ROME – The world is facing a multitude of challenges, from climate change and inequality to the crisis of confidence in our political and economic institutions. The capitalist system itself is undergoing yet another existential crisis, and many countries are facing various trials of their own. The United States is in the grips of an opioid crisis, a childhood diabetes crisis, and a political crisis. China, already struggling to maintain growth in the context of a broader trade and technology war with US President Donald Trump’s administration, is beset by a coronavirus epidemic that threatens to become a pandemic. Argentina is confronting another debt crisis, and mass demonstrations are roiling countries worldwide.
Looming in the background is a deeper ethical crisis that is evident pretty much everywhere. Business leaders, myopically focused on the bottom line, have displayed remarkable moral turpitude. The financial sector has been marked by predatory lending, market manipulation, and abusive consumer-credit practices. Automakers have been caught gaming environmental regulations. The food and beverage industry is knowingly contributing to childhood obesity around the world. Pharmaceutical companies are pushing addictive drugs even as they claim otherwise (while eschewing research into desperately needed new antibiotics).
Or consider Facebook, one of the world’s largest communication and media companies. Last year, the company’s leaders made no apologies for knowingly permitting targeted disinformation campaigns and acts of political subterfuge on their platform, regardless of the consequences for democracy. The company now epitomizes the dangers of a privately controlled monopolistic surveillance economy.
Finally, in addition to a moral crisis, the widening social divisions in so many countries point to a crisis of solidarity.
That we should be confronting all these challenges might seem paradoxical. After all, we are much richer than we were in the past, and we have amassed much more information (which is not to say wisdom) than any previous generation. Recent groundbreaking advances in the physical and natural sciences, the social sciences, and the humanities (particularly history) are too numerous to count. Shouldn’t all this knowledge, all this data, and all these resources enable us better to confront the challenges we face?
Nonetheless, upon closer reflection, we should not be surprised by the current state of affairs. There is always a dialectical process at work behind human “progress.” By solving one set of problems, we usually create new ones. It was hubris that led many to believe that the fall of the Iron Curtain 30 years ago marked the end of history, with most countries quickly converging toward the inevitable: liberal democracy and free-market capitalism. Likewise, the crash of 2008 showed definitively that the problem of severe economic downturns had not in fact been “solved,” as the Nobel laureate economist Robert Lucas Jr. and so many others had previously claimed.
The Emperor Has No Hands
Democracy in societies with high levels of inequality and inadequate social solidarity creates its own conundrums. Some countries, including those in Europe committed to the “European social model,” have found ways around these; the US, clearly, has not. In America, self-interested wealthy elites who want to secure their position at the top have formed a de facto unholy alliance with extremists (including white supremacists and neo-Nazis). By manipulating the political system and supporting measures to disenfranchise and suppress voters, they have effectively replaced American democracy with minority rule.
There are doubtless many factors contributing to America’s crises. But if I had to name one, I would point to the belief in unfettered capitalism that gained wide purchase in the latter third of the twentieth century. Market fundamentalism, ironically, took hold just when economic science had exposed the limits of markets. The Nobel laureate economists Kenneth Arrow and Gerard Debreu had already shown that market failures were pervasive and persistent. And my own work with Bruce C. Greenwald had demonstrated that Adam Smith’s famous “invisible hand” was, in fact, a myth. Owing to the unavoidable presence of information asymmetries and incomplete markets, no economy can be “Pareto efficient.”
Nonetheless, neoliberal economic doctrines found their way to the top of the economic-policy agenda, with devastating consequences for developed and developing countries alike. Thanks to the “Washington Consensus” – which told policymakers to liberalize, privatize, and deregulate broad swaths of their economies – Latin America experienced a lost decade, and Africa, significantly deindustrialized through structural adjustment programs, suffered a lost quarter-century.
Meanwhile, Russia and Eastern and Central European countries making the transition away from Soviet-style communism were subjected to “shock therapy,” which in many cases neither produced economic growth nor helped to consolidate democracy. And financial deregulation in the US and other advanced economies set the stage for the worst global economic downturn since the Great Depression. The 2008 financial crisis revealed the extent to which globalization had been mismanaged, placing corporate interests ahead of those of workers and developing countries. A set of institutional arrangement that was supposed to make everyone better off became Public Enemy No. 1 in both the Global North and South. In the end, financialization and globalization had created a few winners, and many more losers.
Looking back, there is no denying that the neoliberal era increased inequality, accelerated many forms of environmental destruction – not least climate change – polarized electorates, and sowed the seeds for pervasive discontent. To be sure, skill-biased technological change also played a role. But the direction of technological development is itself a result of market forces. The obsession with quarterly earnings and executive compensation led corporations to direct their energy toward creating more unemployment and holding down wages for unskilled workers.
Me or We?
In the end, distorted economics led to distorted politics. Prevailing economic theory still assumes that individual preferences are fixed and largely universal, and that choices are affected only by variables like price and income. Common sense tells us otherwise. As parents, we work hard to raise honest, caring people, not selfish sociopaths. An economic system that prizes only self-interest – following the Wall Street character Gordon Gekko’s credo that “greed is good” – leads to a society governed by and for people whom most parents would send to their rooms.
