Inequality Kills
Population health researchers, most famously and consistently Richard Wilkinson, have long drawn attention to the fact that the link between social class and health status is a gradient, such that an individual’s position in the class hierarchy is directly and causally linked to that person’s health status. It is not just that low income people are more likely to be be in ill health and to die earlier than those higherup the income ladder; high income people are also healthier and live longer than those in the middle. Lower health status reflects not just poverty and absolute deprivation, but also the relative deprivation, stress and anxiety which arise from an inferior position in the social hierarchy. (See Wilkinson’s The Impact of Inequality, New Press, 2005.)
A new Statistics Canada study puts solid new Canadian numbers behind the argument that inequality kills. They link income status in 1991 to mortality (deaths) between 1991 and 2001 and find that “compared with people of higher socio-economic status, mortality rates were elevated among those of lower socio-economic status, regardless of whether status was determined by education, occupation or income. The findings reveal a stair-stepped gradient, with bigger steps near the bottom of the socio-economic hierarchy.”
Some key numbers:
Canadians aged 25 and in the top fifth of the income distribution can expect to have 5.6 more years of life than those in the bottom fifth, and 1.7 more years of life compared to those in the middle one fifth. The gap between the top and bottom one fifth is 6.8 years for men, and 4.3 years for women.
Of Canadians aged 25, 78.1% in the top one fifth can expect to survive to age 75, compared 61.0% in th bottom one fifth, and 72.7% in the middle one fifth.
Of Canadian men aged 25, just 50.6% in the bottom one fifth can expect to survive to age 75, compared to 72.4% in the top one fifth .
http://www.statcan.ca/english/freepub/82-003-XIE/2008003/article/10681-en.htm
Will saving a forest save us money?
The Financial Crisis
Duncan Cameron has an excellent – and disturbing – column on the still deepening financial crisis in rabble:
http://www.rabble.ca/politics.shtml?sh_itm=14e122ab36db1c78ce34a64c243af494&rXn=1&
Economic Questions for Conservatives
As the debacle on Wall Street continues to unfold, how will it all affect the election up here? So far, Harper’s team is not “wearing” the uncertainty and insecurity that people feel regarding the economy, to nearly the extent that they should. I think that partly reflects the lack of concerted attack on economic issues from the opposition parties, and the curious “have-it-both-ways” aspect of free-market economic ideology (namely, if things are going well it’s thanks to the government’s steady hand, but if things are going badly don’t blame government because after all we live in a free-market private-sector system).
I hope that economic concerns will become more prominent in the remaining weeks of the campaign, and that voters begin to hold the Harper team to account for frittering away the proceeds of what was an inevitably time-limited resource boom on tax cuts and military spending – leaving us balanced precariously on the edge of deficit, just as government will need to spend more (not less) on EI benefits and public infrastructure.
To that end, I have assembled some choice quotes from Prime Minister Harper and Finance Minister Flaherty, some related economic factoids, and some possible questions to pose on the economy to Conservative candidates:
On Canada’s Economic Fundamentals
On June 12, 2006, Finance Minister Jim Flaherty said that Canada’s “fundamentals … are as solid as the Rock of Gibraltar.”
On February 27, 2008, Finance Minister Jim Flaherty said this: “I’m proud as a Canadian to be able to say that we have the strongest economic fundamentals in the G7.”
Canada’s real GDP (the total goods and services produced in the economy) shrank slightly during the first half of 2008. According to the OECD’s most recent Economic Outlook, Canada is expected to have the second-worst economic growth of all the G7 economies this year, with real GDP growing just 1.2 percent. Among the G7, only Italy’s forecast growth is worse. If we adjust for population growth (which is much faster in Canada than in Europe), our real GDP per capita is falling, and we are the worst of the G7. According to Statistics Canada, average productivity (which many economists consider the most fundamental measure of economic efficiency) in Canada’s business sector has declined since January 2006. And again according to the OECD Economic Outlook, Canada’s productivity growth over the 2006-2008 period has been the second-worst of any G7 economy (again, only Italy is worse).
Questions for Conservatives:
Do you believe that Canada’s economic fundamentals today are “as solid as the Rock of Gibraltar”?
What is the fundamental purpose of the economy, if not to produce more goods and services, as efficiently as possible?
With falling real output and declining productivity, how are Canada’s economic fundamentals strong?
On Manufacturing
On September 16, 2007, Finance Minister Jim Flaherty said this: “We’re seeing a lot of resilience in Canadian manufacturing businesses.”
