Sunday, August 20, 2017
Photo of Andrés Velasco

The new European populists are parlaying legitimate frustration into a misguided set of policies that can only produce more of the same. Latin Americans learned this the hard way in decades past.

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The Dead-End of Corbynismo

SANTIAGO – Latin America has a new export: populist backlash. It first landed on the warm and receptive shores of the Mediterranean, nurturing support for Greece’s Syriza and Spain’s Podemos. Now it has reached the United Kingdom.

Corbynismo, the ideology of the long-marginalized British MP Jeremy Corbyn – who admired Venezuela’s late president, Hugo Chávez, thinks Vladimir Putin was justified in invading Ukraine, and now heads Britain’s venerable Labour Party – sounds familiar to anyone acquainted with Latin America. It calls for monetary financing of fiscal deficits (now called “people’s quantitative easing”), nationalization of industry (beginning with the railroads), and an end to competition and the private provision of public services. This is the stuff that former Prime Minister Tony Blair and his supporters thought – wrongly, it seems – they had consigned to the dustbin of history.

Of course, this new populism (Hillary Clinton’s Democratic rival Bernie Sanders is also a card-carrying member) has much fodder. As Martin Wolf has emphasized, the 2008-2009 financial crisis made voters understandably angry at “greedy plutocrats and their lackeys in politics and media.” Nobel Laureate Paul Krugman (who sometimes sounds like a Corbynista, but isn’t one) and Wolfgang Munchau stress that Europe’s moderate left lost popular support by being too ready to embrace the extreme version of fiscal austerity demanded by Germany and its orthodox allies.

But being mad is not the same as being right. The new European populists are parlaying legitimate frustration into a misguided set of policies that can only produce more of the same. Latin Americans learned this the hard way in decades past. Europeans (and perhaps Americans) may be about to as well.

Three conceptual confusions cause Corbynismo to get crucial matters completely wrong.

The market for potatoes is not like the market for loans. Yes, bankers are greedy. And, yes, financial markets require close supervision and regulation. But what is true of financial markets need not be true of other markets.

A transaction involving potatoes happens at one point in time only: the buyer parts with her money, the seller parts with his tubers, and that is it. A financial transaction, by contrast, happens over time: the borrower gets the money today and promises to repay in a month, year, or decade. This makes finance especially susceptible to crooks and con men. And because expectations and confidence about future events are crucial, governments must, like European Central Bank President Mario Draghi, stand ready to do “whatever it takes” to stabilize financial markets.

As the great Cuban-Argentine-American economist Carlos Díaz-Alejandro pointed out long ago, financial markets are not disciplined by the threat of bankruptcy. When banks get into trouble, governments always save them or wish they had (think Lehman Brothers). Regulation needs to provide the discipline that markets cannot.

But followers of Corbynismo are wrong to infer that the ills of financial markets infect all other markets, all the time. Countries, whether rich or poor, do not need a Potato Supervisory Board with new and enhanced regulatory powers.

It is great to be Keynesian – but during both halves of the cycle. Yes, orthodox economists of (mostly) Teutonic origin peddle a lethal fiscal-policy prescription. When the economy is booming, they claim, expenditure must be cut (or, if all else fails, taxes raised) in order to reduce demand. When the economy is tanking, expenditure also has to be cut in order to restore confidence and revive investment. For some European economies, this prescription has caused a needlessly long recession.

But it does not follow that, as Corbynistas believe, large budget deficits and debts are harmless. On the contrary, when debts become unsustainable and governments have no option but to close hospitals and slash pensions, it is the poor and vulnerable who suffer most.

The way to render an aggressively counter-cyclical fiscal policy feasible is by relying on modern budget rules. A modern Keynesian government does not hesitate to increase spending in the face of a recession. But, in order to do that, it needs the high credibility and low debt that follow from having saved and repaid debt during the upswing.