Indeed, research in behavioral economics has shown that bankers, particularly traders and investment bankers, tend to be less honest than their colleagues in less competitive areas of finance; they become even less honest when they are primed to think of themselves as bankers. Behavioral research has also identified why economies with extreme levels of inequality have deficient social solidarity. Those at the bottom become increasingly discouraged, abandoning aspirations to achieve their potential. Suspicion that the economy is “rigged” naturally spills over into politics, where polarization and weaponized disinformation rapidly erode solidarity.
Self-interest and ideology go hand in hand. Powerful economic interests are subtly shaping beliefs, norms, and rules in ways that threaten to exacerbate and perpetuate all the other crises we face.
The good news is that another world is possible. People increasingly recognize that capitalism needs to be reformed. The problem is that too many reformers are seeking only minor tweaks, rather than truly effective solutions. Business and political leaders are increasingly acknowledging the need for stronger environmental policies, more investment in education, and even (occasionally) greater equality. But when it comes to making the deep and lasting changes that solving these problems demands, there is mostly silence.
More broadly, the key question is not whether markets (including financial markets) will be a part of the system that we must build, but how they will be balanced with collective action, which has been denigrated for the last four decades. In addition to markets, healthy societies need space for alternative institutional arrangements, such as cooperatives, and for collective action by the state and civil society.
All institutions are fallible and vulnerable to abuse or capture. The solution is not to abolish any one institution, but to create a system in which institutions can check each other constructively. Yet even if institutional arrangements look good on paper, checks and balances will fail if social and economic inequalities become too great. Concentrated wealth will always prevail.
The Pillars of Progressive Capitalism
Over the past few years, I have been developing a vision of “progressive capitalism” that aspires to strike a better balance between markets and other institutions. Needless to say, this would represent a significant departure from the unfettered, lightly regulated system we have now.
Progressive capitalism recognizes that for most firms, the easiest way to maximize profits is to amass market power, crush competitors, block would-be challengers, exploit others’ vulnerabilities, and secure rents, including through undue political influence. As we have seen repeatedly in recent decades – from Enron to Purdue Pharma to Volkswagen – contributing to society tends to come last. That is why we need regulation. The Ten Commandments were a simple set of regulations for a relatively simple society. Today, we need complex regulations for a highly complex modern global economy.
But, of course, the neoliberal deregulation agenda was never really about deregulation per se. The point has always been to regulate in a way that will advance certain interests at the expense of others. At the same time that the big banks argued against regulations that could have stopped the financial crisis, they were advocating bankruptcy provisions that favored them over other creditors; and while they argued for smaller government, they were more than receptive to the hundreds of billions of dollars in bailouts.
Progressive capitalism also recognizes that we achieve certain ends collectively that we could never bring about individually or in competition with one another. Basic research, which corporations and other private actors have little interest in funding, underpins all the advances in our standard of living. Like the air we breathe, it is a public good. To finance public goods, we need taxes. And in a just society, taxation is progressive: it places the largest burden on those who are best equipped to bear it.
Unfortunately, globalization has created many new channels through which multinationals can avoid taxation. As national governments compete for private investment and jobs by slashing their corporate-tax rates, a global race to the bottom has ensued. Everyone loses in this scenario (except corporations and their executives, of course); but the consequences have been particularly adverse for poor and developing countries.
Only recently has the international community finally recognized the problem: the transfer-price system governing international corporate taxation for a century has proven unsuitable for an increasingly digital, innovative, and service-sector-oriented economy. And yet, while efforts to update the system – including the OECD and G20’s Base Erosion and Profit Sharing initiative – are a step in the right direction, they remain woefully inadequate. The debate has come to focus on a proposal for a global minimum tax rate of 12.5%, which would quickly become a de facto ceiling, not a floor. If adopted, it would be another victory for the multinationals: What had begun as an attempt to make them pay more taxes would have ended with an agreement reducing the taxes they paid. Once again, revenue-starved developing countries would be the biggest losers.
A Framework for Solidarity
There are many fronts on which we can and should work together, where collective action could and would engender large societal benefits. Much of America’s success in innovation is attributable to its research and educational institutions, none of which are for-profit. On another front, class-action lawsuits and collective bargaining are important channels through which consumers and workers can unite to advance their shared interests, checking corporate power.
While the neoliberal agenda has failed even to deliver on its promises for growth, which has fallen to two-thirds its level during the decades after World War II, there are alternative frameworks that can boost growth within existing environmental constraints. We now understand that economic growth and social and environmental justice can complement each other. As Nicholas Stern of the London School of Economics and I show in our report for the Carbon Pricing Leadership Coalition, reducing carbon dioxide emissions can be a “growth story.”
For example, the European Commission’s proposed European Green Deal offers a framework for achieving net-zero CO2 emissions by 2050 while also creating jobs and improving living standards. Elsewhere, I have argued that similar concerted efforts – including the Green New Deal in the US – could usher in a worldwide transformation that brings previously marginalized groups into the economy.
