It is clear that the British Tories are looking like the tawdry lot they are as the infighting over the leadership goes on, more often rising to the surface these days as wannabees circle the failing leader Therese May. Her performance at the Tory Annual Conference was poor, and I am not referring to her obvious difficulties with the flu (or whatever it was). I have been stricken with the flu since I left the US a few weeks ago and occasionally struggled for a voice as I gave talks every days for the 2 weeks that followed. It is obvious there is little policy substance in the Tories now and it is only a matter of time before she is ejected. At the same time, the British Labour Party leadership is showing increased confidence and are better articulating a position, that is resonating with the public. They are even starting to look like an Oppositional Left party for the first time in years and I hope that shift continues and they drop all the neoliberal macroeconomic nonsense they still utter, thinking that this is what people want to hear. A growing number of people are educating themselves on the alternative (Modern Monetary Theory, MMT) and demanding their leaders frame the debate accordingly and use language that reinforces that progressive frame. And, in that context, it didn’t take long for the mainstream media to start to invoke the scaremongering again. It is pathetic really. The New York Times article (October 5, 2017) – Get Ready for Prime Minister Jeremy Corbyn – rehearses some of these ‘fears’. It is also true that the Shadow Chancellor has expressed concern himself about these matters – without clearly stating how a sovereign state can override anything much the global financial markets might desire to do that is contrary to national well-being.
The article noted the train wreck that the Tories Annual Conference became – “half-empty … even the stage fell apart … letters fell off the party’s latest lackluster slogan behind her … a disastrous address … [by May herself] … Conservatives are in free-fall, and the degree to which Mrs. May’s days as party leader are numbered.”
We can agree with all that. It was like a surreal comedy watching any news coverage of the Tory’s conference.
The article also notes that at the Brighton Labour Party Annual Conference, confidence was high and the “references to the party leader Jeremy Corbyn as ‘the next prime minister’ sounded not just like peppy campaign talk but a tangible scenario.”
Fringe events at the Conference “routinely saw snaking queues”. Our event organised by Prue and Peter was a big success in terms of crowd numbers and seeming enthusiasm.
It is pretty clear that if there was a national election now, Labour would probably triumph. It would certainly reflect the growing anti-establishment (neoliberal) revolt that is underway across all nations.
In many countries, it is the right-wing parties that are giving voice to this revolt – unfortunately.
Such is the moribund state of the traditional social democratic left parties, which has deserted their missions to advance the fortunes of the weak and the poor, not to mention the rest of the working class, that extremists from the right look reasonable to electorates.
When we were in Spain the week before last, a major street march occurred in Andalusia with thousands calling for jobs – jobs not basic income. It was the Right that organised this march.
Many on the left have disappeared into their own irrelevancy and think it is somehow clever and progressive to concede that the government no longer has any responsibility or can increase employment.
Instead, they advocate ‘frugal’ dollops of basic income to shut people up – keep them consuming (just) – in other words, they have swallowed the neoliberal line hook-line-and-sinker about the incapacity of currency-issuing governments to create work for all those who cannot find it elsewhere.
We are told this will unleash a creative blitz among all these unemployed people who only yearn to paint, sing, play, relax, drink coffee, and discuss philosophy in corner bars all day. Fu$k me! The Spaniards, like all societies yearn for jobs and secure incomes.
Most have more modest ambitions in life than to become the next Ernest Hemingway or Pablo Picasso.
But I heard the basic income refrain as much as I heard the grand scheme for a global democracy from the mouths of the Left over the last 3 weeks.
But I rarely heard any macroeconomic statement associated with these grand plans and solutions that made any sense at all.
What I did hear on that front was the usual neoliberal gobbledygook – the lies about deficits being unsustainable, causing inflation, causing the currency to lose all value, the ever increasing debt burden, and the rest of it.
I have a good head of hair. And I am thankful for that because it gets frustrating listening to smart people with otherwise progressive values and visions being duped by the mainstream neoliberal economics lies.
Which brings me back to the New York Times article cited above.
It recognises that Labour is now more than an opposition – and is actively preparing for government.
So what are the issues?
1. A run on the pound.
2. Capital flight.
3. A civil service that sabotages Labour’s policy plans.
4. Inexperienced shadow ministers.
5. Add free trade agreements with so-called Investor Dispute Resolution Mechanisms embedded.
The usual suspects in other words.
