GV4D4 - week 10

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These are my notes from November 28 for GV4D4 at the London School of Economics for the 2017-2018 school year. I took this module as part of the one-year Inequalities and Social Science MSc program.

The usual disclaimer: all notes are my personal impressions and do not necessarily reflect the view of the lecturer.

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The Politics of Crisis and Austerity

Readings

Populism and the Economics of Globalization by Dani Rodrik

Published July 2017. On left-wing populism in Latin American and right-wing populism in Europe/US as the result of globalisation shocks. Incidentally, there’s a good 2013 New Left Review article on the term “populism” and its usage over time: Populism and the New Oligarchy (my notes are in Bookmarker).

• characteristics of populism:
  • anti-establishment orientation
  • the demos over elites
  • opposition to liberal economic policies
  • opposition to globalisation
  • sometimes, authoritarianism
• this paper: on the economic roots of populism, specifically as the result globalisation
  • other factors mattered too (tech, winner-takes-all markets, labour market dereg)
• explaining the difference between left- and right-wing reactions in terms of the form taken by globalisation
  • immigration shocks -> mobilisation along ethnic/national lines (advanced Europe, Trump)
  • financial effects -> mobilisation along class lines (Latin America, Sanders)
• need to distinguish between the demand/supply sides of populism
  • demand due to economic anxiety, distributional struggles
  • supply depends on what’s offered by political leaders
• previous anti-globalisation backlash, in the US
  • 1882 Chinese Exclusion Act
  • implementation of a gold standard, resulting in expensive credit & falling agricultural revenue for farmers
    • we can see the gold standard as a “financial globalization anchor”
    • this led to a populist movement behind presidential candidate William Jennings Bryan
    • they wanted bimetallism (where silver would also be legal tender) in order to expand monetary supply -> easier credit
    • they were eventually defeated
• trade theory
  • Stolper-Samuelson theorem implies that in the US, low-skilled workers are worse-off due to trade liberalisation
    • (as long as you continue to produce a good that is importable)
  • more generally, we have the magnification effect from neoclassical economics
    • if the price of a factor of production changes, the relative return is magnified
    • which means that if a labour-intensive good decreases in price, wages decrease more than proportionally
    • I’m extremely skeptical that understanding this theory helps us to understand any real-world effects of trade beyond what is obvious
  • as globalisation proceeds, and further trade liberalisation consists of lowering already low tariffs, there’s less economic expansion
    • it becomes more about redistribution within a nation, meaning some gain while others suffer
  • on the effects of NAFTA on the US economy (focusing on lowered tariffs for products from Mexico)
    • negative effects concentrated among high-school dropouts
    • net benefit of NAFTA for the US is zero or close to it (just redistribution from some industries to others …)
  • on China entering the WTO
    • no change in tariffs, but due to increased confidence in most-favoured nation status, trade increased
    • not sure what the author’s conclusions are here
  • basically trade can increase economic inequality within a nation
• the negative effects of trade on certain groups can be dampened by specific state policies
  • but that doesn’t appear to be an aim of either left- or right-wing populist movements
  • in fact, some in the anti-EU movement think leaving the EU could lead to more liberal trade policies (less dampening)
  • difference between the EU/US model: former has historically had much stronger social protections
  • the US could have chosen to follow a more European model, but did not, partly due to (imo misguided) fears by economists on the “inefficiency” of redistributive techniques
  • trade agreements both reflect and exacerbate weakened influence of unions
    • if labour had been strong enough to demand protection from trade liberalisation, the agreement wouldn’t have happened in the first place (or in the same way)
• why is trade picked out specifically as a scapegoat for declining wages, as opposed to technological change?
  • possible answer: people don’t really care about inequality in the classic sense; they care about unfairness
  • so inequality of opportunity vs outcome, because they don’t realise the link—a form of false consciousness maybe
  • when economic advantage is gained as a result of higher productivity (“merit”) or efficiency shortcuts, it’s fine
  • but when it’s as a result of legal arbitrage (taking advantage of lax regulation in Bangladesh, for example) it’s seen as unfair
• financial globalisation (higher cap mobility) -> uncertain, complex effects
  • link between financial crises & globalisation, acc to Reinhart and Rogoff (2009), colour me surprised
  • there’s this one quote that I find hilarious for some reason: “Why would financial globalization increase inequality and the capital share in particular? […] So to some extent these distributional consequences of financial globalization are a genuine surprise.” TO WHOM???
    • it weakens the power of labour because capital can threaten to relocate (say, a factory) elsewhere
    • as capital becomes more mobile, it gets harder to tax; govts have to make up for the shortfall by taxing consumption or wages instead (or taking on more debt, or cutting public services, or both)
• various types of inequality increased as a result of globalisation
  • rural/urban; skilled/unskilled labour; capital/labour; elites/ordinary people
  • the fairness element is important here—people who lost out took it hard because they perceived it as a “rigged playing field” (which … isn’t wrong)
• on different types of populist movements
  • rise of Syriza in Greece, Podemos in Spain and support for Bernie fairly recent
  • Trump/Brexit obviously exploiting cleavages (turning nascent anti-immigration sentiment into an us vs them thing)
  • whereas in Latin America, left-wing populism has been around for a while (small recent rise) & very little right-wing
    • it was clear that the problems resulting from globalisation were NOT caused by immigrants (which were, moreover, usually of similar cultural/ethnic stripes), but rather by structural adjustment
    • thus the popularity of left-wing populism is clear
  • in the case of Greece, there’s a similarity to Latin America in the form of the troika’s miserable handling of the euro crisis
    • similarly in Spain, though to a lesser extent (plus immigrants tend to be from other advanced European countries)
  • in France, though, 40% of immigrants are from Muslim countries; 10% from Sub-Saharan Africa (so ethnic/religious cleavages are obvious)
    • hence the rise of the National Front
• in the conclusion, the author mentions the trade policies of Bretton Woods and concludes “Perhaps it was too successful for its own good”????
  • it’s a very brief mention, so maybe he just didn’t have time to go into it more, but the omission of the fact that Bretton Woods failed for tons of explicitly trade-related reasons is glaring
  • I looked up the author cus I was curious about his larger political views
    • he’s generally critical of unfettered globalisation & neoliberal policy
    • seems to think we can bring back a slightly modified version of Bretton Woods …