Naysayers will argue that we cannot afford to make a rapid transition to a carbon-neutral economy. At the same time, many are also raising concerns about the labor-replacing potential of automation and artificial intelligence. In the US, some have argued that anemic growth and stagnant living standards, despite a trillion-dollar fiscal deficit, reflect secular stagnation, with former US Federal Reserve Chair Ben S. Bernanke once arguing that the real problem is a global “savings glut.”
Well, which is it? We cannot have too much labor and too much capital at the same time that we don’t have enough resources to make the green transition. If we have a superabundance of resources, we should be able to afford to confront the climate crisis and all of the other urgent issues listed above. The roots of our inaction lie not in a lack of resources, but in broken economic and political institutions.
To fix them, we need reform at both the national and global levels. The US, for example, clearly needs a new social contract that is capable of fostering solidarity among all demographic groups and across generations. The new social contract, in turn, will require a larger and revised economic role for government. We need less corporate welfare and more progressive taxation with which to fund social policies for those in need and investments in the welfare of all. Most important, we must rewrite the basic rules of the economy to reverse the toxic legacy of neoliberalism – which made its own revisions to the rules during its long reign of error. To that end, with colleagues at the Roosevelt Institute in New York and the Foundation for European Progressive Studies in Brussels, I have written two books detailing what needs to be done: Rewriting the Rules of the American Economy and Rewriting the Rules of the European Economy.
Rewriting the Rules
Around 40 years ago, the Nobel laureate economist Milton Friedman led a charge to change corporate governance, arguing that a publicly listed firm’s only duty is to maximize shareholder value. As Friedman put it, “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.” If an activity is legal and will increase profits, a firm should pursue it, regardless of the wider social and ecological consequences.
There was never much economic theory to support this doctrine. On the contrary, all the way back in 1977, Sandy Grossman and I showed that shareholder primacy does not actually increase social wellbeing. There has always been an alternative framework on offer. Under so-called stakeholder capitalism, firms would have to account for how their actions affect not only shareholders, but also the environment, workers, customers, and the communities in which they operate.
Progressive capitalism gets part of its name from the Progressive Era, a period in the late nineteenth and early twentieth century marked by social and economic reforms adopted in response to widening inequality and abusive monopolies. One of its achievements was strong competition laws, which were subsequently greatly weakened during the neoliberal era. One of the reasons for rising inequality and weak growth in the US is that firms have been allowed to amass undue market power over the past 40 years, often achieving near-monopoly status. Monopolies result in higher prices – effectively reducing real (inflation-adjusted) incomes in the same way that cutting wages would – and introduce a wide range of economic distortions. Under neoliberalism, changes in labor-market rules also resulted in a sharp decline in unionization and collective bargaining. This, too, has had a first-order effect on the distribution of incomes.
Rewriting the rules for our own time calls for a broad approach that includes all levers of macroeconomic policy. In a world where unemployment and financial fragility are the central economic problems, a monetary-policy framework that focuses narrowly on inflation has little to offer. The same applies to financial regulatory policies that fail to account for systemic risk, not least those associated with climate change. Policymakers should be preparing for the possibility of a disorderly shift once the true costs of carbon are recognized. And the longer we wait to address the problem of climate change, the greater the chances of a more disorderly transition.
Moreover, even after we have rewritten the rules to bring about a more equitable and sustainable economy, we still will need larger public expenditures, including on basic research, technology, infrastructure, and education. The neoliberal era starved the public sector while fueling profligate consumption and misguided investments. The case for reversing course is obvious: estimates of the marginal private returns to public investment suggest that they are far higher than returns in the private sector.
But even if we do all of this, there will still be many people living at or below subsistence levels, experiencing an unnecessarily high degree of anxiety and insecurity. To account for them, we will need a stronger social welfare system. This is hardly a radical idea. Nordic and other European countries have long demonstrated the effectiveness of welfare-state models that recognize markets’ deficiency in providing social protections, and that ensure higher living standards, better health, and longer lives than elsewhere in the developed world.
A twenty-first-century welfare system must not just offer social protection, but also account for market failures beyond the absence of good insurance markets. As we have seen, the real economy usually behaves quite differently than simplistic economic models predict. That is why we have had debt and other macroeconomic crises, all of which have disastrous consequences for large parts of the population, and lead to loss of social capital and public trust.
Moreover, a modern welfare system should reflect the fact that people will need assistance at critical points in their lives, owing in no small part to the inherent imperfections in capital markets that result from information asymmetries. Rich societies should not accept a situation in which a large proportion of children – some 20% in the US – grow up in poverty, with all the lifelong consequences that this entails. Modern societies also should recognize that public options for health care, education, mortgages, and retirement pensions can be more equitable and efficient than private provision. Indeed, the French health-care system achieves higher life expectancy at roughly half the cost of the largely private US system.
Broken Globalization
Of course, national policy choices in almost all countries are now made in the context of a globalized economy. This brings us to yet another severe crisis: the breakdown in multilateralism. Under Trump, the US has gone from being multilateralism’s strongest defender to its primary antagonist, and this comes at a time when we need international cooperation more than ever to tackle collective global challenges, from long-term threats like climate change to acute crises like the recent coronavirus outbreak.
