Saturday, July 26, 2014

"How to Ruin an Economy; Some Simple Ways"

Filmed and edited by Leigha Cohen

(Noam Chomsky spoke at Third Boston Symposium on Economics on February 10th 2014, sponsored by the Northeastern University Economics Society in Boston, MA.)

Let’s suppose that for some perverse reason, we’re interested in ruining an economy and  a society. So, to make the problem interesting, we should select a difficult case, I’ll say not a Central African Republic where it could be done very easily. So let’s pick a rich and powerful society. And best of all, let’s select the richest and most powerful society in history, one with incomparable advantages, one that’s fortunately close at hands, namely, our own.

So, a good way to start to ask what would be signs of a successful economy. Well, to begin with, it should have a people who are eager to work, plenty of badly needed work, that should be done, and ample resources to combine idle hands with needed work. And that picture helps us sketch what a failed economy would look like, the opposite in all respects. And we don’t have to look very far. Right here, there are tens of millions of people eager to work but with no jobs. Many of them have simply dropped out of the work force in despair. There are ample resources to provide employment but they are hidden away where they cannot be accessed in the overflowing pockets of the super rich and corporate sector, in particular, big banks which have been generously rewarded for having created the crises serious enough to have almost brought down the domestic and even the global economy. There are vast amounts of work to be done. The infrastructures collapsing; schools badly need repairs and teachers, the transportation, energy systems have to be radically reconstructed. And there’s a great deal of more ranging from construction work to scientific research.

But the system is so dysfunctional that it cannot put eager hands to needed work, using the resources that would be readily available if the economy were designed to serve human needs rather than wealth beyond the dreams of avarice for a privileged few.

It’s actually hard to think of a more serious indictment of a socio economic system. Well, as you all know, the dysfunctional economy has been accompanied by very highly concentrated wealth and with it, of course, political power follows at once from concentrated wealth that, in turn, yields legislation that drives the cycle forward. Inequality has reached historic heights. In the past decade, 95% of growth has gone to 1% of the population, actually, to a small proportion of those. Meanwhile the general population has faced stagnation or decline. Median real income in the United States is below its level in 1989. For male’s median real income is below what it was in 1968. The labor share of output has fallen to its lowest levels since World War Two. And poorer sectors have suffered severely. The United States has the highest poverty rate in the OECD aside from Turkey. That’s perhaps not too surprising because the US also ranks near the bottom in measures of social justice in the OECD.

For African Americans, household wealth has virtually disappeared during the latest crisis. We should recognize that the grim legacy of slavery which is one of the original sins of American society along with the virtual elimination of the indigenous population. That legacy has never been overcome. There was some amelioration, but not much.

These things didn’t just happen like a tornado. They are the results of quite deliberate policies over roughly the past generation, the period of the neoliberal, so-called, assault on population which has had similar effects elsewhere as well. That’s hardly surprising, either.
The fundamental doctrine of neoliberalism was well expressed by Adam Smith. What he called “the vile maxim of the masters of mankind.” All for ourselves and nothing for other people. And if the masters are given free reign, we should expect the kinds of social and economic disaster that we now see before our eyes.

Well, there are alternatives. Nobel laureate economist Joseph Stiglitz points out that “there are alternatives. But we will not find them in the self-satisfied complacency of the elites, whose incomes and stock portfolios are once again soaring. Only some people, it seems, must adjust to a permanently lower standard of living. Unfortunately, those people happen to be most people.” In short, the vile maxim at work. These developments should not be confused with idealized workings of capitalism and free markets. On the other hand, quite the contrary, the policies are carefully designed to protect the masters from market discipline. That’s always been true back to the 18th century and to ensure that they can rely on beneficence of the powerful nanny state that they carefully nurtured for their benefit.

But let’s continue the exercises of figuring out how to ruin an economy. Suppose we are intent on making the scandal even worse. There are some good ways to proceed. So, modern economies depend very heavily on R&D, research and development. Fundamental work comes primarily from the dynamic state sector on which the advanced economy heavily relies. Almost most of the IT revolution, biology-based industries and much else. Actually that’s a pattern that traces far back but it’ s become much more critical since the Second World War, as impact of science and technology on the society and economy have greatly expanded.

So, a good way to ruin an economy and a society would be to cut back on R&D and federal R&D. And we can read about how that is done from the first issue of the triple-A journal, the American Association for the Advancement of Science journal, Science the first issue in 2014. Here’s what it says. “The 2014 budget will continue what has been a “decades-long slide in the ratio of federal R&D budget to the GDP.” This ratio is often used as a measure of how much a nation values basic research. This ratio, which has fallen 25% in the last decade alone. And that’s continuing.”

In the meantime, elsewhere internationally, investment in science is rising as nations throughout the world connect investment in R&D to the development of their human capital and their future prosperity. For example, the European Union’s flagship research program, Horizon 2020, is set to receive a nearly 30% boost in 2014. The Chinese government’s investment in R&D has been increasing by percentages in the double digits for the last several years and is poised to become the world leader.”

You can draw the consequences without any comment. What’s happening here is a very natural development of the imposition of the business model of seeking short term profit. The future and society, they’re someone else’s business.

Another way to undermine a healthy economy is to encourage the growth of financial institutions. Giving them free reign by deregulation and using state power to underprice risk. These are crucial features of the neoliberal era. From the 1970s and accelerating since, there’s been enormous expansion of the financial sector in economy. By 2007, right before the latest crush, it had reached about 40% of corporate profits. Well, economic growth has continued during this period, though not at the earlier pace. But it’s rather artificial. It’s sustained by repeated bubbles. The each decade had its bubbles, savings loan bubble under Reagan, the tech bubble in the late Clinton years and of course, the housing bubble under Bush. When the last of these boosts created a financial crisis, it has had severe consequences for much of global economy and near depression conditions persist for much of the domestic population. The cost of the latest housing bubble itself, in loss output, was estimated by the Congressional Budget Office to be around $20 trillion. That’s largely the fault of the FED, which was mesmerized by quasi-religious doctrines about efficient markets, and therefore could not comprehend what was very obviously happening right before their eyes as housing rate rose far beyond trend lines, going back a hundred years and the bubble that could have been predicted wasn’t.