Since the Harper government was elected in January 2006, 200,000 manufacturing jobs have disappeared from Canada. That’s the loss of 200 jobs (or one medium-sized factory) every day. Dozens of plants have closed. Real GDP in manufacturing has declined in 7 of 9 quarters (three-month periods) since the 2006 election – and has now fallen by 9 percent in total since Harper came to power. And Canada’s manufacturing trade deficit has more than tripled in just three years, from $16 billion in 2005 to over $50 billion this year.
Questions for Conservatives:
Do you accept that Canada’s manufacturing industry is crisis?
How do you define “resilience”?
Do you think that manufacturing has any special importance in Canada’s economy, or are other sectors just as important?
On The Canadian Dollar
On January 29, 2008, Finance Minister Jim Flaherty said this: “The Bank of Canada has targeted a range of 95 to 98 cents or so for the dollar, and that remains the target of the Bank of Canada, which we support.”
Apparently the Harper government officially supports a Canadian dollar near to par with the U.S. dollar. Yet according to international organizations (like the Organization for Economic Cooperation and Development), the true fair value (based on purchasing power) of the Canadian dollar should be about 80 cents (U.S.). With our dollar therefore about 25% above its fair value, Canadian products (especially manufactured goods) are too expensive to foreign buyers. That’s largely why we’ve lost 200,000 manufacturing jobs during Harper’s term in office, and why our trade balance (for everything other than petroleum) has deteriorated dramatically.
Questions for Conservatives:
Do you believe that the Finance Minister should endorse a particular trading range for the Canadian dollar?
Do you support, as he does, the dollar being close to par with the U.S. dollar?
How can Canadian products compete in international markets when an inflated currency has artificially increased their costs by 25%?
On Supporting the Auto Industry
On February 20, 2008, Finance Minister Jim Flaherty said this: “These Band-Aids for individual companies…, it’s picking winners and losers. Governments aren’t good at that.”
In Windsor on September 4 (three days before calling the federal election), while announcing $80 million over 5 years in financial support for a Ford Canada investment, Prime Minister Stephen Harper said this: “This is not money that is being thrown around on the eve of an election.”
For two-and-a-half years, the Harper government stated it was wrong to provide targeted aid to support key industries, companies, or projects, no matter how important their operations in Canada are to our overall economy. Then, with the election about to be called, the Harper government announced important (and badly-needed) support for major investments undertaken by Ford, General Motors, Bombardier, and others.
Questions for Conservatives:
Which policy will the Harper government adopt toward supporting key industries, if it wins re-election on October 14? The policy of “not picking winners” that it followed for all but one week of its term in office? Or the policy of supporting key industries and investments, that it followed during its last week in office?
On the Federal Budget
On March 11, 2008, Jim Flaherty said this: “Our government told Canadians we would maintain a balanced budget and we intend to keep our word.”
From fiscal 2000-01 through fiscal 2007-08, the federal government ran large annual surpluses that averaged $10.3 billion per year. For the current fiscal year, the Finance Minister had predicted a surplus of $2.3 billion, and for next year just $1.3 billion. The federal surplus has therefore declined by over 80 percent, compared to the levels that prevailed earlier this decade. And if economic growth does not match federal expectations (the government predicted real GDP growth of 1.7 percent in 2008 and 2.4 percent in 2009 – neither of which is likely), then the budget balance will be worse. Indeed, the government did slip into deficit during April and May of this year – and it could end up in the red for the year as a whole if the economy worsens.
By allocating almost all of its spare fiscal room to tax cuts (including corporate tax cuts that will cost almost $15 billion per year when fully phased in by 2012), the government has left no room for contingency in its budget, and created a significant risk of future deficits. But if the government encounters a deficit problem, Mr. Flaherty indicated he will cut spending, not restore corporate taxes.
Questions for Conservatives:
If an economic recession causes a federal budget deficit, which will you preserve? Canada’s health care and social programs? Or lower corporate income taxes?
On Investing in Ontario
On February 29, 2008, Finance Minister Jim Flaherty said this: “If you’re going to make a new business investment in Canada, and you’re concerned about taxes, the last place you will go is the province of Ontario.”
In most countries, the Finance Minister does everything in his or her power to win new investment. In Canada, to score partisan points, the Finance Minister actually discourages investment here. He made these comments at the same time as suggesting that if Ontario had cut its corporate income tax rates (as he did with federal rates – cutting them by about one-third by 2012) then the province’s manufacturing sector would not be in trouble.