The same issues that killed of Labour’s progressive policy positions in the mid-1970s and not only paved the way for Thatcher’s terrible period in office, but also, internally, gave oxygen to the even more terrible Tony Blair and his mindless Blairites, who are still lurking within the Parliamentary British Labour Party.
The same issues that led Francois Mitterand to abandon a credible progressive program in 1983 and implement his disastrous austerity turn with Jacques Delors, the alleged Socialist, turned mindless Monetarist, at the helm.
The same issues that I heard repeated often during our speaking tour over the last three weeks.
It is about time, progressives came to terms with these issues and realised that there are always alternatives. The idea of global capital markets closing down a democratically-elected government is a TINA strategy employed by the neoliberals when they get desperate and long for power themselves.
The New York Times says that the “team” of “shadow chancellor, John McDonnell”:
… has met with “various people, asset managers and others, quietly and privately,” and also is looking at what might happen in the event of the party’s victory and “war gaming” possible scenarios, including a run on the pound or capital flight.
So lets dissect that a bit.
First, there is a widespread belief that global finance markets can shut down a nation through the foreign exchange markets.
This sentiment is, of course, a lasting hangover from the 1970s when the British Labour Party claimed in 1976 that it had run out of money and had to borrow from the IMF.
It is a resonating theme among the Left – that somehow, these global capital markets are stronger than a sovereign state.
So the question that has to be dealt with in progressive ranks is why do they still limit their aspirations as a result of this erroneous fear.
I dealt with this in detail in this blog – Addressing claims that global financial markets are all powerful.
It is true that if governments do nothing and allow ‘hot’ money (short-term speculative capital flows) to flow in and out at will then the hedge funds will have a field day and will treat the national well-being as an irrelevance in their quest for yield.
But, in reality, national governments, which issue their own currencies have a range of options, all of which, largely, overcome the power of the global financial markets.
The first thing that we need to do is to distinguish Foreign Direct Investment (FDI) where a foreign investor provides funds to a productive enterprise in another nation, from Foreign Portfolio Investment (FPI), which represents foreign investments in a nation’s financial assets which bear no interest in an underlying productive activity in the real sector of the economy.
FDI might take the form of building a factory, purchasing land for a firm to locate to, or providing plant, equipment, and skills to aid an firm.
Clearly, once this investment is in place, the notion of capital flight becomes difficult to sustain. Productive capital is in situ. It is not a speculative asset. It usually represents a long-term commitment to the growth process of the nation involved.
A nation that maintains a rule of law, has stable government, develops a skilled labour force and has strong investment in public infrastructure is attractive to FDI.
But the fixed-in-place nature of the assets created by FDI provides workers with opportunities should the owners abandon the capital. Argentina in the early 2000s demonstrated that if the owners abandon their enterprises, workers can take control and continue producing if legal approvals are forthcoming.
Esteban Magnani’s 2009 book (the original text was in Spanish and came out in 2003) – The Silent Change: Recovered Businesses in Argentina – documented experiences of “worker control” where factories are “recovered” by various worker organisations after the capitalist owners abandon them after insolvency.[Reference: Magnani, E. (2009) The Silent Change: Recovered Businesses in Argentina, Buenos Aires, Editorial Teseo.]
He talks about establishing a “more horizontal form of democracy” beyond the typical notions of “representative democracy” where workers know from their experiences how to take control of their workplaces.
There is a great quote from Naomi Klein (from the movie The Take) where she is out the front of the “Brukman factory from which the workers had been evicted” and various opinions were being aired as to the best way forward.
The idea of this round-table, that so-called intellectuals and journalists should offer theories about how the working class should organize and fight, is both offensive and dangerous. This idea is responsible for a lot of what’s dysfunctional about the Left today. If there’s anything to be learned from these surprising Brukman women, it’s that the working class already knows how to organize and fight. In Argentina and around the world, original, creative, effective direct action is way ahead of intellectual leftist theory.
It was a central ‘battle ground’ between the owners who abandoned it and the workers. The state sent troops and police in on behalf of the capitalists but through collective action, supported by a solidaristic working class, the Brukman workers retained control of the factory they occupied and as far as I know they continue to operate.
See article from April 24, 2003 – Argentina’s Luddite rulers – for more on the occupied factories movement.
But all that aside, there is a clear distinction between FDI and the other category of capital flows, Foreign Portfolio Investment (FPI)
FPI includes purchases of shares, corporate and government bonds, and other local currency-denominated assets which are typically easier to liquidate than assets created by FDI. Real estate is included in this category if held for speculative purposes, although it is less liquid than the array of financial assets that the ‘hot’ money is attracted to.
