Category: China

Categories
China Economics Financial Crisis History

The Reagan Revolution (cont.)

[digg-reddit-me]I’ve gotten a bit of feedback/blowback about having simplified what went on the in 1980s that led to the indisputable higher levels of income disparity, the concentration of wealth, the decimation of manufacturing, and the rise of finance. This wasn’t about Ronald Reagan and his neoliberal policies – it is claimed – but about basic economic forces. I tried to take that into account by pointing out that Reagan was only accelerating the trends that started in the 1970s – but let me go further now.

Another major factor that aided these trends was not entirely within Reagan’s control. As John Judis explained in The New Republic, in the 1980s:

…Japan was threatened by a cheaper dollar. To keep exports high, Japan intentionally held down the yen’s value by carefully controlling the disposition of the dollars it reaped from its trade surplus with the United States. Instead of using these to purchase goods or to invest in the Japanese economy or to exchange for yen, it began to recycle them back to the United States by purchasing companies, real estate, and, above all, Treasury debt…

With Japan’s purchases, the United States would not have to keep interest rates high in order to attract buyers to Treasury securities, and it wouldn’t have to raise taxes in order to reduce the deficit…[That] informal bargain…became the cornerstone of a new international economic arrangement…

Judis goes on to explain how this arrangement evolved through the 1990s:

Asian countries, led by China, adopted a version of Japan’s strategy for export-led growth… They maintained trade surpluses with the United States; and, instead of exchanging their dollars for their own currencies or investing them internally, they, like the Japanese, recycled them into T-bills and other dollar-denominated assets. This kept the value of their currencies low in relation to the dollar and perpetuated the trade surplus by which they acquired the dollars in the first place…

Until recently, there have been clear upsides to this bargain for the United States: the avoidance of tax increases, growing wealth at the top of the income ladder, and preservation of the dollar as the international currency…

[The current financial system] is sustained by specific national policies. The United States has acquiesced in large trade deficits – and their effect on the U.S. workforce – in exchange for foreign funding of our budget deficits. And Asia has accepted a lower standard of living in exchange for export-led growth and a lower risk of currency crises.

This financial arrangment was not created by Ronald Reagan – but he did acquiese to it – and spent America into a level of indebtedness it had not been in since World War II. This arrangment would not be consistent with a ideological neoliberalism that was discussed before – but this arrangment, most importantly, did benefit many of those who were vocal proponents of neoliberalism. 

The revolutions of the 1980s then, was not merely the result of a political movement within America – not anymore than the revolutions of the 1960s were. There were international factors that helped along both domestic movements. The combination of this special relationship with Japan – and later China and other Asian countries – with the neoliberal revolution of Ronald Reagan – led to a concentration of wealth and power within a small class of people rarely seen in a developed country. As Paul Krugman observed:

It’s important to know that no other advanced economy has seen a comparable surge in inequality – even the rising inequality of Thatcherite Britain was a faint echo of trends here.

Combined with the neoliberal principle, as described by Stanley Fish, that “Short-term transactions-for-profit [are better than] long-term planning designed to produce a more just and equitable society,” it becomes more clear how we ended up in this enormous financial mess. 

Take away the regulations; encourage short-term profits; reduce taxes; trim the social safety net; “starve the beast” by spending without taxing; and then supercharge the economy with constant stimulus spending (which is what “starve the beast” is) and easy debt from China and Japan. What you get from this is not only a revolution that undermines the American way of life in the mid-term – as wealth is concentrated and middle class and manufacturing jobs dry up – but an unsustainable economy that is going to collapse, and collapse hard. 

In other words, you get what we have now.

Today, we are reaping the effects of the generational bargain at the heart of the Reagan presidency.