When a company is losing money, a reduction in its income tax rate actually hurts it – because it’s after-tax loss is larger than it otherwise would have been.
Questions for Conservatives:
Do you believe that the Finance Minister should publicly discourage companies from investing in Ontario?
Can you explain how a corporate income tax reduction provides any benefit to companies (like the major North American auto companies) which do not have positive profits and hence do not pay income taxes?
Workplace and Employee Survey, 2005
Dr. Evil and the Gajillion Dollar Bailout
A salvo from Armine Yalnizyan on the bailout:
GAJILLION DOLLAR BAILOUTS: FIVE THINGS TO THINK ABOUT
By Armine Yalnizyan, Canadian Centre for Policy Alternatives
As the US government continues to figure out just how much it will take to bail out financial markets, up to the tune of $1 trillion dollars, the sound of Dr. Evil’s voice creeps into in my head – “Okay then. We will hold the world ransom..for One..Hundred..BILLION DOLLARS”
What’s unfolding south of the border is like a crazy Hollywood action movie. Except it’s not funny.
The scale of the thing eclipses any other government intervention in recent history and represents a damning indictment of the cries for a ‘free market’ and ‘less government’ that we’ve been hearing in the U.S. and in Canada for the past 20 years.
If this story was unfolding in Canada, the equivalent amount would be a $100 billion – about half the size of every other thing the federal government does.
It is the sheer size of this disaster that helps put a few things into focus.
First, and most striking: What a stupid way to spend such huge amounts of money.
Think how much further $1 trillion would have gone if even a fraction of it had been invested in creating more affordable housing options, the problem that triggered this mess in the first place.
Or imagine if it had been invested in public supports to help stretch Americans’ paycheques and improve their lives. Think of the public health care and education opportunities a trillion dollar investment could have given Americans.
It’s dumb economics to spend such obscene amounts of money to offset a crisis created by investors, with no clear and direct advantage to the average person on the street other than to say we kept the banks from completely fouling our nest today.
The second striking thing is how risk got shifted from the titans of Wall Street – the big players who get paid fortunes to take risks, gambling with America’s future and the entire global economy – to hard-working families who could never get away with ducking the price for acting irresponsibly.
Of course, the bailouts are spun as benefiting everyone – and that’s true to a point. But a nation of primarily low-paid workers is paying for a handful of loaded losers who made bad bets. In what other type of crap shoot does that happen? The CEO of Lehman’s, which folded under his guidance, earned $40 million last year, including “performance” bonuses. Pardon the pun, but that’s rich.
Not only are average working stiffs paying for these bad boys’ mistakes, they are paying twice, if you count interest. Since the U.S. government is already in deficit, U.S. taxpayers have to borrow the money from someone who has it. Average Americans will be paying for the big risk-takers for a long time to come.
The third thing worth paying attention to is the scary amount of consolidation that these events are triggering. The credit crunch is paving the way for corporate concentration of power and market share in the U.S. and globally.
It’s a world that Dr. Evil would fit right into.
The numbers of players in the financial market are shrinking, making the market share of those left standing players even bigger.
Three of the five largest investments banks in the US have disappeared in the past 6 months.
Bank of America has just “steadied” the market by buying up small fry Merrill Lynch (valued at $50 billion), making it now the world’s largest brokerage with client assets of $2.5 trillion.
Last week Lloyd’s of London swallowed a shaky Scottish based mortgage lender that had lost half its market value. Now Lloyds dominates about 40% of the market.
This kind of corporate concentration should be sending shivers down the global spine.
What does any of this mean to Canada? Conventional wisdom holds that Canadians needn’t worry, the same things are not going to happen here.
But here’s the fourth thing. It’s true that the exposure of Canada’s financial institutions to this contagion has not been enough to warrant bailouts. Major writedowns have led to corrections in the stock market – so the value of your RRSP may just have taken a big hit, but there’s no wave of mergers, and our politicians are not on the hook for tough decisions. Yet.
But things are not looking good, as financial meltdown translates to economic slowdown, putting more jobs on the line on both sides of the border. And if lenders become more skittish about lending and hang on tighter to their money, interest rates will inch up.
All those credit card and mortgage payments that already are so hard to make at month’s end may lead to record personal bankruptcies, if things continue to sour in the labour market, or if the price of borrowing goes up. Canada is not immune to widespread trouble.
So here’s the fifth thing. In the middle of this fiasco, in the middle of an election, one politician has stood strong, focused and clear about the way ahead. Our Prime Minister has stated that governments don’t guarantee jobs, and that “Canadian consumer spending has been a rock that has sustained the economy and we anticipate that that will continue”.
