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The World After Capital

Published by Anonymous (not verified) on Wed, 10/08/2022 - 5:27am in

Tags 

finance

We are in the midst of another global transformation, but this time we might have the tools to get it right.

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Transcript

Rob Johnson:

I'm here today with Albert Wenger. He's a partner at Union Square Ventures here in New York City. I'm excited to talk about his new book, The World After Capital. We come to this meeting at a time when the world is both excited by the possibility of technology and terrified of the disruptiveness of technology. And I think he can help us sort ourselves out. Albert, thanks for joining me here today.

Albert Wenger:

Pleasure to be here.

Rob Johnson:

What inspired you to write this book? You've been a practitioner and a visionary. I have followed your blog. But all of a sudden, you went to the book.

Albert Wenger:

Yeah.

Rob Johnson:

What's going on?

Albert Wenger:

Well, as a VC, I sort of feel like I have this front row seat to innovation, to kind of what's coming down the pike. And even before becoming a VC, I, as a both undergrad and graduate student, had studied computer science and economics, and eventually came to realize, wow, computers are going to have a much, much bigger impact on the world than most people tend to believe, way bigger. And I was seeing it in the kind of things we were investing in. I was seeing it in what was happening in the world. And I was starting to give these talks, and I was sort of trying to get at this idea that somehow this is a big shift. It's a big transition.

And I remember I was walking down, I think, Market Street in San Francisco, and it kind of snapped for me because I had this insight that this is as profound a transition as when we went from the Forager Age to the Agrarian Age and then from the Agrarian Age to the Industrial Age. And that really is what the book is about. The book is about, why is digital technology so disruptive? Why is it causing such a transition? And then how should we be thinking about this transition into a new age, which, in the book, I call the Knowledge Age?

Rob Johnson:

Understanding not only the technology as the possibility for efficiency or whatever but understanding it in its context with a sustainable society is a very important dimension.

Albert Wenger:

I think that's absolutely crucial, right, because if we think about what happened in the transition from the Agrarian Age to the Industrial Age, it took us quite a while to find something that works, right? I mean, in the early Industrial Age, people lived in squalor in the cities, working conditions were terrible, there was child labor, and so forth. It took quite a while. And really, we had sort of a Golden Age of, at least in the US and several other sort of developed countries post-World War II, we're seeing a massive rise again and kind of sort of people being depressed, people taking drugs. Even suicide is climbing significantly. And a lot of this is related to this transition and the shift that we're in. And I think one of the key points is that politicians have been treating this shift as if it were some increment on the Industrial Age.

And people are like, "Yeah, you keep saying that. You keep saying that retraining, which you mentioned, or something else is going to work. But all I see from where I sit is, the elites and the cities are getting wealthier, and where I am, it's sort of devastation and opioids." And so I think because we've been unwilling to acknowledge that we need to invent a new age, we've been caught up in incrementalism. And that incrementalism has opened the door for people like Trump because Trump sort of says, "Well, look, what they're telling you is not working. I'm going to take you into the future," the future in this case being actually an imagined past. It's a return to the past. So he doesn't actually have a forward facing agenda. But this rise of populism that we're seeing in many parts of the world is, again, the same transition that's happening.

And so in the book, I make this point that, why are these transitions happening? It's because some fundamental shift in technology. So the Forager to Agrarian transition was the invention of agriculture. And-

Rob Johnson:

So from hunter-gatherer to-

Albert Wenger:

Exactly.

Rob Johnson:

... systematic agriculture.

Albert Wenger:

And that was roughly 10,000 years ago. And as a result, we changed everything, right? We went from being migratory to being sedentary. We went from very flat tribal societies to extremely hierarchical agrarian societies. We went from basically being promiscuous to being monogamous-ish. And we went from having these animistic religions, where every animal, every tree had a spirit in it, to the theistic religions. And then only a couple 100 years ago, we had the enlightenment. And with the enlightenment, we had all sorts of scientific breakthroughs, chemistry and electricity and mining and so forth. And that, again, brought us this huge change.

It shifted us from living in the countryside to living in the city, from living in large extended family to living in nuclear family and no family, from having lots of comments to basically private property being everywhere, from kind of a great chain of being theology, where religion sort of says, "Look, you're a farmer, and I'm going to tell you how to be the best possible farmer, but you'll never be a noble person because you weren't born as one." We went from that to the Protestant work ethic, which is, you work harder, you make more money, and wealth is good, and maybe even [inaudible 00:05:59] is good. And so we had these two huge transitions. And this sort of insight that I had when I was walking down the street in San Francisco was, the reason what happens is when you make a big technological leap is you shift the binding constraint.

So when you are hunter-gatherer society, your binding constraint is food. How much food can you find? Once you invent agriculture, you're binding constraint is land, arable land. How much arable land do you have? And once you have industry, it shifts to capital. Who can build machines and railroads and infrastructure? And the reason the book is called The World After Capital is because I basically say, "Look, we have sufficient capital," and I have a definition of sufficient that we can talk about in a second. But what the scarcity now is attention. What is it that we, as humans, are paying attention to? It's this huge crisis of attention effectively. And that's sort of the central idea of the book.

Rob Johnson:

Interesting. Now I've seen some, which you might call smoke signals of concern, like the movie The Social Dilemma, and various about how this is affecting the human brain. Somebody gave me a book this weekend. It was about, what was it called, Something about personal mythology. They said you used to have the church, the gods, the parables, and everybody thought of those as the myths, kind of the Joseph Campbell catalog. But now there's so much hitting you all the time that in your own psychology, what becomes your myth is almost a personal thing rather than a collective thing that we all adhere to, like Easter Sunday or Moses or something like that.

Albert Wenger:

And I think that breakdown is related to this technological shift also, not just in the fact that we have social media and so forth, which we can come back to in a second, but also because when we went into the Industrial Age, we made the narrative of purpose. One about, your purpose is to find a job, do well in the job and then also consume and maybe donate a little to the community, right? And that was sort of held out as purpose for people.

But as it's getting harder and harder for many people to find meaningful jobs, jobs that are interesting, jobs that pay a living wage, that narrative has broken down. And we have not substituted any kind of new narrative of purpose. And so, yes, when you have this breakdown of an existing purpose, like the automotive workers when their plants were shut down or coal miners when the mines shut down, when you have that breakdown, when you don't have an alternative narrative, and then you have this infinity of opinions online where you can read anything and everything, that's a perfect storm for a huge crisis of mental health, for a huge crisis of purpose, for a huge crisis of democracy.

Rob Johnson:

Yes. Experts are now on the out and out there. It used to be a professor at NYU or Oxford or University of South Carolina or something, and there was an aura about that. And now people say, "Experts, oh, they're just bag men for power." People like Richard Edelman, who does a lot of work for the World Economic Forum has shown that confidence in expertise, confidence in academic leaders or Nobel Laureates are all plummeting.

Albert Wenger:

Yeah. The Edelman trust survey shows the lowest levels of trust that we've had in a long time. Martin Gurri has a good book about this called The Revolt of the Masses. And in my book, what I attempt to do is to sort of say there is a narrative that we can provide people with. And there is a new source of purposes, a way of thinking about purpose in an age that's post the Industrial Age. And I call it the Knowledge Age because I think basically we need to substitute. We have this, what I call the job loop, and the job loop is, you have a job, you make some money, you spend the money on goods and services that other people produce who also have a job. And that loop was very successful for us.

But the loop that we need to really be spending time on this, this sort of knowledge loop. And the knowledge loop is where you create a piece of knowledge. Knowledge, by the way, I use very broadly in the book, including art, music, etc. And you share that, somebody else can basically consume that piece of knowledge, and they can then create a new piece of knowledge on the basis of that. And that knowledge loop, of course, has been at work for a long time, but we really need to accelerate it now because we have these big unsolved problems like the climate crisis and infectious disease. And so one place to find purpose is in the knowledge loop or in basically supporting things that are non-economic. So a lot of the things that I think we've lost sight of are non-economic things, taking care of your friends, taking care of your family, taking care of animals, the environment, things that are not economically incentivized.

And a big goal of what I write about in the book is, how can we sort of shrink the economic sphere much like we shrunk the agricultural sphere. It's not like when we went from the Agrarian Age to the Industrial Age. It's not like agriculture disappeared. It's just that it went from consuming 80-plus percent of human attention to sub-5% in a developed country today. And I think we need to do the same with the economic sector. We need to go from the sector where everything is based on prices, where everything is explicitly incentivized that now occupies the vast bulk of people's lives. And we need to shrink that down to make room for all these non-economic things because a lot of stuff that we need to work on can't have prices, right? So I don't know whether you saw Don't Look Up.

Rob Johnson:

Oh, sure. Right. David Sirota, the co-writer with Adam McKay, is one of my best friends.

Albert Wenger:

Oh, fantastic. We don't have enough people today looking out for big objects from space. Why? Because there's no price mechanism to incentivize that. Society, as a whole, has to decide. This is an important thing. And there can't be a price for it because these events happen every few million years. There's no market for it. And so in the book I write that there's lots and lots of things that don't have prices and can't have prices. And so the goal of this transition, in my mind, the goal of the power of digital technology in the way we should be using digital technology is to shrink the economic sector and let the non-economic sector grow.

Rob Johnson:

And how do you see the arts in that realm? Is that part of the non-economic sector?

Albert Wenger:

Oh, absolutely. Absolutely. And I think with the internet, we have seen a flourishing of the arts in a really marvelous way, right, because, let's say, you write a song. In the pre-internet world, you kind of had to find a label to put out your song and get it on the radio and so forth. Today, you just put it on your SoundCloud or your website or wherever, YouTube, and millions of people can hear it. And so I think we have, in fact, blown the door wide open on arts. I think we have a huge explosion of beautiful, new graphical art being generated.

And I do think that's something we're already seeing. We just need to create a society where more people find, "That's how all I need to do and I can live." We're still attached to the idea, no, no, no, no, if you want to live, you have to have a job. It's the only way you get to live. You have to have a job. You have to pay for yourself. Otherwise, you don't get to live. But we have all this automation, and we can make more automation. So why should we be attached to this idea that everybody needs to have a job?

Rob Johnson:

And you can connect to large scales of people, what I might call audience, because of this technology. So instead of playing in a bar for 12 people sitting at the counter, maybe 2,000 or more can be watching.

Albert Wenger:

And it doesn't preclude you from playing in the bar.

Rob Johnson:

That's right. That's right.

Albert Wenger:

I mean, these are-

Rob Johnson:

You can do both simultaneously.

Albert Wenger:

... complimentary. Yes, exactly. Exactly.

Rob Johnson:

There's a danger here, which is, in the middle of a transition, in the disruption when the fear is rampant, a counter reaction could, which Michael stomped out the potential, and turn us away from something that could ultimately be a much better life.

Albert Wenger:

Oh, absolutely. But I think the step one is, politicians, leaders of all parts of society need to first accept that we are in the middle of a transition that is as profound as these prior transitions. And so it means we have to change everything. That means we have to change how we think about the education system, how the healthcare system works. In the book, I talk about what I call three freedoms. I talk about economic freedom, informational freedom, and psychological freedom. So economic freedom is some form of universal basic income. Just give people enough money. So if you don't want to work, you don't have to work. If you want to just do art all day, play the guitar, fine, totally fine.

Informational freedom is about who controls computation. Is it controlled by a few large corporations in the government, or is computation accessible to anybody and everybody? And psychological freedom is about, how do we let go of all these things that culture has now told us for several hundreds of years of where your worth comes from, where your value comes from? And how do we live in a world where I can access anybody else's information all the time? How do I create the psychological freedom that I don't constantly react by saying, "Oh, this person is awful, and this is terrible," and I'm in this constant state of agitation? So those are the three freedoms I talk about in the book. And to me, they compliment each other, and they are necessary to handle this transition.

Well, I mean, if you look at the prior transitions, the prior transitions were absolutely awful. When we went from the Hunter-gatherer Age to the Agrarian Age, the hunter-gatherer society is basically wiped out. The agrarian societies basically wiped our the hunter-gatherer society.

Rob Johnson:

[inaudible 00:16:06].

Albert Wenger:

And then how did we get from the Agrarian Age to the Industrial Age? Well, we got there basically through a series of bloody revolutions and the two world wars. I mean, we talked previously about [inaudible 00:16:18] earlier and capital in the 21st century where he documents how the old power, which was land-based capital, wasn't really removed until the end of World War II, when industrial capital became the new power. A lot of people believe that the sort of hunter-gatherer age was sort of this incredibly violent age and that people didn't live very well.

But actually, what we know is that hunter-gatherers worked only a few hours a day and lived pretty happy lives. And things really went sideways on us when we went to agrarian societies because we were bad at agriculture at first. So we didn't produce enough output. So people starved. We lived close to animals, so we introduced all these diseases from the animals. And so actually, that transition was a very bad transition, not just for the hunter-gatherers, whom we wiped out for the most part, it was also bad transition for the agrarians. And some people interpret the story of the fall from Eden as going from this sort of hunter-gatherer life to now having to till the soil and live by this of your work. That's one possible interpretation.

My personal preferred interpretation is that once we started creating knowledge, knowledge started creating new problems for us. So we created the knowledge of agriculture, and that created problems like infectious diseases for us and starvation. And so we needed to figure out how to store things. We needed to figure out how to refrigerate things. And then more recently, we invented fossil fuels and how to burn them to make power into electricity and transportation. And that's created the climate crisis. So I tend to think of the fruit of knowledge and eating from the forbidden tree of the fruit of knowledge as getting on this treadmill of, we invent something, and the thing that we've invented has these consequences that we now need to live with and deal with. So a big part of the thinking in the book is, how do we free up more human attention, get it out of that job loop, and get it into the knowledge loop so we can work on these big problems and also big opportunities, frankly?

