They seek him here and they seek him there, but best bets are back on China. Indeed, earlier today, a Hong Kong radio station reported that Jho Low had most recently fled back from Hong Kong into China, where it claimed he has now been detained pending Dr Mahathir’s visit next month.
Certainly, Malaysia’s newly reinstated veteran leader has made clear he is champing at the bit to get to see the Chinese President, since there are plenty of highly pertinent issues he wishes to discuss, albeit embarrassing to China.
Xi Met Mahathir during his visit in 2013,
These, of course, relate to a series of multi-billion dollar mega-projects that Chinese state controlled companies signed up to with the previous premier, Najib Razak, star patron of the man on the run, Jho Low.
All of them have been frozen by the new government, which has been issuing toe-curling statements confirming everyone’s suspicions that the contracts were prime examples of super-corruption, which the Chinese had been prepared to pander to in return for digging its economic tentacles into Malaysia and cementing a strategic control over the region.
They include two pipe-line deals in East Malaysia with the China Petroleum Pipeline Bureau (CPPB), which the Finance Ministry recently disclosed had already received 88% of the agreed payment two years early and when only 13% of the work had been completed.
The Finance Minister and his team have not minced their words when indicating their firm suspicion that the reason for this outrageous outlay was that the project were being used as a front to channel money to repay billions of dollars of debts owed by Najib’s notorious multi-billion dollar slush fund 1MDB.
Likewise, the grossly inflated East Coast Railway, contracted by Najib to China’s unfortunately named China Communications Construction Corporation – or CCCC (C4 was the explosive used to murder a young woman in a particularly murky case linked to Najib and the has become synonymous with cover-up and corruption in Malaysia).
It was Sarawak Reportwhich exclusively revealed leaked documents back in 2016 that showed how this C4 contract also was inflated by 100% at the last moment, following negotiations with Najib to again write of debts and liabilities connected to 1MDB and Jho Low. The exact repayment details over the next decade were written into a secret annex to the contract, which on the surface had provided merely broad brush calculations to justify the increased expenditure.
Throughout the period when these contracts were being drawn up the already fugitive Jho Low was based in Shanghai, and it is generally agreed that he was acting as Najib’s agent to use the Chinese to get the prime minister off the hook financially and politically after the United States Department of Justice published the exact details of the 1MDB theft in July 2016.
In other words, to save his own skin Najib proved willing to tie up his country in a mountain of debt and obligation to its neighbouring predatory super-power.
Numerous other Chinese funded projects were likewise put underway, in particular the evironmentally catastrophic Forest City, deemed to provide a helpful financial boon to the Sultan of Johore. Not only was the development a perfect conduit for Chinese wishing to export cash, the project envisaged providing citizenship to a million new immigrants.
Mahathir and his reformist allies in the new Harapan government are naturally furious at all these thefts and deceptions and are demanding a re-negotiation with China, should these projects go ahead at all. However, the entire episode represents a humiliating debacle for China, which like the rest of the world had mistakenly placed its bets on the politial survival of the unmasked kleptocrat Najib.
President Xi Jinping will hardly relish the prospect of the extent of his country’s bad behaviour and complicity in corruption being paraded on the world stage and it makes Malaysia’s top wanted man into a useful bargaining chip to help save face in the up-coming diplomatic wranglings and renegotiations.
The Long Arm of the Law will get at him shoot.
It remains to be seen if China will hang on to Malaysia’s wanted man, who can tell all over Najib’s kleptocratic dealings (and China’s own involvement) or bargain a deal that includes the renegotiation of key projects in Malaysia’s favour, in return for a polite silence over the more embarrassing aspects of China’s corrupt part in propping up Najib?
Malaysia has its strong advocate in the trenchant Mahathir, but it appears China has a valuable hostage in its hands.
The United States has had the world’s largest trade deficit for almost half a century. In 2017, the US trade deficit in goods and services was $566 billion; without services, the merchandise account deficit was $810 billion.
The largest US trade deficit is with China, amounting to $375 billion, rising dramatically from an average of $34 billion in the 1990s. In 2017, its trade deficit with Japan was $69 billion, and with Germany, $65 billion. The US also has trade deficits with both its NAFTA partners, including $71 billion with Mexico.
Economist Professor Dr. Kwame Jomo Sundram
President Trump wants to reduce these deficits with protectionist measures. In March 2018, he imposed a 25% tariff on steel imports and a 10% tariff on aluminium, a month after imposing tariffs and quotas on imported solar panels and washing machines. On 10 July, the US listed Chinese imports worth $200 billion annually that will face 10% tariffs, probably from September, following 25% tariffs on $34 billion of such imports from 7 July.
Do US trade deficits reflect weakness?
The usual explanation for bilateral trade deficits is price differentials. However, the US accuses such countries of ‘unfair’ trade practices, such as currency manipulation, wage suppression and government subsidies to boost exports, besides blocking US imports.
Trump views most trade deals such as NAFTA as unfair. His team insists that renegotiating trade deals, ‘buying American’, a strong dollar and confronting China will shrink US trade deficits.
But the country’s overall trade deficit, offset by capital inflows, is related to the gap between its savings and investments. The US spends more than it produces, thus importing foreign goods and services. Cheap credit fuels debt-financed consumption, increasing the trade deficit.
Total US household debt rose to $13.2 trillion in the first quarter of 2018, the 15th consecutive quarter of growth in the mortgage, student, auto and credit card loan categories. American consumer debt was more than double GDP in 2017.
US government budget deficits have also been growing. From 67.7% of GDP in 2008, US government debt rose to 105.4% in 2017. The federal budget deficit was $665 billion in FY2017, rising 14% from $585 billion in FY2016.
The US budget deficit was 3.5% of GDP in 2017. According to the US Congressional Budget Office, it will surpass $1 trillion by 2020, two years sooner than previously projected, due to Trump tax cuts and spending increases.
Dr. Anis Chowdhury, Adjunct Professor of Economics at Western Sydney University (Australia)
The growing US economy may also increase the trade deficit, as consumers spend more on imported goods and services. The stronger dollar has made foreign products cheaper for American consumers while making US exports more expensive for foreigners.