That way of thinking – governments can’t do anything for you, let the market decide, you’re on your own – may have worked last year or even last month. But given the events of last week, the Harper line is starting to sound dated.
We’re learning from south of the border that governments do have a strong and vital role in keeping the market in check. It’s time Canadians start having that conversation — before the meltdown comes to a bank account near you.
The Affluent Society
Since Galbraith has appeared in two recent posts, a timely salvo came to me from Christopher Nowlin:
I happen to think that Galbraith’s 1958 classic, The Affluent Society, speaks more loudly to today’s social, economic, political and environmental troubles in North America than it did to post WWII America’s. I even gave a public talk to this effect in April of this year for the Necessary Voices Society in Vancouver, entitled The Importance of Culture to Climate Change. (You can find it on the web, if you’re interested).
Below is Christopher’s review:
Book Review
written by Christopher Nowlin (2008),
author of To See the Sky (2008)
and Judging Obscenity (2003)
Review of John Kenneth Galbraith’s The Affluent Society (Riverside Press, 1958)
This year is the 50th anniversary of John Kenneth Galbraith’s bestselling The Affluent Society, and the dismal state of the planet’s health provides a perfect reason for reflecting on what this book had to say in 1958 about the “conventional wisdom” of economists and the “genius” of the American way of life. Galbraith was born and raised in rural Ontario, but became an American citizen shortly after obtaining his doctorate from the University of California at Berkeley. He spent a significant part of his professional life teaching economics at Harvard, editing Fortune magazine, and advising Presidents Franklin Roosevelt, John F. Kennedy and Lyndon B. Johnson on a variety of policy issues. He passed away only two years ago, at the age of 97, after having published numerous books, including The Culture of Contentment (1992), wherein he took aim at the tendency of America’s “contended majority” to prefer “short-run” inaction to “protective long-run action” in the face of impending socio-economic and ecological danger, including “global warming”.
The Affluent Society is especially relevant today, perhaps more so than it was for Americans living in the material abundance of the 1950s. Galbraith did not define specifically what he meant by an “affluent society”, but he did observe that, at the time, more died in America “of too much food than of too little”, and that fact seems sufficiently indicative of a society that is generally well-to-do. Galbraith was not unaware that established socio-economic institutions and customs in America had left a “self-perpetuating margin of poverty at the very base of the income pyramid”, and some of his observations and analyses in The Affluent Society showed his concern about this seemingly intractable problem.
One would be hard-pressed to contend that, as a general rule, the American standard of living has dipped over 50 years – if the subprime crisis has dented established patterns of production and consumption, the government’s predictable response has been to restore these patterns as quickly as possible through encouragement of more spending – so it is worth understanding what bothered Galbraith so much about the affluence of his society in the 1950s.
In short, Galbraith believed that American economic policy was preoccupied with the importance of producing material goods at the expense of attending to the public sphere – to health, education, sanitation, transportation, etc. Serious problems arise from such an orientation, pollution being just one, as he observes in the following passage:
The city of Los Angeles, in modern times, is a near-classic study in the problem of social balance. Magnificently efficient factories and oil refineries, a lavish supply of automobiles, a vast consumption of handsomely packaged products, coupled with the absence of a municipal trash collection service…made the air nearly unbreathable for an appreciable part of each year. Air pollution could be controlled only by a complex and highly developed set of public services – by better knowledge stemming from more research, better policing, a municipal trash collection services, and possibly the assertion of the priority of clean air over the production of goods. These were long in coming. The agony of a city without usable air was the result.
For Galbraith, increased production of material goods has been of central importance – the “bedrock” or “anchor” – to the conventional economist’s way of thinking, and the importance attributed to increased production has been buttressed, in his view,
by a highly dubious but widely accepted psychology of want; by an equally dubious but equally accepted interpretation of national interest; and by powerful vested interest. So all embracing, indeed, is our sense of the importance of production as a goal that the first reaction to any questioning of this attitude will be, “What else is there?”
