitably fail and it’s time to place blame, who bears the brunt of it all? Immigrants.

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But, I digress. Let’s talk neoliberal restructuring to set the stage. You know, that period that began in the 70’s where the US and the UK experienced pronounced economic stagnation. When stagflation set in, who better to blame than those damn liberals and the economic policies of the welfare state they induced (am I right, Reagan)? The resentful rhetoric propagated by Reagan and Thatcher suggested that such policies created “welfare queens” looking to loot the government for all they’ve got (just when mainstream economics had me convinced these were the self-interested economic actors dreamed up by the neoclassical synthesis). The ascent of conservative capitalism- in the US under Reagan and George Bush Sr. and in the UK under Thatcher- meant tax cuts, the erosion of labor unions, and new regulations imposed on the economy. These economic regime changes were based on the mainstream theoretical presupposition that what we really needed to do was create an economic environment conducive to unbarred corporate innovation and investment and eagerly accept international policy which, together, opened the proverbial floodgates allowing neoliberalism to leak all over the globe. What a mess.

Free trade agreements, like The North American Free Trade Agreement (NAFTA) and the General Agreement on Trade and Tariffs (GATT), and the emergence of the World Trade Organization allowed labor and capital mobility across borders. Interestingly, the majority of Democrats and Labor party folks alike took no issue with such policies-not under Clinton, not under Blair, not even under Obama. Obama, in fact, unfortunately followed the policy-tide of the bank-bailout Bush administration- the very administration that watched middle and working class American homeowners drown financially (but sure, save the banks)- before him. Post-2008 financial crisis, Obama supported the Trans Pacific Partnership, which certainly aids the perpetuation and spread of Neoliberalist influence. While Obama has made modest strides in terms of challenging the Neoliberal economic scheme- enduring the constant stymie of the republican party- his approaches to socio-economic issues have been predominantly market centered (e.g., Dodd Frank, ACA, etc.). The economic and political quintessence of neoliberalism remains unfettered. As a parallel, the Labor Party actively attempted to defend minorities, but did very little to keep the UK in the EU and have also struggled to directly address neoliberalism.

Unfortunately, the general population of U.S. and the dominant political parties of Europe have bought the story of neoliberalism told by our paternalistic politicians. They convinced the majority that the continuation of this approach is what’s best for them. Meanwhile, the working class suffered and the middle class disappeared; but how? Aren’t we all being provided the greatest possible economic good? Mainstream preachers of Pareto Optimality – a scenario where economic actors can improve their position without disadvantaging/compromising the position of another economic actor- imply the changes that come out of neoliberalism (that of the economic structure, the promotion of free trade and globalization, etc.) should be “efficient;” the loss of some jobs in domestic goods production would be neutralized by the trade stimulus, right?

Wrong. The myth of trickle-down economics proved itself, well, mythological. We’ve seen surging inequality, static wage growth over the last four decades, and disappearing jobs in manufacturing (a 37% decrease in the number of manufacturing jobs since 1979, as per the BLS). These are all hindrances to working and middle class Americans. They paid for neoliberal restructuring only to be denied the prospect of economic security and benefit which induced them to submit to such a socio-economic and political climate.

At the same time, we watched Bush and Blair start politically chaos with Bush’s War on Terror- again, an unrequested paternalistic move that subverted and unsettled the Middle East (note: not a monolith) and provoked an occidental response (well, duh), thus designing an ideal birthplace for ISIS. We’ve seen the Syrian crisis displace millions of Syrians- refugees sprawled across European nations with unequal access to livelihood.

Trump enters the race (and unfortunately the hearts of far too many Americans) and Britain exits the EU. We’ve seen neoliberalism literally create the “problem” Trump has convinced many Americans we have; Mexico’s economic instability is arguably due to the effects of NAFTA and to escape poverty, many immigrate to the US in search of employment. Low-skill working class whites perceive additional threats to their already delicate economic standing-posed by people of color at that- and suddenly the existing issues built by neoliberalist restructuring are not the problem.