One of the reasons for the attacks on multilateralism is that during the neoliberal era, globalization was mismanaged. A key aspect of that mismanagement was flawed rules, which that favored Western multinational corporations at the expense of workers and poorer countries. Countries have more scope for collective action domestically. But the same holds true across borders.
Consider the global financial and macroeconomic system. Following the 2008 crisis, I chaired the United Nations Commission of Experts on Reforms of the International Monetary and Financial System, which presented its findings to the UN General Assembly in 2009. Among other things, we emphasized the need for greater macroeconomic coordination, and advanced a proposal for a new Global Economic Coordination Commission. Now, the International Monetary Fund’s Independent Evaluation Office has issued a report drawing attention to the large externalities associated with unconventional monetary policies. And my own theoretical work has shown that these externalities are particularly pronounced with respect to large, globally influential countries like the US.
This work has also underscored the need for a global framework for restructuring sovereign debt. While the UN General Assembly has adopted a set of principles to guide the creation of such a framework, the US and a few other key countries have not signed on. Meanwhile, subsequent events, not least US District Court judge Thomas P. Griesa’s egregious rulings in favor of Argentinian bondholders, show precisely why such a framework is needed.
The entire history of debt restructuring has been a story of “too little, too late,” featuring excessive delays and insufficient restructurings that set the stage for renewed crises. Under the current system, the suffering imposed on debtor countries is enormous. It is also entirely unnecessary. With a more humane restructuring framework, debtors would be able to restore growth more quickly and repay more of what they owe. As it stands, debt restructuring tends to leave both the creditor and the debtor worse off.
Consider the case of Greece. Following its sovereign-debt crisis, it suffered a 25% decline in GDP, an average unemployment rate of 25% (with youth unemployment exceeding 60%), and massive emigration. Only after an entire society and economy had been unnecessarily devastated did a succession of debt restructurings finally take place.
We typically blame the borrowers in these situations. Yet, as I have noted with respect to the East Asian financial crisis in the late 1990s, there are two sides to every loan: a willing borrower and a willing lender, and it is the lenders who are supposed to be in the best position to assess the risks. Rather than playing the blame game, one should look ahead to determine how to avoid or minimize the impact of debt crises. But if fingers are going to be pointed, lenders should not get a free pass.
From Debtor Prisons to a More Humane Approach to Debt
In crafting a global framework, it is important to remember that sovereign-debt restructurings are more complicated than private restructurings, for two reasons. First, they usually involve a host of informal claimants – pensioners, children, the sick, people with disabilities, the public at large – all of whom have a legitimate right to the resources of the country. Just because the social contract isn’t written down doesn’t mean that a country’s residents have no legitimate or recognizable claims. If anything, many of their claims should be given priority – a principle that is already recognized in Chapter Nine – the provision for indebted municipalities – of the US Bankruptcy Code.
Second, sovereign-debt restructuring can have major implications for the global economy. Mismanagement is a negative-sum game. As the old adage goes, you can’t squeeze water from a stone. If a country doesn’t have the dollars to repay a dollar-denominated loan, something will have to give. Just as debtors’ prisons didn’t help creditors recover funds from individuals in the nineteenth century, austerity programs do not help countries repay their debts today. Both approaches are inhumane and counterproductive.
Simple arithmetic tells us that there are only three ways to restructure sovereign debt: postpone payments, reduce interest rates, and shrink the principal (that is, force creditors to take a haircut). Some ways are better than others, both for the creditor and the debtor. Lowering interest rates reduces the probability of default, which in turn justifies the lower rate. Multiple equilibria are possible, especially given the costs of bankruptcy. There could be equilibrium with low interest rates, and another with high interest rates. Too often, financial markets gravitate toward the inefficient high-interest-rate equilibrium.
This brings us back to the central theme of solidarity. It takes only a little bit of compassion and economic rationality to see that the low-interest-rate equilibrium is preferable. Forcing a country in crisis to accept a 9% interest rate when the rest of the world is awash in liquidity (and when some countries have negative interest rates) should be called out for what it is: usury. Yet under New York law, that is the interest rate applied to debt in default (pre-judgment). A 9% rate is also being applied to Argentina’s debt by the Paris Club of sovereign creditors – a group whose supposed raison d’être is to safeguard global financial stability.
Obviously, developing a new framework for sovereign-debt restructuring will take time. But in the immediate term, we have an opportunity in Argentina to show that there is a better way forward. It is time to abandon an approach that has failed repeatedly, and to embrace one based on global solidarity and economic common sense.
Solidarity and Reforming Capitalism
The same goes for the other crises I have mentioned. Rising inequality reflects political choices, not some natural process or iron law of economics. In the coming years, we will have a choice whether to close our national divisions, or let them continue to widen. We can choose to restore social capital and public trust, or we can allow it to erode further.
Perhaps this moment of mounting crises will shake our leaders from their complacency. We have the opportunity to construct an alternative economic system, an alternative form of globalization, an alternative form of capitalism. Those who believe that a more equitable and sustainable world is possible are correct. Getting there won’t be easy, but we have no choice. We are on an unsustainable path. Unless we shift to a better one, the crises to which the current system has given rise will only grow worse.
