Economics for the summer

June 23, 2019

Last week Martin Wolf, the FT economics journalist, listed the new economics books
that he would recommend for summer reading.

He started off with Austerity: When It Works and When It Doesn�t, by Alberto
Alesina, Carlo Favero and Francesco Giavazzi, Princeton, RRP�27/$35. Wolf
commented that �this is an extremely important book. It uses empirical evidence to
assess the effects of fiscal austerity through spending cuts versus tax increases.
It concludes that the negative effects on output of spending cuts are far smaller
than those of tax increases. Moreover, spending-based plans are more effective in
lowering the growth of debt than tax increases. Yet, it should be noted that the
costs are assessed only in terms of aggregate output and so ignore the
distributional impacts of spending cuts versus tax rises.�

Alesina et al have been leading supporters of the positive impact of �austerity� on

economic growth, in contrast to the pile of evidence from the IMF and other sources
that the policies of austerity have not helped (instead hindered) economic recovery
in any of the major capitalist economies.

When they first published a paper on this, Alesina et al reckoned that �fiscal
adjustments based upon cuts in spending are much less costly, in terms of output
losses, than those based upon tax increases. �.spending-based adjustments generate
very small recessions, with an impact on output growth not significantly different
from zero.� And �Our findings seem to hold for fiscal adjustments both before and
after the financial crisis. We cannot reject the hypothesis that the effects of the
fiscal adjustments, especially in Europe in 2009-13, were indistinguishable from
previous ones�. In other words, cutting government spending (austerity) had little
effect on the real GDP growth rate and that applied to the post-crisis �austerity
policies of European governments.

At the time, I wrote in a post that �economic growth in capitalist economies

depends on an expansion of business investment and that depends ultimately on the
profitability of those investments. If we look at the multiplier effects of
government spending, taxation and borrowing on growth through the prism of
profitability, we find that it is very unlikely that extra government spending,
whether financed by taxes or borrowing, would boost profitability in the business
sector and therefore raise capitalist investment and economic growth.� In other
words, raising or cutting government spending will have only marginal impact on
growth. The change in the profitability of capital is what matters in a capitalist
economy.

Wolf�s second recommendation was Russia�s Crony Capitalism: The Path from Market
Economy to Kleptocracy, by Anders Aslund, Yale University Press, RRP�25/$35. Wolf
comments that �This superb book shows why Putin�s regime is a leading catastrophe
of the 21st century. Russia�s president has constructed what Aslund calls �an iron
quadrangle of four circles of power�: vertical state power; big state enterprises;
his cronies; and the �Anglo-American havens, where he and the cronies can safely
keep their money�. According the author what is needed is �radical transparency
over the beneficial ownership of wealth held in the west.�

In other words, we need to expose the money laundering and tax avoidance of Russian
oligarchs that has been assisted by Western banking. After the scandals of the
Panama papers and the Deutsche Bank and Danske bank tax scams, that is a forlorn
hope. As Gabriel Zucman and Thomas Wright have shown in a meticulous and in-depth
analysis of the size and extent of tax havens and tax avoidance, far from them
being reduced or controlled, on the contrary, such schemes are an increasing part
of international corporate profits, organised and transacted by the banks. About
half of all the foreign profits of US multinationals are booked in tax havens.

The next book Wolf highlights is The Globotics Upheaval: Globalization, Robotics
and the Future of Work, by Richard Baldwin, Weidenfeld & Nicolson, RRP�20.
According to Wolf, �Globotics� describes the integration of artificial intelligence
with robotics. Improvements in technology will make it far easier to collaborate at
a distance. Moreover, many tasks now carried out by people will be done by AI and
robots. The combination will, he argues, transform (and threaten) the economic
opportunities of huge numbers of relatively educated people in high-income
countries.