It's not just about problems. It's also opportunities. We've made huge breakthroughs in decoding the genome and understanding how cells work. We're making huge material science breakthroughs. We're making breakthroughs in building rockets. So there's also all this upside. I agree with you though that if there isn't a narrative that describes a future, that makes sense, not just technological sense, but also societal sense, if we leave this vacuum, then people like Trump will come in with a very crude narrative. And it will resonate with people because we haven't given them an alternative. And you asked me in the beginning why I wrote the book. That's really the thrust of the book is to start to create a narrative that people can be excited about.

Rob Johnson:

There's another dimension to this that economists often worry about. They had this old, what I'll call, metaphor called the Treaty of West failure, the nation state. And they were installing a government that governed those things. In the world of globalism with the technology, nanosecond transfer of money or other things, many people are scared that with those efficiencies, powerful can escape governance. And how do I say, people are very much more vulnerable and at risk. And it felt to me like in the beginning of globalization, say, when I was in college and people like [inaudible 00:20:01], I can remember the book, Global Reach, and various people at Harvard MIT were talking about, there was so much enthusiasm for globalization. And now it almost feels like, as you say, the Trumpians have picked up, and it's a haunted house.

Albert Wenger:

Yeah, no, there's definitely a backlash against it. And I think one can easily understand why, right? I mean, we've taken a lot of manufacturing and shifted it from the US to other places. And people have lost jobs, we talked about this earlier. And we had told people, "Your job, that's kind of your purpose." And so absolutely, it's really easy to understand why people are discontent with globalization. However, I would say with the technological progress we're making, that's no longer the sort of question, right, because Nike today can make a shoe without a human touching it, from beginning to end. So it doesn't matter what the price of labor is. It's just a bunch of machines churning out shoes. And so while I think there are good arguments to be made why globalization was maybe not handled always in the smartest of ways, I think sort of undoing that and thinking that when you reassure manufacturing, you're going to create a lot of manufacturing jobs, I think, is equally wrong. So if we reassure manufacturing, it's going to get reassured in a very, very, very low labor [inaudible 00:21:19]-

Rob Johnson:

I was going to say, you just put the robots on a different continent in a simple [inaudible 00:21:24] way. We've gone through a pandemic, a tremendous distress in crisis. I saw some interesting upsides. I have two little daughters. And so my daughters, at the start of the pandemic, were in second and fifth grade. My second grader became, what you might call, virtuous, a virtuoso in the realm of using a laptop computer and transferring things, stuff I didn't learn how to do till I went to college. So I think at some level, what you might call the silver lining of the stress of homeschooling and so forth allowed some of these children to get on the pathway to that world that you're envisioning.

Albert Wenger:

So we homeschooled our children all the way through high school.

Rob Johnson:

Really?

Albert Wenger:

We now have two graduating college seniors, one at Wesley and one at UPEN. And we have a sophomore at Cornell. So we embraced homeschooling long before it became popular and in part because the education system we have today is strictly an industrial system. We created it and scaled it. We treat children by manufacturing date and that-

Rob Johnson:

So Ken Robinson talks about this in great detail.

Albert Wenger:

Yes. Exactly. Yes. And so, because I believe we're past Industrial Age, that's the whole point of the book, I wasn't going to suggest that our kids go through an Industrial Age system. And so we had those beautiful setup. They spend a couple hours a day with tutors in the rest of the day. They could kind of do whatever they felt like. And sometimes that was making a movie, sometimes that was cooking, sometimes that was learning how to make fashion. There was very sort of wide variety of interests, but the interests are what propelled the curiosity. So much of the school system is about stamping out curiosity. And to the extent that we want this knowledge loop to work, we want more rather than less curiosity.

Rob Johnson:

Yeah. My older of those two young daughters, who's now almost 13, in seventh grade, said, "Dad, being in remote school for a year, I'm not sure how much I think going to school is a good thing anymore." And she started looking online and found a Stanford Online High School and said, "I may want to apply to that." And I said, "Well, what are you going to do with your time?" She said, "Paint, draw, and play the piano. And maybe you'll let me borrow your guitar." And so she was right in that space.

Albert Wenger:

And so I do think the pandemic accelerated certain things that were already happening. So homeschooling was growing, and it's grown much more as a result of some microschools, just alternatives to the existing school system. Remote work, was already a trend, has grown tremendously. In our portfolio, we have 125 active portfolio companies. A third roughly are entirely remote now. They don't have an office anymore. So that's a trend that got accelerated. But I also think, coming back to something you said earlier, the crisis also showed how fragmented society is today. I mean, at every step along the way, is there a virus? Is there not a virus? Did it come from China, from a lab? Does it matter? Should we mask? Should we not mask? I mean, every single thing became super polarized. Everything became a reason for people to yell at each other as opposed to trying to work with each other.

And that is the result of this sort of social media landscape that we find ourselves in, which we haven't learned how to be good citizens. And nobody's taught us how to be good citizens in that world of this sort of multi, just anybody gets to say whatever they want at any time. Now, I think that's a good world ultimately. I just think we need to figure out to live in it. And that's going to take us some time. And again, that requires some level of creation. You said it earlier. You need to have some level of creation, some level of values that you all subscribe to, something that you sort of say, "That all makes us want to sort of be together first," and then we can disagree about certain things. That's fine. But we need this base layer where we sort of say, "Here's some level of solidarity," and I love the quote that you have coming in, right, which talks about that it's not just for ourselves, not just for our family, but for all of us.

And so that's really a big part of the sort of book, is to sort of say, how can we create this narrative? How can we, in a way, bring back some form of humanism, some form of sort of talking about human solidarity amongst ourselves as the first and foremost thing before we get into whatever our differences on any policy on any particular issue might be? But right now, we don't have that because it used to be provided by religion, not being provided by religion anymore. Purpose used to be provided by work, for many people, not being provided by work anymore. So we have these things that have broken down the Edelman service shows trust has broken down massively. So we badly, badly need to reinvest in this base layer of what is it that when we get to together makes us see each other as humans, as wanting to work with each other, not against each other?

Rob Johnson:

Healthcare with the pandemic and all the technology, are you seeing an evolution of healthcare and healthcare systems in a way that's hopeful?

Albert Wenger:

Yeah. I mean, we've made a number of investments in digital health. And I think as a first step, just giving people more and better access to information is really, really important. So for instance, we're investors in a company called Clue that makes an app for women where women can track their cycle and can really sort of empower women to understand their reproductive situation. That's easily accessible. Anybody with a smartphone can just download that app, right? You don't need to go to a doctor. You don't need a prescription. You just go get the app. We've made an investment in a company called Nurx, that if you want birth control, for example, you used to have to go to a doctor and get a prescription in many states. With Nurx, you just do it over text. Text back and forth with the doctor, get a birth control prescription.

So I do think broadening access is something that's happening through digital technology. But we still are very much in this problem where we have created a setup in healthcare where so much is about making profits off drugs, making profits for healthcare systems. And I think when you're trying to provide this kind of service, you need structures that allow not just profit optimization but also saying, we need to serve the community, whether that's by mandate or because we simply embrace that as who we are. Doesn't matter where, how it comes about, but it needs to be there. And I think we've lost sight of that. I mean, I think a lot of that dissent into sort of the maniacal focus on profit starts around the Milton Friedman, a company sold responsibilities as-

Rob Johnson:

[inaudible 00:28:26] to earn the profit. Yeah.

Albert Wenger:

[inaudible 00:28:29]. And so we need to come back from that. And again, the basic idea here is, if we create more room for non-economic activity... So non-economic activity includes a lot of basic research, right, and a lot of health is actually still very poorly understood. Try to read up on nutrition and see how incredibly poorly nutrition is understood. By the way, you earlier said, we have this lack of trust into academics. Well, one reason we have this lack of trust in academics is because, for example, if you look at nutrition, the whole thing about carbohydrates versus fats, that came out of a Harvard study that was paid for by the carbohydrate industry. And so it's no wonder why people don't trust things because when you sort of peel back the cover, all of a sudden, "Wait. We've been told this thing is bad when in fact this other thing is bad, largely because of a study done by some prestigious academics who are paid off by the sugar industry?"

Rob Johnson:

Yeah. There's a book, Lady Colin Campbell I believe had been at Cleveland Clinic and Cornell, called The China Study. And it was about the transformation of people from agriculture to the coastline industries and how their diet changed in the onset of things like Alzheimer's disease and heart disease and so forth. And when Campbell created that book, he came back, and he was invited to be on boards of many health charities. He took so much heat from industry people, who, he then, I think his second or third edition of the book, wrote a final chapter about the political economy of inhabiting foundations to stop them from recommending healthy things to preserve the profits. And it was really, really hard reading. I mean, my father was a physician, and I was like, "Wow, I can't believe how tense this has become." And then I look at my friends, Democratic party friends, Republican party friends, concerned about physical discipline. And I showed them World Health Organization, United States ranking 38th, OECD numbers on the cost of healthcare per capita-

Albert Wenger:

Are way up, sure.

Rob Johnson:

... we are double the OECD average. And I believe all but one OECD country ranks above us in performance. So I said, "If you guys are budget hawks, why don't you go after that?" Whether it's pharmaceutical insurance or whether there are many dimensions to the cost, but why aren't we creating with all of our technological wizardry and so forth, in innovativeness and the way we talk about our society's vitality, why aren't we producing twice as good for half the price instead of 38th best for twice the price?

Albert Wenger:

And one of the arguments I make is because we're caught up in this job loop thinking and because we're caught up in those thinking of, the way to do things is through market prices. And I'm a VC. I love markets. I love-

Rob Johnson:

Well, they're a valuable tool.

Albert Wenger:

Yeah. But there are lots of things that they can solve. And we have gotten to this point of sort of market maximalism, where we're like, "Oh, well, the way to solve this is by privatizing it, and the way to solve this is..." And in fact, at the same time, we've allowed many markets to become highly concentrated. I have a chapter on why concentration is being driven further by digital technology. Digital technology drives concentration massively because of basically what happens when you have data,, and then you have a little more data and you have a little more data. And you see this in Google and Facebook, but you will also see it in manufacturing, you will also see it in CPG. And you've seen it. You've seen it in financial services. So we're sort of this strange combination where we have this market maximalism where we believe we can solve everything from markets.

At the same time, we have very poorly functioning markets [inaudible 00:32:27] highly concentrated with lots of market power. And then we wonder why we have bad outcomes. So in my mind, we just need to really kind of hit the reset button in a big way and make this big transition where we let more and more people opt out of that system. Once we let people opt out of that system, interesting things will happen. As long as we keep people trapped in this job loop, if you are working for a pharmaceutical company, if that's how you make your living, and that's how you pay for your house, for your children's education, and so forth, of course you're going to push this drug even if you know that it's the wrong thing, even if you know that it makes people addicted, because iit's hard to get off that thing once you're inside of it.

Rob Johnson:

Yeah. I once attended a lecture at the Union Theological Seminary, and the individual, the speaker that night gave a talk about why we've deified markets. And he said, because looking at it, he's a theologian at face value. It's a tool. It's an instrument as a means to our end. But he talked about how, at the end of the futile period, he was talking about Scotland and Adam Smith going from the theory of moral sentiments to wealth of nations, and he said, "They realized that using moral and ethical discourse as a civil servant made you look like you were affiliated with the corrupt futile lords because the church had been co-opted. So you went to this antiseptic scientific value of free discourse, which carried on." And then when the communist nations, Russia and China, adopted this central planning on scientific basis, a lot of people didn't want to use that antiseptic language anymore. And so they deified the market, and the market became the thing that solved all our problems.

Albert Wenger:

And I think it's fair to say, and I say it in the book, I think it's fair to say that markets actually worked incredibly well for the creation of capital. So the capital in the title of the book is not financial capital, it's physical capital. We don't drive around and go bars, you need cars. You don't cloth yourself in dollar bills, you need clothing. So markets actually were incredibly good at giving us a lot of capital. It's the question now, what do we point all those resources at? And this is the moment where we need to recognize that there are these vast swaths of problems and opportunities that cannot be addressed by the market system. In effect, one way of saying it, I say it in the book, is that it's because markets have been so successful that the problems that are kind of left over are the problems that markets and especially markets of the variety that we have today cannot and will not solve.

And so this goes back to the same idea that when we went from the Agrarian Age to the Industrial Age, we shrunk the agricultural sector relative to human activity. And now we need to do the same with the economic sector, with the one where everything is explicitly incentivized through an income, through profit, through stock options. We need to shrink that relative to human activity and really let the human activity that's based solely on, "I'm doing this because I want to do it, because I want help my friend, because I want to spend time with my daughter, my parents, because I want to take care of animals," whatever the case may be, to really create room for that. And we have the technology because of digital technology. Because of automation, we have the ability to do this.

Well, we have to create a society where this becomes possible and desirable for people where you don't look at somebody and say, "Well, that person's a bum. They just play the guitar all day. They don't have a job," where you go, "Oh, well, it's beautiful that they can play the guitar. I kind of like that song." That mindset shift is dramatic, and it requires us to change everything exactly the same way we changed everything in those two big [inaudible 00:36:15].

Rob Johnson:

[inaudible 00:36:15]. Yeah.

Albert Wenger:
And we just don't seem to have the will or the desire to embrace this. Instead, we're just clawing on as hard as we can to the Industrial Age, which is no longer working.

For a critical history of poverty finance: Placing neoliberalism in colonial capitalism

Published by Anonymous (not verified) on Tue, 09/08/2022 - 6:00am in

In this short blog post, I want to make the case for why a critical study of ‘poverty finance’ is crucial to understanding neoliberalism and its limits, following the publication of my new book A Critical History of Poverty Finance.

The term ‘poverty finance’ is Katherine Rankin’s. She uses it to refer to ‘the business of extending financial services to those traditionally excluded from the mainstream financial system’. For Rankin, the general term ‘poverty finance’ is a means of drawing out the connections between projects in the global north and south—showing how both microcredit and subprime mortgage markets depend on a kind of ‘socio-spatial fix’. That is, Rankin emphasises how poverty finance creates new avenues for the redeployment of over-accumulated capital both by reconfiguring spatial relations (as in David Harvey’s ‘spatial fix’) and by configuring the survival of racialised and gendered marginal populations in ways that are amenable to financial accumulation.

