Project Syndicate: At the upcoming New Summits event, you will participate in a panel discussion on the New Green Economics. Last year, you wrote that building a sustainable world would require an “overhaul of the global financial and monetary system” to “put finance back in its proper place as servant, not master, of the global economy.” That means, for starters, increasing “democratic oversight of the international financial system.” How has the pandemic highlighted this imperative, and how might it be pursued?
Ann Pettifor: The COVID-19 crisis exposed the deep flaws in our capitalist systems, and the globalized financial sector’s greed, vulnerability, and detachment from the real economy. In fact, during the pandemic, free-market capitalism was suspended, and Wall Street, the City of London, and Frankfurt were effectively nationalized (albeit unconditionally) after the shadow-banking sector’s near-implosion in March 2020.
The Italian sociologist Paolo Gerbaudo described the public reaction to the systemic flaws the pandemic exposed as the “Great Recoil”: economies and societies turned away from the globalized system, and reoriented themselves toward the domestic, nation-state economy. Public support in the United States for the military’s withdrawal from Afghanistan partly reflects this recoil.
This is still simply reaction; it is not yet structurally embedded. But it is preparing the ground for a new economic transformation. That transformation could be ugly – for example, taking the form of nationalism, or even fascism. But it could also be progressive, like the transformation overseen by Franklin D. Roosevelt in the 1930s, with the interests of the domestic economy prioritized over those of the financialized and globalized economy.
PS: You also noted that, “For the US Federal Reserve and other major central banks, the top priority is not to stabilize the financial system, but rather to keep it spinning.” This is exemplified by the large-scale quantitative easing of recent years. You’ve likened this policy to an addiction – one that can be kicked only by ensured that “the extraordinary privilege of credit creation is always balanced by a responsibility not to take undue risks.” How could this be achieved, and why is it important to creating a sustainable economy?
AP: I think that Matthew C. Klein and Michael Pettis, in their recent book Trade Wars Are Class Wars, have illuminated the folly of relying on central bank monetary operations to tackle deep and dangerous global economic imbalances. These imbalances are a result of globalized, export-oriented, over-producing economies drowning in goods and services, while purchasing power at home (and worldwide) is cut.
Germany and China are classic examples of this type of economic system, which is hostile to their own, domestic constituencies. Cuts in purchasing power prevent companies from making sales and therefore profits, and they impair the ability of individuals and households to pay their bills. Firms and households must borrow in order to maintain profits and income.
The combination of excessive production and purchasing-power cuts is deflationary. Tackling deflation with quantitative easing is, as John Maynard Keynes once argued, like pushing on a string. But central banks apparently do not view their role as helping to restore balance to a very imbalanced economy, or as prioritizing the domestic economy over the globalized economy. Technocrats at central banks act to sustain and protect just one sector of the global economy: the financial sector.
The financial sector has, in turn, abandoned the “free market,” and wants its risky activities to be guaranteed and protected by taxpayers. They call this “de-risking” investment. It is an extraordinary distortion of a system once defined as “free-market capitalism.” Even worse, as the financial sector demands protection from the taxpayer, it uses capital mobility to dodge taxation systems.
How can this be changed? By once again privatizing Wall Street and the City of London, and withdrawing subsidies, guarantees, and protection. This means, first and foremost, introducing controls over capital mobility, and obliging global corporations to pay their fair share of taxes.