ROME – The world is facing a multitude of challenges, from climate change and inequality to the crisis of confidence in our political and economic institutions. The capitalist system itself is undergoing yet another existential crisis, and many countries are facing various trials of their own. The United States is in the grips of an opioid crisis, a childhood diabetes crisis, and a political crisis. China, already struggling to maintain growth in the context of a broader trade and technology war with US President Donald Trump’s administration, is beset by a coronavirus epidemic that threatens to become a pandemic. Argentina is confronting another debt crisis, and mass demonstrations are roiling countries worldwide.
Looming in the background is a deeper ethical crisis that is evident pretty much everywhere. Business leaders, myopically focused on the bottom line, have displayed remarkable moral turpitude. The financial sector has been marked by predatory lending, market manipulation, and abusive consumer-credit practices. Automakers have been caught gaming environmental regulations. The food and beverage industry is knowingly contributing to childhood obesity around the world. Pharmaceutical companies are pushing addictive drugs even as they claim otherwise (while eschewing research into desperately needed new antibiotics).
Or consider Facebook, one of the world’s largest communication and media companies. Last year, the company’s leaders made no apologies for knowingly permitting targeted disinformation campaigns and acts of political subterfuge on their platform, regardless of the consequences for democracy. The company now epitomizes the dangers of a privately controlled monopolistic surveillance economy.
Finally, in addition to a moral crisis, the widening social divisions in so many countries point to a crisis of solidarity.
That we should be confronting all these challenges might seem paradoxical. After all, we are much richer than we were in the past, and we have amassed much more information (which is not to say wisdom) than any previous generation. Recent groundbreaking advances in the physical and natural sciences, the social sciences, and the humanities (particularly history) are too numerous to count. Shouldn’t all this knowledge, all this data, and all these resources enable us better to confront the challenges we face?
Nonetheless, upon closer reflection, we should not be surprised by the current state of affairs. There is always a dialectical process at work behind human “progress.” By solving one set of problems, we usually create new ones. It was hubris that led many to believe that the fall of the Iron Curtain 30 years ago marked the end of history, with most countries quickly converging toward the inevitable: liberal democracy and free-market capitalism. Likewise, the crash of 2008 showed definitively that the problem of severe economic downturns had not in fact been “solved,” as the Nobel laureate economist Robert Lucas Jr. and so many others had previously claimed.
The Emperor Has No Hands
Democracy in societies with high levels of inequality and inadequate social solidarity creates its own conundrums. Some countries, including those in Europe committed to the “European social model,” have found ways around these; the US, clearly, has not. In America, self-interested wealthy elites who want to secure their position at the top have formed a de facto unholy alliance with extremists (including white supremacists and neo-Nazis). By manipulating the political system and supporting measures to disenfranchise and suppress voters, they have effectively replaced American democracy with minority rule.
There are doubtless many factors contributing to America’s crises. But if I had to name one, I would point to the belief in unfettered capitalism that gained wide purchase in the latter third of the twentieth century. Market fundamentalism, ironically, took hold just when economic science had exposed the limits of markets. The Nobel laureate economists Kenneth Arrow and Gerard Debreu had already shown that market failures were pervasive and persistent. And my own work with Bruce C. Greenwald had demonstrated that Adam Smith’s famous “invisible hand” was, in fact, a myth. Owing to the unavoidable presence of information asymmetries and incomplete markets, no economy can be “Pareto efficient.”
Nonetheless, neoliberal economic doctrines found their way to the top of the economic-policy agenda, with devastating consequences for developed and developing countries alike. Thanks to the “Washington Consensus” – which told policymakers to liberalize, privatize, and deregulate broad swaths of their economies – Latin America experienced a lost decade, and Africa, significantly deindustrialized through structural adjustment programs, suffered a lost quarter-century.
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Meanwhile, Russia and Eastern and Central European countries making the transition away from Soviet-style communism were subjected to “shock therapy,” which in many cases neither produced economic growth nor helped to consolidate democracy. And financial deregulation in the US and other advanced economies set the stage for the worst global economic downturn since the Great Depression. The 2008 financial crisis revealed the extent to which globalization had been mismanaged, placing corporate interests ahead of those of workers and developing countries. A set of institutional arrangement that was supposed to make everyone better off became Public Enemy No. 1 in both the Global North and South. In the end, financialization and globalization had created a few winners, and many more losers.
Looking back, there is no denying that the neoliberal era increased inequality, accelerated many forms of environmental destruction – not least climate change – polarized electorates, and sowed the seeds for pervasive discontent. To be sure, skill-biased technological change also played a role. But the direction of technological development is itself a result of market forces. The obsession with quarterly earnings and executive compensation led corporations to direct their energy toward creating more unemployment and holding down wages for unskilled workers.
Me or We?
In the end, distorted economics led to distorted politics. Prevailing economic theory still assumes that individual preferences are fixed and largely universal, and that choices are affected only by variables like price and income. Common sense tells us otherwise. As parents, we work hard to raise honest, caring people, not selfish sociopaths. An economic system that prizes only self-interest – following the Wall Street character Gordon Gekko’s credo that “greed is good” – leads to a society governed by and for people whom most parents would send to their rooms.