These underlying economic forces have become more important than policies in raising the overall trade deficit, while bilateral deficits reflect specific commercial relations with particular countries. Thus, disrupting bilateral trade relations may only shift the trade deficit to others.
Have the cake and eat it?
So, why does the US have a structural trade deficit? As the de facto international ‘reserve currency’ after the Second World War, the US has provided the rest of the world with liquidity. Its perceived military strength means it is also seen as a safe place to keep financial assets. Of about $10 trillion in global reserves in 2016, for example, around three fifths (60 per cent) were held in US dollars.
US supply of international liquidity by issuing the global reserve currency offers several economic advantages. It also earns seigniorage from issuing the main currency used around the world, due to the difference between the face value of a currency note and the cost of issuing it.
With growing foreign demand for dollars, the US can run deficits almost indefinitely by creating more debt or selling assets. Demand for dollar-denominated assets, for example, US Treasury bonds, raises their prices, lowering interest rates, to finance both consumption and investment.
While foreign investors buy low-yielding, short-term US assets, Americans can invest abroad in higher-yielding, long-term assets. The US usually reaps higher returns on such investments than it pays for debt, labelled America’s ‘exorbitant privilege’.
” As the US retreats from the global diplomatic stage, use of other reserve currencies, including China’s renminbi, has been growing, especially in Europe and Africa. Thus, ironically, as Trump wages trade wars on both foes and friends, China will probably gain, both geo-politically and economically.
The resulting global economic shift will not only hurt the US dollar and economy through the exchange rate and borrowing costs, but also its geopolitical dominance”.–Jomo and Anis
Thus, for the US to enjoy the ‘exorbitant privilege’ of the dollar’s role as the major reserve currency, it must run a chronic trade deficit. Therefore, giving up the dollar’s global reserve currency status will have major implications for the US economy, finances and living standards.
Can the US win Trump’s trade war?
Barry Eichengreen noted that countries in military alliances with reserve-currency issuing countries hold about 30% more of the partner’s currency in their foreign-exchange reserves than countries not in such alliances. Instead, Trump has prioritized reducing trade deficits to strengthen the US dollar and dominance while disrupting some old political alliances.
As the US retreats from the global diplomatic stage, use of other reserve currencies, including China’s renminbi, has been growing, especially in Europe and Africa. Thus, ironically, as Trump wages trade wars on both foes and friends, China will probably gain, both geo-politically and economically.
The resulting global economic shift will not only hurt the US dollar and economy through the exchange rate and borrowing costs, but also its geopolitical dominance.
Anis Chowdhury, Adjunct Professor at Western Sydney University (Australia), held senior United Nations positions in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development. In 2007, he was awarded received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. He was recently appointed a member of Prime Minister Dr. Mahathir Mohamad’s Eminent Persons Council on Strategy and Policy.
Despite unprecedented technology-enabled development, the world is beset with challenges, from violent conflict to rising inequality. The underlying reason for these problems may be that we have reached a turning point in the march of technological progress – and we are navigating it very badly.
The Protectionist (Donald Trump) is the Loser. The Globalist (Xi Jinping) will emerge the winner eventually.
NEW YORK – “It was the best of times; it was the worst of times,” said President Xi Jinping, quoting Charles Dickens’ famous line to open his speech at the 2017 World Economic Forum. “Today,” Xi continued, “we also live in a world of contradictions.” On one hand, “growing material wealth and advances in science and technology” have enabled unprecedented rates of development. On the other hand, “frequent regional conflicts, global challenges like terrorism and refugees, as well as poverty, unemployment, and a widening income gap” are generating deep uncertainty.
Xi then posed a potent question: “What has gone wrong with the world?”
Perhaps the answer lies with the very technology that Xi regards as the key to China’s rise to high-income status. Specifically, it may be that we have reached a turning point in the march of technological progress – one that we are navigating very badly.
Technology has been shaping and reshaping our lives ever since early human beings discovered how to make tools from stone. It is only natural for such a long process to include moments when technological change generates unprecedented challenges.
One such turning point was the Industrial Revolution. In mid-eighteenth-century Britain, the revolution’s birthplace, progress entailed considerable adversity. Some workers toiled 12-14 hours per day, yet inequality surged. And the incidence of child labor rose beyond the levels seen in some of the poorest Sub-Saharan African economies today.
But Europe rose to the occasion. Groundbreaking research in economics was carried out by the likes of Adam Smith and Antoine Cournot, leading to novel interventions like progressive income tax, as well as new labor laws and regulations. As a result, the Industrial Revolution accelerated economic development and human welfare.
Human development has seen other “industrial revolutions,” including the one that is currently unfolding. This so-called Fourth Industrial Revolution is centered on advances in digital technology, including “labor-linking technologies” (which enable workers across continents to work together in real time) and, more recently, artificial intelligence and robotics.
These advances have enabled economic globalization, which, like the Industrial Revolution, has brought unprecedented progress, as Xi acknowledged, while generating new challenges, including rising inequality and worker vulnerability. But instead of managing those challenges, as Europe did in the nineteenth century, much of the world is succumbing to political polarization, rising nationalism, and a toxic blame game. Most notably, the United States under President Donald Trump has initiated what is rapidly escalating into a tit-for-tat trade war – one that will be devastating for the entire world, but especially for the US itself.
What such behavior fails to take into account is that globalization is, fundamentally, a natural phenomenon. It is the result of billions of individuals going about their daily activities, making decisions based on the possibilities available to them. Arguing against globalization is as constructive as blaming gravity for a building’s collapse. As Xi pointed out in his WEF speech, it “is a natural outcome of scientific and technological progress, not something created by any individuals or any countries.”
In the case of Trump’s trade war, US policy also reflects a misunderstanding – one that economists have repeatedly pointed out – about bilateral trade deficits. According to Trump, a trade deficit is essentially a loss, and the countries with surpluses vis-à-vis the US, such as Mexico or China, are behaving in unfair and exploitative ways. Thus, they should be made to pay.