The general rubric of poverty finance—designating activities aimed at extending finance to those ‘outside’ the mainstream financial system—is also a useful way of grouping together a range of activities across time. The history of poverty finance in this sense can be traced back through a cluster of highly failure-prone interventions in colonial contexts dating to the early decades of the twentieth century.

In my book, I trace out some of this history, with an eye on the threads linking colonial interventions, through the era of structural adjustment, the failures of microcredit, and the current vogue for ‘fintech’. Studying poverty finance is especially valuable because it helps us position the neoliberal project and its limits against the backdrop of colonial capitalism.

Market fantasies

It’s commonplace for critics of contemporary forms of poverty finance—like the promotion of fintech, financial inclusion, and microcredit—to describe these interventions as ‘neoliberal’. They are right. The push to widen ‘access’ to finance constructs poverty as a problem of lack of finance, to be remedied by laying the groundwork for the incorporation of the poorest into new markets. Poverty finance, in this sense, encapsulates the neoliberal reliance on building new markets or market-like devices as solutions to all manner of social problems.

These stories of ‘inclusion’ can mask a reality of grim exploitation. Microcredit, and increasingly fintech-enabled credit, have been linked to a number of crises of overindebtedness. Maybe the most prominent took place in Andhra Pradesh, India in the late 2000s, culminating in the suicides of dozens of overindebted farmers and a major regulatory overhaul of the country’s microfinance sector. More recently, the scope of digitally-enabled debt in Kenya has prompted even erstwhile cheerleaders at the World Bank’s Consultative Group to Assist the Poor to call for ‘a market slowdown and a greater focus on consumer protection would be prudent’.

Yet, without diminishing the horrific nature of these crises, they are also outliers. When we look at the longer history of poverty finance, we see a tendency for finance capital to pile into a few places (like Andhra Pradesh, or more recently Kenya), while skipping over the vast majority of people and places in the global south. This has taken place in the face of the prompting and prodding of the Bank and national governments seeking to promote wider ‘access’ to finance across the board.

There is a crucial paradox at the core of poverty finance interventions. The reason the poor are seen to need access to finance—namely due to their low and unpredictable incomes—is also a key reason why alleviating poverty by providing financial services to the poorest on a commercial basis has typically proven to be little more than a politically-driven fantasy. It’s risky and not particularly profitable, under most circumstances, to lend money to, insure, or provide other financial services to people with small and irregular incomes. Real accumulation, in short, doesn’t operate in the ways that neoliberals would like.

The history of poverty finance, then, is first and foremost a history of grim failure, even on its own terms. If poverty finance epitomises neoliberal narratives about development, these failures are telling about the limits of neoliberalism itself. We know pretty well at this point that failure, as such, is a core part of the history of neoliberalism, as in, for instance, Jamie Peck’s evocative description of neoliberalism ‘failing and flailing’ forward through a dispersed series of policy experiments. My book chimes with this picture in important ways. But the history of poverty finance is also particularly revealing of just how much the trajectories of neoliberal development practice have been shaped by the messy encounter between the neoliberal project and the deep-rooted histories of uneven development generated by colonial capitalism.

Making markets in a colonial world

Crucially, the failures of neoliberal poverty finance interventions are easier to understand if we place them in their colonial context. This is true in the widely accepted sense that global patterns of poverty and uneven development are colonial in their origins, but also in the maybe less obvious sense in that the organisation of production and accumulation in colonial territories has had enduring effects on the development and specific organisation of postcolonial financial systems. Colonial economic systems varied, but they were broadly designed to transfer profits back to the metropole, and transfer the costs and risks of productive activities onto racialised working classes (broadly understood) in colonised territories.

Colonial banks, in this context, specialised in lucrative, low-risk activities like facilitating funds transfers between colonised and metropolitan territories. They made comparatively few loans in general, almost entirely to colonial governments, large merchant firms, and to expatriate plantations, farms, or mines where these were present. The infrastructures that banks built up to facilitate these activities centered on branch networks overwhelmingly concentrated on a handful of key commercial centres.

Colonial officials in the first half of the twentieth-century were often concerned about the consequences of this system for the inability of the small farmers to access credit. In terms that aren’t alien to present-day debates, they worried that limited access to credit undermined agricultural productivity. They also identified many of the same underlying obstacles as in contemporary analyses of financial inclusion. One survey of Nigerian banking operations published in 1952, for instance, noted that ‘Many Africans wish to operate accounts… on which the average balance is small and the number of transactions high’. Such accounts could only be profitable ‘under (rare) conditions where returns on assets were sufficiently high to outweigh the cost of making many small transactions’. Colonial efforts to promote wider access to finance, which often relied on building parallel state-backed credit systems, generally ended in failure.

Many postcolonial governments ramped up these efforts, often launching state-owned agricultural development banks. In a very important sense, more recent neoliberal forms of poverty finance emerged out of failed efforts at the World Bank and USAID in particular to expand the operations of these institutions by shifting them onto a more commercial footing. State-owned banks were key victims of structural adjustment, and the Bank and others increasingly turned to the promotion of microcredit as a way of working around the limits of commercial financial infrastructures that had often retained their colonial geographies.

In short, poverty finance offers up a vital lens on neoliberalism because it is a site where market fantasies smash up particularly clearly against the realities of uneven development in a (post)colonial world. Present-day experiments with fintech should be positioned in this longer history of unsuccessful efforts to grapple with the limits of colonial financial infrastructures, and more widely with patterns of radically uneven development inherited from colonial capitalism. A Critical History of Poverty Finance makes a contribution towards starting to map this terrain.

The set image is of the United Africa Company (UAC) central offices in Nigeria, a division of Unilever.

The post For a critical history of poverty finance: Placing neoliberalism in colonial capitalism appeared first on Progress in Political Economy (PPE).

The Role of Public REITs in Financialization and Industry Restructuring

Published by Anonymous (not verified) on Tue, 02/08/2022 - 2:39am in

Tags 

finance

Real Estate Investment Trusts (REITs) are considered “passive” investors and are exempt from corporate tax. But in reality, they play a very active role in reshaping whole industries, like healthcare.

How Public Real Estate Investment Trusts Extract Wealth from Nursing Homes and Hospitals

Published by Anonymous (not verified) on Tue, 02/08/2022 - 2:39am in

Tags 

finance

Real Estate Investment Trusts (REITs) are considered “passive” investors and are exempt from corporate tax. But in reality, they play a very active role in reshaping whole industries, like healthcare.

Real Estate Investment Trusts (REITs) are important financial actors that control over $3.5 trillion in gross assets and over 500,000 properties in the U.S. Yet they have been largely ignored because tax rules define them as ‘passive investors.’ They exist as tax “pass through” entities and pay no corporate taxes if they invest at least 75 percent of their assets in real estate, derive 75 percent of their gross income from real property, and pay out at least 90 percent of taxable income (excluding capital gains) as shareholder dividends each year.

In our new report, “The Role of Public REITs in Financialization and Industry Restructuring” (Institute for New Economic Thinking Working Paper #189), we question this conventional view of REITs as passive investors. Our evidence shows that they are financial actors that aggressively buy up property assets and manage them to extract wealth at taxpayers’ expense. They do not simply wait patiently to buy real estate through market transactions, sit back passively, and collect the rent. The case studies in this report suggest that their tax-exempt status should be revisited.

We identify three important ways in which REITs have had a powerful impact on the US economy in general and on productive enterprises more specifically – whether intended or not. We draw on cases from markets where REITs have a major presence – nursing homes, hospitals, and hotels.

First, because REITs were designed to facilitate retail investing in the real estate market, they have become an important mechanism for expanding the financialization of the US economy. That is, they increase the power of finance capital by expanding its reach into larger swaths of the productive economy. They have expanded the pool of capital available for transactions that monetize real property and turn it into tradable assets – financial widgets with little or no connection to the real purpose of the productive enterprises that occupy the properties they own.

Second, REITs have played a major role in industry restructuring and consolidation. They have done so by promoting REITs as a separate asset class – one that should be legally separate from the commercial enterprises that produce goods and services on real estate property. By separating ownership of real property (property company or PropCo) from the enterprises operating on that property (operating company or OpCo), investors may more precisely calculate the returns to capital based on the risk-reward features of the asset class – in this OpCo/PropCo model, real estate assets versus the goods or services produced on the property. And the stock market values these assets differently.

Thus, REITs have grown and expanded their reach by separating real estate assets from productive assets. They have dominated M&A activity in real estate markets due to their tax-exempt status, which allows them to pay higher premiums for properties than non-REIT property owners. As REITs buy up local property and consolidate it into national or global property corporations, they also facilitate the consolidation of the operating companies that become their tenants. That is, they facilitate industry consolidation both at the property level and at the commercial enterprise level.

This is evident in the three sectors analyzed in this study. In healthcare, healthcare REITs have partnered with private equity firms to separate assets into property and operating entities -- with REITs financing the expansion and consolidation of PE-owned nursing homes and hospitals into mega-chains with enhanced local, regional, or national market power. The anti-competitive implications of these developments in healthcare have become a major focus of scholarly research and a major concern for political leaders and anti-trust regulators. A similar pattern of concentrated ownership is evident in the hotel sector, where REITs have dominated M&A activity and fostered industry consolidation – both at the level of the hotel real estate and also at the level of the brands and operating companies that manage the property assets.

A third effect of REITs occurs at the level of operating companies and the outcomes for the companies, employees, and consumers. By law, REITs must act as passive investors to retain their tax-exempt status, which means that they cannot interfere with the management or operating decisions of their tenants. This has led to the OpCo/PropCo model described above, which separates property and operations ownership into separate legal entities – entities that by law must maintain arms-length relations. But this separation poses major problems from the standpoint of effective business management and service delivery. That is because productive operations depend importantly on the quality and maintenance of the underlying property. The quality of patient care depends on how well facilities are maintained; hotel revenues depend on customer satisfaction with both services and facilities.

In other words, the separation of property ownership from operations is driven entirely by the financial logic of maximizing returns for investors – NOT the business logic of providing high quality integrated services. The legal requirement for an arms-length relationship between property and operating companies is in conflict with the needs of the business, and ironically, also the ability of real estate owners to make sure that operations on their properties are managed effectively.

To overcome this dilemma, REITs have developed work arounds to allow them to influence or partner with the companies that manage their properties – strategies that are at odds with the original conditions for their tax-exempt status. They have successfully lobbied for legal changes that have freed up REITs to behave more and more like publicly traded corporations, but without paying the corporate taxes that their counterparts pay. These work arounds vary based on different risk-reward assumptions across industries.

Moreover, the cases in this report show how REITs achieve their financial goals through work arounds that directly or indirectly shape the decisions or business strategies of their tenants -- and in turn, outcomes for consumers, patients, and employees. However, they bear no legal liability for what happens to the operating company or any of these stakeholders. While these REIT strategies may be technically legal, they undercut the original intent of the laws.

In healthcare, REITs use sale-lease back agreements with healthcare operating companies in which the companies are tenants and the REITs are landlords. These agreements assume that government reimbursement systems provide long term predictable funding mechanisms. The tenants bear all of the profit-loss risks, as well as the costs and risks of property maintenance. Thus, healthcare REITs are viewed as safe investments that yield reliable dividends, almost as safe as bonds. They bear little risk if an operating company fails; and in that event, their properties may be repurposed for a new tenant. Healthcare operating companies in nursing homes and hospitals, however, bear substantial risk of financial failure due to ongoing cost increases and uncertain and unpredictable funding.

Healthcare REITs have teamed up with private equity firms to strip property assets from healthcare providers. Our case studies show how private equity firms have bought out nursing homes and hospitals using extensive debt, and then have sold the underlying property to a REIT, in what is known as a ‘sale-leaseback.’ The PE firms have taken the proceeds from these sales to pay dividends to themselves and their investors, rather than using them to improve healthcare services for patients. The REITs have received inflated rents from healthcare providers, while the healthcare providers have become tenants of the property they formerly owned. Now they are burdened with ‘triple net’ leases in which they pay rent subject to annual escalator clauses (and continue to pay the costs of property maintenance and improvements, taxes, and insurance).

While REITs appear to be passive investors in these cases, a deeper analysis shows how they have made it possible for private equity firms to extract wealth through excessive debt financing; and how they have undermined healthcare providers’ financial stability through charging excessive rents with unsustainable escalator clauses in long-term renewable leases. Our case analyses illustrate how this happens. They include examples in skilled nursing: Healthcare Properties (HCP) (a healthcare REIT) and HCR ManorCare (owned by PE firm Carlyle Partners); and Health Care REIT and Genesis (owned by Formation Capital). In hospitals, they include Medical Properties Trust (a healthcare REIT) and its involvement with Cerberus-owned Steward Health, Leonard Green-owned Prospect Medical Holdings, and LifePoint Healthcare, owned by PE firm Apollo.

In hotels, by contrast, REITs bear most of the risk of profit and loss, as they lease their properties to taxable REIT subsidiaries, which in turn contract with hotel operators -- paying them a fee for managing the REIT’s properties and reimbursing them for labor and other expenses. Hotel REITs hide behind the complexity of contracting relationships to argue that they maintain arms-length relations with operators. But their financial concerns over risk management lead them to promote strategies to ‘actively manage’ their assets and drive down hotel operating costs, which became particularly evident during the COVID pandemic.

Notably, if operating companies or their stakeholders suffer negative consequences due to REIT ownership strategies, the REITs bear no liability or responsibility for these outcomes.

In sum, this working paper suggests that scholars and policy makers need to take a much closer look at REIT activities. Their profits and executive compensation have been extraordinary in recent years, with little discomfort caused by the COVID pandemic. Their financial transactions offer little or no transparency, and taxpayers deserve a clear assessment of how much they are subsidizing yet another asset class that may be contributing to greater inequality in the US economy.

Beyond greenwashing: The hollow foundations of ethical capital

Published by Anonymous (not verified) on Thu, 21/07/2022 - 6:00am in

The explosion of ESG investing

ESG investment funds, which claim to invest according to environmental, social and governance criteria, grew to almost US$3 trillion in 2021.  With a 53% increase since 2020, this made ESG the fastest growing sector of the asset management industry.

