The recent crop of stimulus packages presents us with a once-in-a-lifetime opportunity to compare economic strategies. The sums involved are staggering. How will we feel when we look back on this period in 10 years? Will we wish we had all adopted Thailand’s “trickle up” model, giving money straight to those who need it most? Or will we wish we had followed the US example, covering as many bases as possible? The European Union is turning the crisis into an opportunity, and taking significant steps towards a greener world. And then there’s the option of the big spend-up on infrastructure, as exemplified by countries like Norway.
One thing is certain: unions must help bring economics under democratic control. The Age of Ideology is over.
| Stimulus packages
(approximate $US totals)
United States: $838 billion
(note: several of these packages
1) The Scattergun approach
This is the approach recommended by the International Monetary Fund, and it shows how far they have come since neo-liberalism ran aground. They recommend that governments apply a wide range of measures, including all kinds of spending increases and tax cuts. “Governments don’t want to put all their eggs in the same fiscal basket,” said Carlo Cottarelli, director of the fund’s fiscal affairs department (more). However it is worth noting that the IMF is not promoting this approach because of inherent merits, but because of “uncertainty over what might work”. It might be argued that this is better than insisting on failed approaches, as they did in the 80s and 90s, but the world has paid an enormous price for their new agnosticism. Countries which are following their advice include the USA, France, South Korea, Singapore and New Zealand.
2) Equity injections
We have already seen (UK, USA) that propping up banks will not necessarily produce an increase in credit. Economist Joseph Stiglitz sums up the result of Bush’s first package: “We poured money into the banks, they poured out money, to their executives in the form of bonuses, to their shareholders in the form of dividends. Some of what they had left over they used to buy other banks — to pursue strategic goals for which they could not have found private finance…” (more)
The UK experience was similar. The government’s intervention no doubt saved banks from collapse, but: “…lending has actually fallen, while the cash has been used to shore up their profitability. The banks have incompatible obligations – to maximise profits for shareholders and meet ministers’ lending demands – while the government is already effectively shouldering their risks and liabilities…” (more)
Spain and Japan have also taken this path (see more and more respectively). One can only hope they are also working on Plan B.
3) Investment in infrastructure and public services
This is the most popular response. When the dust settles and analysts start comparing strategies, it will also be the most difficult to assess. Investment in rail can mean one thing if it is publicly owned (ie bringing forward maintenance costs), and quite another if the service has been privatised (ie increasing the value of an asset which can then be sold). Similarly, money directed towards public services will not produce the same result as expenditure on private contracts (shoring up employment rates, as opposed to boosting economies of scale and dividends). There are overlaps in these results, of course, but the differences will make it hard to draw clear conclusions. Countries which are following this model include Germany, Norway, Finland, Australia, China, Sweden, Chile, Argentina, the USA, Canada and France.
4) Job creation and green jobs
The European Union package is an interesting one. (download) It includes measures to boost purchasing power and generate growth and jobs: “…by jump-starting the economy with investment in infrastructure, green technology, energy efficiency and innovation, the package aims to accelerate the transition to a knowledge-based, low-carbon society.” (more) Similarly, the US package aims to make three-quarters of federal buildings more energy efficient and weatherize 2.5 million homes, leading to the creation of up to 4 million jobs. (more) South Korea is: “(investing $38.1 billion) over the next four years on environmental projects in a “Green New Deal” to spur slumping economic growth and create nearly a million jobs”. (more) The main thrust of Sweden’s plan: “is to help unemployed people find jobs and to counteract unemployment“. (more) Chile also aims to create 100,000 jobs (more) and Spain to create 300,000. (more)
5) Company tax cuts
Given the roots of the financial crisis, it is rather surprising to see some governments responding with enormous corporate tax cuts. It is also deeply unfair to the taxpayer. Such cuts are a prominent feature of the packages from India, Brazil, Finland, New Zealand, Canada, Singapore and the USA.
6) Social support and direct aid to workers
Dismayingly few of the stimulus packages feature prominent measures to directly alleviate poverty. Of course keeping people employed is the best solution, but there is no doubt that many will lose their livelihoods. Last year the ILO forecast a growth in global unemployment of 20 million. This figure has already been exceeded in China alone. (more) They also forecast that the number of working poor (those on less than a dollar a day) would rise by 40 million, and those on 2 dollars a day by 100 million. In this respect the best stimulus packages are those of Singapore, Thailand, China and Australia. Some of the UK’s tax reductions help a little in this regard as well. (more)
A warning from Japan
As we noted above, the infrastructure/public services option is the most popular. Let’s take a moment to consider the first part of this solution, infrastructure, in light of what has been happening in Japan. Since 1991 the country has spent $6.3 trillion on infrastructure in an attempt to deflect the downturn which began when the real estate bubble burst in the late 1980s. This spending was discontinued last year, with very few satisfied with the results. (more)
“…it matters what gets built: Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more bang for the buck than infrastructure spending.”