To understand the fallacy, consider your interaction with the neighborhood grocery store. At the end of each year, you run up a large “trade deficit” vis-à-vis the store, because the store sells goods to you, whereas you do not sell anything to the store. To claim that China “owes” the US for its trade bilateral trade surplus would be like saying that your local grocery store owes you for the money you spent there during the last year. In fact, you were not cheated, just as your employer was not cheated by the bilateral deficit it runs with you. Rather, you made mutually beneficial transactions based on your needs.
The modern economy depends on bilateral trade deficits; it would collapse without them. In an age of advanced technologies and accelerating specialization, attempting to manufacture everything domestically or bilaterally would be prohibitively costly.
The One and Only Harley defies Trump’s America First Trade Policy
For now, the US seems committed to its demands that its partners pay up. The more likely scenario, however, is that economies like Canada, Europe, and Mexico will seek to offset the impact of Trump’s tariffs by deepening their ties with China – an obvious win for America’s main global competitor. Meanwhile, US corporations will probably move production elsewhere to avoid retaliatory tariffs, as some – such as Harley-Davidson – have already threatened to do.
There is no denying that the technological turning point at which we find ourselves has caused strain for all countries. But instead of blaming one another for the challenges generated by technological progress – an approach that will only bring about the worst of times – we should work together to address them. Any country that refuses to do so will create strain for all – and end up condemning itself to being left behind.
Kaushik Basu, former Chief Economist of the World Bank, is Professor of Economics at Cornell University and Nonresident Senior Fellow at the Brookings Institution.
In London, in the nineteen-thirties, the émigré Hungarian intellectual Karl Polanyi was known among his friends as “the apocalyptic chap.” His gloom was understandable. Nearly fifty, he’d had to leave his wife, daughter, and mother behind in Vienna shortly after Austria lurched toward fascism, in 1933. Although he had long edited and contributed to the prestigious Viennese weekly The Austrian Economist, which published such celebrated figures as Friedrich Hayek and Joseph Schumpeter, he had come to discount his career as a thing of “theoretical and practical barrenness,” and blamed himself for failing to diagnose his era’s crucial political conflict. As so often for refugees, money was tight. Despite letters of reference from eminent historians, Polanyi failed to land a professorship or a fellowship, though he did manage to earn thirty-seven pounds co-editing an anti-fascist anthology, which featured essays by W. H. Auden and Reinhold Niebuhr. In his own contribution to the book, he argued that fascism strips democratic politics away from human society so that “only economic life remains,” a skeleton without flesh.
In 1937, he taught in adult-education programs in Kent and Sussex, commuting by bus or train and spending the night at a student’s house if it got too late to return home. The subject was British economic history, which he hadn’t much studied before. As he learned how capitalism had challenged the political system of Great Britain, the first nation in the world to industrialize, he decided that it was no accident that fascism was infecting countries as disparate as Japan, Croatia, and Portugal. Fascism shouldn’t be “ascribed to local causes, national mentalities, or historical backgrounds,” he came to believe. It shouldn’t even be thought of as a political movement. It was, rather, an “ever-given political possibility”—a reflex that could occur in any polity experiencing a certain kind of pain. In Polanyi’s opinion, whenever the profit-making impulse becomes deadlocked with the need to shield people from its harmful side effects, voters are tempted by the “fascist solution”: reconcile profit and security by forfeiting civic freedom. The insight became the keystone of his masterpiece, “The Great Transformation,” which was published in 1944, as the world was coming to terms with the destruction that fascism had wrought.
Today, as in the nineteen-thirties, strongmen are ascendant worldwide, purging civil servants, subverting the judiciary, and bullying the press. In a sweeping, angry new book, “Can Democracy Survive Global Capitalism?” (Norton), the journalist, editor, and Brandeis professor Robert Kuttner (pic above) champions Polanyi as a neglected prophet. Like Polanyi, he believes that free markets can be crueller than citizens will tolerate, inflicting a distress that he thinks is making us newly vulnerable to the fascist solution. In Kuttner’s description, however, today’s political impasse is different from that of the nineteen-thirties. It is being caused not by a stalemate between leftist governments and a reactionary business sector but by leftists in government who have reneged on their principles. Since the demise of the Soviet Union, Kuttner contends, America’s Democrats, Britain’s Labour Party, and many of Europe’s social democrats have consistently tacked rightward, relinquishing concern for ordinary workers and embracing the power of markets; they have sided with corporations and investors so many times that, by now, workers no longer feel represented by them. When strongmen arrived promising jobs and a shared sense of purpose, working-class voters were ready for the message.
Born in 1886 in Vienna, Karl Polanyi grew up in Budapest, in an assimilated, highly cultured Jewish family. Polanyi’s father, an engineer who became a railroad contractor, was so conscientious that when his business failed, around 1900, he repaid the shareholders, plunging the family into genteel poverty. Polanyi’s mother founded a women’s college, hosted a salon, and had a somewhat chaotic personality that a daughter-in-law once likened to “a book not yet written.” At home, as Gareth Dale recounts in a thoughtful 2016 biography, the family spoke German, French, and a little Hungarian; Karl also learned English, Latin, and Greek as a child. “I was taught tolerance not only by Goethe,” he later recalled, “but also, with seemingly mutually exclusive accents, by Dostoyevsky and John Stuart Mill.”
After university, Polanyi helped to found Hungary’s Radical Citizens’ Party, which called for land redistribution, free trade, and extended suffrage. But he remained enough of a traditionalist to enlist as a cavalry officer shortly after the First World War broke out. At the front, where, he said, “the Russian winter and the blackish steppe made me feel sick at heart,” he read “Hamlet” obsessively, and wrote letters home asking his family to send volumes of Marx, Flaubert, and Locke. After the war, the Radical Citizens took power, but they fumbled it. In the short-lived Communist government that followed, Polanyi was offered a position in the culture ministry by his friend György Lukács, later a celebrated Marxist literary critic.