Indeed, research in behavioral economics has shown that bankers, particularly traders and investment bankers, tend to be less honest than their colleagues in less competitive areas of finance; they become even less honest when they are primed to think of themselves as bankers. Behavioral research has also identified why economies with extreme levels of inequality have deficient social solidarity. Those at the bottom become increasingly discouraged, abandoning aspirations to achieve their potential. Suspicion that the economy is “rigged” naturally spills over into politics, where polarization and weaponized disinformation rapidly erode solidarity.
Self-interest and ideology go hand in hand. Powerful economic interests are subtly shaping beliefs, norms, and rules in ways that threaten to exacerbate and perpetuate all the other crises we face.
The good news is that another world is possible. People increasingly recognize that capitalism needs to be reformed. The problem is that too many reformers are seeking only minor tweaks, rather than truly effective solutions. Business and political leaders are increasingly acknowledging the need for stronger environmental policies, more investment in education, and even (occasionally) greater equality. But when it comes to making the deep and lasting changes that solving these problems demands, there is mostly silence.
More broadly, the key question is not whether markets (including financial markets) will be a part of the system that we must build, but how they will be balanced with collective action, which has been denigrated for the last four decades. In addition to markets, healthy societies need space for alternative institutional arrangements, such as cooperatives, and for collective action by the state and civil society.
All institutions are fallible and vulnerable to abuse or capture. The solution is not to abolish any one institution, but to create a system in which institutions can check each other constructively. Yet even if institutional arrangements look good on paper, checks and balances will fail if social and economic inequalities become too great. Concentrated wealth will always prevail.
The Pillars of Progressive Capitalism
Over the past few years, I have been developing a vision of “progressive capitalism” that aspires to strike a better balance between markets and other institutions. Needless to say, this would represent a significant departure from the unfettered, lightly regulated system we have now.
Progressive capitalism recognizes that for most firms, the easiest way to maximize profits is to amass market power, crush competitors, block would-be challengers, exploit others’ vulnerabilities, and secure rents, including through undue political influence. As we have seen repeatedly in recent decades – from Enron to Purdue Pharma to Volkswagen – contributing to society tends to come last. That is why we need regulation. The Ten Commandments were a simple set of regulations for a relatively simple society. Today, we need complex regulations for a highly complex modern global economy.
But, of course, the neoliberal deregulation agenda was never really about deregulation per se. The point has always been to regulate in a way that will advance certain interests at the expense of others. At the same time that the big banks argued against regulations that could have stopped the financial crisis, they were advocating bankruptcy provisions that favored them over other creditors; and while they argued for smaller government, they were more than receptive to the hundreds of billions of dollars in bailouts.
Progressive capitalism also recognizes that we achieve certain ends collectively that we could never bring about individually or in competition with one another. Basic research, which corporations and other private actors have little interest in funding, underpins all the advances in our standard of living. Like the air we breathe, it is a public good. To finance public goods, we need taxes. And in a just society, taxation is progressive: it places the largest burden on those who are best equipped to bear it.
Unfortunately, globalization has created many new channels through which multinationals can avoid taxation. As national governments compete for private investment and jobs by slashing their corporate-tax rates, a global race to the bottom has ensued. Everyone loses in this scenario (except corporations and their executives, of course); but the consequences have been particularly adverse for poor and developing countries.
Only recently has the international community finally recognized the problem: the transfer-price system governing international corporate taxation for a century has proven unsuitable for an increasingly digital, innovative, and service-sector-oriented economy. And yet, while efforts to update the system – including the OECD and G20’s Base Erosion and Profit Sharing initiative – are a step in the right direction, they remain woefully inadequate. The debate has come to focus on a proposal for a global minimum tax rate of 12.5%, which would quickly become a de facto ceiling, not a floor. If adopted, it would be another victory for the multinationals: What had begun as an attempt to make them pay more taxes would have ended with an agreement reducing the taxes they paid. Once again, revenue-starved developing countries would be the biggest losers.
A Framework for Solidarity
There are many fronts on which we can and should work together, where collective action could and would engender large societal benefits. Much of America’s success in innovation is attributable to its research and educational institutions, none of which are for-profit. On another front, class-action lawsuits and collective bargaining are important channels through which consumers and workers can unite to advance their shared interests, checking corporate power.
While the neoliberal agenda has failed even to deliver on its promises for growth, which has fallen to two-thirds its level during the decades after World War II, there are alternative frameworks that can boost growth within existing environmental constraints. We now understand that economic growth and social and environmental justice can complement each other. As Nicholas Stern of the London School of Economics and I show in our report for the Carbon Pricing Leadership Coalition, reducing carbon dioxide emissions can be a “growth story.”
For example, the European Commission’s proposed European Green Deal offers a framework for achieving net-zero CO2 emissions by 2050 while also creating jobs and improving living standards. Elsewhere, I have argued that similar concerted efforts – including the Green New Deal in the US – could usher in a worldwide transformation that brings previously marginalized groups into the economy.