Categories
China Economics Financial Crisis Politics

Stimulus and Stability

[digg-reddit-me]This Wall Street Journal article by Bob Davis accompanied by this graph to the right illustrates just how far from world opinion the Republican right is in it’s rejection of stimulus spending. This is not necessarily a bad thing – but it should give pause to those who are defending the fiscal austerity Republicans are proposing in the middle of this crisis. This issue is not considered a partisan issue for most of the world – and it is mainly Republicans in power today who see stimulus spending during a sharp downturn as something “liberal” or controversial.

David Brooks’s expressed his fair-minded exasperation this Sunday – as he pronounced the idea of the Republican-proposed government spending freeze “insane.” 

The International Monetary Fund – not normally known as a squishy, leftish organization as it promoted free trade and capitalism around the globe – is in favor of large stimulus packages:

The IMF has been urging nations to increase fiscal stimulus by at least 2% of gross domestic product to boost growth. Of the G-20 nations, only the U.S., Spain, Saudi Arabia, China and Australia are expected to reach that goal in 2009, according to the IMF.

More importantly, and more interesting then discrediting an almost powerless political party, is to notice that there seems to be some sort of inverse relationship between a society’s social safety net and the amount of stimulus spending they are proposing. 

This makes sense on a number of levels. Automatic stabilizers which should take some of the pressure off a need for a stimulus are not included here. On another level, these nations without a strong safety net must rely more heavily on economic growth for societal stability. 

If this is true, China and America would be more reliant on constant economic growth to relieve social and political pressure and would be more likely to have larger stimulus packages. France and Germany with stronger safety nets would feel more insulated and be less likely to push for large stimulus packages. This is exactly how this matter is playing out on the world stage today – with some exceptions due to political leadership. 

But both states with strong social safety nets and those without them are dependent on growth over time. But those states without strong safety nets feel the economic bumps more strongly – and downturns end up being more disruptive.

Categories
China Financial Crisis Foreign Policy Politics The Opinionsphere

Signs of the Coming Upheaval

Andrew Ross Sorkin and Mary Williams Walsh in the New York Times:

The loss that A.I.G. is preparing to report on Monday would be the largest ever by any company in a single quarter.

Tom Friedman quoting Ian Bremmer:

“As we look at 2009, on every issue, with the single exception of Iraq, everything is worse…Pakistan is worse. Afghanistan is worse. Russia is worse. Emerging markets are worse. Everything big out there is worse, and some will be made even worse by the economic crisis.”

There is a geopolitical storm coming, concluded Bremmer, “and it is not priced into the market yet.”

Tim Bowler of the BBC reports:

The biggest challenge facing China is not slowing growth but unemployment, which could trigger social unrest, a Chinese government minister has said.

Categories
Barack Obama China Economics Financial Crisis Foreign Policy The Bush Legacy The Opinionsphere

Dubya’s China Legacy

Isabel Hilton in The Guardian:

George W Bush’s presidency…was a pleasure for Beijing to deal with: it distracted itself with two unwinnable wars, leaving China to expand its influence, quietly contrasting Beijing’s peaceful international profile with the US’s embattled one. By playing the bad boy in international climate politics, the Bush administration eased the pressure on China to do more about its own soaring emissions. And in the most active and important aspect of Bush’s China policy, the strategic economic dialogue, set up in 2006 to strengthen ties, the US depended on China first to soak up US debt and then to help manage the consequences of the crisis.

Categories
China Economics Financial Crisis Political Philosophy

Stimulus Is What We Need

[digg-reddit-me]It is commonly stated that China’s ruling power has struck a kind of bargain with it’s people – that they will accept the one-party rule and other political restrictions – as long as the government is able to keep the standard of living rising. Orville Schell, Dean of the Graduate School of Journalism at the University of California at Berkeley and author of several books on China, gives a typical explanation:

…it would not be excessive to say that everything – economic health, social stability, political reform, environmental modernization, etc. – all depend on China’s economy maintaining at least a 6 percent to 7 percent growth rate. This is something that most market economies cannot do in perpetuity given the nature of cyclical growth cycles.