Austerity by Mark Blyth (chapters 1, 6)

From 2013. I just read the whole book. The basic idea is that austerity is dumb and unjustified, due to a misreading (possibly deliberate) of the causes of the sovereign debt crisis in Europe.

Notes in Bookmarker.

Lecture

• up until now, we’ve been focusing mainly on the golden ages of the postwar period
• mentions autumn budget & how growth is forecasted to be low, which poses a challenge to redistributive politics
  • other challenges: lots of sovereign debt (post-crisis), 80-90% of GDP now (whereas under New Labour there was a target of 40%)
  • Brexit, high unemployment and/or wage stagnation (or both), left parties in retreat (except here, with the absolute boy)
    • there’s been some wage growth since 1997, but most of it was before financial crisis
    • otoh, wage growth among 1% (from 1975 onwards) has been staggering
• one of the impacts of financial crisis: threw the economics profession into disarray; lots of long-standing ideas about how to manage capitalist economies challenged
  • in this intellectual confusion, the ideas behind austerity came to the forefront
  • though welfare retrenchment was being debated even in the 80s/90s (as part of neoliberalism)
• why retrenchment of the state today?
  • fall of org labour simultaneously with businesses no longer want to give concessions
  • political changes (less democratic)
    • politicians are less willing/able to serve their constituents due to the power of the global capitalist class
    • (this ties in nicely with Wolfgang Streeck on Marktvolk vs Staatsvolk)
    • plus existence of ethnic/cultural divisions can sometimes undermine national working-class solidarity
  • ideational change among ruling classes
  • less of the upheaval associated with world wars (ties into Piketty/Great Leveler)
• in 90s, Pierson wrote about welfare state retrenchment and used the phrase “politics of permanent austerity”
  • not quite the same as reversal of the welfare state; instead, growth slows/stops
  • can’t quite drop existing commitments (democratic difficulties there)
    • Pierson theorises that politicians like offering greater welfare spending and dislike cutting them
    • though ofc this depends on which group you’re pandering TO
    • think classic Republican strategies to denigrate those benefiting from certain policies (Reagan’s welfare queens, Romney’s makers and takers) in an attempt to divide and conquer, usually along ethnic/cultural lines (so people end up voting to make others suffer as a pretty grotesque alternative to redistribution)
  • retrenchment politics characterised by blame shifting (opposite of diff politicians trying to claim credit)
  • easier to mobilise against cuts to welfare state than against increasing
    • recent movements in healthcare legislation in the US are kind of proof of this? at least in terms of a populist movement, not necessarily legislative process
  • Thatcher/Reagan etc didn’t actually reduce the size of the welfare state; they just changed the composition of it
• now onto the current period of post-crisis austerity
  • after financial crisis, immediate response was a Keynesian stimulus package
  • 2009 onwards, pre-crisis economic orthodoxy returned
  • reasons for recourse to austerity:
    • winner-take-all politics (Pierson) where policy decisions were driven by organised combat (wealthy elites over democratic decisions)
    • power resources theory: organised labour movements in disarray and so capitalist class ruled the roost
    • technocracy (central bankers, etc hold all the power)
    • depolicitisation of economics where most parties (except Corbyn’s Labour) treat economic policy as outside the realm of party politics
    • also it fits in well with neoliberal orthodoxy & it’s hard to challenge that (despite how the crisis should have challenged the hegemony of neoliberalism)
• some history on Keynesianism: he proposed that it was ok for govts to take on debt in order to stimulate economy
  • main thesis: imperfections of the “free market” mean it needs to be managed by state
  • legitimised the expansion of the state
• three phases of intellectual responses to crisis
  • left triumphant, thinking that neoliberalism had finally been put down (eg Paul Mason’s Meltdown, Stigliz’s Freefall, etc)
  • now: left depression, accepting that neoliberalism is here to stay (Rogoff’s This Time is Different; Colin Crouch’s Strange Non-Death of Neoliberalism; Mark Blythe’s Austerity)
• on zombie ideas & how it’s so hard to challenge economic orthodoxy among ruling class (policy elites), conservativism & resistance to new ideas
• but now we have the rise of populism which may finally spur the death of neoliberalism
  • on the left, anti-austerity and socialism; on the right, anti-immigration and nationalism
• he’s done some work on a typology of populist movements based on welfare states
  • states with inclusive welfare states that are net creditors tend to see right-wing, anti-immigrant groups
  • whereas those that are net debtors (Greece, Spain etc) more left-wing
  • and for LMEs, which are all net debtors, you see both