Well, the primary mechanism for rewarding the agents of crises is the government insurance policy known informally as “too big to fail.” That guarantee goes far beyond the direct bailouts that it extends to cheap credit, artificially high credit ratings and many other devices. And the scale is huge. There’s recent IMF study which found that virtually the entire profit of the major banks traces to tacit government insurance, reaches the level of $83 billion a year according to analyses in the business press, the Bloomburg News. The insurance policy, of course, leads to underpricing of the risk. Hence, making the next crisis is more likely.

After the most recent crisis, several prominent economists, including Nobel Laureates, raised the question of the general impact of financial institutions in the Casino economy of the neoliberal period. And they also pointed out that it had not been much studied by economists. They suggest that inquiry would show that these institutions might be harmful to the economy. There are some who have gone much farther. So, perhaps the most respected financial correspondents in the English speaking world is Martin Wolf of the London Financial Times. He concludes that “an out-of-control financial sector is eating out the modern market economy from inside, just as the larva of the spider wasp eats out the host in which it has been laid.”

Well, as in other developed societies, the economy, the US economy—it’s actually state capitalist economy—but it’s partially market-based and markets have both positive and negative features. So, that tells another good way to ruin an economy and a society: undermine the positive features and amplify the negative features. And in fact, huge resources are devoted to these tasks. The great benefit of markets is that they’re supposed to provide consumer choice. It’s only partially true even in principle but put that aside. This beneficial consequence results from informed consumers making rational choices as you learned in your economic courses. That’s the core principle of the markets.

And as you all know, there’s an enormous industry which is devoted for undermining this principle by creating uninformed consumers who will make irrational choices. That’s known as the advertising industry. In a functioning market economy, ads would provide information to consumers about the products that are available. All you have to do is turn on the TV set to see the goal is exactly the opposite. It is to undermine markets by delusion and manipulation making sure that there are uninformed consumers who will make irrational choices.

And in part, these efforts reflect another tendency that undermines markets, that’s the rise of oligarpoly which has actually advanced considerably in recent years. That offers opportunities to avoid price wars by tacit collusion that shifts the goals of business to product differentiation which is often quite meaningless. And it requires massive advertising to delude consumers. From en economic point of view, that’s mostly waste and that’s enormous in scale. Well, these are among the ways to undermine the positive features of markets.

There’s negative features of markets intrinsic to them called market efficiency. That’s ignoring externalities. So, when a firm makes a risky transaction, if it’s paying attention, it takes care to cover its own risk. But it does not consider systemic risk. That is the risk that the loss will effect others and maybe bring down the market as, say, when AIG insurers collapsed, tanking the economy, or actually it would have tanked the economy, if the nanny state hadn’t ridden to the rescue. Here, the government insurance policy plays a crucial role in amplifying a harmful feature of markets. 

Actually, there’s a much more serious case of ignoring externalities, namely distraction of the commons. There’s a standard notion which you have heard called the tragedy of the Commons, which is supposed to mean that if the commons are held by the general public, they will be destroyed. So, therefore they have to be privatized. Actually if you take a look at the facts, the opposite is usually true. It’s privatizing that destroys the commons and for good reasons.

We should be aware of that today, the most significant case of destroying the commons is environmental catastrophe. Informed and rational people can hardly ignore the fact that the drive for short term profits is leading directly to severe economic threats. And imminent ones are within the next generation or two, but that’s another externality that is ignored. And in this case, there’s no one around who can bail out the perpetrators. They can’t run, cap in hand, to the nanny state and say bail me out. Or the future generations whose chances of decent survival, they’re placing it at great risk.

Well, a future historian, there may not be one in fact, but if there is one, such a historian will look back on the current scene with some amazement. There are some who are trying to impede the threat of environmental catastrophe. There are others who are devoted to accelerating it. Who are they? Well, in the forefront of the struggle to overcome the threat are those we call primitive. The first nations in Canada, indigenous people in Latin America, aboriginals in Australia, tribal communities in India and their counterparts all over the world. And the leading the latest disaster are the richest and most powerful countries in the world, the ones that have unique advantages, primarily the United States and Canada. Canada, in particular, has become the scrooge in the world with its activities ranging from tar sands to mining activities that are destroying much of the world. These are countries with unique advantages and they’re in the lead to the race to destruction.

The suicidal drive is conducted with considerably euphoria in what’s called the century of energy independence in which North America becomes the Saudi Arabia of the 21st century. The excitement is scarcely tainted by reflection on what the world would look like as fossil fuels are consumed with unrestrained exuberance. There’s even gloating of the fact that Europe is reducing its efforts to move toward sustainable energy. Reason? It can’t compete with U.S production based on the cheaper energy that is destroying the world and a society.

The corporate sector has announced quite openly that it’s carrying out major propaganda campaigns to convince the public that climate change, if it’s happening at all, does not result from human activity. These efforts are aimed at overcoming the excessive rationality of the public which continues to be concerned about the threats that scientists overwhelmingly regard as near certain and quite ominous. All of that makes sense, under prevailing ideology and prevailing institutional structure which is directed towards pursuing the viral maxim of the masters of mankind. And in this case, it goes well beyond ruining an economy.