Clearly, this capital can be withdrawn very quickly and can be the source of financial instability.
Capital controls function to limit the extent of the currency depreciation when a currency is under attack from ‘hot money’ speculators.
If targeted to short-term capital transactions (‘hot money’) they counter the speculative flows that might destabilise an exchange rate and force a nation to run down its foreign exchange reserves.
In February 2010, the IMF released a research paper – Capital Inflows: The Role of Controls – where they argued that under certain circumstances “capital controls … is justified as part of the policy toolkit to manage inflows”.
The IMF concluded that short-term speculative surges can compromise sound macroeconomic management – by pushing the exchange rate up and undermining trade competitiveness.
They also acknowledged that:
… large capital inflows may lead to excessive foreign borrowing and foreign currency exposure, possibly fueling domestic credit booms (especially foreign-exchange denominated lending) and asset bubbles (with significant adverse effects in the case of a sudden reversal).
FDI which “may include a transfer of technology or human capital” can “boost long-term growth”, but the flows associated with FPI – “such as portfolio investment and banking and especially hot, or speculative, debt inflows — seem neither to boost growth nor allow the country to better share risks with its trading partners”.
Another IMF article (June 2016) – Neoliberalism: Oversold? – concluded that short-term capital flows have questionable legitimacy and that:
Among policymakers today, there is increased acceptance of controls to limit short-term debt flows that are viewed as likely to lead to—or compound—a financial crisis. While not the only tool available—exchange rate and financial policies can also help—capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad.
Which brings into question why a nation would ever allow unfettered FPI.
Capital inflows that manifest as FDI in productive infrastructure are relatively unproblematic. They create employment and physical augmentation of productive capacity which becomes geographically immobile.
So an incoming British Labour Government has many tools available to it under law to curb the destructive impacts of these short-term speculative FPI flows that do nothing to advance long-term well-being of the people.
The imposition of country-by-country capital controls can help eliminate the destructive macroeconomic impacts of rapid inflows or withdrawals of financial capital but may not be sufficient.
Outright prohibition is one option.
For example, China prevents foreign funds from investing directly into its capital market. It also has quotas on the use of short-term foreign debt that its domestic banks can engage.
Other forms might include required fixed deposits to be made at the central bank of some proportion of the any foreign currency borrowing by domestic firms.
If we adopt a progressive view that the only productive role of the financial markets should be to advance the social welfare of the citizens then it is likely that a whole range of financial transactions, which drive cross-border capital flows, should be made illegal rather than controlled through capital restrictions.
In this context, capital controls may be an interim strategy while the nation sorts through the legislative tangle that would be involved.
This approach would best be introduced on a multi-lateral basis spanning all nations rather than being imposed on a country-by-country basis. The large first-world nations should take the lead. However, given that such leadership is unlikely to be forthcoming a single nation could still act unilaterally in this regard.
Local banks should play no role in facilitating the entry of speculative short-term flows. In this context, the only useful thing a bank should do is to faciliate a payments system and provide loans to credit-worthy customers.
These approaches are unlikely to impact on the willingness of investors to provide FDI as long as the nation has stable government, contractual certainty via the rule of law, and a growing economy with a skilled workforce.
Local tax rules can impact on FDI but that is another story again.
Despite the claims to the contrary, governments impose such controls because they are effective.
The retort is that the financial markets will always subvert capital controls, but the reality is different. Speculators know full well that such controls stop their damaging behaviour.
As Dani Rodrik noted in his Op Ed (March 11, 2010) – The End of an Era in Finance:
Otherwise, why would investors and speculators cry bloody murder whenever capital controls are mentioned as a possibility?
While it is usually claimed that imposing such controls would automatically cut a country off from access to international capital markets, plunging the nation into autarchy, the experience of various countries that have imposed capital controls in recent years disproves this claim.
Indeed, the evidence shows that countries that employed constraints on surging capital inflows fared better than countries with open capital accounts in the recent global financial crisis.
The fact is that a strong state can curb destructive capital flows and defend a floating exchange rate from collapse.
The New York Times article acknowledges that:
As it turns out, while businesses predictably wince at Labour’s plans to increase corporate taxes, party advisers say many in the business sector welcome their commitment to investing in infrastructure, especially technology.
This is the point. Financial markets chase profits not ideological purity. A growing economy with innovative investment in public infrastructure is fertile for attracting FDI.
This is not to say that it should fix the exchange rate. Far from it.