The rapid flow of funds into ESG investments has led to many demands from investors and the financial press for reliable accounting information. There is enormous variability in valuations of stocks and indices according to ESG criteria, and even a fundamental confusion about what ESG investing is.

In response to this variation and confusion, there is a proliferation of standards aiming to account for non-financial value. Two of these initiatives are the Sustainability Accounting Standards Board (SASB) and Integrated Reporting (IR), which have recently merged into the Value Reporting Foundation.

Critical accounting literature has long recognised the limitations of social and environmental accounting. A key concern is that accounting standards fail to properly measure the complexity and diversity of social and ecological value. This might be perceived as a fundamental or epistemological disconnect between the domains of the financial and the social: these things are incommensurable. Alternatively, others find that while financial accounting might be up to the task of attaching prices to all manner of values, to do so would devastate the rate of profit, so there is a reluctance to develop comprehensive measures.

But looking beyond these limitations reveals the productive function of ESG accounting frameworks.

In a recent article for Critical Perspectives on Accounting, I argue that while SASB and Integrated Reporting fail to fully account for the social and ecological impacts of business activity, this is not crucial to their function. ESG accounting standards provide a foundation for the accumulation of ‘ethical capital’ for which a comprehensive account of social and ecological value is unnecessary.

What is ethical capital?

The term ‘ethical capital’ tends to elicit a visceral response. For some people, it suggests a beacon of hope in a post-political world desperate for social and economic transformation. For others, ethical capital is an oxymoron and a greenwashing exercise.

ESG investors themselves, like others I characterise as ethical capitalists, tend to steer clear of any discussion of ethics at all. But the massive growth of ethical capital, of which ESG investing is one branch, is predicated on its ambiguity and hidden contradictions. By uncovering the conflicts about what ethical capital comprises, I aim to expose the tensions, debates and disagreements that ethical capital’s advocates profit from concealing.

Ethical capital is a process by which ethical claims or credentials are incorporated into intangible assets such as corporate reputation and credit ratings. Where capital perceives political issues that may become risks to accumulation, it absorbs them as profit making opportunities. Typical examples include climate change, forced labour, and workplace health and safety.

The phenomenon of ethical capital as a way of making profits need not imply that capital has become more ethical (whatever that might mean). Ethical capital merely permits investors to speculate on which ethical issues they think will be the most lucrative to support or avoid. It is a mode of investing based on ethical claims, and the ethics underlying those claims are as varied as the people who assert them.

Accounting for ESG

Like any other form of capital accumulation, ESG investing relies on accounting to provide relevant, consistent and comparable information to support investment analysis. Standards like those set by SASB and IR translate ethical issues into metrics that corporations use to bolster their sustainability credentials. Where these credentials become part of an intangible asset like a brand or a credit rating, they boost stock values and returns.

Bringing together accounting for intangible assets and accounting for social and ecological values, SASB and IR create a basis on which businesses can create, measure and trade intangible ‘ethical assets’. In SASB’s approach, this involves developing a list of ‘sustainability topics’ that are relevant to particular industries and requiring firms to report on these. The process for determining which sustainability topics are relevant involves consultation with industry participants and investors, as well as media analysis and other desktop research to reveal the nature of public opinion on these issues. The issues of financial materiality is paramount.

For IR, the rationalisation process focuses on ‘six capitals’, which include the traditionally recognised financial and manufactured capital, as well as four non-financial capitals: human resources, natural, intellectual and social / relationship capital. IR then requires firms to report on how it is growing these six capitals, but privileges financial outcomes and the interests of shareholders.

Redefining ethics through the frame of financial materiality, SASB and IR are grounded by the proposition that there is no contradiction between the interests of business and the interests of everyone else. A core tenet of ethical capital is that responsible business is more profitable, but this is only true if ethics are restricted to those issues with financial implications. The rationalisation and standardisation of ethical issues through the SASB and IR frameworks renders a constrained form of market-compatible ethics legible to capital in the form of risk.

While critics of social and ecological accounting are correct to identify that ESG standards fail to properly account for social and ecological value, that they have regard only for financial interests and that they are disconnected from reality, these arguments miss a crucial point. ESG accounting does not need to be accurate nor comprehensive to support the accumulation of ethical capital. Indeed, if ESG accounting was more comprehensive, it would undermine ethical capital production, which relies on concealing the conflict between profitability and sustainability. The ambiguity of ESG accounting standards is crucial to the growth of ESG investing and the accumulation of ethical capital.

The post Beyond greenwashing: The hollow foundations of ethical capital appeared first on Progress in Political Economy (PPE).

Fresh audio product: reining in the cops, the limits to sensitive money management

Published by Anonymous (not verified) on Fri, 01/07/2022 - 8:40am in

Just added to my radio archive (click on date for link):

June 30, 2022 George Maher, author of A World Without Police, on the movement to defund and eventually abolish the cops • Tariq Fancy, author of this series of articles, on the (severe) limits to using finance to fix the climate

Inflation: The Japanese Exception

Published by Anonymous (not verified) on Fri, 27/05/2022 - 11:21pm in

Published in Nikkei Asia 23/5/2022

Impressive social cohesion to keep price rises tame

You have to feel sorry for Bank of Japan Governor Haruhiko Kuroda. Just when he has finally hit his inflation target, after over a decade of trying and failing, he is being slammed by politicians and journalists for being responsible for the rise in the cost of living.

When Kuroda first took office in the spring of 2013, he signed an agreement with the government of the day promising to deliver 2% inflation. For most of the previous two decades, Japan had been mired in a deflationary stagnation which, let’s not forget, was accompanied by collapsing real estate prices, a record number of bankruptcies and a 50% surge in suicides.

Mounting costs are not an unfortunate side-effect of inflation. They are inflation itself. Nowhere in the world is inflation being led by higher wages. In every case, costs are rising with worker compensation growing at a much lesser rate. Japan remains the developed country with the lowest inflation, and there are good reasons why that is likely to remain the case.

Kuroda’s policies and the initiatives of then Prime Minister Shinzo Abe did put a stop to deflation, but until recently prices remained becalmed.  This was a global phenomenon. Most central banks in the developed world found that inflation was coming in well below their targets, mostly 2% also, but this was generally treated as good news.

Indeed, a hubristic notion took root that inflation had been conquered for good, thanks to such structural factors such as demographics, globalization, the rise of online commerce and faith in the “forward guidance” of central banks.

Thus, the “Goldilocks scenario” – in which economic conditions are neither “too hot” nor “too cold”, but “just right”, like the young lady’s porridge in the children’s tale – would be a permanent state of affairs.

Now Goldilocks has left the building, suffering from a badly burnt mouth and pursued by a large number of bears. The “structurally impossible” view of inflation – strongly promoted by previous BoJ Governor Masaaki Shirakawa and other hard money advocates – has been comprehensively discredited.

Why has inflation suddenly burst out, contrary to the predictions of central banks and noted economists? The immediate trigger was the response of governments to the Covid pandemic, which was very different from the policies adopted to counter the Global Financial Crisis.

From 2008 onwards, the money collectively created by central banks via quantitative easing largely remained within the financial system. It may have had an impact on asset prices, but there was none on ordinary products as no new demand had been created.

In contrast, governments dealt with the economic trauma caused by Covid lockdowns by launching what were essentially money drops on households and companies.  New buying power met supply blockages and, hey presto, suddenly there was inflation.  Quite a lot of it, in fact.

Inflationary pressures have spread worldwide. The latest print of the consumer price index in the U.S. is 8.3% higher than the same month last year. In the U.K. the CPI is up 9%; 7.8% in India; 4.8% in South Korea; 5.4% in Singapore. Even Germany, once a pillar of financial rectitude, is recording CPI inflation of 7.4%, the worst reading since 1974. In this context, Japan’s 2.4% stands out like a good deed in a weary world.

An importer of nearly all its primary energy, Japan was hammered by the 1972 oil shock, with inflation spiralling to over 20%. Yet, by 1982 Japanese inflation had fallen to 3%, a full 8% lower than inflation in the UK at the time. It has never risen any higher since, except when consumption tax hikes caused distortions.

Why should that be so? Investment scholar Edward Chancellor offers some intriguing thoughts in a recent essay for Breaking Views. It is worth quoting at length.

“Inflation is always and everywhere a monetary phenomenon, Milton Friedman famously proclaimed. But what causes the abnormal growth of the money supply? Economists are silent on the matter. Sociologists have an answer. Inflation, they say, is as much a social as an economic phenomenon. According to British sociologist John Goldthorpe, inflation is a sign of social divisions – inflation, he writes, is the “monetary expression of distributional conflict.””

On that reading, inflation is an unconsciously willed outcome of the political process.  You would expect to see the highest inflation in countries with the most fractured politics. In fact, rising populism would be a good signal of future inflation. “Distributional conflict” has long been a familiar phenomenon in Latin America and emerging Asia, but now we see it escalating in the U.S., the U.K. and the Eurozone.

On the other hand, countries which have uneventful politics and a high level of social cohesion, such as Japan and Switzerland, would not experience inflation as an inevitable consequence of political failures that have been long in the making. In the case of a “regime shift” to a world in which inflation is an ever-present possibility and threat, these countries would be relatively well positioned. They would likely be rewarded by strong currencies too, improbable though that might seem right now in Japan’s case.

Is such a regime shift likely to take place, or will inflation revert to trivial levels once the various supply blockages have disappeared? That is the most hotly debated subject in financial markets today. From this author’s perspective, it does seem that the tectonic plates of the world economy have shifted in a highly significant way.

Through most of this century, the economic shocks tended to be disinflationary, the accession of China, with its enormous labour market, to membership of the World Trade Organization being the biggest factor of all. But in recent years the shocks – the pandemic, the Russian invasion of Ukraine – have sent prices soaring

There are surely more such to come. If the logic of globalization was disinflationary, then de-globalization should have the opposite effect.  Likewise, the government and ESG (Ethical, Social and Governance) mandated target of zero net carbon emissions could turn out to be a major driver of higher costs

No doubt, inflation will ebb and flow as the financial authorities attempt the well-nigh impossible feats of stabilizing prices without crushing the economy and stimulating the economy without causing a resurgence in inflation.  Expect to see Jay Powell, Christine Lagarde and other central bankers pivoting like ballerinas as they over-compensate in both directions.

In the case of severe economic dislocation, we may well see another round of money drops –  modelled on the Covid response, but dressed up as green transition subsidies or solidarity payments.

As for BoJ Governor Kuroda, he has finally seen his 2% inflation target achieved, although that may not last as the huge rises in energy prices drop out of the calculation next year.  Market expectations of Japanese inflation over the next 10 years – as measured by the difference in yields between inflation-protected and regular bonds – are for an annualized rate of a mere 0.84%.

So Kuroda will have an opportunity to run a victory lap before ending his second term in April 2023 – and his successor will be able to celebrate the lowest inflation rate in the G20.

Macro Effects Of A Hypothetical Crypto Crash?

Published by Anonymous (not verified) on Wed, 18/05/2022 - 3:02am in

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This article is a short outline of what I see as the macroeconomic effects of a possible continuation of weakness in crypto financial markets. The direct effects would be small, although weakness in crypto is interleaved with the fortunes of the tech sector. It is certainly possible that all risk assets will be under pressure if the economic situation deteriorates, so crypto might be akin to the canary in the coal mine — a signal of other dangers.

I end with a discussion of so-called “stable coins.”

No, I Am Not Predicting a Collapse

I do not trade crypto, nor do I have any interest in doing so. Although I view the space as infested with scams, I do not believe that life is inherently fair and that prices must crash as a result of this. There is obviously a shake-out happening of the weakest crypto assets, and all I am interested in here is discussing the effects of a hypothetical extrapolation of this trend.

Correlation And Canaries

The “technology” sector has one interesting characteristic — there is a large group of investors that mainly invest in tech. Individuals might differ on which securities they hold, but as a group, they are all in the same baskets of stocks. The issuers of tech “securities” then align their issuance to match the demand of these investors, and they are able to support asset prices at valuation levels that appear ridiculous when compared to other sectors.

This behaviour creates volatility — the herd can drive prices up, at the cost of the entire sector being whacked if a liquidation event occurs. To what extent investors borrowed against their positions, they will face a margin calls at the same time.

If the global economy deteriorates due to factors like the commodity price shock and supply chain disruptions due to the lockdowns in China, past history suggests that risk asset prices will also tend to get cut down. Crypto losses would be part of this process. The discussion here is whether it is possible for crypto assets to enter a bear market without taking the real economy with it.

Crypo Industry Not That Large

The reason not to be concerned about crypto as a stand-alone trigger for a recession is the the limited footprint of the industry in the real economy. The main effect would be a reduction in employment and advertising spending. However, these firms are not major employers, and it is unlikely that the jobs would disappear instantaneously — it would be steady losses over a few years. Presumably, most of the employees already learned how to code, and so might be able to find jobs elsewhere. One of the major capital expenditures would be chips for “mining” rigs and servers, but given that demand is outrunning the supply of chips, this would probably be a net benefit for production — firms that were unable to produce goods due to chip shortages would be free to ramp up production.


The figure above illustrates the scale issue. I have picked an important industry in the United States whose fortunes are tied to financial markets: residential construction. The top panel shows the level of (annualised) fixed investment, and the bottom panel is the change in spending over a year. (Technical note: the investment figures are quarterly figures at an annual rate. If we wanted to show “investment over the year,” we should use the 4-quarter moving average of the above series. I wanted this non-smoothed series because it is scarier.) In a typical recent non-volatile year, the change in spending runs at about $50-100 billion — and that is just one (major) component of total economy fixed investment in one (major) economy. I am unsure how much the crypto industry spends on wages, bribes, and equipment in a year, but I see no evidence that it would be anything other than a rounding error when compared to expenditures in industries run by grownups.

