My Theory on the Economy, and Other Things
This is a great TED Talk by Greece’s ex-Minister for Finance (https://goo.gl/3EdU2C).
One of my favourite parts is his point about capitalism being like a predator that is so successful at catching its prey that its prey goes extinct (capitalism's prey being the political sphere). He says:
“I spoke about my quarrel with capitalism. If you think about it, it is a little bit like a population of predators, that are so successful in decimating the prey that they must feed on, that in the end they starve.
Similarly, the economic sphere has been colonizing and cannibalizing the political sphere to such an extent that it is undermining itself, causing economic crisis. Corporate power is increasing, political goods are devaluing, inequality is rising, aggregate demand is falling and CEOs of corporations are too scared to invest the cash of their corporations.”
Mobilising idle cash
In addition to has great point about capitalism cannibalising itself by dominating the political sphere, another point I like from this talk is about the mountains of idle cash and the great wastefulness that creates.
Varoufakis says this in the talk:
"This is my quarrel with capitalism. Its gross wastefulness, all this idle cash, should be energised to improve lives, to develop human talents, and indeed to finance all these technologies, green technologies, which are absolutely essential for saving planet Earth."
But how to "energise" that cash?
I recently watched a TED Talk by Piketty from 2014 (https://goo.gl/NLe7KJ) which got me thinking. He has pointed out that wealth inequality is far greater than income inequality, and that, in terms of redistribution, an income tax (no matter how strong and progressive) is not sufficient by itself, not by a long shot. We need taxes on accumulations of wealth/capital.
Imagine if there was such a disincentive for people to accumulate massive amounts of essentially idle wealth (and stash it in, I don't know say Panama… or New Zealand). This could be achieved through some form of taxation and/or through greater financial transparency and the pressure that comes from that, as endorsed by Piketty. I believe that nothing would get that money moving quicker back into the economy and new ventures! As Kahneman illustrates in Thinking, Fast and Slow, people are more motivated to avoid loss than to obtain a gain, so losing $5 to wealth tax is more motivating than gaining $20 by investment.
That to me is one of the most effective ways to stimulate the economy, and ensure that money continues to flow around the economy (ie, to increase the velocity of money and create a more circular economy). Nothing else seems to really be working post-recession. It is becoming pretty apparent that fiscal and monetary policy isn't working; if anything I wonder whether they aren't making the overall situation worse!
Continuing with quantitative easing, effectively printing more money and giving it to the banks in the hopes they will responsibly lend it or invest it to get the economy (as a whole) kick-started, seems mad. It seems to me that that new money just gushes through the existing financial infrastructure straight to a handful of individuals at the top, with some minor leakage ('trickle down') along the way - there's a reason it's called "trickle down" and not "rain down". No wonder QE is so popular! But unlike physical or civic infrastructure, those minor cracks in the financial infrastructure seems to be monitored closely and always under repair to ensure minimum leakage.
If they are to continue printing money, then at least give it to the Government to spend on improving infrastructure or other services, or inject it directly into socially/environmentally worthwhile projects, both of which should create jobs and provide beneficial services to society. (Although I remain wary of the fact that the way things are set up means that any money injected into the economy ultimately, and far too quickly, ends up in the hands (read offshore bank account) of the rich rather than continuing to circulate around the economy.)
Nor does lowering interest rates to encourage borrowing and investment seem to work, as far as I can see. The rich (I kind of hate referring to the rich elites who are hogging all the cash and corrupting the political process, as it makes you seem like some sort of whacky lefty conspiracy theorist, but the Panama papers (amongst other things) demonstrate the truth behind some of these assertions). Anyway, the rich who are sitting on massive sums of money could essentially fund any large project or venture that would materially impact the economy with cash (no lending required). And I can see at least a couple of factors that might put everyday people (the rest of us) off taking up these low interest rates and getting our comparatively measly sums out there.
The first is, would you take out a loan (and/or invest your hard saved cash) into a business or venture that is large enough to affect the economy, where there is likely to be a gigantic multinational competitor who will probably use its endless financial, legal and political resources to cut you out so they can retain their market share and their ability to further accumulate such resources.
The other reason, I reckon at least, is that you need to give people confidence in the future before you can stimulate them to spend their savings, or take out a loan, to fund a business venture, or just to fund consumer spending or buying a house.
