Most of the failed political leaders and their corporate mates are in Switzerland at the moment, presumably wining and dining in fine style and pontificating about what the rest of this need to do next. The sheer preposterousness of the World Economic Forum in Davos is astounding. There remains a denial by the leaders of what has to be done. They seem insistent that the failed neo-liberal paradigm should remain intact. Apparently, calls for reforms just reflect an unrealistic nostalgia for the past. It is apparently nostalgic (meaning nonsensical) for us to long for the days when nations delivered full employment, real wages growth in line with productivity, and declining inequality. This accusation of nostalgic longing is the way the elites are avoiding facing the facts that their economic model based upon self-regulating markets has failed and will never deliver on its promises. We need a new approach that recognises the capacities and options available to a currency-issuing national government. This is not a nostalgic longing for an unchanged world. Rather it is a realisation that the macroeconomic fundamentals of a currency-issuing national state have not changed, notwithstanding the challenges that globalisation presents.
In the middle of the 18th century, Davos began to offer medical services to the rich which aimed at providing cures for a number of illnesses, especially tuberculosis. For more than 100 years, the particular micro-climate up in the high valleys of Switzerland was seen to be an excellent environment for the recovery from urban-related (pollution-based) diseases.
In the Second World War, even though Switzerland claimed itself to be neutral, German and Italian Nazis often gathered in Davos.
It seems that Davos is still keen to play host to anti-Democratic forces.
In keeping with its traditions as a sanatorium, the founder of the WEF was quoted in the UK Guardian article (January 25, 2012) – Davos: a sanatorium for those in denial of capitalism’s ills – as saying:
Davos will be the sanatorium for the world for the next five days.
That would presume that the gathering at Davos had some answers. The reality is that the utterances that are coming out already suggest more of the same failed models. World leaders are entranced with neo-liberalism and until they become free of the rapture there will be no change of direction.
The journalist, Larry Elliot also noted that while everybody realises that the political solutions in Europe are failing:
What there isn’t, is a plan for getting out of the mess, or even much of a desire on the part of those doing very nicely out of the current system to start drafting one.
I would exclude Chicago economists from the collective “everybody”. They are in a world of their own and still believe the free market is working.
It is still too early to consider some of the published material surrounding the World Economic Forum. However, there have been some interesting statements already made by some of the world leaders.
I was interested in the comments made by the Dutch businessman Ben Verwaayen in one of the opening sessions at Davos. He said that our roles as both consumers and citizens were often at odds with each other.
He gave the example of the consumer coming out of a shop with a bag full of “globalisation” (that is, imported goods) but then complaining as a citizen to the government to be protected from the consequences of globalisation – the unemployment and lost incomes.
That irony extends to many aspects of our life. On the way to work today, I noticed many cars sporting various-sized Australian flags. There is no surprise because today is a public holiday celebrating Australia Day or as the indigenous population prefer to think of it Invasion Day.
At present there is growing popular resentment over the loss of jobs in manufacturing in Australia as a result of increased import competition (especially as the exchange rate has risen so significantly in the last year or more given the record terms of trade in primary commodities).
There are increasing calls for more government assistance to save the jobs as a nationalistic gesture – we are constantly being told that Australia needs a manufacturing sector.
Of-course, these calls are despite the fact that imported cars are now outstripping locally-made cars in terms of sales.
In terms of the flags, the irony of-course, is that most, if not all, of them will have been bought in the cheap shops are proliferating throughout Australia selling goods at rock-bottom prices that come from China.
At Davos, Verwaayen then claimed that the concept of a nation was disappearing and being replaced by direct relationships between local regions and global markets. He claimed that problem with this is that policymakers are still operating as if there was a national prerogative that policy could service.
This is a popular neo-liberal narrative and provides the literature which is known as “new regionalism”.
New regionalism became popular as part of the so-called Third Way movement in Britain and Europe in the 1990s and beyond. Concepts such as social entrepreneurship and new regionalism emerged as the governments embraced the so-called Third Way – neither free market (right) or government regulation (left) – as a way to resolve unemployment and regional disadvantage.
The Third Way movement included new ideas about space – that is, the global, national and local regional layers which still rely on individualistic and market-based constructs inherent in neo-liberalism.
Unemployent is still rendered as an individual problem – the ultimate “privatisation”.
New Regionalism proposes a series of “solutions” or separate policy agendas that build on these individualistic explanations for unemployment and accepts the litany of myths used to justify the damaging macroeconomic policy stances that are now the norm in Europe and beyond.
By failing to ask the correct questions, these “solutions” then appear, on first blush, to have (undeserved) plausibility.
New Regionalism emerged in the mid-1980s and was largely driven by case studies documenting economic successes in California (Silicon Valley) and some European regions (such as Baden Württemberg and Emilia Romagna).