”A 1998 report by the Japan Institute for Local Government, a non-profit policy research group, found that every ¥1 trillion, or $11.1 billion, spent on social services like care for the elderly and monthly pension payments added ¥1.64 trillion in growth. Financing for schools and education delivered an even bigger boost of ¥1.74 trillion…But every ¥1 trillion spent on infrastructure projects in the 1990s increased Japan’s gross domestic product, a measure of its overall economic size, by only ¥1.37 trillion, mainly by creating jobs and other improvements like reducing travel times. Economists said the finding suggested that while infrastructure spending may yield strong results for developing nations, creating jobs in higher-paying knowledge-based services like health care and education can bring larger benefits to advanced economies like Japan, with its aging population.” (1)
The role of unions
If there is one thing which unions do extremely well, it is keeping things real. This is exactly what we have missed over the last ten years. As unions were increasingly marginalised, economies grew further and further removed from people and the things they need. However unions have learned a lot during their time in exile. The ideological split of the 20th century (communist vs social democrat vs liberal unions) has sunk from view, and the focus now is on practical outcomes.
Last year the International Trade Union Confederation (ITUC) made a solid contribution to the G20 crisis summit in Washington. They drew from the international experience of member unions – and their recommendations come from lessons learned the hard way. It is well worth reading their contribution, no matter which side of the fence you sit on. (download – 10 pages)
Here, in paraphrase, are some of the measures which they proposed to get things real again, and to keep them that way:
- Governments should bring forward infrastructure investment programmes that can stimulate demand growth in the short term and raise productivity growth in the medium term.
- They should adopt a “Green New Deal” to create jobs through alternative energy development and energy saving and conservation.
- Tax and expenditure measures should be introduced to support the purchasing power of middle and low income earners.
- A new growth regime should ensure balanced real wage growth in line with productivity increases.
- Fair, responsible and progressive taxation should neither facilitate the accrual of fortunes, nor provide incentives for the pursuit of speculation, but rather contribute to growth.
- Governments should enter financial markets to nationalise banks, guarantee deposits, buy up bad debts and recapitalise the banking systems… However, they should not nationalise losses while financial institutions privatise profits.
- A national and global regulatory architecture should be built so that financial markets return to their primary function: to ensure stable and cost-effective financing of productive investment in the real economy.
- In developing and emerging countries, governments should counter economic slowdown through monetary policy, by supporting job creation programmes and extending or creating social safety nets.
- Beyond infrastructure, this is also the time to invest in people – in their education and health, and in care for the very young and the aged.
- The worst error in the current circumstances would be to cut public sector budgets. There must be a renewed commitment to the provision of publicly financed, quality public services.
- The international community should swiftly expand emergency loans through the IMF and increase assistance from the World Bank and UN agencies.
- Governments should take equity stakes in the finance system and act as activist investors to protect public interest and ensure that taxpayers are eventually reimbursed.
- The ILO’s core labour standards should underpin a new financial governance system, with parity in voting between developing and industrialised countries.
- Working people should have a seat at the table in these meetings and institutions. They have little confidence that bankers and governments meeting behind closed doors will get it right this time. There must be full transparency, disclosure and consultation.
This final message is implicit in most of the ITUC’s other points. Indeed, initiating a process to democratise finance and production may be the greatest contribution unions can make.
Unions get their hands dirty. They are pragmatic, they engage people in decision-making, and they build relationships. It is significant in this respect that the ITUC is not rejecting tax cuts or bank bail-outs outright. In the real world, these things are necessary. However, rather than turning this into a candyfest for miscreants, the ITUC is looking for public value in the way these remedies are applied. If governments must bail-out banks and corporations, they should become activist shareholders in the public interest as part of the process. These proposals lead towards demystification and participation. The current mess we are in would not have occurred if the gap between promise and reality had been under public scrutiny.
There will be those who simply cannot bring themselves to see unions as creative players in economic reconstruction. These people should study what happened in Ireland; a story which unfolded over roughly the same period as that of Japan described above. Beginning in the late 1980s, the country dug itself out of a deep crisis and went from being one of the poorest countries in Europe to one of the richest. To begin this process, the government called “all hands to the pumps”. They brought unions and employers together to initiate a public discussion which went far beyond consultation, to the point of comprehensive tripartite national planning. This approach enabled deep changes to be introduced. Since then, the country has been run in accordance with a series of national agreements between unions, employers and the state. (2)
Similarly, Central Europe was rebuilt through a ‘social partnership’ between unions, employers and governments after World War II. The results demonstrate very clearly that union participation in the economy is good for stability, productivity and performance. In fact, there seems to be a strong correlation between high union membership and high levels of economic performance. (more)
It is a pity Iceland did not pay more attention to its neighbours, in this respect. It is probably the European country most devastated by the financial crisis, to the point of forced regime change. Ten years of increasing abstraction and deregulation in the financial sector have left the economy in shreds, and after the failure of all three of its major banks it became the first industrialised nation to require IMF help in 30 years. (more) “the principal fuel for Iceland’s boom was finance and, above all, leverage. The country became a giant hedge fund”. (more) Now, with the neo-liberal government deposed, centre-left caretakers are preparing the way for a new approach. National commentator Andri Snaer Magnason sums up the country’s mood:
“…there is power in all the political debate and lots of political and social energy – endless [political] parties popping up, Facebook groups, cells and idealists, and possibly a new constitution (not that we have read the old one), and people are speaking up. So, economic fear, political courage, shaking economy, and search for new values – we need profound change… We need less professional politics and more participation of the people.” (more)
Iceland might also consider the case of Argentina. In 2001 the Argentinian people brought down their government and then rejected three Presidents in two weeks. They demanded new rules, not just new leaders. Less than a year later, having defaulted on their debt to the IMF and unlinked their currency from the US dollar, the country started finding its own way forward. There was a process of reindustrialisation, some renationalisations, and large-scale investment in public works. Unemployed workers reclaimed factories and ran them democratically, and the public demanded engagement in decision-making in a way it had never done before. The result? The economy grew by at least 8 percent a year from 2003 to 2007. Like Ireland, the people of Argentina saved themselves.
