Saving capitalism

The 2007-2010 global financial crisis has generated endless debates in economic circles on how to save the capitalist economic system.  The debates are unresolved.  And so are the problems that the financial crisis has spawned, such as Brexit and the rise of right-wing populist politicians and demagogues. The crisis is also an aggravating factor in the spread of terror and Islamic fundamentalism.

No major reforms in the global capitalist order have also been introduced.  To avoid a repeat of the global banking crisis, the G20 countries simply pushed, through the Basel 3 agreement, for higher capitalization and liquidity ratio in the banking system. However, global financial speculators have remained free to do their vulture-like business. As to the World Trade Organization, the Doha Development Agenda of 2000 is still an unsettled agenda 17 years after, with the trade liberalizers in a standoff with those seeking development and trade flexibility.

At the national level, many countries adopted fiscal stimuli, studiously avoiding the austerity non-solution that the IMF prescribed to the hard-hit countries during the 1997-1998 Asian financial crisis.  The United States had a huge $1-trillion Troubled-Asset Relief Program, a big percentage of which helped bail out banks and firms that were considered “too big to fail”. The widespread use of fiscal stimuli elicited the cryptic observation by then- World Bank Chief Economist Justin Yifun Lin that the crisis revealed the “best-kept economic secrets” of developed countries:  they all  pursue “Industrial Policy” despite their endless avowals of allegiance to free trade.  The secret was fully exposed with the election of the outspoken Donald J. Trump. His “America First” agenda means every country must take care of its own national development priorities despite economic globalization and the proliferation of free-trade agreements.

However, not all countries pursued stimuli. The heavily indebted European countries embraced fiscal austerity. Paul Krugman, in his book End This Depression Now (2012), berated these countries as  “Austerians”, countries which reduced national budgetary expenditures while raising taxes at the same time. He labeled the austerity policy as “wrongheaded” and “destructive”.  Indeed, it was, because unemployment and underemployment doubled, even trebled, in the PIIGS (Portugal, Italy, Ireland, Greece and Spain) while the fiscal crisis remained uncorrected. The austerity program that impoverished Greece and its people shall hound Europe and its EU masters for decades to come.

In the meantime, Europe, America and many in the developing world have been experiencing slow growth, stagnating industrial capacity, and high unemployment and underemployment.  On top of these is the painful realization among economists and policy-makers that social and economic inequality has been deepening within and across capitalist societies around the globe. The long-term economic decline has been accompanied by growing inequality. This has been dramatically illustrated in the publication of Capital in the Twenty-First Century (2013), written by the French economist Thomas Piketty. Piketty argued that, in the past three centuries of capitalism, the rate of capital return in Europe and America is persistently greater than the rate of economic growth. In the study of Piketty, the top 10 percent of wealth holders in the US for the years 2010-2011 owned 72 percent of America’s wealth, while the bottom half accounted for only 2 percent.

Growth and inequality in surging Asia happen to be also the themes in major economic publications of the Asian Development Bank and UN agencies. For example, the focus of the 2012 Asian Development Outlook is “Confronting Rising Inequality in Asia”.  Countries with comparable data, the Philippines included, have been registering higher inequality as measured by the Gini coefficient.  China, the economic growth champion, has been transformed from a state of relatively equal income distribution to one that is very unequal.

The social and political ramifications of deepening inequality amid  growth are not difficult to fathom. They give birth to revolts, social divides, ghettoes, sectoral violence, drugs, crimes and so on.  So what is the way forward?

Piketty’s remedy: a tax on capital.  Ironically, in the early draft of the tax-reform package of the Duterte administration, tax on capital is proposed to be reduced, which is somewhat in line with the thinking of the  tax adviser of Ronald Reagan, Arthur Laffer, who proposed lowering taxes for the rich to stimulate growth in the American economy.

The truth, however, is that stabilizing a crisis-ridden and unequal capitalist system requires more than a tax-reform package. To tame the Great Depression of 1929-1933, US President Franklin Delano Roosevelt, ahead of the economic thesis for an activist macroeconomic governance propounded by John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936), launched a “New Deal” program, which involved a series of big public-work projects to create millions of jobs and the enactment of strict laws regulating the financial system to avoid a repeat of the bank crash. These were complemented with various social assistance programs for the poor. But the most radical policy initiative under the New Deal is the one giving American workers better protection in organizing unions and securing better terms in their collective negotiation efforts—at a time when America was still in crisis and had not yet recovered!

After World War II, Western Europe, facing the threat from Communist Eastern Europe, expanded the Roosevelt-Keynesian social-economic program into a full-blown welfare state system where the jobless are given the means to live and find jobs, the sick and elderly ample care, the unionized workers a voice in the bargaining table and even in the corporate board (via codetermination law in Germany), and the gap between the rich and the poor narrowed by a progressive taxation system and a corporate culture limiting the wage differences between managers, supervisors and rank-and-file workers.

The trouble is that the welfare state system has been eroding.  Economic globalization and the shift in economic thinking favoring free-wheeling neo-liberal economics are the culprits. The welfare state system is even on the brink of collapse in some European countries due to the global financial crisis, with the Austerians managing to control the levers of policy-making. This, in brief, is the reason the debates on the future of the capitalist system have been intensifying, not easing.

One of those engaged in the global debates is Prof. Robert Reich, US labor secretary under President Bill Clinton. In Saving Capitalism (2016), Reich argued for the need to reform America’s corporate system in order to save capitalism “for the many, not the few”. He demolished the old argument of “free traders” seeking less government role in business and in shaping the economic directions of society, stating that no “free market” is possible without government.  Further, he pointed out that the “invisible hand” in the market is not really that invisible; it “is connected to a wealthy and muscular arm” of the corporations.  Those who argue for free market are the ones trying to influence the market for themselves. Reich went on to outline how the American big corporations and their CEOs are able to manipulate the market and the politicians, monopolize products ranging from agriculture seeds to ICT data, hollow out manufacturing by outsourcing everything, organize business to maximize returns to shareholders, and minimize taxes for the rich.  An ex-Cabinet man, Reich concluded that the so-called free market system is
really an alliance between Wall Street and Washington.

So what is Reich’s proposed alternative?  A return to Keynesian model of development where the government leads in designing, organizing and enforcing the market to meet the needs of the many, not the few.  He also argues for a fairer sharing of present and future wealth, not through a simple higher taxation for the rich but through an assurance that every citizen shall have a basic decent income.

Is this vision of economic governance possible in America?  In Europe? In the Philippines?  The answer lies in the collective hands of the millennials and the next generation.