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Good Background, Objectively Derived
on May 13, 2013
Author Kuttner contends that our overall perspectives on debt have now become impediments to economic revival. The alleged benefits of fiscal discipline to business confidence will not materialize because businesses will hesitate to invest in the resulting depressed economy. Moral claims keep getting conflated with practical economic questions, and our debates focus obsessively on the wrong debts - public, instead of private (student debt, underwater mortgages). Further, he points out that rising public deficits did not cause the recent financial collapse, rather the collapse caused the higher deficits. Reality - private debt caused the crash and prolongs its aftermath. Our children's prospects depend on whether the economy can product better job opportunities and less private debt in the immediate future, not on eg. projected finances for Social Security a decade from now.
Kuttner also sees double standards in our attitudes towards debt relief - corporations are allowed to shed pension plans, bankers get bailed out in their role as debtors while protected as creditors, and bankers usually are also in line ahead of pensioners in a bankruptcy. After 9/11 we increased military spending by over $3 trillion in the space of a decade - that was OK, but not spending a similar amount reviving our infrastructure. Meanwhile, today's retirees can't get decent returns on their savings because central banks have cut interest rates to historic lows to prevent the crisis from deepening. (Banks want cheap money for themselves, draconian terms for everyone else.)
The last great financial collapse was ended not by belt-tightening but rather by public investments post WWII like the GI Bill and the Marshall Plan, coupled with pent-up demand caused by rationing. Banks were well-regulated, and parasitic profits from financial manipulation was insignificant. Some exotic financial devices hadn't been invented yet, and most that had been devised were prohibited by New Deal reforms. Salaries in finance were relatively modest, except in investment banking where partners put their own capital at risk and did not expect to be bailed out. Chastened by the catastrophe of reparations extracted from Germany after WWI, nearly all Nazi-Germany debt was written off. The U.S. debt ratio rose between 2001 and 2008 because of two wars and gratuitous tax cuts for the wealthy, not an excess of social generosity. The deficit then spiked mainly because of a falloff in government revenues as a result of the recession. At the same time, declining real wages and inflated asset prices led the middle class to use debt as a substitute for income.
Prior to the Great Depression, 'Finance Capitalism' was predominant in an era characterized by small government, little regulation of banking and finance, and growing income and wealth inequalities. The consequence - an economy much more financially unstable that recorded numerous and prolonged economic contractions.
Beginning in the 1980s, the IMF and World Bank promoted what has become known as the Washington Consensus - developing nations needed to have tight fiscal policies, keep their exchange rates and labor costs competitive, privatize state ventures, reduce or eliminate subsidies, and open their financial markets to foreign capital flows. Two decades of intermittent crises brought the IMF to admit that this one-size-fits-all guidance often worsened recessions. Simultaneously, several major developing nations (Japan, South Korea, Brazil, China) attained very high levels of growth by rejecting key tenets of the Washington Consensus. They incubated and protected their industries, relied on government-business cartels, limited speculative money flows, and negotiated advantageous terms on which foreign suppliers and investors could participate. Taiwan built its dominance in microelectronics exports with a government industrial policy and subsidies. Beijing manipulates its currency to keep it undervalued to promote exports, and the U.S.-China Trade Commission estimates that half of China's industry is still owned by the state, directly or indirectly, and most of the rest is subject to mercantilist rules favoring Chinese-owned companies.
Washington promotes free-market capitalism through the IMF, WTO, OECD, and its own diplomacy, but indulges China's lapses. Why? You don't mess with your largest creditor - China held $1.16 trillion in U.S. Treasuries as of 6/2012, and almost half our foreign debt is owed China. Borrowing from abroad allowed the U.S. to outspend its national income between 2000 and 2008 by $4.3 trillion - most financed chronic trade deficits. Our chronic trade deficits are a mark of our falling economic performance and will eventually translate into reduced living standards, especially when interest rates rise to more normal levels.
'Countries don't go out of business' observed Citibank chairman Walter Wriston in 1982. But they frequently default - at least 250 times since 1800 according to one compilation. Often these were caused by adherence to the Washington Consensus, then those losing money in such loans bailed out by the Federal Reserve.