In other words, AI and robots will boost trade but reduce jobs in areas that
previously assisted trade and investment. Yes, it�s a dialectical issue. Reducing
the labour time, particularly transport and logistics time, can only increase
productivity. But under capitalism, that does not mean less working time for all,
but a loss of jobs that technology replaces. Those jobs must be replaced by new
jobs associated with the new technology. That can happen.

But as Marx pointed that does not mean a seamless process of change. �workers who
have been thrown out of work in a given branch of industry can no doubt look for
employment in another branch�even if they do find employment, what a miserable
prospect they face! Crippled as they are by the division of labour, these poor
devils are worth so little outside their old trade that they cannot find admission
into any industries except a few inferior and therefore over-supplied and under-
paid branches. Furthermore, every branch of industry attracts each year a new
stream of men, who furnish a contingent from which to fill up vacancies, and to
draw a supply for expansion. As soon as machinery has set free a part of the
workers employed in a given branch of industry, the reserve men are also diverted
into new channels of employment, and become absorbed in other branches�
(Grundrisse).

Wolf also recommends The Sex Factor: How Women Made the West Rich, by Victoria
Bateman, Polity, RRP�16.99. Bateman is the Cambridge academic, notorious for her
�naked protests� on TV against Brexit. Apparently she argues that �women�s freedom
is vital for economic prosperity. It boosts wages, skills, saving and
entrepreneurial spirit, and it delivers a democratic and capable state.�

Although Bateman is a feminist, she believes, against many feminists, that markets
�have?.?.?.?been central to building women�s freedom�. Wolf thinks she is right on
that. But does the evidence support the view that capitalism and markets have
helped make women freer? Yes, capitalist accumulation has led to a sharp increase
in the employment of women, but also to the increased exploitation of female labour
power (at lower wages than men). Yes, women have made Western capitalism rich, but
not vice versa.

The most self-serving of the books recommended by Wolf is Firefighting: The

Financial Crisis and its Lessons, by Ben S Bernanke, Timothy F Geithner and Henry M
Paulson Jr, Penguin, RRP$16/Profile, RRP�9.99. In this we are told by the very men
that ensured the bailout of US banking and financial institutions with taxpayer
money how they saved the world (for capitalism). Wolf agrees �If what these three
men did during the financial crisis had not been done, the world would, in my view,
have experienced a second great depression.�

This book is really a repeat of Ben Bernanke�s own memoir published four years ago
when he defended his role as head of the US Federal Reserve. In that book he would
like us to think that he �courageously� saved the world by adopting unconventional
monetary policies learnt from the lessons of the Great Depression and in the teeth
of orthodox opposition. But he did not save the world but only the banks (the
biggest ones) and his unconventional monetary policy has not revived the US
economy, let alone the world, but only fuelled a new credit-led stock market and
bond boom for the 1%.

Wolf admits that �the story told in this short book contains a sober warning.
Despite stronger regulation and more robust financial systems, further financial
crises will happen. Policymakers need tools to put out these fires. But, in the US
at least, their ability to do so is now less than it was before the crisis. We must
pray that we do not learn to regret this.�

Perhaps the answer is to adopt a policy of massive monetary injections directly to

the public, by-passing the banks. This is the policy recommended to save the world
economy in the next crisis in The Case for People�s Quantitative Easing, by Frances
Coppola, Polity, RRP�35. Wolf: �The alternative, she argues, is for central banks
to create money in a crisis that provides people with purchasing power directly.
The view that this must be part of the policy arsenal is right. We should think
about how this is to be done when a crisis hits once again.� The �money trick�
continues to dominate the thinking of Keynesian and post-Keynesian economists like
Coppola, Pettifor and, of course, the Modern Monetary Theorists. My views on these
ideas and policies are expressed in several posts.