In the case of buying a house, it would help if they were affordable in the first place and the market weren't dominated by investors and speculators. It doesn't matter how low the interest rates are if you can't afford the deposit - if anything, lower interest rates in such circumstances only serves to further benefit the wealthy (those with capital).
In the case of confidence in the future, before committing to spending their savings or taking out a loan, people need to have confidence that (amongst other things):
their job won't be lost to automation or their set of skills otherwise marginalised or made redundant
that bankers won't fuck the economy again and screw over everyone but themselves
that their salary compared to the richest 1% won't get relatively worse over the next decade (that is, that income inequality won't continue to worsen)
that we aren't facing environmental disaster in the next decade or two, and that their country or region (or their country's key trading partners) aren't going to be overrun with people displaced by civil war or the effects of climate change, as is apparently becoming the case in Europe - and by all estimates this is set to get substantially worse worldwide on our current trajectory (off the top of my head, I think the projections are for around 200 million climate refugees by 2050; that dwarfs Europe's "crisis" of 1-2 million migrants)
that we aren't facing a foreseeable future where security of food supply and sources of fresh water are a very real concern
that if you take up the Keynesian carrot of lower interest rates and start a business your gigantic multinational competitors aren't going to improperly exercise their financial/political/legal muscle to push you out (as mentioned above)… and so on
Nothing makes you want to spend your hard earned cash, or take on the burden and risk of borrowing (and thereby help the economy get back on its feet) than the prospect of facing one if not all of the above threats in the imminent future…
There's a whole bunch of things required to "fix" the economy (by which I mean get it moving again), a lot of which I would suggest would also improve society and also move us towards a different version of capitalism - for instance:
fixing inequality and social mobility (I have other thoughts on the social and economic benefits of these more generally, which I will refrain from talking about here)
meaningful climate action and actions to preserve natural resources
taxing offshore funds, or idle capital generally (as well as appropriate income and other tax schemes)
having appropriate safety nets for displaced workers and those with redundant skills (incidentally, I think if people had confidence that such measures were in place, we might see increased support for stronger action on climate change in particular, but also equality, because many people might be scared that laws and regulations designed to combat those problems will negatively affect the economy (and therefore them), and whether or not that is true, if they had some confidence that they lived in a more just, equal and egalitarian society that would not leave them out in the cold if they lost their job or if some other hardship befell them, then they might be more likely to support the necessary policy measures
education, to not only ensure your populace is able to meaningfully engage in society (and not be led astray by the ramblings of a narcissistic nutter like Trump), but also to ensure your workforce of tomorrow is able to (out)compete others in the globalised workforce by having something to export to the world other than unskilled labour and manufacturing jobs, rather than resorting to backwards (and ultimately useless) protectionist measures of the kind peddled by Trump (two Trump jabs in one bulletpoint, but he and his supporters epitomise what I believe is wrong with the world, so I am unapologetic for this)
supporting genuine stability and peace in various regions in the world (quite apart from the fact that political instability fuels extremism, and apart from the eye-watering cost of war (including the massive profits to be made by the industrial military complex), it is hard to build a stable and robust economy when you have millions of refugees to process (or not…) and when the public's attention on political matters is dominated by fear of mass migration/terrorism. That public fear then pervades and severely interrupts all aspects of policy and politics - for instance, Brexit (a terrible decision from an economic perspective, but many Brexiters are persuaded, wrongly I say, by the allure of closing our borders and regaining sovereignty), or the rise of the far right and populism…and Trump (sorry, again). All of these would be terrible for the economy (and society), and would not I think actually fix the problems they purport to fix
But politicians seem more interested in patching up effects than fixing causes… Perhaps they are driven by the popular vote, but I will avoid a rant on the impact of the media on that for now.
Paradoxically, I believe that in doing many of the things we are told will be bad for the economy, and not doing many of the things we are told are good for the economy, we might instead actually strengthen the economy while also creating a better society, as many of those things would substantially increase people's quality of life and confidence: confidence in people, confidence in their future, confidence in government and in the fact that the government is looking out for everyone's interests, and not just their cronies. What else drives a healthy economy than booming, well-founded confidence?
Bernie Sanders seems to get it, and has even been endorsed by a major Wall Street player, Asher Edelman (video here, https://goo.gl/DSccN7).