The Leave campaign and Trump have hacked the interests of UK and US low-skilled working class white individuals, who blame immigrants for their job losses. These individuals really lost their jobs because of neoliberalist restructuring as free trade moved manufacturing jobs overseas, while simultaneously causing economic insecurity in nations like Mexico, thereby motivating immigration. By creating and playing on the sentimentalism attached to xenophobia, patriotism/nationalism, religion, racism, and lack of economic confidence (all bound up with one another, by the way) caused by neoliberalist restructuring, Trump and the UK’s Independence Party became the “saviors” with class interests at the heart of their intentions. This is undoubtedly a self-reinforcing mechanism. Their manipulation continues to reap them undue success and secure mass appeal. It is only suitable that the last 30-40 years of the Right wing utilizing racism and the conflict between traditionalist and progressive values has culminated into the likes of a Trump candidacy and the Leave campaign. These are merely the current guise of the neoliberal economic agenda, still hell-bent on toiling any hope for socio-economic equity.

The moral of the story? If we, presumably progressives and proponents of heterodoxy, seek to challenge the social constructions which contribute to economic instability, rising inequality, unjust wage structure, and a labor force altered by free trade like racism and harmful traditionalist notions, we cannot let the underlying perpetuity of neoliberalism go unaddressed. Working and middle class individuals will only continue to act against their class interests. Workers will continue to feel hopeless. Wages will continue to stagnate and jobs to disappear. This cycle will continue as long as we allow a power-serving social, economic, and political climate- that says rejecting the establishment in the form of racism, xenophobia, and overt nationalism is the solution to their problems- to persist.

Written by Daniella Medina
Illustrations by Heske van Doornen

The Job Guarantee: The Coolest Economic Policy You’ve Never Heard Of

The Job Guarantee: The Coolest Economic Policy You’ve Never Heard Of

When you think of economic issues what are the first things that come to mind? Poverty, inequality, unemployment, inflation, and crisis are all common answers to the question. Wouldn’t it be great if there was a policy that could address all of those issues (and more) in a cost-effective manner? In this […]

Carbon Trading, Sustainable Development and Financial Fragility

Carbon Trading, Sustainable Development and Financial Fragility

The response to climate change is one of the most pressing policy issues of our time. Carbon trading assets are currently worth more than $100 billion. This market is expected to reach $3 trillion by 2020. In Stabilizing an Unstable Economy Hyman Minsky notes that the markets for financial assets are inherently […]

A Sinking Ship

A Sinking Ship

Eight years ago, the world economy was shaken by the worst financial crisis since the depression of 1929. Despite the trillions of dollars spent on bailouts and on governments’ attempts to stimulate the economy through monetary policies, the world has not yet fully recovered, and several developing countries are facing their bitterest share just now. Still, many refrain from acknowledging the necessity of governments to engage in a different – and more effective – policy to boost economic activity and employment: fiscal expansions. Nevertheless, the burden is getting so heavy that even the more skeptical are turning to reason.

A recent text written by three important economists at the IMF, titled Neoliberalism: Oversold?, has drawn a lot of attention in the past days. Perhaps the most impressive matter that should be highlighted about the text is in its very title: the use of the word neoliberalism, so far mostly used by critics of this agenda that gained strength in the 1980s and generally associated with a sort of “conspiracy theory”. Besides that, the findings of the text should come as no big surprise to non-mainstream economists: instead of economic growth, neoliberalism has brought financial instability and increasing inequality.

This is due to two main pillars of the neoliberal agenda: capital flows liberalization and government fiscal consolidation. Freedom of the capital accounts was expected to bring about a more efficient allocation of resources in an international level. Both developed and developing countries would reap benefits from it: the former by obtaining higher returns on capital investment and the latter by receiving the necessary savings to finance capital development.

The same is true for austerity policies, which would lead to a more efficient allocation of resources domestically. Two main ideas associated with fiscal consolidation are the famous “crowding-out effect,” in which government expenditure would decrease the availability of resources to the private sector thus not resulting in any real change in the economy (a mechanism adjusted by the interest rate), and the “burden of debt”, in which public indebtedness would necessarily lead to higher taxes in the future, then transferring the “burden” to pay off the debt to the future generations.