This is different than the technology crash that took place around the year 2000. Although there were dubious web companies with huge market capitalisations and a half dozen employees, there were tech firms that had a huge spending footprint: telecom equipment suppliers and the telecom industry. Working from memory, the European incumbent (i.e., privatised state monopolies) telecom firms spent 100 billion euros on 3G licenses, and a larger amount on the infrastructure buildout. Unfortunately, the debt markets started to barf all over telecom paper, and the spending spree dried up — which then whacked the high-flying communications equipment manufacturers.

Market Cap A Hypothetical

The main reason to get excited about crypto collapses are the drops in market capitalisation. However, the market cap is just the price of the last trade — which might be a tiny quantity — times the notional outstanding. Since the whales know they need to hold to allow prices to rise, the free float of a non-pegged crypto asset is going to be most of its outstanding. (Trading volume can easily be the same small portion of the float being turned over rapidly.)

Take an extreme (and unrealistic, to keep the math simple) example: a small group could create bogus orders in an illiquid asset with 1 million units outstanding, and trade a single unit back and forth until the price doubles from $100 to $200. There is a market cap increase of $100 million, but only a single unit with a value of at most $200 was being sent back and forth. The market capitalisation increase is orders of magnitude greater than the actual transactions.

One might point to the elusive “wealth effect”: the holders had an increase in paper wealth. However, this only matters if behaviour changes. There are two mechanisms for this.

  1. People/firms borrow against their crypto holdings. Anecdotally, this is happening, but it is unclear to me that financial firms are willing to give loans collateralised by the full market value of crypto holdings, and the amounts involved are small when compared to something home equity lines. If prices fall, this mechanism would result in forced liquidations. In any event, these borrowings are used to buy financial assets, which does not affect GDP.

  2. Savings rates drop as a result of increased wealth. Once again, this is happening, but it is unclear how large the effect is. From the perspective of latecomers to crypto, the anecdotal evidence points to an effect that is the opposite of what is predicted by models: they increase their savings into the asset when the price rises, then stop once the price falls.

Since holders of crypto assets are international, we would need to compare the hypothetical wealth effect to the combined GDP of the holders’ countries. Even if we took a high end (implausibly high, in my view) estimate of the wealth effect multiplier at 5% ($1 increase in market cap raises spending by $0.05), the “wealth effect” of $1.3 Trillion in crypto wealth evaporating (estimate taken from https://coinmarketcap.com/) is $65 billion. This is not enough to cause a recession.

There has been a transfer of wealth from new entrants to early adopters, and the new entrants would need to rebuild their retirement savings. That process would be slow, and not a driver of the business cycle.

Summary: Other Things Need to Go Wrong

To get a recession, other things need to go wrong beyond crypto. The energy price spike is providing us one candidate, particularly for economies outside North America.

I will now discuss “stable” coins.

Two Models For Stability and Liquidity

The crypto universe mainly consists of technical people attempting to re-invent wheels that developed in finance decades/centuries earlier. One things that they have re-discovered the great mismatch between borrowers and lenders: lenders want ultra-short maturities (i.e., “liquidity”) with high interest rates, and borrowers want long maturities with low interest rates. Traditional finance accommodates these incompatible demand by having a range of financial products, with high liquidity ones offering low returns, and returns increasing as the maturity increases. (Equity is the limit of this: highest expected returns, infinite maturity date).

Although a fiat currency issuer has no problem with providing liquidity, the private sector is not in a similar position. There are two main models for providing the ability to withdraw funding on demand: banks, and money market funds.

  1. Most popular commentary on banks obsessively focuses on bank deposits and loans (because of a “money” fixation), banks have an entire balance sheet. They hold liquid securities on the asset size, have access to credit facilities (often from the central bank, but otherwise “senior” banks), and issue term deposits. bonds, and equities. This means that they are “over-collateralised” if we looked at their deposit liabilities alone.

  2. Money market funds match assets to liabilities (investor unit holdings) on a 1:1 basis. Retail-facing money market funds are regulated, and constrained to hold “liquid” securities, and use a special accounting treatment that allows them to keep their unit values at a “par” value. (I worked on the analytical support for a money market fund that was held by institutions. Investment restrictions were somewhat self-imposed, and the accounting treatment was not really my concern.)

“Stable” coins in crypto generally attempt one of these two strategies: either over-collateralisation (like a bank), or a money market fund structure.

Over-collateralisation works on the assumption that there are buffers in less senior liabilities (including equity) that allow for a variation in asset values without the value of assets dropping below the value of the senior liabilities whose value is pegged. Whether this is credible depends upon one’s beliefs about the risk models being employed.

Bank Runs

For something like a money market fund, there is very little room for risky assets. Let us imagine a fund that wants to peg its unit value at $1, has 10,000 units outstanding, and has $9,000 invested in a no-risk liquid asset, and $1,000 in a illiquid risky asset.

Let’s then assume that the risky asset value drops by 20%, which puts the value of the assets of $9,900, giving each unit a fair value of $0.98. If the fund sells the liquid asset to redeem its units at par, the investors redeeming get a profit versus fair value — at the cost of the investors who hold. We can then see what happens if investors redeem 2,000 units at a time.

  • After the first withdrawal, there are 8,000 units backed by $7,800 of assets, dropping the value per unit $0.975.

  • After the second, units drop to 6,000, and the per unit value is $0.9667.

  • The third drops the per unit value to $0.95.

  • The final tranche is liquidated at a value of $0.90. These unit holders ate all the losses to benefit the unit holders that exited.

If investors see that such a situation is developing, the rational response is to redeem units to avoid being the final holders that eat the losses — akin to a “bank run.” The first rule of a panic is to panic first — in this case, the earlier you liquidate, the higher the per unit asset value.

Stopping a “Bank Run”

The only way to avoid breaking a pegged unit value if the portfolio value drops below the peg is to inject enough new funding to meet withdrawals. If liquidation is avoided, the yield on risky assets might overcome the earlier losses.

Where do the inflows come from?

  • New investors that are unaware that asset value dropped below the peg value. In a traditional money market fund, investors move into and out of the fund in an irregular fashion, and the accounting smoothing is normally enough to cover up issues.

  • Parties close to the fund will inject new funds at par. Since management of the fund is presumably profitable (why create it otherwise?), such an injection is rational, at least within limits. There might also be an incentive to avoid the fund liquidating its positions.

  • Investors might lend against assets with a valuation haircut. This would cut into future interest income (since the borrowing rate is presumably high), and reduces the backing of unit holders further in a liquidation scenario. This is normal practice for banks, but would be more awkward for a money market fund.

Other than the fortuitous possibility of new inflows, all of these possibilities involve somebody taking a loss — operators injecting capital, or unit holders being subordinated by new financing. A segment of the crypto industry appears to have convinced itself that it was possible to create a fund with a magical ability to avoid such losses: the structure would mint new tokens to cover the loss.

This brings us back to a fairly basic valuation question: if an entity can mint tokens at no cost to recover losses, why not print infinite amounts to get an infinite amount of free value? Does that not appear to be a free economic lunch? In the case of BTC, the defenders argued that the finite number of tokens meant that there was no free lunch. In other cases, this question was dealt with by assuming nobody would ask it.

My impression is that stable coins are being forced to evolve to match the two existing traditional models for managing pegged asset values. That said, without robust controls on manager behaviour, accidents can still occur.

Email subscription: Go to https://bondeconomics.substack.com/ 
(c) Brian Romanchuk 2022

The Ukrainian War and the End of Globalization?

Published by Anonymous (not verified) on Tue, 12/04/2022 - 4:41am in

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Economic sanctions against Russia are adding to a major redistribution of income from workers and middle-class consumers to profits in international trade.

Russia’s catastrophic attempt to gain re-entry into the league of great powers, after its re-entry into capitalism reduced the country to a raw materials supplier to stronger economies, calls to mind Kalecki’s remark about the fascist promise to humiliated nations after the First World War, that ‘roads to glory lead to war.’ In the violence into which this latest ‘road to glory’ has descended, it is sometimes forgotten that Russia may possess the largest army in Europe (and possibly in the world, depending on how much weight is given to reserve soldiers). But economically it has not recovered from the loss of the peripheral republics of the old Soviet Union, and the ‘shock therapy’ of economic liberalization after the Russian government abandoned socialism. The World Bank estimates that Russia now is merely the 11th largest economy in the world, not only after the United States, China, and Japan, the European behemoths of Italy, France, the United Kingdom, and Germany, but also the ‘emerging markets’ of India and South Korea.

Russia’s claim to great power status is therefore based on its stock of nuclear weapons, its economic function as a petrol pump for Europe, and an army that is far from sweeping all before it in Ukraine. It is to prevent the use of these weapons (and save on military casualties among their own citizens) that the powers in Europe and North America have preferred to use economic sanctions, in the hope that further impoverishment degrades the national dignity that is being restored with such violence and might evoke mutiny in the Russian elite. The possibility of such a mutiny cannot be accurately assessed by anyone outside the Kremlin. And further impoverishment will be significant but will affect largely the consumption of the wealthier middle classes, who have the most to lose from payment restrictions on imported goods and the joys of foreign travel. Although there are reports of Chinese banks refusing letters of credit to Russian customers out of fears that they may be declined facilities by US banks or face fines of their subsidiaries in the US, Russia retains access to the international payments system of China. And the Indian government is helping to set up a system for the exchange of rouble-rupee payments, although Indian banks will also be wary of possible retaliation by the US. Russian foreign exchange controls require traders to surrender 80% of their foreign earnings for conversion into roubles, and the Russian government has demanded payment for Russian oil in roubles. This is helping to stabilize the rouble exchange rate, after it fell to nearly half of its pre-war value against the US dollar, while international prices of oil and natural gas are benefitting from additional supplies.

However, much of these restrictions on foreign exchange transactions are journalistic hyperbole: The demand for payment in roubles is actually a requirement to deposit dollars in Sberbank or Gazprombank to buy the roubles required to pay for oil. And the obligation placed on traders to surrender dollars means that the Russian foreign exchange market has in effect been brought onto the balance sheet of the Russian central bank, where the central bank decides the rate at which it buys those compulsorily exchanged dollars.

The talk in the commodity markets is of the emergence of a two-tier system in which a fairly high official price is paid for energy and raw materials, but half the price is charged for such products from Russian sources. Similarly, Russian consumers may expect to pay well above the market price outside Russia for their imported goods. In the food-deficient Middle East, food prices are already rising and will rise further, as war affects Ukrainian agriculture. This coincides is the breakdown of cheap off-shore manufacturing, as global supply chains are disrupted: At the beginning of March, Volkswagen temporarily stopped production of electric cars in its factory in Zwickau due to the failure of supplies from Ukraine.

These unprecedented shifts in international markets have moved our business and financial leaders, on whose wisdom and foresight our prosperity is supposed to depend, to declare a new (inflationary) era in world economic affairs. Towards the end of March, as the war entered its fifth week, Larry Fink the Chief Executive of BlackRock, the world’s largest asset manager, wrote to his shareholders at the end of March that ‘The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades… A large-scale reorientation of supply chains will inherently be inflationary.’ (Financial Times 26 March 2022). Fink had in mind the disruption to cross-border supplies due to the war and revulsion against doing business with Russia.

But globalization is more than this, and less. It is more than just ‘global supply chains’ assuring cheap raw materials and components to assembly plants on the fringes of industrial centers. Behind this is a system of worldwide payments, necessary for settling trade and debt obligations in different countries. The Society for Worldwide Interbank Financial Telecommunications, or SWIFT, is a network of 11,000 banks around the world through which most cross-border payments are routed. Although ostensibly a co-operative of member banks, it has agreed to remove select Russian banks from its messaging system, through which cross-border payments are made. However, Sberbank and Gazprombank have so far been spared expulsion from the payments system because German oil and natural gas importers pay for their imports through those banks. Pressure is now building up in Germany and Austria to eliminate such imports. But as long as imports continue, the banks through which they are paid have to be allowed to transfer such payments.

The US Federal Reserve also offers currency swap facilities to selected other central banks, in Europe, but also in Japan, Mexico, Brazil, and South Korea, allowing those central banks to draw dollars that are necessary as backing for many international transactions. The central banks outside the US, benefitting from these facilities, will of course be careful not to jeopardize their access to currency swap facilities by allowing commercial banks to make payments that bypass US sanctions. This is in addition to the freezing, shortly after the invasion of Ukraine, of up to 40% of Russian reserves held in markets outside Russia.

It is possible to argue that this international payments system is really at the heart of what is called globalization because it is the system that allows money and capital to flow between countries. In the heady years following the dissolution of the Soviet Union, when Francis Fukuyama celebrated the end of history, this international integration of finance underpinned the globalization announced by Anthony Giddens and Zygmunt Bauman. But the lived experience of globalization was always less than this. Russia and China did eventually join the World Trade Organisation and the International Monetary Fund. But the development of free trade and international payments systems was largely regional, most notably in Europe with the establishment of the European Union and its Single European Market, and in North America with its North Atlantic Free Trade Agreement (superseded in 2020 by the US Mexico Canada Agreement), with other regional agreements in the cone of South America, in West Africa, Southern Africa, and South-East Asia. Most of the world’s population, in India, China, and the poorer countries of the world, make no use of international payments and live in countries where cross-border trade and its associated payments are strictly controlled. In those countries, only a wealthy minority with financial assets in off-shore territories, such as Mauritius and tax havens in the Caribbean, can move their deposits freely around the world. And even in countries where such payments are unrestricted, that freedom is only within the territories of associated countries. ‘Globalization’ always promised more than it delivered.

This system of regional trade and payments areas was already fragmenting before the War in Ukraine. The most spectacular case has been the departure of Great Britain from the European Union, ‘going global’ to set up barriers to international trade and payments. But perhaps the biggest push towards that fragmentation has been the use of economic sanctions by the United States as an alternative to military persuasion, which is perhaps Donald Trump’s most significant innovation in statecraft. Sanctions require only an Executive Order signed by the President of the United States. But US banks also have a central position in the international financial system. US commercial banks provide dollar-based foreign exchange swaps (between commercial banks, backed also by central banks’ currency swaps with the Federal Reserve) as security for credit transactions in other currencies. This means that banks in other countries cannot bypass US sanctions without losing the foreign exchange swap facilities with US banks that foreign banks need to conduct their business. This banking and financial power will now ensure that most banks around the world fall into line with US sanctions.