As Galbraith saw it, profit-oriented American corporations and entrepreneurs have to sell the goods and services they manufacture and invent, and they do so by creating consumer desire (“want”) for these goods and services through advertising. Once consumer desire is created, a “dependence effect” kicks in. Non-essential, frivolous goods and services, gadgets or luxuries become regarded by consumers as essential – as the bare necessities of life. The Model T, the television, the cellphone, and the Blackberry could readily be grouped into this lot of consumer “goods”. Some of these products become socially institutionalized, and when their popularity inspires the erosion of publicly provided goods and services (such as public telephones), one can say that they become essential in fact. Galbraith took pains to argue that one sinister by-product of the dependence effect was a society chock-full of highly indebted individuals and families, precisely the societies of Canada and the U.S.A. today. As he succinctly portrayed the dynamics of mass debt creation:
It would be surprising indeed if a society that is prepared to spend thousands of millions to persuade people of their wants [through advertising] were to fail to take the further step of financing these wants, and were it not then to go on to persuade people of the ease and desirability of incurring debt to make these wants effective. This has happened.
Certainly it has, and the current American subprime crisis is but the tip of the iceberg.
Galbraith believed that the conventional economic wisdom exaggerates the importance of production to economic security in an affluent society. He wrote,
So compulsive, indeed, is the pressure to maintain output as a requisite of economic security that the economy is impelled to a level of performance which, as things now stand, it can sustain only with difficulty and at some cost and danger.
Now that was written 50 years ago, at a time when Galbraith could not likely have foreseen the dramatic changes in levels of industrial output and economic performance that have occurred not only in North America but in China and India, and there can be no question that, “as things now stand”, all of these economies can be sustained “only with difficulty and at some cost and danger.” The London-based journalist, Daniel Ben-Ami, wrote in his 50th anniversary review of The Affluent Society that many of the themes of the book anticipated “growth scepticism”, which Ben-Ami describes elsewhere as “sets of ideas which question the benefits of economic growth.”1 For Ben-Ami, such ideas themselves have become “the conventional wisdom” and it is time to launch a “counter-attack” against them.2 Indeed, Ben-Ami is an ardent opponent of growth skepticism. He believes, for example, that economic growth has enabled human beings to “become better able to control disease, curb the impact of the seasons and minimize the impact of natural disasters”, and has improved the environment “for millions of people”.3
I, for one, see the current state of global affairs much differently than Ben-Ami, and cannot help but wonder if he simply chooses to ignore the very real, historical correlations of supply and demand that have led to the most obvious ecological perils facing humankind today. Galbraith has not missed the mark. Political leaders in North America, Asia and elsewhere remain preoccupied with economic growth as the precondition for general societal well-being or “economic security”, to use Galbraith’s expression, and the destructive ecological consequences of this attitude are obvious throughout the world. But let us consider just one troubling spot of many, simply because it is drawing so much public attention of late, and rightfully so.
The tar sands mines in northern Alberta currently constitute the world’s largest industrial area. In 2006 Prime Minister Stephen Harper announced that “an ocean of oil-soaked sand lies under the muskeg of northern Alberta – my home province”, and he described the scale of oil sands development as “an enterprise of epic proportions, akin to the building of the pyramids or China’s Great Wall. Only bigger.”4 These observations were made with enthusiasm, even relish, and there is no question that the current Alberta and Canadian governments have a pro-development and pro-growth attitude in relation to the tar sands. It is also obvious, however, that the problem of “social balance”, as Galbraith understood that expression, is starkly real in the surrounding communities of Fort McMurray and Fort Chipewyan. As private and public oil companies around the world clamour to get a piece of the tar sands action so that their purses can expand and their associated domestic economies can grow, the health and welfare of the surrounding communities and wildlife is rapidly deteriorating, and the Athabasca River is sorely depleted. Josh Harkinson’s recent “Tar Wars”5 draws attention to the inflation and attendant homeless that has hit Fort McMurray, the remarkably high rate of cocaine-use among tar sands workers and Fort McMurray residents, the rise in prostitution, the decline in medical services, the increasing amounts of mercury, arsenic, and polycyclic aromatic hydrocarbons in the Athabasca River, the mutated and deformed fish being caught in Athabasca Lake, the deteriorated quality of duck, muskrat and moose meat being eaten, and “the tide of serious illnesses [that] has passed through Fort Chip’s tiny health clinic.”
Readers may decide for themselves whether the economic prosperity brought to the people living and working in the tar sands region, which has been created not only by a fear of peak-oil but by greed and a belief in economic growth and production at almost any cost, is worth all the social and environmental destruction that has accompanied it. But the overwhelming damage cannot be denied, and for this reason alone the concerns that Galbraith voiced in The Affluent Society and the suggestions he offered for improving the quality of life for all, remain so relevant today.
The Harper Record
The Harper Record was necessarily researched and written long before an election was called, but its publication does coincide with an election campaign and thus may help citizens to make informed choices about the future of their country. Regardless of the election outcome, its contents will continue to be relevant between elections. In detailing what a minority Conservative government really did, or failed to do, it may serve as a guide and model for future elections.”