When the Communists fell, pogroms broke out, and Polanyi fled to Vienna. “He looked like one who looks back on life, not forward to it,” Ilona Duczynska, who became his wife, remembered. Duczynska was a Communist engineer, ten years younger than he was. She had smuggled tsarist diamonds out of Russia in a tube of toothpaste and once borrowed a pistol to assassinate Hungary’s Prime Minister, though he resigned before she could shoot him. She and Polanyi married in 1923 and soon had a daughter.
Karl Polanyi and Nobel Laureate in Economics Joseph E. Sitglitz
These were the days of so-called Red Vienna, when the city’s socialist government was providing apartments for the working class and opening new libraries and kindergartens. Polanyi held informal seminars on socialist economics at home. He started writing for The Austrian Economist in 1924, and he was promoted to editor-in-chief a few months before the right-wing takeover sent him into exile. Duczynska remained in Vienna, going underground with a militia, but, in 1936, she, too, emigrated, taking a job as a cook in a London boarding house. In 1940, Bennington College offered Polanyi a lectureship, and he left for Vermont, where his family soon joined him and he began to turn his lecture notes into a book. “Not since 1920 did I have a time so rich in study and development,” he wrote.
Polanyi starts “The Great Transformation” by giving capitalism its due. For all but eighteen months of the century prior to the First World War, he writes, a web of international trade and investment kept peace among Europe’s great powers. Money crossed borders easily, thanks to the gold standard, a promise by each nation’s central bank to sell gold at a fixed price in its own currency. This both harmonized trade between countries and stabilized relative currency values. If a nation started to sell more goods than it bought, gold streamed in, expanding the money supply, heating up the economy, and raising prices high enough to discourage foreign buyers—at which point, in a correction so smooth it almost seemed natural, exports sank back down to pre-boom levels. The trouble was that the system could be gratuitously cruel. If a country went into a recession or its currency weakened, the only remedy was to attract foreign money by forcing prices down, cutting government spending, or raising interest rates—which, in effect, meant throwing people out of work. “No private suffering, no restriction of sovereignty, was deemed too great a sacrifice for the recovery of monetary integrity,” Polanyi wrote.
The system was sustainable politically only as long as those whose lives it ruined didn’t have a say. But, in the late nineteenth and early twentieth centuries, the right to vote spread. In the twenties and thirties, governments began trying to protect citizens’ jobs from shifts in international prices by raising tariffs, so that, in the system’s final years, it hardened national borders instead of opening them, and engendered what Polanyi called a “new crustacean type of nation,” which turned away from international trade, making first one world war, and then another, inevitable.
In Vienna, Polanyi had heard socialism dismissed as utopian, on the ground that no central authority could efficiently manage millions of different wishes, resources, and capabilities. In “The Great Transformation,” he swivelled this popgun around. What was utopian, he declared, was “the concept of a self-regulating market.” Human life wasn’t as orderly as mathematics, and only a goggle-eyed idealist would think it wise to lash people to a mechanism like the gold standard and then turn the crank. For most of human history, he observed, money and the exchange of goods had been embedded within culture, religion, and politics. The experiment of subordinating a nation to a self-adjusting market hadn’t even been attempted until Britain tried it, in the mid-eighteen-thirties, and that effort had required a great deal of coördination and behind-the-scenes management. “Laissez-faire,” Polanyi earnestly joked, “was planned.”
On the other hand, Polanyi believed that resistance to market forces, which he dubbed “the countermovement,” truly was spontaneous and ad hoc. He pointed to the motley of late-nineteenth-century measures—inspecting food and drink, subsidizing irrigation, regulating coal-mine ventilation, requiring vaccinations, protecting juvenile chimney sweeps, and so on—that were instituted to housebreak capitalism. Because such restraints went against the laws of supply and demand, they were despised by defenders of laissez-faire, who, Polanyi noticed, usually argued “that the incomplete application of its principles was the reason for every and any difficulty laid to its charge.” But what was the alternative? Once the laissez-faire machine started running, it cheerfully annihilated the people and the natural environment that it made use of, unless it was restrained.
Polanyi offered the example of the enclosure movement in sixteenth-century England, when landowners tore down villages and turned common lands into private pastures. The changes brought efficiencies that raised the land’s food yield as well as its value, in the long term improving life for everyone. Enclosure was a good thing, in other words; the numbers said so. In the short term, however, it dispossessed peasants who couldn’t immediately improvise a new living, and it was only because of a countermovement—led in piecemeal fashion by the monarchy, in a long, losing battle with Parliament—that more people didn’t die of exposure and starvation. If you argued that resistance did not compute, you would be right, but the countermovement, though it couldn’t stop progress, shielded people by slowing it down. It made enclosure so gradual that, even three centuries later, the poet John Clare was lamenting its advance in his sonnets.
In the nineteen-thirties, when Polanyi was first formulating his critique, the British economist John Maynard Keynes was likewise arguing that capitalist economies aren’t self-adjusting. The markets for labor, goods, and money, he showed, don’t find equilibriums independently but through interactions with one another that can have unfortunate, counterintuitive side effects. In hard times, economies tend to retrench, just when stimulus is most needed; the richer they get, the less likely they are to invest enough to sustain their wealth. During the Depression, Keynes made the case that governments should deficit-spend their way out of recessions. By the time Polanyi’s book was published, the Keynesian view had become orthodoxy. For the next few decades, the world’s leading economies were tightly managed by their governments. America’s top marginal tax rate stayed at ninety-one per cent until 1964, and anti-usury laws kept a ceiling on interest rates until the late seventies. The memory of the financial chaos of the thirties, and of the fascism that it gave rise to, was still vivid, and the Soviet Union loomed as an alternative, should the Western democracies fail to treat their workers well.