By looking into data, the IMF authors reach the conclusion that the beneficial effects of such policies “appear to have been somewhat overplayed”. Indeed, instead of stimulating economic growth, those policies have resulted in decreasing output. Capital account liberalization has been much associated with financial instability (especially in the recipient countries), and fiscal cuts with increasing unemployment. Most importantly, such policies seem to lead to increasing economic inequality, which hurts the sustainability of economic growth in the long-run.

Fiscal consolidation and free capital flows have led to the trap that the world economy is now found: a sinking ship commonly referred to as “secular stagnation”. After almost a decade has passed since the financial crisis and advanced economies still have not engaged in fiscal stimulus despite the failure of the non-orthodox monetary policies on bringing about robust growth. Instead of having that money spent into the economy, banks and other private investors were just sitting on it – apparently not even negative interest rates managed to encourage lenders, showing the limits of monetary policy to generate growth and sustain employment.

Illustration: Heske van Doornen

Furthermore, in a world in which capital flows are free, high international liquidity was mostly drained by developing economies due to the high interest rate differentials. The increase in capital flows has a direct impact both on foreign reserve accumulation and exchange rates, which can have disruptive effects for developing countries hurting foreign trade competitiveness and risking a balance of payment crisis. In a case of increasing country’s indebtedness denominated in foreign currency, a change in the perception of international lenders might lead to either capital flood or capital flight.

This deserves special attention in the current state of the world economy. The US has not yet reached the levels of inflation that it aims (despite the plan to continue the interest rate hikes), China is going through a downturn and a restructuring of its economy towards a consumer-based one, Europe is in the brink of dismantling, and Latin America is struggling both politically and economically (with Brazil as one of the protagonists). The drop in global trade and the reverse in money flows can bring about an obstacle to the ability of developing countries to obtain foreign exchange, and thus to meet their foreign debt commitments.

With decreasing global demand and a lack of willingness to make use of fiscal stimuli, the burden of the adjustment during this sluggish riptide is the employment level. In a report from January, the International Labour Organization (ILO) estimated that world unemployment is likely to reach 200.5 million in 2017, an increase of 3.4 million new jobless people within this and the next year, with the developing and emerging economies in Latin America, Asia and Africa taking the worst impact, plummeting along with commodity prices.

How can we stop the ship from sinking? A coherent global effort to generate demand and employment is needed. Governments, especially in countries with a greater economic and political leverage (such as US and Germany), should engage in fiscal expansions targeting investment and employment. With investors’ animal spirits leashed, policy makers should not count on the private sector as a source of aggregate demand, and neither on exporting their way out of the crisis – as in a “beggar-thy-neighbor” type of policy. Instead, direct employment creation should be an objective of a global coordination, which then would provide the necessary aggregate demand to revive global trade, besides being a great mechanism to tackle the neoliberal trend of rising inequality.

Ideally, this should be the first step towards a more substantial change in the international financial architecture: from one that incites financial instability through chronic current account deficits/surpluses and abrupt movements of capital, towards one that nurtures and sustains stability and employment in the long-run. [For an enlightening discussion on the subject, see here].

What we shall remember is that although developing countries are being the first ones to fall into the cold waters of depression, the whole ship will sink eventually unless the proper policies are adopted – and austerity and liberalization have proven not to be useful lifebuoys.

Written by Vitor Mello
Illustration by Heske van Doornen

Why is Austerity Still Being Prescribed?

Why is Austerity Still Being Prescribed?

After years of strict austerity and a worsening crisis, the Greek economy is still in a slump. However, Eurozone officials continue to prescribe the medicine of austerity.  The diagnosis for the Greek crisis was the fiscal profligacy of its government, and thus to restore the health of its economy, Greece simply had […]

American Council of Ladder Producers Officially Backing Donald Trump – The Minskys Exclusive Story

American Council of Ladder Producers Officially Backing Donald Trump – The Minskys Exclusive Story

Earlier this week Carlos Maciel, The Minksys’ Special Correspondent for Vertical Matters, attended the yearly conference for the American Council for Ladder Producers (ACLP), he managed to do a few interviews. Here is what he found out about the institution’s recent letter of support for the Trump presidential campaign.Carlos Maciel: Here I […]