In The Wealth Effect: How the Great Expectations of the Middle Class Have Changed
the Politics of Banking Crises, by Jeffrey M Chwieroth and Andrew Walter, Cambridge
University Press, RRP�29.99/$39.99, Wolf tells us that future financial crises will
require yet more bailouts by government and this book says there is no way out of
this. �We have ended up in a race between the regulatory capacity of the state and
the financial sector�s ability to discover new ways to collapse. There is no
straightforward way out of this dangerous red queen�s race.�

In many posts and papers, I have argued that there is a way out of recurring
financial crises. Regulation has not worked and will not work. Public ownership
and public banks under democratic control is the only way to end speculation, money
laundering and tax evasion by the financial sector. To quote Lenin: �The banks, as
we know, are centres of modern economic life, the principal nerve centres of the
whole capitalist economic system. To talk about �regulating economic life� and yet
evade the question of the nationalisation of the banks means either betraying the
most profound ignorance or deceiving the �common people� by florid words and
grandiloquent promises with the deliberate intention of not fulfilling these
promises.�

Wolf praises the next book Democracy and Prosperity: Reinventing Capitalism through
a Turbulent Century, by Torben Iversen and David Soskice, Princeton, RRP$29.95/�24
because it reckons that �democracy� and capitalism go together and cannot be
separated: �democracy and markets have proved highly successful over the past
century and, in all probability, will continue to be so in future.� This rosy-
glassed view stands in opposition to the reality that when it comes to a choice
between preserving capitalism and the profits of the owners of capital and
sustaining �democracy�, the latter has always been sacrificed for the former.

Then there is China. Wolf recommends The State Strikes Back: The End of Economic
Reform in China, by Nicholas Lardy, Peterson Institute for International Economics,
RRP$23.95. Lardy�s new book promotes his argument that �China has moved away from
market-oriented reform towards a more state-controlled economy, partly in order to
strengthen the control of the party-state. This, he argues, is a mistake. Among
other things, China cannot simultaneously promote a state-controlled domestic
economy and argue for an open world economy. It must choose. The current path will
prove damaging for both China and the world.�

Lardy has regularly forecast the collapse of the Chinese economy unless it fully
adopts markets and gets rid of state control. And yet the evidence of China�s
economic success stands in contradiction to this view. Yes, China is an autocratic,
one-party state increasingly dominated by one man. But a switch to open markets,
free trade and opening up to foreign investment will not deliver �democracy�, but
the very economic collapse Lardy claims it will avoid.

That markets are no solution to economic prosperity and democracy is actually

hinted at in The Third Pillar: The Revival of Community in a Polarised World, by
Raghuram Rajan, William Collins, RRP�30/Penguin Press, RRP$30. Rajan, former
governor of the Reserve Bank of India, argues that the balance between the market
economy and the state has been disrupted. The solution is to empower a third
pillar: the local community. He recommends shifting �from maximising shareholder
value to maximising the overall economic value of businesses, taking in investments
by workers and suppliers.� Rajan has claimed in the past that he was one of the
few mainstream economists that warned about the dangers of financial speculation
before the global financial crash but he was dismissed. Now it seems that his
solution is the utopian one of �community politics� and �shareholder democracy�.
More sophistry.

In The Power of Capitalism: A Journey Through Recent History Across Five

Continents, by Rainer Zitelmann, LID Publishing, RRP�23.79/$33.42 , we get the true
voice of capital. According to Wolf, �Capitalism is the only economic system that
has proven to be successful, in the long term. This is the core argument of
Zitelmann�s lively polemic. As is true of most ideologues, he oversimplifies. He
understates the costs of high inequality. He also understates the fragility of
free-market financial systems. But, at a time when socialism is becoming
politically attractive, he rightly points to the proven economic superiority of
market economies built on private property.�

Zitelmann is in no doubt that capitalism is the best of all possible worlds. Wolf
agrees and he does not want �socialism� either, except that he is concerned that
the financial sector is unstable and capitalism may create inequality. There you
have it. One wing of the mainstream is all out for capital and markets; the other
wing is too, but wants to manage it better and make it fairer.