In terms of international monetary systems, too, Keynesianism held sway. In 1944, at the Bretton Woods Conference, Keynes helped to negotiate a way of harmonizing exchange rates that gave national governments enough elbow room to boost their domestic economies when necessary. Only America continued to redeem its currency with gold. Other nations pegged their currencies to the dollar (making it their reserve currency), but they were free to adjust their currencies’ values within limits when the need arose. Countries were allowed, and sometimes even required, to impose capital controls, measures that limited the cross-border flow of investment capital. With investors unable to yank money suddenly from one country to another, governments were free to spur growth with low interest rates and to spend on social programs without fear that inflation-averse capitalists would sell off their nations’ bonds. So weak was the political power of investors that France, Britain, and America let inflation shrink the value of their war debts considerably. In France, the economist Thomas Piketty has quipped, the period amounted to “capitalism without capitalists.”
The result—highly inconvenient for free-market fundamentalists—was prosperity. In the three decades following the Second World War, per-capita output grew faster in Western Europe and North America than ever before or since. There were no significant banking or financial crises. The real income of Europeans rose as much as it had in the previous hundred and fifty years, and American unemployment, which had ranged between fourteen and twenty-five per cent in the thirties, dropped to an average of 4.6 per cent in the fifties. The new wealth was widely shared, too; income inequality plummeted across the developed world. And with the plenty came calm. The economic historian Barry Eichengreen, in his new book, “The Populist Temptation” (Oxford), reports that in twenty advanced nations no populist leader—which he defines as a politician who is “anti-elite, authoritarian, and nativist”—took office during this golden era, and that a far narrower share of votes went to extremist parties than before or after.
“This was the road once taken,” Kuttner writes. “There was no economic need for a different one.” Nevertheless, we strayed—or, rather, in Kuttner’s telling, we were driven off the road after capitalists grabbed the steering wheel away from the Keynesians. The year 1973, in his opinion, marked “the end of the postwar social contract.” Politicians began snipping away restraints on investors and financiers, and the economy returned to spasming and sputtering. Between 1973 and 1992, per-capita income growth in the developed world fell to half of what it had been between 1950 and 1973. Income inequality rebounded. By 2010, the real median earnings of prime-age American workingmen were four per cent lower than they had been in 1970. American women’s earnings rose for a bit longer, as more women made their way into the workforce, but declined after 2000. And, as Polanyi would have predicted, faith in democracy slipped. Kuttner warns that support for right-wing extremists in Western Europe is even higher today than it was in the nineteen-thirties.
But was Keynesianism pushed, or did it stumble? Kuttner’s indignation about its fall from grace is more straightforward than the course of events that led to it. In the years following the Second World War, Europe was swimming with dollars, thanks to the Marshall Plan and American military aid to Europe. Beyond America’s jurisdiction, those dollars slipped free of its capital controls, and in the nineteen-sixties investors began to sling them from country to country as impetuously as in the days before Bretton Woods, punitively dumping the bonds of any government that tried to run an interest rate lower than those of its peers. The cost of the Vietnam War sparked inflation in America, and the dollar’s second life as the world’s reserve currency risked pushing the inflation even higher. When America fell into recession in 1970, the Federal Reserve tried to boost the country out of it by dropping interest rates, and America became a target of opportunity for speculators: capital fled the country, taking gold with it. By May, 1971, the United States was facing its first merchandise trade deficit since 1893, an indication that the high dollar was discouraging foreign buyers. Unwilling to pacify investors by inflicting austerity on voters, President Richard Nixon uncoupled the dollar from gold, ending the Bretton Woods agreement. Then, in October, 1973, Arab nations, upset about America’s solidarity with Israel during the Yom Kippur War, embargoed oil sales to the United States, and the price of crude nearly quadrupled in the space of three months. Food prices skyrocketed, and, as wallets were pinched, the country tumbled into another recession.
At this juncture, a new economic monster appeared: stagflation, a chimera of inflation, recession, and unemployment. Keynesian economists, who didn’t think that high unemployment and inflation could coëxist, were at a loss for how to handle it. The predicament provided an opening for their critics, most notably Milton Friedman, who argued that incessant government stimulation of the economy risked promoting not only inflation but the expectation of inflation, which could then spiral out of control. Friedman declared Keynesianism discredited and demanded that the government refrain from tampering with the economy, other than to manage the money supply.
In 1974, Alan Greenspan, President Gerald Ford’s economic adviser and an acolyte of Ayn Rand, likewise urged resisting political pressure to help the economy grow. “Inflation is our domestic public enemy No. 1,” Ford declared, and the Federal Reserve raised interest rates. Five years later, when a revolution in Iran set off a second spike in oil prices, a new round of inflation, and yet another recession, President Jimmy Carter’s Federal Reserve chair, Paul Volcker, raised interest rates again and again, to as high as twenty per cent. By 1982, America’s G.D.P. was shrinking 2.2 per cent a year, and unemployment was higher than it had been since the Great Depression. The nation had gone back to stabilizing its currency the old-fashioned way—by throwing people out of work—and utopian faith in self-regulating free markets had made a comeback. Kuttner thinks that this was a terrible mistake, arguing that the inflation of the seventies was limited to particular sectors of the economy such as food and oil. That sounds a little like special pleading. It’s not clear how Ford and Carter could have resisted the pressure they were under to find a new policy solution once it was clear that the old one wasn’t working.
In time, Keynesians adapted their models—one adjustment took into account Friedman’s discovery of the dangers posed by the expectation of inflation—and the resulting synthesis, New Keynesianism, is now canonical. Both the Bush and the Obama Administrations adopted Keynesian policies in response to the financial crisis of 2008. But when stagflation flummoxed the Keynesians it cost them their near-monopoly on political advice-giving, and laissez-faire was rereleased into the political sphere. In January, 1974, the United States removed constraints on sending capital abroad. A 1978 Supreme Court decision overturned most state laws against usury. By the early twenty-first century, Kuttner charges, every New Deal regulation on finance was either “repealed or weakened by non-enforcement.” Starting in the eighties, developing nations found free-market doctrine written into their loan agreements: bankers refused to extend credit unless the nations promised to lift capital controls, balance their budgets, limit taxes and social spending, and aim to sell more goods abroad—an uncanny replica of the austerity terms enforced under the gold standard. The set of policies became known as the Washington Consensus. The idea was pain in the short term for the sake of progress in the long term, but a 2011 meta-analysis was unable to find statistically significant evidence that the trade-off is worth it. Even if it is worth it, Polanyi would have recommended tempering the short-term pain. From 2010, when austerity measures were first imposed on Greece, to 2016, its G.D.P. declined 35.6 per cent, according to the World Bank. A federally appointed panel is now pushing for a similar approach in Puerto Rico.