Both flexible and fixed exchange rate regimes are subject to speculative attacks from financial players intent on seeking short-term gains.
Ultimately, the best way to stabilise the exchange rate is to build sustainable growth through high employment with stable prices and appropriate productivity improvements, even if the higher growth is consistent with a lower exchange rate.
The choice of exchange rate regime provides no defense against destructive capital flows. However, evidence shows that ‘sudden stop’ episodes are much more common in fixed exchange rate regimes.
In fact, it is often forgotten that the Bretton Woods system was ultimately derailed precisely by speculative capital flows that threatened the exhaustion of the foreign exchange and/or gold reserves of nations running external deficits.
It is also the case, that it was only capital controls that gave any semblance of currency stability during the fixed exchange rate period, especially in the various European arrangements that followed the collapse of the Bretton Woods agreement in 1971.
The other point relates to claims that a nation will run out of money if foreign investors lose confidence in the government, or, more to the point, dislike the policies it is pursuing.
This is also patently false.
For example, China does not fund the US government. It just invests the financial surpluses in US dollars it earns from its current account surpluses against the US economy. Instead of keeping the cash receipts within the US banking system, Chinese interests swap into a US-dollar denominated financial asset earning a return above cash.
No foreign investor funds any currency-issuing government.
Further, given a sovereign nation does not have to borrow anyway, global financial markets cannot influence the capacity of such a state to spend to advance domestic well-being.
Also, any exchange rate depreciation that might occur under a British Labour government as growth stimulates imports will change the fortunes of the traded-goods sector of the economy. Exports become cheaper in world markets while at the same time imports become more expensive.
Britain could expect its tourism industry to grow even further as a result of the currency depreciation. The depreciation during the GFC and then again after the Brexit referendum certainly has led to a rise in tourism.
The British government tourist agency – VisitBritain – provides excellent data on British tourist flows and spending.
It shows that for the first-quarter 2017, total visitors rose by 9.88 per cent and their spending rose by 15.58 per cent over the year. So that is the Winter-quarter.
The following graphic (taken from their site) shows the time-series evolution for each of the four-quarters from 2003.
In July 2016, the UK recorded “its biggest-ever month for tourist visits” (Source).
Tourism is Britain’s “fourth-biggest service export, and one of … [its] … fastest growing sectors”.
Further, “The sharp drop in the pound has inevitably made tax-free spending attractive for overseas visitors.”
We also witness a rise in import substitution when the exchange rate depreciates, which stimulate local employment and relieve the cost pressure on local citizens.
Whenever the Australian dollar depreciates (as it does regularly), we go on holidays up the coast rather than to the ski fields of Europe!
What about the claim that the bureaucracy would undermine the British Labour government’s agenda?
The New York Times article writes:
Labour’s plans to restructure the economy represent a break with a neoliberal consensus of the past 30 years. This shift does have popular support, yet it might conceivably face institutional resistance. Britain’s civil service, which has met with the Labour leadership and which is democratically committed to political neutrality, could respond to populist left policies with a technocratic disposition toward continuity and slow, incremental change.
Possibly but not insurmountable.
And, finally, what about free trade agrements?
I considered Investor dispute resolution mechanisms in this blog – The case against free trade – Part 3 – which was one of four blogs I wrote about ‘The case against free trade’.
The conclusion is obvious.
These so-called ‘free trade’ agreements are nothing more than a further destruction of the democratic freedoms that the advanced nations have enjoyed and cripple the respective states’ abilities to oversee independent policy structures that are designed to advance the well-being of the population.
The underlying assumption is that international capital is to be prioritised and if the state legislature compromises that priority then the latter has to give way.
A progressive agenda would ban these agreements and force corporations to act within the legal constraints of the nations they seek to operate within or sell into.
Fairly simple in fact.
The sabre-rattling from the conservatives will always accompany the likelihood of a progressive government being elected. There are clear cases when capital has conspired to undermine a government it saw as threatening its position.
But usually the government has failed to use its own capacities correctly in these situations. For example, if the private sector goes on a ‘capital strike’ and reduces investment, the solution is simple. Increase public investment to improve essential services while the private sector gets over its uncertainty.
The point is that short of invading a nation with a military force, all capitalist interests have to work through the existing legal framework that is set by the legislative fiat of the nation state.
A Corbyn government would be able to resist any threats from self-interest capital interests to ensure its acted in the interests of all the people rather than just the few!
Reclaim the State book offer
Go to www.reclaimthestate.org – for discount codes.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.