Naysayers will argue that we cannot afford to make a rapid transition to a carbon-neutral economy. At the same time, many are also raising concerns about the labor-replacing potential of automation and artificial intelligence. In the US, some have argued that anemic growth and stagnant living standards, despite a trillion-dollar fiscal deficit, reflect secular stagnation, with former US Federal Reserve Chair Ben S. Bernanke once arguing that the real problem is a global “savings glut.”
Well, which is it? We cannot have too much labor and too much capital at the same time that we don’t have enough resources to make the green transition. If we have a superabundance of resources, we should be able to afford to confront the climate crisis and all of the other urgent issues listed above. The roots of our inaction lie not in a lack of resources, but in broken economic and political institutions.
To fix them, we need reform at both the national and global levels. The US, for example, clearly needs a new social contract that is capable of fostering solidarity among all demographic groups and across generations. The new social contract, in turn, will require a larger and revised economic role for government. We need less corporate welfare and more progressive taxation with which to fund social policies for those in need and investments in the welfare of all. Most important, we must rewrite the basic rules of the economy to reverse the toxic legacy of neoliberalism – which made its own revisions to the rules during its long reign of error. To that end, with colleagues at the Roosevelt Institute in New York and the Foundation for European Progressive Studies in Brussels, I have written two books detailing what needs to be done: Rewriting the Rules of the American Economy and Rewriting the Rules of the European Economy.
Rewriting the Rules
Around 40 years ago, the Nobel laureate economist Milton Friedman led a charge to change corporate governance, arguing that a publicly listed firm’s only duty is to maximize shareholder value. As Friedman put it, “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.” If an activity is legal and will increase profits, a firm should pursue it, regardless of the wider social and ecological consequences.
There was never much economic theory to support this doctrine. On the contrary, all the way back in 1977, Sandy Grossman and I showed that shareholder primacy does not actually increase social wellbeing. There has always been an alternative framework on offer. Under so-called stakeholder capitalism, firms would have to account for how their actions affect not only shareholders, but also the environment, workers, customers, and the communities in which they operate.
Progressive capitalism gets part of its name from the Progressive Era, a period in the late nineteenth and early twentieth century marked by social and economic reforms adopted in response to widening inequality and abusive monopolies. One of its achievements was strong competition laws, which were subsequently greatly weakened during the neoliberal era. One of the reasons for rising inequality and weak growth in the US is that firms have been allowed to amass undue market power over the past 40 years, often achieving near-monopoly status. Monopolies result in higher prices – effectively reducing real (inflation-adjusted) incomes in the same way that cutting wages would – and introduce a wide range of economic distortions. Under neoliberalism, changes in labor-market rules also resulted in a sharp decline in unionization and collective bargaining. This, too, has had a first-order effect on the distribution of incomes.
Rewriting the rules for our own time calls for a broad approach that includes all levers of macroeconomic policy. In a world where unemployment and financial fragility are the central economic problems, a monetary-policy framework that focuses narrowly on inflation has little to offer. The same applies to financial regulatory policies that fail to account for systemic risk, not least those associated with climate change. Policymakers should be preparing for the possibility of a disorderly shift once the true costs of carbon are recognized. And the longer we wait to address the problem of climate change, the greater the chances of a more disorderly transition.
Moreover, even after we have rewritten the rules to bring about a more equitable and sustainable economy, we still will need larger public expenditures, including on basic research, technology, infrastructure, and education. The neoliberal era starved the public sector while fueling profligate consumption and misguided investments. The case for reversing course is obvious: estimates of the marginal private returns to public investment suggest that they are far higher than returns in the private sector.
But even if we do all of this, there will still be many people living at or below subsistence levels, experiencing an unnecessarily high degree of anxiety and insecurity. To account for them, we will need a stronger social welfare system. This is hardly a radical idea. Nordic and other European countries have long demonstrated the effectiveness of welfare-state models that recognize markets’ deficiency in providing social protections, and that ensure higher living standards, better health, and longer lives than elsewhere in the developed world.
A twenty-first-century welfare system must not just offer social protection, but also account for market failures beyond the absence of good insurance markets. As we have seen, the real economy usually behaves quite differently than simplistic economic models predict. That is why we have had debt and other macroeconomic crises, all of which have disastrous consequences for large parts of the population, and lead to loss of social capital and public trust.
Moreover, a modern welfare system should reflect the fact that people will need assistance at critical points in their lives, owing in no small part to the inherent imperfections in capital markets that result from information asymmetries. Rich societies should not accept a situation in which a large proportion of children – some 20% in the US – grow up in poverty, with all the lifelong consequences that this entails. Modern societies also should recognize that public options for health care, education, mortgages, and retirement pensions can be more equitable and efficient than private provision. Indeed, the French health-care system achieves higher life expectancy at roughly half the cost of the largely private US system.
Broken Globalization
Of course, national policy choices in almost all countries are now made in the context of a globalized economy. This brings us to yet another severe crisis: the breakdown in multilateralism. Under Trump, the US has gone from being multilateralism’s strongest defender to its primary antagonist, and this comes at a time when we need international cooperation more than ever to tackle collective global challenges, from long-term threats like climate change to acute crises like the recent coronavirus outbreak.