There are signs that President Obama may move towards a more inclusive national model, given the way his “bi-partisan” approach is being rebuffed. It is a necessary step. As Professor Drew Westen puts it: “The problem with a message of bipartisanship… is that it makes it very difficult to tell the story of why things are so bad that we need dramatic change.” (more) The working relationship needed to save the US economy is not a bipartisan one between Democrats and Republicans, but a tripartite one between unions, employers and the government.
Towards a new tripartism?
Traditionally, ‘tripartism’ involves workers and employers working with government to help shape social and economic policies, by way of negotiation between chosen representatives. On the union side, workers elect representatives in their workplace, who then elect leaders among themselves, who in turn elect (or appoint or employ) people who in turn elect (or appoint or employ) people, until at some stage somebody represents them all in tripartite negotiations. In the course of all this the link between working people and their voice in the social dialogue can become extremely tenuous. To what extent can such negotiators claim legitimacy in representing members’ views? At just about any point in the chain self-interest can trump democracy, so that representatives become accountable, rather than responsible, for their interpretation of the members’ views.
With the rise of NGOs at the end of the twentieth century and, in particular, the indigenous peoples’ movement, many unions have started augmenting representative democracy with deliberative democracy. This means putting measures in place so that members can speak for themselves, or with as little mediation as possible. It allows participation to become a process, rather than a scheduled event. The tools and techniques of deliberative democracy include such things as online polls, focus groups, surveys, questionnaires, argument mapping, open blogs and FaceBook groups, televoting, stratified sampling and structured interviews. These owe as much to developments in market research as they do to the golden age of Athens.
Obama’s election campaign contained many elements of such an open, deliberative process. Can he (or anybody else) now map this openness against a tripartite structure, so that social dialogue becomes more like “national conversation”?
Next year will be a rough one for many governments who do not engage the public and labour unions in rebuilding confidence. Business as usual is over. Stephen Harper found this out the hard way in Canada. At first, he tried to respond to the crisis in a “more of the same, only more” fashion. The only measure his conservative government were willing to consider was a wage freeze. Public outrage grew so strong that in the end he only held on to power by abruptly suspending parliament. Having recanted, he negotiated a stimulus package with opposition parties, and is now on short notice.
The same thing happened in Latvia. At first the country’s finance minister, when asked the cause of the crisis, responded: “nothing special”. Shortly afterwards the main bank had to be nationalised and the country was forced to seek IMF loans. Violent demonstrations swept the country and the Minister of Agriculture was driven from office. Then, in February, the Prime Minister was forced to resign. (more) The causes are familiar: reckless bank lending, a housing bubble, lack of regulation and a government that just wouldn’t wake up to the fact that business as usual is no more.
The public does not want old answers to the new questions it is raising. Those governments who refuse to listen will not last long. By the same token, corporations and banks will face an unprecedented level of scrutiny. Unions and NGOs will be asked to shoulder responsibilities which some of them are ill-prepared for. However, as the ITUC has seen, these are good things. Until now economics has been a field for contesting ideologues. Models were taken on faith, rather than tested and proven. Now, trillions of dollars are being poured into a controlled test. Failures will be made very public indeed. Successes will be examined in minute detail, so that they can be emulated. Economics is about to become a regular science, rather than a dark art.
What we lost along the way was only ever a confidence trick, anyway.
by Peter Hall-Jones and Conor Cradden,
(1) Mark Zandi of Moody’s Economy.com recently produced some similar data in assessing “bang for the buck” in the US stimulus package. He found that:
For every dollar spent on temporary increase of food stamps you get a $1.73 in economic activity.
For every dollar spent on extending unemployment insurance you get a $1.63 in economic activity.
For every dollar spent on infrastructure you get a $1.59 in economic activity.
For every dollar spent on general state aid you get $1.38 in economic activity.
For every dollar spent on refundable lump sum tax rebate you get a $1.22 in economic activity.
For every dollar spent on non-refundable lump sum tax rebate you get a $1.01 in economic activity.
For every dollar spent on making dividends and capital gains refunds permanent you get 38-CENTS in economic activity!
(2) Sadly, Ireland’s success faltered in 2008, due to a housing bubble, poor financial regulation, ill-considered investments in infrastructure, and tax cuts. The cowboys had gained the upper hand.