We did this in Chile during the copper price boom of 2006-2008, running budget surpluses of up to eight percentage points of GDP. When Wall Street melted down, we had the fiscal room to apply one of the most aggressive anti-crisis plans anywhere. A rigorous fiscal rule, designed and applied by center-left governments, made it all possible.

Progressive ends are not the same as statist means. There is nothing inevitable or God-given about suffering, injustice, and inequality. That is why modern social democrats and progressive liberals are eager to right social wrongs. But effectiveness requires agnosticism about the policies required to achieve lofty ends.

Consider health care. Different things work differently in different places. Britain has a single payer and a single service provider: the National Health Service. Canada has a single public payer but mostly private providers. Obamacare establishes a public mandate to buy private insurance (with public subsidies for the poor) to finance services provided by (mostly) private hospitals and clinics.

The same is true in education, pensions, or housing for the poor. States are right to spend generously on education; but, of the world’s top ten universities listed by the Shanghai ranking, seven are private. Successful pension systems often have a solidarity pillar (public) and a contributory pillar (private). And so on. This is old hat to students of modern public policy. Yet the Corbynistas seem to have assimilated none of it.

That is the bad news. The good news is that the ideas already exist to provide a progressive alternative to 1960s-vintage Corbynismo. Some were developed in the rich world; others in emerging countries. Political leadership – Italy’s prime minister, Matteo Renzi, is one example – is now required to push those ideas forward.


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Photo of Mariana Mazzucato

Indeed, a progressive economic agenda must begin with the recognition that wealth creation is a collective process and that market outcomes are the product of how these various 'wealth creators' interact.

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Jeremy Corbyn’s Necessary Agenda

BRIGHTON – Seven economists (including Joseph Stiglitz, Thomas Piketty, and me) have agreed to become economic advisers to Jeremy Corbyn, the new leader of the British Labour Party. I hope we will have a shared goal to help Labour shape an economic policy that is investment-led, inclusive, and sustainable. We will bring different ideas to the table, but these are my thoughts on the kind of progressive agenda the United Kingdom – and the rest of the world – now needs.

When the Labour Party lost the election last May, it received considerable criticism – even from its own frontbenchers – for failing to embrace the business community as “wealth creators.” But while businesses clearly create wealth, so do workers, public institutions, and civil-society organizations, which, through dynamic partnerships, drive long-term growth and productivity. Indeed, a progressive economic agenda must begin with the recognition that wealth creation is a collective process and that market outcomes are the product of how these various “wealth creators” interact.

We must drop the false dichotomy of governments versus markets and begin to think more clearly about the market outcomes we want. There is plenty to learn from public investments that were mission-oriented, instead of focused on “facilitating” or “incentivizing” business. Policy should actively shape and create markets, not just fix them when they go wrong.

Indeed, policies traditionally considered “business friendly,” such as tax credits and lower tax rates, can be bad for business in the long run if they limit governments’ future ability to invest in areas that increase innovation-led growth. Likewise, it is time to move on from the debate over austerity to a new conversation about how to build smart, mutually beneficial public-private partnerships to fuel decades of growth.

For starters, we must invest in education, human capital, technology, and research. Massive technological and organizational advances have raised productivity in many sectors. Many (if not most) of these breakthroughs have their origins in publicly funded research. Ensuring future advances will require direct policy interventions and investments in innovation across the entire innovation chain: basic research, applied research, and early-stage company financing.

Moreover, we need more patient, long-term finance. Most existing finance is too speculative and too focused on short-term outcomes. Exit-driven venture capital might be appropriate for gadgets; but technological revolutions have historically required patient, committed public financing. In some countries, like Germany and China, public banks take on this role. In others, the job is done by strategic public agencies.