One of the reasons for the attacks on multilateralism is that during the neoliberal era, globalization was mismanaged. A key aspect of that mismanagement was flawed rules, which that favored Western multinational corporations at the expense of workers and poorer countries. Countries have more scope for collective action domestically. But the same holds true across borders.
Consider the global financial and macroeconomic system. Following the 2008 crisis, I chaired the United Nations Commission of Experts on Reforms of the International Monetary and Financial System, which presented its findings to the UN General Assembly in 2009. Among other things, we emphasized the need for greater macroeconomic coordination, and advanced a proposal for a new Global Economic Coordination Commission. Now, the International Monetary Fund’s Independent Evaluation Office has issued a report drawing attention to the large externalities associated with unconventional monetary policies. And my own theoretical work has shown that these externalities are particularly pronounced with respect to large, globally influential countries like the US.
This work has also underscored the need for a global framework for restructuring sovereign debt. While the UN General Assembly has adopted a set of principles to guide the creation of such a framework, the US and a few other key countries have not signed on. Meanwhile, subsequent events, not least US District Court judge Thomas P. Griesa’s egregious rulings in favor of Argentinian bondholders, show precisely why such a framework is needed.
The entire history of debt restructuring has been a story of “too little, too late,” featuring excessive delays and insufficient restructurings that set the stage for renewed crises. Under the current system, the suffering imposed on debtor countries is enormous. It is also entirely unnecessary. With a more humane restructuring framework, debtors would be able to restore growth more quickly and repay more of what they owe. As it stands, debt restructuring tends to leave both the creditor and the debtor worse off.
Consider the case of Greece. Following its sovereign-debt crisis, it suffered a 25% decline in GDP, an average unemployment rate of 25% (with youth unemployment exceeding 60%), and massive emigration. Only after an entire society and economy had been unnecessarily devastated did a succession of debt restructurings finally take place.
We typically blame the borrowers in these situations. Yet, as I have noted with respect to the East Asian financial crisis in the late 1990s, there are two sides to every loan: a willing borrower and a willing lender, and it is the lenders who are supposed to be in the best position to assess the risks. Rather than playing the blame game, one should look ahead to determine how to avoid or minimize the impact of debt crises. But if fingers are going to be pointed, lenders should not get a free pass.
From Debtor Prisons to a More Humane Approach to Debt
In crafting a global framework, it is important to remember that sovereign-debt restructurings are more complicated than private restructurings, for two reasons. First, they usually involve a host of informal claimants – pensioners, children, the sick, people with disabilities, the public at large – all of whom have a legitimate right to the resources of the country. Just because the social contract isn’t written down doesn’t mean that a country’s residents have no legitimate or recognizable claims. If anything, many of their claims should be given priority – a principle that is already recognized in Chapter Nine – the provision for indebted municipalities – of the US Bankruptcy Code.
Second, sovereign-debt restructuring can have major implications for the global economy. Mismanagement is a negative-sum game. As the old adage goes, you can’t squeeze water from a stone. If a country doesn’t have the dollars to repay a dollar-denominated loan, something will have to give. Just as debtors’ prisons didn’t help creditors recover funds from individuals in the nineteenth century, austerity programs do not help countries repay their debts today. Both approaches are inhumane and counterproductive.
Simple arithmetic tells us that there are only three ways to restructure sovereign debt: postpone payments, reduce interest rates, and shrink the principal (that is, force creditors to take a haircut). Some ways are better than others, both for the creditor and the debtor. Lowering interest rates reduces the probability of default, which in turn justifies the lower rate. Multiple equilibria are possible, especially given the costs of bankruptcy. There could be equilibrium with low interest rates, and another with high interest rates. Too often, financial markets gravitate toward the inefficient high-interest-rate equilibrium.
This brings us back to the central theme of solidarity. It takes only a little bit of compassion and economic rationality to see that the low-interest-rate equilibrium is preferable. Forcing a country in crisis to accept a 9% interest rate when the rest of the world is awash in liquidity (and when some countries have negative interest rates) should be called out for what it is: usury. Yet under New York law, that is the interest rate applied to debt in default (pre-judgment). A 9% rate is also being applied to Argentina’s debt by the Paris Club of sovereign creditors – a group whose supposed raison d’être is to safeguard global financial stability.
Obviously, developing a new framework for sovereign-debt restructuring will take time. But in the immediate term, we have an opportunity in Argentina to show that there is a better way forward. It is time to abandon an approach that has failed repeatedly, and to embrace one based on global solidarity and economic common sense.
Solidarity and Reforming Capitalism
The same goes for the other crises I have mentioned. Rising inequality reflects political choices, not some natural process or iron law of economics. In the coming years, we will have a choice whether to close our national divisions, or let them continue to widen. We can choose to restore social capital and public trust, or we can allow it to erode further.
Perhaps this moment of mounting crises will shake our leaders from their complacency. We have the opportunity to construct an alternative economic system, an alternative form of globalization, an alternative form of capitalism. Those who believe that a more equitable and sustainable world is possible are correct. Getting there won’t be easy, but we have no choice. We are on an unsustainable path. Unless we shift to a better one, the crises to which the current system has given rise will only grow worse.