Greed and unbridled competition will solve the world’s ills, suggested Razeen Sally, a director of the European Centre of International Political Economy and a faculty member of the London School of Economics.
It’s not often that a Business Times opinion editorial makes me angry, but this column penned by him and carried in the 8 March 2011 edition of the newspaper, made up for lost time.
I think he got it the other way round. In my view, it is greed and unbridled competition at the expense of economic morality that has created the global mess we are in.
No doubt, I am not an economist, and certainly not a star economist like him, but it is precisely because I am not an economist that I can see the importance of factoring morality into the equation. We are not just economic digits, and human societies are not just engines for creating output. There are equally important considerations like happiness, well-being and social justice. And — call it a quasi-religious dimension, if you wish — the question of dignity for every single person.
His essay (archived here), titled ‘Restore economic liberalism – fast’, comes with a battle-cry: The social-engineering stormtroopers of 21st century illiberalism creating mayhem must be halted in their tracks.
Who are these stormtroopers? They are governments (and thinkers behind them) who have done or are planning to do three broad things: (1) urgent action to mitigate the economic and social effects of the 2007/2008 financial meltdown, running up budget deficits if necessary, (2) new rules to regulate large financial institutions more closely in future, and (3) correcting for market failures such as providing/encouraging housing for the low-income, creating a national healthcare framework and taking measures to counteract global warming.
Sally virtually blames interventionist governments for creating the financial crisis by distorting what he imagined was the pure, competitive free market prior to 2007/2008. He thinks that the lesson to be learnt from the crisis is not more regulation, but to shrink the role of government greatly.
A huge red herring is wrapped in the newsprint that carried his article. In arguing against an active social role for governments, he wrote: “Governments are assumed to have the knowledge, ability and honesty to manipulate macroeconomic aggregates, fix market failures and coordinate policies globally. . . . It panders to the belief that superior minds can solve complex social and economic problems with targeted interventions.”
He is too quick to dismiss state action as solution. It’s not so simple and governments are not so bad. Governments sometimes succeed, sometimes fail. Most often, they achieve some partial success towards social objectives, with unanticipated side effects that they have to keep working on. But what’s the alternative? Either Sally believes that market failures don’t happen and therefore there should never be a need for governments to intervene — a point of view that takes such leave of reality, it borders on religious fanaticism — or that they do happen, but nobody, not even governments, should do anything to try to correct for them. This was where my sense of morality was outraged.
In human society, social objectives are as important as economic ones. Ask around and most people will say happiness is more important than wealth. Happiness cannot be achieved without collective attention to issues of security, dignity and justice. Does one seriously expect that unbridled capitalism will deliver these?
And yet, that is what Sally appears to be praising. This excerpt is more myth than sense:
Macroeconomic stability and liberalisation of product and factor markets were the signal features of the Reagan revolution in the US, the Thatcher revolution in the UK and the Single Market revolution in the EU. They delivered growth, globalisation and prosperity.
New distortions to competition are bound to compromise prospects for recovery and reglobalisation. These are likely to be the medium-term consequences of short-term ‘crisis interventions’.
Third, the crisis gave a fillip to calls for stronger global governance. This gives succour to those who are instinctively sceptical of markets and favour collectivist, command-economy- type solutions.
The laudatory mention of Ronald Reagan was particularly ironic, since Sally in his article had demanded that governments keep to balanced budgets. During the term of this president (1980 – 1988) the US federal debt increased by US$1.860 trillion (Source: http://zfacts.com/p/318.html). As a percentage of the US gross domestic product, the federal debt was 32.5% of GDP at the start of his term and 53.1% eight years later when he left office (Source: http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms).
The chief thrust of Sally’s article was that we should go back to the simpler times of 1970 – 2000 when governments scaled back on social objectives and focussed on opening markets, allowing companies to go global. The increased attention to state intervention post-2007, in his view, will prove a disastrous U-turn.
Yet, if one looks past the myths, some very troubling facts come into focus.