This also means de-financializing the real economy, which has been overly focused on short-term concerns, so that profits are reinvested into production and research and development, rather than hoarded or spent on share buybacks. Over the last decade, Fortune 500 companies in areas like information technology, pharmaceuticals, and energy have spent more than $3 trillion buying back shares in order to boost stock prices, stock options, and executive pay. Meanwhile, in the United States and Europe alone, companies have hoarded nearly $4 trillion. Companies should be rewarded for reinvesting their profits in production, innovation, and human-capital formation.

Next, we must increase wages and standards of living. Until the 1980s, productivity increases were accompanied by wage increases and rising living standards. This link was broken by a drop in labor’s negotiating power and companies’ increased financial orientation. Unions are key to effective corporate governance and hence should be more involved in innovation policy, pressing for investments in education and training – the long-run drivers of wages.

Public institutions must also be strengthened. Bold policy choices require public agencies and institutions that are able to take risks and learn from doing so. Outsourcing government services that lie within the government’s own competency hinders this process as it reduces the public sector’s “absorptive capacity.” Creating a network of well-funded, decentralized agencies and institutions that work in partnership with business would make government both more effective and more strategically focused.

The tax system must be made more progressive as well, with tax credits for businesses designed to encourage inclusive outcomes. We must end the current practice of blindly lowering taxes, creating loopholes that allow legal tax avoidance, and offering tax credits that have little effect on investment and job creation.

When the public sector takes key risks along the innovation chain – such as providing guaranteed loans to companies like Tesla – we should think more creatively about the kinds of contracts that enable the public to share not only the risks, but also some of the rewards.

We must also shape a new narrative on debt. Rather than focus on budget deficits, we should concentrate on the denominator of debt-to-GDP ratios. As long as public investment increases long-term productivity, the ratio will remain in check. In the OECD, many of the countries with the highest debt-to-GDP ratios – including Italy, Portugal, and Spain – ran relatively modest deficits, but failed to invest effectively in education, research, training, or well-designed welfare programs that facilitate economic adjustment.

Fiscal and monetary policy will be important, but only if coupled with the creation of opportunities in the real economy. Money creation, through quantitative easing, will not fuel the real economy if the new money ends up in banks that do not lend. And when businesses do not see opportunities, interest rates stop affecting investment.

Finally, we must not shy away from guiding the direction of development toward a green economy. Beyond “shovel-ready” infrastructure projects, fiscal stimulus should support transformational projects, such as those that led to advances in information and communication technology, biotech, and nanotech that were “chosen” by public policy working alongside businesses. Green development can be about much more than renewable energy; it can become a new direction for the entire economy.

The British Labour Party, along with other progressive parties around the world, has a responsibility to change the discussion on economic policy. By doing so, it has the opportunity to shape the future.


Britain’s New Old Left

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  1. Comment Commented

    Economics is one subject. There already are many more. Each relying upon the taken-for-granted well-fed-well-educated-perfect-law&order-morality factors that engage the ordinary life & living and order it - when discussions about various subjects engage our attentions. Yet that hardly is the truth or reality and most seem to run blindly - with some subjects like economics enjoying an attention far greater in value and import. Even when the basic conditions always remain begging for their original ceteris paribus state. Thus it is natural that economics will look beyond itself to survive and recognize that any market merely is one set of activities amongst a plethora of others: with each's engagement being the ordinary ceteris paribus conditions that each is meant to improve and enrich. Hardly an easy task even as one steps upon the great monster of the 21st Century politics: legitimacy of the politician that accrue not because of failure or success to come with great visions to lead, but personal poverty on account of individual integrity & robustness of character. Or the basic honesty-integrity-accountability-transparency factors. So already quite a road downhill already achieved. Getting all the factors in place with reaching the original starting position (we should already have been miles uphill by now in the legitimacy markers and that does not seem to have happened and it is a terrible nightmare). One economic model (it isn't that but then calling it a living model barely gets any attention including in-built sustainability that naturally includes the environment) is the Bee-Hive or the Honey-Comb model. Even I may have envisaged this without being an economist. Perhaps one could work around this model. Read more