Over time, the economic sanctions imposed in support of Ukraine will have important economic consequences. The cost of living in virtually all countries of the world will rise, on top of the price inflation that was already taking off even before the war started. This will be blamed on the war, and declared by all right-thinking people to be part of the sacrifice that is necessary to defend democracy and peace against autocracy and war. But, short of rationing, natural catastrophe (such as Covid), and war, there is very little that makes people change their patterns of day-to-day expenditure, even if they may now season their expenditure with complaints about the prices now being paid for their customary shopping. This will allow the government of Russia and its friends to declare that the economic impact of sanctions has been contained and they are not really working.

However, there is something else that is happening that is no less real than inflation, even if it is less obvious than the rise in inflation. When international markets and payments systems fragment, it is the arbitrageur who makes money, at the cost of producers and consumers. Consider the market for luxury imported goods in Russia, such as German cars or French wines. These will not cease to be available in Russia. But they are already becoming much more expensive, both because of the depreciation of the Russian rouble against the Euro, and because of the more roundabout methods now necessary to secure shipments of these goods and pay German and French exporters for them. In the oil market, traders will seek out Russian oil that they can buy at a much lower price, in devalued roubles perhaps because of sanctions, but refined products like petrol will be supplied at a price above the much higher price for non-Russian oil.

In short, economic sanctions against Russia are adding to a major redistribution of income from workers and middle-class consumers to profits in international trade. It reinforces the boost to profits in the armaments industries as governments around the world expand their military capabilities and supplies to the combatants in Ukraine. This shift in distribution comes at a time when, in the recovery from Covid, business corporations are raising their prices to recover revenue lost due to measures taken by governments to suppress Covid, and to repay the debts run up by those corporations during the pandemic. Profiteering from military and economic warfare needs to be exposed and challenged. Given the existing institutions of international capitalism, it is difficult to suppress such profiteering. But it can be taxed, as such profits were in Britain and the United States during the Second World War, to pay the costs of aid to Ukraine, refugee relief and the reconstruction of health services, and to protect the living standards of the less well off. Our captains of business and generals of finance should welcome the opportunity to contribute to the defense of liberal values. The Ukrainians are paying for their democracy with their blood and their lives; working people and their families around the world should not also have to pay for the profits that are made out of that struggle.

The author is grateful to Noemi Levy-Orlik, Riccardo Bellofiore, Thomas Ferguson and Joseph Halevi for comments on an earlier draft.

Re-orienting Global Finance Towards Ecological and Social Goals

Published by Anonymous (not verified) on Tue, 12/04/2022 - 2:11am in

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UNCTAD Director Richard Kozul-Wright and Kevin Gallagher, Global Development Policy professor at Boston University, discuss their book, The Case for a New Bretton Woods. Ever since the post-war economic order was dismantled beginning in the 1980s, a re-design of the global economic order has become increasingly urgent in light of the social and ecological crises that we face.

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Transcript

Rob Johnson:

Welcome to Economics and Beyond. I'm Rob Johnson, president of the Institute for New Economic Thinking.

"There's something happening here. What it is, ain't exactly clear." Buffalo Springfield saying that in the 1960s. But with what's happening in the Ukraine, what's happening with climate, what's happening in financial instability, what's happening in social unsustainability and field equality are raising questions among everyone about whether we have a system, whether we have, which you might call, the means to avoid a war, whether our children are going to be able to survive or thrive?

These two gentlemen, Kevin Gallagher, he's from Boston University, runs a Global Development Policy Center, and Richard Kozul-Wright, who has been a guest on this podcast before. He's the director of the United Nations Conference on Trade and Development, Globalization and Development Strategies. They've written a book that is, how do we say, the time is ripe for us to read and explore the vision that I've had the privilege of exploring here in the last couple of days since I've seen the book, The Case for a New Bretton Woods, Polity Press puts it out. And clearly as we approach the World Bank's and IMF meetings and so forth, it's a challenge that I really admire that you gentlemen have put together to go to the table and using the analogy of Bretton Woods. Meaning another time coming out of dysfunction when something coherent was created.

So thank you both for joining me today, and let me start with you, Kevin, what inspired you guys? I'm talking about all the craziness going on, but what inspired you guys to do this and to think you can make a difference?

Kevin Gallagher:

Well, it's great to be on this show with you, Rob. We, in 2018 and 2019, were very concerned about the modest at best, response of the global system in responding to the 2008, 2009 financial crisis. And heading into 2018 and 2019, there was a massive rise of right-wing populism, rising inequality around the world, and a lack of real action on climate change. And so with UNCTAD, the Global Development Policy Center put together a bunch of focus groups with civil society heads, union representatives, policy makers, and so forth. And we said, "We need to re-pivot these institutions for the 21st century like we did in 1944 during Bretton Woods. And we need to put together a set of guiding principles that would do that.

And Richard and I released a short pamphlet in 2019, and then in the midst of the COVID crisis, where we saw, once again, not learning the lessons of 2008 and 2009, we saw how the multilateral system failed to vaccinate the world, failed to deal with the liquidity issues and failed to deal with the financial inability that came around from the COVID crisis that we just buried ourselves in our offices for a few weeks and banged out this larger book to spell out a larger case for a Bretton Woods moment.

We don't want to go back to Bretton Woods. We're not going to be issuing new MAGA hats around here, but what was amazing, especially for this time, we didn't anticipate the war, is that the conversation about the need for a set of principles that would guide global economic governance for a century, started in say, 1933 and culminated in 1944 in the midst of massive populism, in the midst of massive inequality and in the midst of an actual war is when they actually forge these things.

That era did not let a good crisis go to waste, they put together a set of principles and a set of institutions that worked relatively well until say, the early 1980s and this book calls for that kind of a moment. We're calling for a global discussion to realign global economic institutions for our collective climate, social and development goals.

Rob Johnson:

Richard, I must say right at the outset, I am so glad that my young scholars initiative has a summer school that's an affiliate with UNCTAD and this is grist for the mill. This is really exciting to me to see you stepping up like this together.

Richard Kozul-Wright:

Yeah. And I think we will pick up these issues, Rob, in the summer school in August this year, very much, we want to focus on these issues. I would just add to what Kevin has said UNCTAD in a way been on the front line of these issues since the beginning, back in the 1960s, when we were disgruntled or dissatisfied to some extent with the way in which the development issue had been handled by the Bretton Woods institutions. Coming out of the increased political independence of developing countries, they didn't think the rules of the game that had been hatched in the 1940s really touched on many of their concerns, particularly when it came to access to long term, stable, affordable finance.

So, UNCTAD has been at this, trying to reform those rules for some time, but it was very much in the 60s and 70s, a reformist agenda. There was a massive shift as you know, in the rules of the game, from the late 1970s, early 1980s and call it what you like, neoliberalism, hyper globalization, these are big debates I know, about how you actually describe that shift, but it was a fundamental shift away in many respects from what had actually been established in Bretton Woods, the need for a multilateral system, not to override governments, not to reduce their policy space, but to support governments in their endeavors for a more inclusive and sustainable growth and development path. It was heavily dictated by the needs and interests of advanced economies, but that was the intent of multilateralism.

Despite the conventional histories that you hear about a 75 year old rules based international order, that's not really the story of the postwar era. There was a real radical rethinking and shift in the late 70s, early 80s in a that we found to be much more inhospitable to the needs and interests of developing countries, than was true of the original model.

And so we moved interestingly, in UNCTAD, from being essentially reformers of the system, right? We thought this was the system that was a good system in principle, as we try and articulate in the book too, but it needed change, but it didn't need radical overhaul to a system that was ... Because the need for developing countries to have their own development path in a way was accommodated within the old Bretton Woods system. By the time we got into the late 70s, early 80s, the system had shifted from that idea of a multilateralism that was there to support a progressive state agenda to essentially being enablers of this new, highly financialized world. And that was a world that we saw as being particularly hostile to what developing countries need to progress.

And so we've been very critical of this Bretton Woods, 2.0 or whatever you would like to call it for the last 30 or 40 years. And there are some big issues that we'll talk about in there, I think, that we try and articulate in the book of which, perhaps the biggest and it's become even more significant, I think, over the last decade is of course the question of public debt, sovereign debt, the whole pressures the developing countries now face because of the burden of debt that on them, which we don't think essentially means that they can't deliver the sustainable development goals that the international community has committed itself to and without fundamental change.

We're not arguing for a completely new system, but without some fundamental changes in that system, it will be very difficult to meet the climate crisis, to meet the growing problems around inequality that Kevin talked about, and now, to meet the problem of the geopolitical problems that have emerged as a consequence of the war itself.

Rob Johnson:

In my experience in running a podcast, I get frequent comments about climate change. Why do we all talk about it and do nothing? And my sense is the specter and the danger related to climate deterioration and the fierce accidents and things that happen vis-à-vis the weather and flooding in coastal cities, is really haunting people. And the IPCC just put out a report that essentially said, "We better get on the horse, because it's time to ride. It's not time to talk about it." What's getting in the way? Obviously, each national government can't take care of the system unto itself. And if one starts to do things and puts its society through transformation but the others don't join, they can become despondent because things will continue to deteriorate unless we all cooperate. But either of you, what do you see that's going to kickstart us, we might call out fantasy and fear world and into action with regard to climate?

Kevin Gallagher:

That's another reason why we wrote this book. There's some incredible points of light that you can point to all over the world of incredible action on climate change. But like you said, a stable climate is a global public good. And Charles Kindleberger wrote the classic book on the public goods that need to be provided by global institutions. But obviously, when Kindleberger was talking, there was no thought about climate change. The problem wasn't even there. And so just like famines, Amartya Sen wrote great work many years ago about how there's famines all around the world, but there's no lack of food. There is a need for an incredible stepwise mobilization of finance to be able to transform the world economy south and north towards a low carbon and more socially inclusive economy. But it's not that like the finance isn't there though.

The number one tenet of our book is that global finance needs to be oriented towards our social and environmental goals. And in the 1940s when we created these institutions, the core thing everyone was concerned about in those days was, full employment and policy autonomy, to be able to manage that. The 21st century, that is still, full and core decent jobs have to be at the center, but so does a stable climate, and that can only be done at a global level.

One of the statistics that we think really screams out of this book is that if you look in the year 1980, the world economy has increased by a factor of about seven, and the trade has increased by a factor of about 10, but finance, which is now in trillions of dollars of global assets and liability is 25 to 35 times larger than it was in 1980, but gross fixed capital formation, what nerds like us call, it's just basic investment, has not changed. And as a matter of fact, in developing countries, it's gone down. If you take China out of the equation, that is the one country that has really been investing in a future, and most recently over the past decade, really putting together the industrial policies to focus on wind and solar. But like you said, the world has to do this, and this is why we call for a global solution and global institutions to make this robust.

With all due respect, I wrote this book with a great friend from the United Nations, and I think the United Nations treaties, the Paris Climate Agreement and so forth are super important treaties in and of themselves, but they have been satellited by these core international economic institutions. And one of the things, especially on climate change that we're saying in this book is that we cannot pretend that this Paris Agreement is going on on some other part of the planet, and that it has to be mainstreamed and wired in to our global economic institutions, whether it be the G20, the IMF, the World Bank and the world's network of central banks that provide so much liquidity and so much financial direction around the world.

Rob Johnson:

When we talk about whether it's climate or the pandemic, I can envision that future textbooks cannot make externalities in public goods chapters 37 and 38. It's on center stage right now and I believe that from reading your book, the map that you're creating is acknowledging the power or the importance of this collaborative public goods. And I enjoyed Kevin when you were talking about the difference between finance, which is in some levels extracting from the system, from real capital, which is building the system.

And when you're extracting more vigorously while not enlarging the pie, then the questions of social sustainability also come roaring onto the stage. And that balance particularly between north and south, seems to me to be essential at this time. And I believe in the Global South, some of the difficulties that others like Richard, when you and I did a thing with Patrick Bond in a panel, talking about how to, what you might call, get capital into the emerging world when people are afraid of corruption, meaning private capital flows are afraid to go there. They charge an enormous risk premium. But we need the capital to go to the equatorial region so that solar panels can provide a renewable source of non-carbon energy. There's so many dimensions here.

But let's zoom around again a little bit. Richard, where do you see this in relation to the pandemic? We're surely learning that when we don't vaccinate everyone and a handful of people, like they say, the 10 richest people doubled their net worth through the crisis and had we taxed them and given everyone a vaccination, we probably would've saved trillions of dollars in macro economic assistance that was induced by the crisis and the duration of that crisis. What is the pandemic teaching us about the structural reforms that need to be made?

Richard Kozul-Wright:

Yeah, there are a couple of things that I would add into what Kevin said too, Rob, that clearly come out of the last few years. One is, there has been, and I think this is very much linked to the whole financialization trend, there has been this short-termist mindset has become hardwired into decision making, not just in economic decision making, but political decision making too. And what we're talking about are long term challenges that essentially require planning and industrial policy, things that have not been consistent or conducive to the narrative that has emerged over the course of the last two or three decades. So that short-termist kind of mindset is a huge challenge.

And of course, that's linked to, and I think this gets back to the question that you raised about why we're not really seeing the changes. Interests form around the behaviors that you've talked about these short-termist predatory type behaviors that are not conducive to the investment strategies that we need to see to deliver on these global public goods. And that's been true of the pandemic, right?

The speed at which the scientific community collectively came up with a solution through the vaccine, has contrasted sharply with what you just mentioned, this huge asymmetry in the distribution of the vaccine between the North and the South. And not only that, the resistance of the advanced economies, particularly to wave intellectual property to allow developing countries to begin the process of actually being able to make the vaccines themselves, right. And quite clearly, the power of pharmaceutical interest groups is central to that in which intellectual property has itself become a source of rents and rent-seeking behavior. And as you know, all the evidence suggests that the intellectual property regime that we have in place now has far less to do with stimulating innovative behavior than it does with creating quick rents that boost profits through extracting value from elsewhere in the system.