Another academic and former US Secretary of Labour (under Bill Clinton), Robert Reich, has shown from his early research that
in 1960, the chief executive of one of America’s 100 largest nonfinancial corporations earned, on average, $190,000, or about forty times the wages of his . . . . average factory worker. After taxes, the chief executive earned twelve times the factory worker’s wages. By 1990, the chief executive earned, on average, more than $2 million, not even including stock options that hadn’t yet paid out — a sum equal to ninety-five times the wage of his average factory worker. The regressive shift in the tax burden during the Reagan-Bush years has made the disparity even more absurd. After taxes, the 1990 chief executive’s compensation was seventy times that of the average factory worker.
(Source: Suite greed by Robert Reich, 1 January 1992, http://www.prospect.org/cs/articles?article=suite_greed)
I recall reading a more recent article by Reich in which he presented updated figures that showed the disparity between CEO pay and the average worker’s salary leaping several multiples since 1990. I vaguely recall a figure indicating that today’s CEO is paid close to or even more than a thousand times what the average worker is paid, but alas, I cannot find that source now for this post.
Or maybe I remembered wrongly, because what I did find sounds even worse:
From 1950 to 1975, the 30,000 richest Americans made $36 for every dollar earned by the bottom 90%. From 1981 to 2005, the 30,000 richest Americans made $141,000 for every dollar earned by the bottom 90%.
(Source: Where have you gone, Gordon Gecko? Oh right, you’re still here. By Paul Buchheit. http://www.stateofnature.org/whereHaveYouGone.html. Prior cited source: David Cay Johnston, Free Lunch (Portfolio, Penguin, 2007).)
Through globalisation, these forces were exported to many other countries. Today, similar gaps are becoming commonplace elsewhere.
As an aside, let me just mention the case of surgeon Susan Lim which many Singaporeans would have read about in the press. She billed a member of the Brunei royal family millions of dollars for her services. Many of her invoices were mark-ups for services actually performed by other doctors. I’m in no position to say what a fair rate should be, but what has been noticeable to me is that no one in the medical profession (as far as I know) has spoken up to say her charges were unusual. Even those doctors who rendered services and for which Susan Lim marked up by many multiples (for her own benefit) stood by her. One can hardly avoid the suspicion that the entire profession (at least in the private sector) fail to see anything morally questionable about such quantums.
It is mind-boggling that there is a whole body of opinion, possibly represented by Sally’s article, that sees nothing wrong with such income disparities, and worse: that continue to assert that governments should not attempt to intervene to correct or compensate for these results of extreme capitalism.
Surely the failure is not that governments are doing too much, but that they are doing too little or they are too ineffectual? Am I the only one seeing things this way?
One of the most memorable insights I took away from Jacques Attali’s lecture this January when he was in Singapore was this: the age of globalisation has created corporations and a marketplace bigger than governments, whose remit is limited by national borders. Corporations and the wealthy are able to escape or minimise taxation and regulation by choosing where to operate or domicile themselves. In response, governments had to pile on the sweeteners over the last few decades, by lowering tax rates, and — although I don’t remember Attali saying it, I’m sure it would only be obvious from the historical facts — crafting regulations that are ever-more corporation- and millionaire-friendly.
The solution, according to Attali — and it is one that you could hardly reject if you agree with his diagnosis — must be for governments to get together and coordinate their actions. They should not be in a race to the bottom. It is only through coordinated governmental action that financial crises and market failures on a global scale (e.g. global warming) can be tackled.
To that I would add that governments have to find the courage to deal more aggressively with domestic social objectives too, e.g. housing and income.
Another aside: China will spend more than 1.3 trillion yuan to build or renovate 10 million apartments for low-income households this year. Over the five-year plan 2011-2015, the aim is to build 36 million low-cost apartments. Beijing is also introducing a new rule that 70 percent of land available for housing must be devoted to low-cost housing. These interventionist moves are to counter the tendency of property developers to cater only for the wealthy, and to assuage rising anger among the people.
Razeen Sally is highly suspicious of inter-governmental coordination, rejoicing that so far, leaders have not been too successful at what he called “global-governance wishful thinking”. Clearly he would frown at Beijing intervening in housing supply, just as he condemned the US government for its housing policies. And he would not have governments managing exchange rates no matter what havoc they wreak, or have “global designs” on dealing with climate change.
If this school of thought reigns supreme for much longer and infects governance ideas in many other countries, the social horrors we will witness in a generation will be such that another round of socialism might not seem such a bad thing.