The interlinked ideas that define this approach to “space” are consistent with Ben Verwaayen’s characterisation that the “national” level is now getting in the way of development.
New Regionalism claims that “the region” is now the “crucible” (to use the words of British regional scientist John Lovering) of economic development and should be the prime focus of economic policy.
In this way, the claim is that regions have now usurped the nation state as the “sites of successful economic organisation” (Scott and Storper’s words) because supply chains (in the post Fordist era) have become more specialised and flexible given the need to deal with uncertain demand conditions.
New Regionalism advocates argue that regional spaces provide the best platform to achieve flexible economies of scope that are required to adjust to increasingly unstable markets.
These socio-spatial processes involve localised knowledge creation, the rise of inter-firm (rather than intra-firm) relationships, collaborative value-adding chains, the development of highly supportive localised institutions and training of highly skilled labour.
These dynamics require firms to locate in clusters, often grouped by new associational typologies (for example, the use of creative talent or untraded flows of tacit knowledge) rather than by a traditional economic sector such as steel.
The new post-Fordist production modes emphasise new knowledge-intensive activities encouraging local participative systems. By achieving critical mass of local collaborators, a region could be dynamic and globally competitive.
Most these claims are based on induction of regional “successes” without regard for the specific cultural or institutional contexts, and lack any coherent unifying theoretical underpinning.
It is highly disputable whether the empirical examples advanced to justify the claims made by New Regionalist proponents actually represent valid evidence at all.
For example, John Lovering (1999: 382) examined the claimed made in the 1990s about Wales and concluded:
[Reference: Lovering, J. (1999) ‘Theory led by policy: the inadequacies of the New Regionalism’, International Journal of Urban and Regional Research, 23, 379-395]
If one factor has to be singled out as the key influence on Wales’ recent economic development … it is not foreign investment, the new-found flexibility of the labour force, the development of clusters and networks of interdependencies or any of the other features so often seized upon as an indication that the Welsh economy has successfully ‘globalized’. Something else has been at work which is more important than any of these, and it is a something which is almost entirely ignored in New Regionalist thought … It is the national (British) state.
That is, a supportive macroeconomic policy framework.
While many criticisms can be levelled at New Regionalism, its major weakness is that perpetuates the notion that regions can entirely escape the vicissitudes of the national business cycle through reliance on a combination of foreign direct investment and export revenue.
It is a different spin (a variation) on the “business cycle is dead” notion and amounts to a denial that macroeconomic policy – that is, at the national level – can be an effective response to global trends that penetrate via the supply chains defined by trade patterns to the local region.
New Regionalism thus supports neo-liberal claims that fiscal and monetary policy is impotent and, in turn, it constructs mass unemployment as an individual phenomenon.
By ignoring the fact that mass unemployment demonstrates the unwillingness of the central government to spend sufficient amounts of currency given the non-government sector’s propensity to save, the neo-liberal position is left unchallenged and is actually reinforced and a new style of Says Law emerges with claims that post-Fordist economies need to focus on “supply-side architectures”.
Modern Monetary Theory (MMT) provides us with a way of understanding that currency-issuing monopoly embedded in the national state is still powerful and can be used to advance domestic prosperity independent of the way in which global changes manifest.
That is not to say that these major changes in supply chains and changes in the pattern of energy demand etc are not major events which are forcing national economies to adapt. That clearly is the case and I have written about it at length.
But even with the pressure of these changes, the national state remains relevant.
The reason why mass unemployment occurs hasn’t changed as a result of globalisation. It still remains that if aggregate spending is not sufficient to purchase the total supply of goods and services, there will be an unplanned increase in inventories leading to a rise in unemployment and/or underemployment.
To avoid this situation, net government spending (the budget deficit) must fill the spending gap. So mass unemployment always reflects a choice made by government to provide lower net government spending and accept higher unemployment.
When involuntary unemployment exists, nominal (or real) wage cuts cannot “clear” the labour market unless they somehow eliminate the desire of the private sector to net save, and thereby increase its overall spending in the economy. That is, of-course, unlikely in the extreme. The opposite is highly probably.
Furthermore, individual search endeavour cannot eliminate the macroeconomic constraint imposed on the labour market. In other words, the unemployed cannot search for jobs that are not there.
Extending the model to include the foreign sector makes no fundamental difference to the analysis, because private domestic and foreign sectors can be consolidated into the non-government sector without loss of analytical insight.
Only government deficit spending can accommodate any net desire to save by the non-government sector and eliminate unemployment.
In contradiction to mainstream rhetoric, the systematic pursuit of government budget surpluses must be manifested as systematic declines in private sector savings.
Mass unemployment thus arises because the budget deficit is too small, whatever global forces are operating to shift the pattern of production between nations.