There is no shortage of villains in Kuttner’s narrative: financial deregulation; supply-side tax cuts; the decline of trade unions; the Democratic Party, which, by zigging left on identity politics and zagging right on economics, left conservative white working-class voters amenable to Donald Trump. Perhaps the most vexed issue Kuttner discusses, however, is trade policy—whether American workers should be protected against cheap foreign goods and labor.
The contours of the problem call to mind Polanyi’s account of enclosures in early-modern England. Half an hour with a supply-and-demand graph shows that free trade is better for every nation, developed or developing, no matter how much an individual businessperson might wish for a special tariff to protect her line of work. In a 2012 survey, eighty-five per cent of economists agreed that, in the long run, the boons of free trade “are much larger than any effects on employment.” But although free trade benefits a country over all, it almost always benefits some citizens more than—and even at the expense of—others. The proportion of low-skilled labor in America is smaller than in most countries that trade with America; economic theory therefore predicts that international trade will, on aggregate, make low-skilled workers in the United States worse off. The U.S. government has, since 1962, compensated workers laid off because of free trade, but the benefit has never been adequate; only four people were certified to receive it during its first decade. In a 2016 paper, “The China Shock,” the economists David H. Autor, David Dorn, and Gordon H. Hanson wrote that, for every additional hundred dollars of Chinese goods imported to an area, a manufacturing worker is likely to lose fifty-five dollars of income, while gaining only six dollars in government help.
In a laissez-faire utopia, dislodged workers would relocate or take jobs in other industries, but workers hurt by rivalry with China are doing neither. Maybe they don’t have the resources to move; maybe the flood of Chinese-made goods is so extensive that there are no unaffected manufacturing sectors for them to switch into. The authors of “The China Shock” calculate that, between 1999 and 2011, trade with China destroyed between two million and 2.4 million American jobs; Kuttner quotes even higher estimates. NAFTA, meanwhile, lowered the wage growth of American high-school dropouts in affected industries by sixteen percentage points. In “Why Liberalism Failed” (Yale), the political scientist Patrick J. Deneen denounces the assumption that “increased purchasing power of cheap goods will compensate for the absence of economic security.”
Kuttner follows Polanyi in attacking free-market claims of mathematic purity. “Literally no nation has industrialized by relying on free markets,” he writes. In 1791, Alexander Hamilton recommended that America encourage new branches of manufacturing by taxing imports and subsidizing domestic production. Even Britain, the world’s first great champion of free trade, started off protectionist. Kuttner believes that America stopped supporting its manufacturing sector partly because it got into the habit, during the Cold War, of rewarding foreign allies with access to American consumers, and eventually decided that exports of financial services, rather than of manufactured goods, would be the country’s future. Toward the end of the century, as American manufacturers saw the writing on the wall, they shifted production abroad.
Kuttner doesn’t give a full hearing to the usual reply by defenders of laissez-faire, which is that a transition from goods to services is inevitable in a maturing economy—that the efficiency of American manufacturing means that it would likely be shedding workers no matter what the government did. Even Eichengreen, a critic of globalization, notes, in “The Populist Temptation,” that, if you graph the share of the German workforce employed in manufacturing from 1970 to 2012, you see a steady, grim decline very similar to that of its American counterpart, despite the fact that Germany has long spent heavily on apprenticeship and vocational training. The industrial revolution created widely shared wealth almost magically at its dawn: when an unemployed farmworker took a job in a factory, his power to make things multiplied, along with his earning power, without his having to learn much. But, as factories grew more efficient, fewer workers were needed to run them. One study has attributed eighty-seven per cent of lost manufacturing jobs to improved productivity.
When a worker leaves a factory, her power to create wealth stops being multiplied. The only way to increase it again is through education—by teaching her to become a sommelier, say, or an anesthesiologist. But efficiency gains are notoriously harder to come by in service industries than in manufacturing ones. There are only so many leashes a dog walker can hold at one time. As a result, if an economy deindustrializes without securing a stable manufacturing core, its productivity may erode. The dynamic has caused stagnation in Latin America and sub-Saharan Africa, and there are signs of a comparable weakening of America’s earning power.
Meanwhile, in the factories that remain, machines have grown more complex; the few workers they employ need to be better educated, further widening the gap between educated and uneducated workers. Kuttner dismisses this labor-skills explanation for job loss as an “alibi” with “an insulting subtext”: “If your economic life has gone to hell, it’s your fault.” This is intemperate but, in Kuttner’s defense, he has been warning American politicians to protect manufacturing jobs since 1991, and has been enlisting Polanyi in the cause for at least as long. Moreover, he has a point: to talk about productivity-induced job loss when challenged to explain trade-induced job loss is to change the subject. Economists estimate that advances in automation explain only thirty to forty per cent of the premium that a college degree now adds to wages. And though Eichengreen is right about manufacturing’s declining share of the German workforce, it still stood at twenty per cent in 2012, which is roughly where the American share stood three decades earlier, and the German decline has been less steep. Somehow, Germany’s concern for its manufacturing workforce made a difference.
In any case, if one’s concern is populism, it may not matter whether jobs have been lost to trade competition or to automation. In areas where more industrial robots have been introduced, one analysis shows, voters were more likely to choose Trump in 2016. According to another analysis, if competition with Chinese imports had been somehow halved, Michigan, Wisconsin, and Pennsylvania would likely have chosen Hillary Clinton that year. Economic explanations like these have been challenged. In April, the political scientist Diana C. Mutz published a paper finding that Trump voters were no more likely than Clinton ones to have suffered a personal financial setback; she concluded that Trump’s victory was more likely caused by white anxiety about loss of status and social dominance. But it’s not surprising that Trump voters weren’t basing their decisions on their personal circumstances, because voters almost never do. And Mutz’s own results showed that the factors most likely to lead to a Trump vote included pessimism about the economy and preferring Trump’s position on China to Clinton’s. It may not be possible to untangle economic anxiety and a more tribal mind-set.