When this topic is brought up in foreign policy discussions, it is often understood as a uniquely Chinese problem – this bargain between the people and the state that they will accept an authoritarian government in return for a growing economy. But a government’s dependence  on its ability to increase opportunities for its people for its legitimacy is not a uniquely Chinese problem. The Chinese government may only be able to survive as long as it continues to provide economic growth to it’s citizens, but how different is this bargain the Chinese people have made with their government from the bargain the America people have with ours? As long as American citizens have their basic needs met and a reasonable opportunity to succeed, they will accept a polarized distribution of wealth, corruption of various sorts, and sundry other injustices. And as long as the Chinese citizens are moving towards having their basic needs met and have a reasonable opportunity to succeed, they will accept a single-party state, restrictions on freedom of speech and assembly, and other restrictions.

Any state’s constitutional structure is legitimated by whether it provides for the needs of it’s people. In another age, the state merely provided security against hostile invasions and criminals; later, it provided an identity as well; by the middle of the 20th century, a state was legitimated by the extent to which it could provide for the basic needs of it’s citizens. The Cold War was, to a large degree, a competition between the capitalist states and the Communists states to see which could provide more ably for the needs of it’s citizens. Today, the state is evolving from providing for the needs of it’s citizens to providing opportunities for it’s citizens. The basic problems of sufficient housing, food, clothes, and other necessities are able to be met with our global prosperity. ((Clearly, the problems associated with deficiences in these areas aren’t gone. But technologically, we have solved them. The problems remaining are systematic – how to satisfy the needs of those who don’t have access to the excess prosperity of the developed world.))

This evolution of our state into a market-state can best be seen by looking at the long-term trends in politics, shaping both the left and the right – as politiciains, with their ears constantly attuned to changing expectations, have sensed this evolution before most. Looking from Carter to Clinton to Obama, we can see how each has progressively embraced a different sort of liberalism – each less focused on a government providing services and more focused on government providing opporunity. Carter was a traditional big state Great Society liberal; Clinton favored free trade, ending welfare, and reining in the deficit; Obama’s liberalism accepts a number of libertarian premises and seeks as it’s goal the maximization of opportunity – as his health care reform plan, for example wouldn’t force people to join any particular program while offering a stable base for a necessary service that often causes people to remain in jobs they would not otherwise. A similar evolution can be seen in Nixon to Reagan to Bush – as Nixon favored big government programs; Reagan attacked big government; Bush focused on creating an ownership society among other reforms. Even when misguided – as for example his Social Security proposal – it was focused on offering greater opportunity.

James Glassman speaks for many doctrinaire anti-government conservatives when he suggests we allow our economy to contract – as eventually, it will reach bottom and bounce back. Stimulus – he says – is the wrong metaphor:

“We’re going to have to jump start this economy with my economic recovery plan,” [Obama] said on January 3. According to the image, one can jolt a dormant economy into action just as one can hook up polarized cables to a car battery, clamp a defibrillator to the chest, or breathe into the ear of a reluctant lover. Suddenly, the object of our attention will be back in action, aroused…

In fact, stimulus may be precisely the wrong metaphor. Rather than getting jazzed up, we need to be calmed down and to take the time to learn from the Great Depression, a time when government did too much, not too little.

Putting aside the non-consensus historical take on government action in the Great Depression (discussed here), Glassman misses the point our political leaders do not: our societal order is premised on the idea of continuous growth. A growing economy in a market state is like a beating heart – without it, we cannot survive. Perhaps a more apt metaphor is a business not making a payroll – the company can’t continue if it’s employees don’t get paid. The employees will no longer consent to subject to their employer’s authority – and the company will dissolve. When the nation-states of the early 20th century were not able to legitimate their structure by providing for the basic needs of their citizens, radicalism, revolution, and war ensued as the old order broke down and fascism and Communism took it’s place. Today, if market-states are unable to provide opportunity their citizens, they will not survive going forward. 

Our politicians and the elites sense this – which creates the manic desire to arrest this free fall and start our economy moving forward again – before it’s too late.