And for us in Geneva and the WTO, that resistance to waving the TRIPS Legislation, I think, has been symbolic of what I would call a kind of neomercantilist type of behavior that has become endemic behind a veil of multilateralism. It's these very powerful interest groups that have become very influential in shaping the international agenda, which seems to be inimical with the kinds of challenges that we're talking about here, which require this longer term collective planning, oriented initiatives, if we're going to meet them.

So that is particularly worrying. We can take positives, I think, from the way in which the scientific community did respond in this remarkable way to the pandemic. But as we get into the political economy of it, if anything, it may well have become worse as a consequence of the pandemic. And certainly as we come out of the pandemic and what we're seeing now and what we're experiencing with the policy shifts that are taking place in the advanced economies, tightening of monetary policy, et cetera, is taking place without any thought for what the consequences of that might be for developing countries that were struggling before the pandemic, and now face an increasingly hostile international environment that has already begun to tip some of these countries into social and political conflict. We've seen that in countries like Sri Lanka and unless something is done seriously about these issues and quickly, will become a much more prevalent feature of the geopolitical landscape. And that's got to be a worry for everybody.

Rob Johnson:

Yeah. I'll use an analogy from my own life experience. I grew up in Detroit, Michigan. When Detroit declared bankruptcy, people said, "What do you mean bankruptcy? You can tax people." And I was working there as an advisor to people who were trying to resolve what was happening. And I said, "You can raise taxes on the body politics so you don't have to reduce the pension and the healthcare for women who worked for 45 years in municipal government and earned those rights." And by the way, they're not eligible for social security or Medicare, because they were covered by this other system. And everybody said, "Well, what do you do?" I said, "Well, a company declares bankruptcy when it doesn't have revenue. All you guys have to do is raise the taxes." And a gentleman, happened to be in the Republican party from the state legislature said, "I need to talk to you."

And he said, "You're right, we could raise taxes. And as soon as we did, someone would run in a primary against me, well-funded by people because they threaten to move their capital out anytime you do anything, and we think that would devastate the base, but more important than that, I'll lose my job if I back supporting these people."

So you have these ladies 45 years of work, not being rewarded because capital has nanoseconds escape possibilities and politicians are afraid of them. I'm speaking about a particular institutional episode, but that's what you might call the generic tension in the era of globalization where nation state control is deteriorated and capital and technology being so mobile have so much relative power compared to people.

Kevin, you have thoughts regarding the, how would I say? There's that saying, we're all in this together. But as I was listening to Richard, sometimes we're not because they create an otherness and rally around what we might call the nation state or the community or a subset of the community to protect them. But not dealing with some of these things like disease can come flowing right back on top of us and being tribal is what you might call contributing to the cumulative damage that not only others will feel but we'll feel.

Kevin Gallagher:

Throughout the book, we really see three inherent things that are fundamentally characteristic of the world economy right now. And like you said, they can't be in chapters 37 and 38 of economics textbooks for the 21st century, right? Because what you just said about pandemics, if you don't deal with it anywhere, it's going to hurt people everywhere, is the same thing about climate change. If we don't deal with climate change globally, it's more droughts and more fires in California, it's more taxing on the public budget here in the United States and it wipes out the entire capital stock in countries like Barbados, et cetera, and causes fundamental financial instability there. So climate and pandemics, we really see this book as acknowledging the fact that the world economy is now inherently, financially unstable, economically unequal and environmentally unstable.

And all of these things are global public goods. When there's financial instability, anywhere, we see it over and over again with the financial crisis that keep racking us, is everywhere. If inequality is creating increased polarization, rising of right-wing populism and obviously climate and pandemics are also just globally costing so much.

This book is really about starting a global conversation about putting these things at the center. And what I think is different about the 21st century now, because as Richard has said, and we say throughout the book, and obviously you know, a lot of these problems just started in the late 1970s and early 1980s. But what is so characteristic of the 21st century now, is that they're all right on our front radar screen and the constituents, unfortunately, of the people who have been hurt are all over the planet.

It's not just poor farmers in Mexico that were going to get hurt by the North American Free Trade Agreement, now it's the folks in Detroit, it's the folks in Poland who will have to shift from coal to clean air, same thing with South Africa and the folks in the Caribbean. And so there is a conversation that needs to happen that we hope to kick off with this book.

And that if you think about these three core parts of instability, financial instability, inequality and unstable climate and health systems, if you put those at the center and you say, "Hey, dealing with these things, they're not charity. They're not little issues that need to be dealt with. We need to rewire the system to make sure that these fundamental things that are public goods are at the heart of the system and that these are investments rather than charity giveaways."

You start to have a different conversation with all different kinds of folks, including the Republican that you talked to in Detroit. Investing in people, investing in infrastructure, investing in a new economy, helps people get jobs and helps people get re-elected. And the big problem has been a lack of investment. The investment that we've had has been towards a 20th century economy, and it's been anemic while we've extracted all of this financialization that has been going in a different direction, which has been feeding off of itself. We need to make sure that the financial system and the trade system is oriented towards our development, equality and climate change goals. And if we sit and have a set of principles that guide us and say, "Hey, what are these fundamental things for the 21st century?" We can rewire these institutions towards those goals. And that's what we're really talking about in this book.

Rob Johnson:

Yeah.

Richard Kozul-Wright:

Yeah. And I would just add, Rob. I know people are worried sometimes about historical parallels, but using the New Deal, it's not an accident. Ironically, those three things that Kevin mentioned were of course, central to the Roosevelt Agenda. There was an environmental crisis linked to the Dust Bowl and other problems, there was obviously financial instability that came out the Great Depression and of course, there was rampant inequality that had to be dealt with by the original New Deal. So in a sense, what I think has often been lost in that telling of the historical story, there was a strong intenationalist dimension to the New Deals.

They're often taught as somehow inward looking at protectionist agenda. And I find that to be very misleading in terms of the historical narrative. And it's not an accident, it's the same people that were concerned with these issues domestically, often were the same people who were behind the original discussions to build a multilateral architecture, that would also tackle these problems worldwide. Morgenthau who has a interesting history, and you wouldn't necessarily think as being a hero in that kind of world is a hero in our books. I think that the contribution of people like him to the original Bretton Woods story is often forgotten, partly because there was a strong pushback in the United States fairly early from 40s after Roosevelt died against a lot of the original intentions of the designers of Bretton Woods.

The pushback against that need to control highly mobile speculative capital begins very early in the US. It took them a while really to rewire the system in a way that they wanted. And it doesn't really happen till the late 70s, early 1980s, but they began that pushback early on. And so it was a very conscious effort to go back to the New Deal and it's original intent, to think about what they achieved and were trying to achieve back then and what is still useful today. There have been significant changes, of course, in the structure of the global economy since then that have to be accommodated by any new multilateral agenda. But there are real lessons from that period that need to be recovered, I think, if we're going to have that more inclusive and sustainable agenda that Kevin talked about.

Rob Johnson:

I'm drawn as I was reading your book to someone that, well, John Bellamy Foster and Robert McChesney turned me on to many years ago. And it was a man called the Earl of Lauderdale. He was the 13th Earl of Lauderdale, and he read The Wealth of Nations by Adam Smith. And I guess what I would say, he raised a specter in 1804 saying, "What do you mean air and water have no value because they have zero price? If you cut them off, we all die." And I guess what Adam Smith was saying was that exchange value when the population was small in relation to the planet meant that you didn't have to pay for air or water and you could survive.

It seems as though that balance has changed. And what I guess I'm getting at is, this is a little bit like I made a podcast recently with man named Peter Barnes, from Northern California. The idea is that the earth, the water, the ocean, the fish, the upper atmosphere are assets, but they haven't been properly treated as assets that need to be preserved, cultivated, enhanced, whatever you want to call it. We don't have the mindset that indigenous people had that were so dependent upon the earth. And perhaps since the Industrial Revolution, we've parted ways further with dependence upon the earth.

But these assets now, it's almost like if you want to say, the spirits are coming down on us pretty hard to change course. And it concerns me now because I feel like, and we haven't talked about this yet, but the nationalism and the fear that the Ukraine conflict is bringing to the surface is taking us further to what I will call the Bismark playbook. When you can't handle all the fear and instability at home, pandemic, social unsustainability, you declare a foreign enemy to rally everybody behind you to get them to obey. But in this context, with these other assets, these public goods deteriorating, that diversion of focus is going to exacerbate rather than ameliorate the kind of things we need to do together. How do we and China get together when Xi Jinping and Putin and the American administration are all playing, what you might call demonization games with one another?

Richard Kozul-Wright:

Yeah, that is, obviously, a major concern that we have where we are in Geneva, Rob, because what the big players do is going to be critical, that's clear, that was clear at COP at the end of last year. Kevin has pointed out that China has done some pretty remarkable things over the course of the last two decades, including with respect to the environment, although it is now, of course, the world's single largest emitter. That's partly a reflection of its size, partly a reflection of the fact that it had to grow so quickly to be able to deliver the huge reductions in poverty that people were celebrating until a few years ago.

What worries me more out, Rob, is the attitude of the, what is still the hegemon, right? The US, despite all the talk of de-globalization and de-dollarization, the United States remains the hegemon in this world economically and militarily, that's fairly clear. And we went through a brief period with the new administration, where there was a lot of talk about the parallels between the Biden administration and the Roosevelt administration, and the hope that kind of similar mindset would be ... And including at the international level, clearly Biden had a much more of a multilateral spirit than the previous administration had, that's clear. But it doesn't seem to have lasted. And I think behind it and it's this very intangible quality that is critical, but difficult to pin down at both the national and the international level, which is the role of trust in any system.

All systems have their different interests, but if you have a system which has different interests and no trust, it's very difficult to get any degree of consensus and forward thinking in that system. And trust is being now hemorrhaged from the multilateral system. And the war is not the cause of that. I think it may well accelerate that in the way that you described, but behind that is the hemorrhaging of trust from particularly, the most powerful countries in the world. Trust is now a scarce fact in the advanced capitalist economies. And I think thinking about that problem of rebuilding trust in the leading market economies has to be central to any hope of being able to meet these challenges through collective action at the multilateral level. That is a difficult problem to think through, but it is a central issue in any progressive discourse that needs to be constructed.

Rob Johnson:

I was going to say, you [Kevin] and I live in the United States. When he talks about the deterioration of trust, we have people like Angus Deaton and Anne Case writing about the diseases of despair. We have a guy like Donald Trump getting elected for president by running around saying the system is rigged. I think he's right on target about one of the assets that is deteriorating in the United States.

Kevin Gallagher:

Yeah. It's absolutely true. And it's disheartening to see that in a democracy where we should be deliberating, but we're turning from deliberating to demonization. On a professional level, security and war is a bit above my pay grade, but I want to make sure we put Putin in a different category than China. And I think one silver lining is that China has provided some healthy competition to Western hegemony on these issues. The West, as hegemons, has not really acted, right? We failed in pulling together the world to adequately deal with the financial crisis and again, with COVID. And it wasn't until China put together the Belt Road Initiative and started building roads and infrastructure all over around the world where all of a sudden the World Bank and international institutions, and the West started saying, "Oh, gosh, we have to start paying attention to infrastructure."

And so now there's infrastructure financing going on at the World Bank and there's a whole global effort to try to do that. And sometimes this competition is getting increasingly unhealthy because the West is seeing it as a zero sum game, but not to deny that China has geopolitical motivations for all of their policy as do we. That's what career rate of the entire regime in 1944 and the larger they get, the more interest they have to protect around the world, but their global policy on their Belt Road Initiative is to help create interconnectivity and lay the foundations in terms of infrastructure for the 21st century. And just in March of 2021, they committed for that to be a low carbon Belt Road Initiative. They're no longer going to finance coal projects around the world, and they're shifting into wind and solar.

And so I see that as, the United States doesn't have a foreign policy like that, Europe doesn't have a foreign policy like that, Japan doesn't have a foreign policy like that. That's healthy competition that will help green these institutions. And I think that the hegemonic states at this point really face a choice, to bring us back to the trust conversation. We need to learn how to make these institutions more inclusive in terms of governments, other countries and the citizens in those countries, and we need to make them broader to deal with also issues of inequality and climate change. And if we don't, there are increasing alternatives where countries can go. If you don't like the projects that you might get from the World Bank, you can have China finance a wind farm in your country.

Argentina doesn't want to go to the International Monetary Fund because they keep making them privatize more and more and get rid of more and more government. So they went to China and got the largest solar power plant in Latin America. So I see the rise of the rest as Alice Amsden used to call it, a good, healthy, competitive signal to the world about how we need to be more accommodative and more inclusive and bring these issues right into the center.

Rob Johnson:

I think you're really talking about something that's very important in the dynamic. I just had a nice conversation with Kishore Mahbubani about 21st century Asia, a young lady named Joanna Chiu, who writes for the Toronto Star, who is from China originally. And they're both capable of being very critical of China, but it's not all good, all bad. Adair Turner who works closely with me here at INET, talks about how we've had a pleasant surprise because the cost of renewables, wind and solar have come down so much because of the public investment in R and D that's been done in China. So there's plus and minus columns in all of this and to demonize China is to miss some of the positive elements that you underscore.

Richard Kozul-Wright:

And there's an important lesson there, of course, for what we try and say in the book which is, the need. Again, part of the original model was, is this need to get back to public finance and public investment, international and domestic, which was the original intent of the Bretton Woods model. China is, essentially, a public finance, public investment model. One of our frustrations, even though we are critical in the book about some of the recent policy conditionalities and other practices of the multilateral institutions they're massively underfunded given the scale of the problems that they face and the mechanisms that they could mobilize to address those problems. We want to see more financing come through the multilateral financing institutions, whether that's at the international level or indeed at the regional level.