Casting about for a Polanyi-style countermovement to temper the ruthlessness of laissez-faire, Kuttner doesn’t rule out tariffs. They’re economically inefficient, but so are unions, and, for a follower of Polanyi, efficiency isn’t the only consideration. A decision about a nation’s economic life, the Harvard economist Dani Rodrik writes, in “Straight Talk on Trade” (Princeton), “may entail trading off competing social objectives—such as stability versus innovation—or making distributional choices”; that is, deciding who gains at whose expense. Such a decision should therefore be made by elected politicians rather than by economists. America imposed export quotas on Japan in the seventies and eighties, to the alarm of headline writers at the time: “Protectionist Threat,” the Times warned. But Rodrik, looking back, judges the measures to have been reasonable ad-hoc defenses—“necessary responses to the distributional and adjustment challenges posed by the emergence of new trade relationships.”
Trump’s chief trade negotiator served on the Reagan team that administered quotas against Japan. A similar approach today, however, seems unlikely to work on China, whose economy is much more messily enmeshed with America’s. You probably can’t name as many Chinese brands as Japanese ones, even though you probably buy more Chinese-made products, because they are sold to Americans by American companies. American workers may wish they had been shielded from the effects of trade with China, but American businesses, by and large, don’t. Perhaps that’s why Trump has escalated from a tariff on steel and aluminum to erratic threats of a trade war. To achieve his campaign goal of bringing manufacturing jobs home from China, he will have to not only impose tariffs but also convince multinationals that the tariffs will stay in place beyond the end of his Administration. Only then will executives calculate that they can’t just wait it out—that they have no choice but to incur the enormous costs and capital losses of abandoning investments in China and making new ones here. It’s hard to imagine such a scheme working, unless Trump establishes a political command over the private sector not seen in America since the forties. That can’t be ruled out, given the state of affairs in Russia, China, Hungary, and Turkey, but it seems more likely that Trump’s bluster will merely motivate businesses to be deferential to him, in pursuit of favorable treatment.
“Basically there are two solutions,” Polanyi wrote in 1935. “The extension of the democratic principle from politics to economics, or the abolition of the democratic ‘political sphere’ altogether.” In other words, socialism or fascism. The choice may not be so stark, however. During America’s golden age of full employment, the economy came, in structural terms, as close as it ever has to socialism, but it remained capitalist at its core, despite the government’s restraining hand. The result was that workers shared directly in the country’s growing wealth, whereas today proposals for fostering greater financial equality hinge on taxing winners in order to fund programs that compensate losers. Such redistributive measures, Kuttner observes, are only “second bests.” They don’t do much for social cohesion: winners resent the loss of earnings; losers, the loss of dignity.
Can we return to an equality in workers’ primary incomes rather than to one brought about by secondary redistribution? In a recent essay for the journal Democracy, the Roosevelt Institute fellow Jennifer Harris recommends reimagining international trade as an engine for this rather than as an obstacle to it. When negotiating trade deals, for instance, governments could make going to bat for multinationals conditional on their agreeing to, say, pay their workers a higher fraction of what they pay executives.
Failing that, we’d be better off with redistributive programs that are universal—parental leave, national health care—rather than targeted. Benefits available to everyone help people without making them feel like charity cases. Kuttner reports great things from Scandinavia, where governments support workers directly—through wage subsidies, retraining sabbaticals, and temporary public jobs—rather than by constraining employers’ power to fire people. “We won’t protect jobs,” Sweden’s labor minister recently told the Times. “But we will protect workers.” Income inequality in Scandinavia is lower than here, and a larger proportion of citizens work. Maybe a government can insure higher pay for its workers by treating them as if they were, in and of themselves, valuable. True, Denmark’s spending on its labor policies has at times risen to as high as 4.5 per cent of its G.D.P., more than the share America spends on defense, and studies show that diverse countries such as ours find it harder to muster social altruism than more racially and culturally homogenous ones do. Nonetheless, programs like Social Security and Medicare, instituted when a communitarian ethic was still strong in American politics, remain popular. Why not try for more? It might make sense even if the numbers don’t add up. ♦
US President Donald Trump has exploited popular anger to advance his own interests, but he did not create that anger. America’s elites have spent decades doing that, creating the conditions for a figure like Trump to emerge.
HONG KONG – Many blame today’s populist rebellion in the West on the far right, which has won votes by claiming to be responding to working-class grievances, while stoking fear and promoting polarization. But, in blaming leaders who have seized on popular anger, many overlook the power of that anger itself, which is aimed at elites whose wealth has skyrocketed in the last 30 years, while that of the middle and working classes has remained stagnant.
“US President Donald Trump has exploited popular anger to advance his own interests.”–Sheng and Geng
Two recent analyses get to the heart of the issues at play, particularly in the United States, but also in the rest of the world. In his new book Tailspin, the journalist Steven Brill argues that US institutions are no longer fit for purpose, because they protect only the few and leave the rest vulnerable to predatory behavior in the name of the free market. According to Brill, this is an upshot of America’s meritocracy: the best and brightest had the chance to climb to the top, but then essentially pulled the ladder up behind them, as they captured democratic institutions and used them to entrench special privileges for themselves.
The author Matthew Stewart agrees, arguing that, “the meritocratic class has mastered the old trick of consolidating wealth and passing privilege along at the expense of other people’s children.” Stewart shows that in the mid-1980s, the share of US wealth held by the bottom 90% of the population peaked at 35%; three decades later, they owned just 20%, with almost all of what they lost going to the top 0.1%. The 9.9% between these two groups – what Stewart calls the “new American aristocracy” – comprises what used to be called the middle class. In 1963, the 90% would have had to increase their wealth sixfold to reach the level of the 9.9%; by the 2010s, they would need 25 times their wealth to reach that level.