The non-government sector depends on government to provide funds for both its desired net savings, and for payment of taxes. To acquire the currency it needs, the private sector offers real goods and services for sale.
Unemployment therefore occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save. In general, given that the non-government sector desires to hold currency, deficit spending will be the norm if high levels of employment are to be maintained.
As long as the national government can enforce tax obligations in the currency it issues then these conclusions will hold. Globalisation might shift tax bases off-shore if government regulation permits. But ultimately, military invasions aside, the national government maintains the capacity to determine the regulative and policy environment that global businesses have to operate within.
Global businesses do not sell at some abstract global level – they sell to you and I in our local shops (predominantly – that is, notwithstanding the rising proportion of on-line shopping). Even as on-line shopping becomes more commonplace, the goods and services will still have to cross national borders.
Irrespective of globalisation, there are no financial constraints on a national, currency-issuing government spending.
This myth starts with a false analogy between household and government budgets. A household, the user of currency, must seek finance before they can spend, whereas the government, the issuer of the currency, spends first and never has to worry about financing.
Further, it still remains, no matter how integrated economies are globally, that the currency-issuing government’s spending provides the private sector with the currency they need to discharge their tax liabilities and to net save.
This spending precedes the tax payments and logically cannot be financed by the same. If the private sector desires to net save then total government spending must exceed taxation; therefore, there must be a budget deficit. Budget surpluses thus squeeze the desires of the private sector to hold financial assets, net save and pay taxes. Ultimately, they must lead to mass unemployment due to insufficient spending.
Ben Verwaayen then got into his stride and claimed that part of the problem at present is that people are being nostalgic for a past that is gone forever.
Larry Elliot expressed Verwaayen’s view as being that people should:
Shape up, embrace change, get with the globalisation programme: that was his answer to those angry at corporate excesses, job insecurity, offshoring and banks deemed too big to fail.
There is no doubt the globalisation has changed the pattern of our lives, the way we work, the products we consume, and the way we spend our recreation time.
As I noted above, globalisation has not undermined the fundamental facts that govern macroeconomic activity – that spending equals income equals output which drives employment growth.
There are only 3 broad sectors in the economy: (a) the private domestic sector; (b) the external sector; and (c) the government sector.
Each of those sectors contributes one way or another to aggregate demand. Domestic economic activity (real GDP) is determined by aggregate demand.
If spending from the private domestic sector and the external sector is insufficient to generate enough output consistent with full employment then there is only one other source of aggregate spending possible in any economy, no matter how open it is to the external sector.
All the supply chain developments, all the changes in labour mobility, all the changes in patterns of world production, all the new product innovations, do not alter these basic macroeconomic facts.
So when economic growth is flagging and private domestic spending is subdued and the external sector is draining growth in government deficits are the only way to boost economic activity.
Globalisation has not altered that reality.
There are some other macroeconomic realities are also important to consider.
1. Consumption will remain the most important component of aggregate demand, notwithstanding environmental concerns that would indicate we should reallocate the pattern of consumption towards “green” goods and services.
2. A reliance on credit-driven consumption is not sustainable overall.
3. To ensure that consumption growth is funded by wages growth, real wages have to grow in proportion to productivity growth.
A characteristic feature of the neo-liberal era has been the deliberate (policy-induced) widening of the gap between real wages growth (which was deliberately suppressed) and productivity growth. The only way that consumption growth was possible in this environment was through the expansion of credit. The rising indebtedness of the non-government sector was unsustainable and remains the crucial problem that has to be addressed.
This growth strategy, that suited the elites, has resulted in the current financial crisis. The redistribution of real income that resulted from this strategy also provided the financial markets with the “gambling chips”.
While it is anathema to neo-liberal ideology, governments have to ensure that that workers (and their unions) are empowered to gain greater access to real income in the form of faster real wages growth in line with productivity growth.
There is nothing nostalgic about citizens demanding that their elected governments stop acting in the interests of the elites and instead ensure that the policy environment they create is consistent with broad prosperity.
There is also nothing nostalgic about currency-issuing governments using their fiscal capacity to ensure that aggregate demand is sufficient to generate high levels of employment growth and broad provision of public goods.
In radio interviews (etc) that I give I stress the need for nations to return to the “new” normal. Households are now returning to their their previous behaviour – that is, they are now saving around 10 per cent of their disposable income (although this varies according to nations – for example, the ageing population in Japan will probably save less than that over time).
Given that every nation cannot run external surpluses (by definition) then this “new” normal will also require continuous budget deficits (of varying sizes relative to GDP) if nations are to achieve high levels of employment and stable growth.
These observations remain valid irrespective of the changes that globalisation might be responsible for.
Editorial note: I spell-checked and checked the syntax – a bit!
That is enough for today!