And with respect to the climate issue for example, there is a knee jerk reaction that somehow, only private finance can solve this problem. And whilst in any market economy, private finance has to have a critical role, this idea that public investment is somehow 20th century or mid-20th century as part of a policy paradigm is both deeply misleading. But ultimately, we'll make it increasingly difficult to deliver on the investment projects for mitigation and adaptation.

As the IPCC report, essentially, needs to be in place over the course of the next five years. The private financing, particularly the way it's currently constructed, is not going to deliver the projects we're talking about over the next five years. And so unless we get the public financing model right, get back to the role that development banks can play, public banks can play using sovereign wealth funds and other mechanisms. It's easy to take a fairly bleak view if you take the science seriously, of our abilities to meet these exacting targets that people now know we have to meet.

Rob Johnson:

Yes. There's a writer with the New York Times who I recently talked to, Peter Goodman, who's written his book, which is getting a lot of attention called Davos Man. But earlier than that, Peter and I talked about an article he wrote, which was called, I believe it was in the New York Times, late 2019, called, or early 2019, excuse me, We love the robots. And it was about the process of a society embracing transformation. In other words, what economists call the production possibility frontier improves with an innovation, but how you transit, who gets damaged, who are the losers, who are the winners? We used to get that parable when we were taking economics courses, free trade can make everyone better off and nobody worse off. But the asterisk on that comment is, you've got to do the transformational assistance.

I have friends from West Virginia now who are telling me, "Well, you grew up in Detroit, do you expect us to play along with this global public good and get trampled?" We need to work with China, but a whole lot of Americans who got trampled by globalization with no assistance, either from tech, machine learning and automation, or from globalization don't want any part of that, but that's not a failing of the possibilities. That's a failing of our political economy and the transformation that could have made everybody better off. And we have to start to see that, like we talked about, the pervasiveness of the side effects and how we choose a pathway that considers everyone.

It's almost as if people have to be given more power and money, less power where we might call votes, but it's very, very daunting to see how despondent and discouraged Americans are about the possibilities of global cooperation at exactly the time as your book underscores in many contexts is necessary. How do we start that rebuilding of that trust that you've been talking about?

Kevin Gallagher:

Well, our book is one very small effort to try to start a conversation to put some of this together. And what you're referring to is what a lot of us call a just transition and what we say in this book that we really need a just transition within borders and across borders. And the great experiment with free trade and globalization from 1980 to 2020, created an incredible amount of structural transformation and an incredible amount of wealth creation, but those that were left behind were just completely left behind. Like you said, the production possibilities expanded, they were Pareto efficient, but folks in Detroit, rural farmers in Mexico, industrialized workers in Brazil and in South Africa, these folks were not the winners, and there was no public insistence, no steering of private sector finance to help those entrepreneurs, those communities and those workers get the opportunities in the new sectors.

And we can't make that mistake that we made on globalization, the mistake that we make on structural transformation for reworking the global economy into a low carbon and more socially inclusive one. It is clear that the Polands and the Kentuckys and the South Africas and the Trinidad and Tobagos do not have those natural assets that they were able to export and create livelihoods for in the 20th century, those are going to be stranded assets into the 21st century. We can strand the assets, but not the people and not the entrepreneurs and not the communities. And that's an underscore or a role for global public institutions for the North-south component. If the Europeans are going to have a carbon border adjustment tax, well, part of that tax should go to finance transitions in places like Mozambique, that exports so much carbon intensive activity to the Europeans.

And just like in the United States, our economy will be much better off as we go low carbon, if you incorporate the externalities, but certainly, certain sectors, communities and workers are going to shrink, and we need to make sure that those folks are put at the front of the line that we're investing in those people in those places, so they can be part of the transformation, because what we've learned from globalization, you talk about the rise of right-wing populism and Donald Trump and all this global conflict, is that we see a lot of this rise of conflict as a symptom of not doing the globalization transformation right over the past 40 years. And we have to do it, and as the IPCC report tells us, we have to do it now.

Richard Kozul-Wright:

And we have done it before, Rob. One of the funny things about the China story is that, back in the 60s and 70s, the rise of countries like Japan and the East Asian NICs and the rising share of global trade was tremendously rapid. It's just that at that time, the response was not to become more introverted. It was to invest in alternative job opportunities for people in coal mines in the North of England or textile workers in New England, because you could generate better jobs for people than those kinds of jobs. But of course, it requires a capitalist class essentially, that is willing to take it's profits and reinvest those profits in job creating areas. And that's what happened to some extent in the 60s and into the 1970s.

In a world where huge chunks of profits are being used to buy back shares or to pay out large dividend payments, then that social role of investment is being eroded and the symptoms that we've seen, the pathologies of 21st century politics follow from that inability of the system to use the resource it has available, to create new opportunities for people that are moving out of declining industries. And in our story, those new opportunities have to be in a low carbon or carbon free economy. And the opportunities are there. We have some systemic problems though that make that virtual circle, I think, difficult to establish. But again, I would go back, at least getting back to a story in which the opportunities for public investment are given much greater room. Gets us back to some awkward questions about, do we need to nationalize the fossil fuel industries to be able to make the changes that Kevin talked about? This takes you into more politically uncomfortable territory.

But it's not that we haven't been here before. We have been here before and we did some things right then, we did some things wrong then I think learning those lessons as we move forward to meet these 21st century challenges, is at least in a small way, the intent of the book. And I think is a conversation that is urgently needed if we are going to address these problems.

Rob Johnson:

Yeah. I'm haunted at times, going back to your reference to the New Deal. There seem to be a time when, if you looked at public opinion polls, people on the far right, we would just say, worshiped markets and people on the left worshiped government. And what really haunted me is, during the Obama years, and by the way, I would always recommend David Sirota and Alex Gibney's new podcast called Meltdown about the deterioration of the country in the aftermath of not doing what that opportunity that crisis created. But what I saw in 2010 and 2011 was polls like the Gallup poll about belief in government. And what happened was, the people on the right still believed in the market, but the people on the left thought government was captured.

And the reason I raise that spectrum now, I have read a book, a year or so ago by Naomi Klein's older brother, Seth Klein called The Good War about the, essentially the analogy to a Canadian war preparation at the time of World War II. They entered the Allied side three years before the United States. And Seth talks about essentially, the need to do that, but a whole lot of very interesting people like Geoff Mann and Joel Wainwright and everybody said, "Whoa, whoa, whoa, whoa, whoa. We're in a place where people are so afraid government is captured. If we give them that power, will they actually do good or they'll continue in what you might call the rent extraction process?

And so inspiring the body politic of the need for the state and the pervasiveness of externalities public goods like we've been talking about, seems to me to be a formidable challenge because of the woundedness in recent years in the distrust of governance that has ensued. How do we overcome? You can sing, we shall overcome, but we got to have a hypothesis here. How do we get there? And I think, guys, I went to a conference recently that was a exploration of Dr. King's speech, Time to Break The Silence; Beyond Vietnam.

And you guys are like Dr. King, you're calling out the truth. He took quite a beating, New York Times, Washington Post, many of the affiliates that he had in the civil rights movement got mad at him, because he went after that when he talked about militarism, materialism and racism as the triad of poisons to our society. But I've watched you write a book, like his speech. You rose to the occasion, you brought this out. But how do we now evolve? Which you might call the north star you created. How do we create the spaceship to get us to that north star?

Kevin Gallagher:

Well, it's interesting that you say that you just read that, because if you look at page one in our book, we actually quote Dr. King and I should say on this podcast, a great graduate of Boston university here. If I could, I'd love to share that quote because we feel like that those words around the Vietnam War really ring true for the call that we're making today. He says, "We are now faced with the fact that tomorrow is today. We are confronted with the fierce urgency of the now. In this unfolding conundrum of life and history. There is such thing as being too late. This is no time for apathy or complacency, this is a time for vigorous and positive action." So we are re-echoing that same call that he made and saying, gosh, those words are even more resonant or just as resonant now, and especially if you bring climate change into this story and listen to what the IPCC just said. But how to do it?

We are researchers economists and think tanks. We're writing a book to try to have a global conversation, but in our last chapter, we evoke the words of another great person in history, John Kenneth Galbraith in his concept of countervailing power. One of the reasons why the Roosevelt administration and ensuing years moving forward was that there was coalitions of countervailing power, different kinds of actors that were able to negotiate with Capitol to be able to discipline Capitol and discipline the state. We think that the Capitol needs to be disciplined, the state needs to be disciplined, and these international institutions. We're not just saying pump more money into the government, into the International Monetary Fund it's going to change these problems. Is that well, there needs to be countervailing power.

And we see it in a lot of different places. I already mentioned that China is a healthy form of global competition on some of these issues. The different movements, we see Amazon organizing for unions in the United States we see the Green New Deal movement in the United States, we see the fact that the European Union has legislated net zero and has legislation that they're deliberating about just transitions. Those are the kinds of countervailing power that you can see in the North. And what's inspiring now in the South, especially in the midst of Russia's war in Ukraine is the reemergence of a non-aligned movement. A reemergence of a number of countries around the world, that of course are going to condemn the obstruction of the sovereignty of an individual nation. But they're not going along with the sanctions and they want something to be done with the global economic ramifications.

The fact that oil prices and wheat and grain prices are skyrocketing when before the invasion of Ukraine in January, well, the World Bank sounded the alarm and said that just the interest rate rises in the United States might put 60 countries that are in debt distress over the cliff into a debt crisis. And we already saw Sri Lanka step over that. Now with the spikes in grain and oil, that debt issue is even an even bigger one. And if we have a debt crisis like we had in the past, that again hurts everybody here wherever you are in the world.

Richard Kozul-Wright:

Yeah. And for us building coalitions amongst developing countries is critical to rebalancing the international orders. And we have to be honest, it's what we lack at the moment say compared with the 1970s, when we got the initiative to try and create a new international economic order that developing countries pursued through the United Nations. But as Kevin said, there are clearly signs of change. And just to follow up on Kevin's point, I think there is a growing recognition that we cannot make the kinds of investments that we need to make to deal with the climate and other problems given the burden of debt that many developing countries now operate under. It just doesn't add up.

And I think there is slowly a move to fill this gap within the multilateral order of mechanisms that can properly handle the debt problem. And Martín Guzmán, as I think you know, the finance minister of Argentina, Rob, has always said, we have a system that always delivers too little too late. And countries, even if they go through some restructuring, often find themselves back in the same position, four or five years later. Not necessary through any corruption or incompetence on their part, but simply because outside pressures just force them back into a corner.

And I think there is a real serious conversation now building to think more creatively about the need to handle an issue like that. Which is, it's going to be the big issue for the next three or four years in the developing world in a much more effective way than we have. There's the famous aphorism of Bertolt Brecht, because things are the way they are, things will not stay the way they are. And I think that at this moment in time, I think that's a particularly appropriate degree of optimism for thinking about the challenges ahead that we face.

Rob Johnson:

Well, Kevin, I'm smiling when you reminded me of Dr. King being at Boston University. In part because the person that I am most immersed in reading for my own education, my own evolution right now was his mentor, a man named Howard Thurman. Books like The Luminous Darkness, are extraordinary. And this is a man, when he was trying to figure out early in the 20th century, how to be effective, he got himself sent to India to meet Gandhi and explore how to be what you might call fierce and inspire trust or alleviate fear at the same time. And he is a very, very profound influence on Dr. King.

When I was at this conference a few days ago, Dr. King's youngest child, Bernice King was one of the speakers at the end, and she and the other panelists, Andrew Bacevich from the Quincy Foundation, a former military official and others were really quite powerful. And I started thinking about the question of how fear is really the obstacle in the way of what we need to do. Your book as a north star, gives us a destination. We know where the voyage has to go through the clarity and the insight and the profoundness of your argument, but to alleviate fear, as we've talked about, we also have to bring the trust together. We have to have action. We have to see people doing things that deliver results.

But I think the alleviation of fear was very profoundly in the mind of Dr. King in his writings. And at this conference, they closed with a song and the name of the song by a man named Brian Courtney Wilson is, Fear Is Not Welcome. And in the beginning of the song, I'll read you the lyrics, "Let me begin and confess, I need Your healing. I made a friend of the fear that I have been feeling. And I believed the lies it spoke that led me into doubts, but I'm calling on Your angels army now." And then the chorus. "Fear is not welcome. Fear is not welcome. Fear is not welcome in my heart anymore. I'm casting it away by the power of Your name. Fear is not welcome in my heart anymore."

I believe that the two of you have made a contribution. I'll just speak personally to reducing my fear, because you're rising to the challenge, and as I call it a North Star, you're creating a vision and we've got to get to the place where our government officials recognizing the structure of this global world, the pervasiveness of externalities and probably goods is such that they should be embarrassed if they don't follow your roadmap, they should suffer embarrassment. Not just public embarrass, but as custodians for their own children, for the societies that they govern, if they don't start to see the light that, how would I say it? You have helped create.

So, first of all, I want to congratulate you. Secondly, I want to remind my young scholars of what kind of an example for their career development. That's a pathway where you are also guides is they can see you grasping the challenge, the purpose, stepping out of line with the courage to go after this. And so I thank you both. Any final thoughts?

Kevin Gallagher:

How could you follow those great words? Thanks so much for having us on and thanks for letting us have this conversation with you and all of your audience.

Rob Johnson:

Richard.

Richard Kozul-Wright:

Yeah. And let me second that, Rob. It's always a pleasure, of course, to talk to you. And those are, I think very optimistic words, as well as calling people to account, to some extent, I think is part of your story.

Rob Johnson:

Well, Dr. King knew he had to call things out and bear the burden of resistance from power as a prelude to success. Calling things out is the first, envisioning the destination, and then marshaling the trust and the alleviation of fear getting there, that's the playbook I see. And you've made a very, very fine contribution and I look forward to the next chapter, because me and my audience will all follow you closely in light of what you've created. Thanks for today.

Kevin Gallagher:

Thanks for having us.

Richard Kozul-Wright:

Thanks a lot. Thank you.

Rob Johnson:

Bye-bye. And check out more from the Institute for New Economic Thinking @ineteconomics.org.


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