Much of the US population is working harder than ever, yet has suffered a decline in living standards, compounded by high levels of household debt and, in many cases, lack of health insurance. The top 10% have easy access to higher education that will enable their children to have the same privileges as them; the bottom 90% must work much harder to cover sky-high tuition fees, and typically graduate with a heavy debt burden. The top 10% receive first-rate medical care; the bottom 90% often do not, or must pay an exceptionally high price for it.
Blaming outsiders is politically expedient. But the only way to “make America great again” is by addressing its internal injustices. No import tariff or border wall can do that.
Taxation is supposed to level the playing field. But US Republicans have long pushed to lower taxes on the rich, arguing that lowering marginal tax rates will promote investment, employment, and economic growth, which will cause the wealth to “trickle down” to the rest of society. In fact, tax cuts for the rich merely further entrench their advantages, exacerbating inequality.
Making matters worse, the poor pay more indirect taxes (on land, real estate, and consumer goods), and the bottom 20% of the US population pays more than twice what the top 1% pays in state taxes. Add to that the challenges posed by automation and robotization, not to mention increasingly frequent and intense natural disasters, and it is not hard to see why so many people are so furious.
According to Stewart, the 9.9% is “the staff that runs the machine that funnels resources from the 90% to the 0.1%,” happily taking its “cut of the spoils.” But the inequality that this machine generates can have serious consequences, as it spurs social discontent and, as we are seeing in the US today, erratic policymaking. As the Austrian historian Walter Scheidel argues, inequality has historically been countered through war, revolution, state collapse, or natural disaster.
Avoiding such a dramatic event would require the 10% to do a much better job of advancing the interests of the 90%, in terms of income, wealth, welfare, and opportunities. Yet a combination of economic myopia and political polarization has led many instead to try to divert popular anger toward immigrants, China, and trade (including with close allies). As a result, the entire world is now caught in an escalating protectionist war that nobody will win.
It is true that, historically, internal contradictions and imbalances have often led to interstate conflict. But that is not inevitable. Rather, the outcome depends on the quality of leadership. In the US, for example, George Washington, Abraham Lincoln, and Franklin D. Roosevelt succeeded in strengthening their country because they recognized the need to address internal divisions in the light of America’s core values, global position, and long-term goals.
US President Donald Trump has exploited popular anger to advance his own interests. But he did not create that anger; America’s elites have spent decades doing that, creating the conditions for a figure like Trump to emerge. Now that Trump is in charge, the conditions of the 90% are set to deteriorate further. His approach to trade, in particular, will not only fail to help the people he purports to represent; it will also destroy the sense of fairness and stewardship that has historically bound the masses to their leaders.
Blaming outsiders is politically expedient. But the only way to “make America great again” is by addressing its internal injustices. No import tariff or border wall can do that.
China has enshrined Xi Jinping’s thought on diplomacy as the supreme guidance to the country’s foreign affairs at a key conference, which also urged the country to take an active part in leading the reform of the global governance system.
In an address at the Central Conference on Work Relating to Foreign Affairs held in Beijing on Friday and Saturday (June 22 and 23), Chinese President Xi Jinping, who is also Gneral Secretary of the Central Committee of the Communist Party of China (CPC), underscored the importance of keeping in mind both internal and international imperatives, focusing on realizing China’s national rejuvenation, promoting human progress, and making contributions to the building of a global community with a shared future for humanity, the Xinhua News Agency reported.
“We should thoroughly implement the thought on diplomacy of socialism with Chinese characteristics for a new era, continuously facilitate a favorable external environment for realizing the Chinese Dream of national rejuvenation and promote the building of a community with a shared future for humanity,” said Xi.
He highlighted major aspects of the thought, which include forging ahead with the Belt and Road construction on the principle of achieving shared growth through discussion and collaboration and lead the reform of the global governance system with the concept of fairness and justice.
“Many solutions China has proposed to global issues have proven to be of great help in recent years, and thanks to those useful solutions, the global system is witnessing a positive reform toward fairness and justice,” Wang Wen, Executive Dean with the Chongyang Institute for Financial Studies at Renmin University of China, told the Global Times.
China’s development pattern has offered developing countries a fine example, China’s economy has contributed to one third of global growth, and China’s proposals in solving matters such as North Korea‘s nuclear issue have been adopted by the world, according to Wang.
“The global governance system has reached a balance between the West and the rest with China’s contribution,” Wang said.
China’s proposals have also guaranteed international order in global free trade and UN system-based political agreements, both of which have turned chaotic due to the US government’s radical polices, Li Haidong, a Professor at China Foreign Affairs University, told the Global Times.
But it’s not enough for China to just participate in the global governance system, rather China is expected to lead the reform of the system to help change the current closed and unfair system, experts said.
China’s proposal of building a community for the shared future of mankind is the Ideal outcome of reform on the global governance system, and the Belt and Road initiative and global partnership is a step in this direction, Wang Yiwei, Director of the Institute of International Affairs at Renmin University of China, told the Global Times.
The thought also stresses to uphold the authority of the CPC Central Committee as the overarching principle and strengthen the centralized, unified leadership of the Party on external work.
Wang Yiwei said that China stressed the leading role of the CPC at all levels, and it is significant for the CPC to lead China’s diplomacy and coordinate and promote China’s foreign policies.”The CPC’s leading role helps China better deal with the US government in trade war, and promote the Belt and Road initiative,” Wang Yiwei said.
Xi Jinping thought on diplomacy
While delivering concluding remarks at the conference, Yang Jiechi, member of the Political Bureau of the CPC Central Committee and Director of the Office of the Foreign Affairs Commission of the CPC Central Committee, said that the most important outcome of this conference is that it established the guiding position of Xi Jinping thought on diplomacy.
It is a major theoretical achievement in the thoughts on state governance in the area of diplomacy by the CPC Central Committee with Comrade Xi Jinping at the core, and a fundamental guideline for China’s external work in the new era, Yang said.
Wang Wen said that Xi Jinping thought on diplomacy is the epitome of China’s foreign policies in the past five years, and is also an answer to current chaotic diplomatic thought with hesitation and lack of confidence.