Seminar

• the supposed objective of austerity: cut govt spending to restore business confidence
  • a “streamlined” public sector should raise business confidence
  • there was concern that too much public debt would seem unsustainable, deterring investment
  • the “crowding out” theory, that public spending was in direct competition with private
  • fears of inflation
• what’s wrong with having too much public debt?
  • interest payments can get predatory
  • after a certain point, you may not be able to borrow more
  • or you may have to declare bankruptcy, which will affect your credit rating
  • otoh (and this is the hill I will die on), the level of debt that is considered “too much” is very arbitrary
    • the immorality or inefficiency of public debt is almost tautologically true: it’s bad because everyone says it’s bad
    • declared bad by fiat (like the EU saying debt should not exceed 60% of GDP)
    • plus Germany managed to mostly default on its debt (the first time, with a war; the second time, with the London Accords of ‘53) and it’s fine now
• it’s not just about debts, though; it’s also about deficits, and the fears they stoke of neverending, increasing debt
  • deficits in most EU countries other than Germany all fairly high
  • could be solved via the flip side of fiscal policy: by raising taxes (esp on the wealthy), not just cutting spending
  • the reason govts did not, for the most part, choose this route comes down to political ideology (in a word: neoliberalism)
  • alternatively, monetary policy (by printing money or changing interest rates) is another option, but not for countries in the Eurozone ofc
• Keynes’ automatic stabilisers: in a slump, welfare spending will go up (and tax revenue will go down) because of increased unemployment (assuming good unemployment benefits)
• the initial response to crisis: cut interest rates to near-zero
  • but when interest rates are that low, you face the zero lower bound that limits your possibilities
  • so govts went for an expansionary monetary policy, with quantitative easing (first in the US in late 2008; a few months later, in Europe as well)
• by the end of 2009, the sovereign debt crisis begins
  • unstable govt balance sheets (filled with toxic assets) throw bond markets into disarray—they stop trusting govt bonds
  • everyone tries to dump weak govt bonds at the same time, leading to a contagion effect
  • these govts have to raise interest rates massively, which has multiple negative consequences:
    • can negatively affect currency (outside of a monetary zone) in making exports uncompetitive
    • saddling future with high interest payments
    • depressing domestic activity
  • countries like Greece then had to turn to the IMF for a bailout, with was granted only under conditions of austerity (i.e., punishing the citizens)
    • even though the bailout was primarily for French/German financial institutions
  • the point of austerity is twofold:
    • first, balance the budget and thus prevent need to borrow more money
    • secondly, to signal to potential investors that your fiscal house is in order and so encourage investment
  • incidentally, while all this is going on, German bonds begin to look increasingly attractive, even despite very low yields
    • after all, they have a surplus
    • and since they’re in the Eurozone, there is no upward pressure on the currency to make exports less competitive
• on the distribution of the effects of austerity
  • depends on the nature of cuts + specific country, but generally, affected the poor the most
  • after all, even in a universalistic welfare state, where cuts are made above the board, the poor will always be affected the most in absolute terms (you have fewer alternatives to relying on the state)
  • in an LME, though, since welfare systems are more residual, any cuts will disproportionately affect the poor (since the wealthy don’t usually use it much in the first place)
  • in general, austerity is bad for almost everyone (one might call it “universally stupid”)
  • otoh, capital is more mobile than labour
  • it can actually benefit the top 1% (which were otherwise negatively affected by the crisis), because they can just park their money in assets (cf. housing bubble)
• on trade liberalisation:
  • always winners and losers, usually along class lines
  • capitalist class accrues more gains, but there are fewer of them, so unless you have a strong redistribution system that kicks in, there were will quite a few losers
  • hence populism is almost inexorable if you let the situation fester long enough …

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