Reviewed in the United States on April 10, 2018
For years we've been told that allowing China unfettered access to global trade opportunities would expose its citizens to democracy, and ultimately make that nation more democratic. That hasn't happened, while elsewhere we're seeing a backlash against both global markets and liberal democracy. Now comes Robert Kuttner with the opposite theory - that global capitalism is undermining democracy.
Ultra-nationalists who reject both the EU and the doctrine of liberal trade are now the 2nd or 3rd largest party in much of Europe. Democracy is under siege. This reaction is compounded by resentment of immigrants and refugees, as well as resurgent racism. Nothing in the structure of the late-20th-century economy compelled reversion to an unregulated 19th-century market. This was a political shift. When American government turned back into an ally of finance in the 1970s and continued emphatically into the 1980s, goals for the global system reversed. Today's version of globalization is profoundly antidemocratic. Global trade agreements narrow the space for national policy and weaken government's ability to contain capitalism. Meanwhile, the popular revulsion against the results of globalization is elevating antidemocratic leaders, parties and ultranationalionist sentiments. The rise in terrorism and fear of aliens also promotes support for anti-foreign strongmen.
Post-WWII, banks could not do business outside the borders of their home countries. There was no speculation in currencies because exchange rates were fixed. Categories of financial products that operate globally today add to system ungovernability and instability - eg. credit default swaps that did not exist then. Originally interest rates could be kept low, providing cheap capital without worry that easy money would fuel speculation and bubbles. This also constrained the wealth and power of financial elites. Since then elites have won the policy debates but lost the citizenry.
Globalization also accelerates cross-border movements of people/cheap labor. Remittances have become an important source of income for much of the third world. Meanwhile, government and politics in the democracies are hobbled by paralysis in the face of escalating problems. In the U.S., three decades of cynical Republican and corporate blockage of economic remedies discredited government and politics, paving the way for Trump.
In the history of the West, democracy has expanded by limiting the power of capitalists. When that fails, dark forces are often unleashed. Recently Democrats have been forced to rely more on raising money than group activity - eg. via the rise of advertising, opposition research, computer analyses. This has pushed that party to the right, while at the same time Republicans have also moved further to the right. Both seek big donations from Wall Street.
American corporations are now making record profits, yet workers' wages have stagnated over the last few decades as productivity increased. Global capitalism has allowed U.S. corporations to step around decades of protections (minimum wage, child labor, labor unions, health and safety regulations, local taxes, etc. restrictions). However, deregulated capitalism returned the upper hand to the elites - and they began dominating politics again. Many contend that today's problems are caused by immigration and technological change. Kutter contends that 'Democracy no longer writes the rules for capitalism - instead it is the other way around.
During the period between the two world wars, free-market liberals in France, Britain, and the U.S. They put debt collection ahead of economic recovery. Up until the German election of July 1932 that made Nazis the largest party, the governing coalition was practicing economic austerity commended by Germany's creditors. tried to restore the pre-WWI laissez-faire system.
The New Deal shackled private finance in a manner that has not been equaled before or since. The 1933 Glass-Steagall Act removed an entire category of speculation and conflict of interest by requiring stock brokerages and investment-banking houses to be divorced from commercial banking. Interest rates charge borrowers and paid depositors were also tightly regulated - to discourage forms of competition that could damage solvency. Nationwide banking was prohibited and branch banking limited. It was the behemoth banking conglomerates, liberated from New Deal restraints, that engaged in complex speculation and excess leverage to reap immense speculative profits - then crashing in 2007-8. Credit evaluation was not delegated to third parties, instead performed directly by loan officers. There were no significant bank failures after 1934.
In the U.S. and Britain, the rate of inflation tended to exceed the interest rate on public debt for three decades after WWII. Thus, the average burden of public debt declined over time.
The economic slowdown of the 1970s brought the resurgence of business influence, laissez-faire ideology, and right-wing politicians to dismantle much of New Deal financial regulation.
Trade unions prevalent in Europe after the war were often recognized as partners, and also understood the need for not pricing themselves out of the market. Key contracts were set at national levels - factory-level settlements that were more generous were frowned upon as destabilizing.
The share of U.S. income going to the top 1% fell from 36% of total income in the 1920s to about 24% in the 1950s, to less than 15% in several European nations while unemployment was less than 2% for two decades.
In the 1970s a laissez-faire financial system and global disorder returned after 1973, unemployment rose and wages came under pressure. Women entering the labor force in large #s continued the growth of more equal household income for a few more years. Then, as capital was deregulated, incomes took off again at the top, supply-side theories gained ground and taxes were cut - especially for the well-off.
The Iron Law of Capitalism - return on invested capital tends to exceed the rate of economic growth, and wealth thereby becomes more concentrated over time.
As Europe recovered after WWII and U.S. dollars flowed outward in the form of military aid and tourism, the U.S. current account balances became negative by about $1 billion/year in the early 1950s and $3 billion/year by the late 1950s. Offshore dollars could then be loaned out to finance European growth, with less regulation. By 1960, dollars held offshore exceeded the value of gold held in Ft. Know by $19 billion. By 1968, Vietnam War spending overseas added to the problem, creating a run on the dollar, a 10% tax on imports, wage/price controls, and the price of gold was left to the markets. Fixed exchange rates ended, along with currency controls and tight financial regulation. Rising imports were acerbated by the Arab oil embargo - quadrupling the price of oil. Now governments needed to run their economies less in service of steady growth and full employment, and more to keep the trust of financial speculators wanting high interest rates, less taxes on capital, balanced budgets, limited social outlays. The U.S., however, went into deficit spending and every growing trade deficits.