Hot, Flat and Crowded: Tom Friedman Heats Up
Michigan lawmaker opposes Great Lakes compact in US House because he says it’s not strong enough
Ken Thomas, September 22, 2008, Associated Press Newswires – A key Michigan lawmaker said Monday he will oppose a compact to prevent the diversion of water from the Great Lakes because it allows bottled water to be shipped from the region.
GM Watch: Michael Pollan and Monsanto CEO at Google on YouTube
The Wage-Price Squeeze
In August 2008, ordinary Canadians were squeezed by rising annual inflation and slowing annual wage growth.
The decline in consumer prices from July to August 2008 (-0.2%) was smaller than the normal seasonal decline in prices between these months. (On a seasonally-adjusted basis, Statistics Canada estimates that consumer prices rose 0.2%.)
Compared to last month, the annual inflation rate edged up by 0.1% to 3.5%. At the same time, the annual growth in average hourly wages slowed by 0.2% to 3.8%. In real terms, Canadian workers were being paid only 0.3% more in August 2008 than in August 2007.
Of course, this national figure masks important regional variations. Inflation significantly overtook wage growth in two provinces. In Ontario, real wages decreased by 0.7%, eclipsing the 0.1% decrease recorded last month. Real wages also fell by 0.9% in Nova Scotia.
In British Columbia, real wages stagnated with wage growth barely exceeding inflation.
The only large improvements in real wages occurred in Newfoundland and Labrador (4.4%), Prince Edward Island (4.6%) and Saskatchewan (4.0%), which have relatively little effect on the national average.
Rising energy prices accounted for half of the annual increase in consumer prices. With the core inflation rate at only 1.7%, well below the Bank of Canada’s 2% target, there is ample room to cut interest rates.
By expanding the US money supply, the bailout of the American financial system may place downward pressure on the US dollar. Indeed, the Canadian dollar shot up 1.5 cents relative to the American dollar yesterday. To moderate the exchange rate and keep Canadian exports viable, the Bank of Canada should cut interest rates.
Wages, Inflation, and Real Wages by Province, August 2007 – August 2008
(Labour Force Survey and Consumer Price Index)
Canada: 3.8% – 3.5% = 0.3%
NL: 8.6% – 4.2% = 4.4%
PEI: 9.4% – 4.8% = 4.6%
NS: 3.5% – 4.4% = (0.9%)
NB: 4.8% – 2.6% = 2.2%
QC: 3.8% – 3.1% = 0.7%
ON: 2.8% – 3.5% = (0.7%)
MB: 4.6% – 3.4% = 1.2%
SK: 7.4% – 3.4% = 4.0%
AB: 5.3% – 4% = 1.3%
BC: 3.4% – 3.3% = 0.1%
Employment Insurance, July 2008
School board revenues and expenditures, 2005
The Conservative governments record comes under fire in new e-book
Kari Levitt’s JKG Lecture
Back in June, we co-awarded the first John Kenneth Galbraith Prize in Economics to Kari Levitt and Mel Watkins. Unfortunately, there was a snag with the transcription of Kari’s lecture and she had to recreate it. We now have the text and have posted it below. So congrats once again to both Kari and Mel for their outstanding contributions to Canadian economics. If you missed it, Mel’s lecture is available here.
The Great Financialization
Kari Polanyi Levitt
I am honoured and delighted that the Progressive Economics Forum has awarded me the John Kenneth Galbraith prize, and I am especially pleased that it is shared with my friend and colleague Mel Watkins. We go back a long way and we have come through many struggles together. Clearly, Mel Watkins is prima inter pares of Canadian political economists as we have witnessed in the outstanding presentation to this panel and your decision to honour him with the Galbraith award.
In the course of the last few days, I have not been with the Canadian Economics Association but with the Canadian Association for the Study of International Development, which is very dear to my heart which I assisted in founding. This reflects the fact that over the years, my areas of work, of research, of interest and of reflection have shifted to the global south. I am particularly moved to receive the Galbraith award because I have not been able to engage with Canadian issues for many years. So, I would like to take this opportunity to express my appreciation and thanks to colleagues at Canadian Centre for Policy Alternatives, to Duncan Cameron who is with us here this afternoon, and so many others for carrying on the good fight in the arena of Canadian political economy so effectively. As Canadian progressive economists, they may be small in numbers compared to mainstream academics but their critique of Canada’s drift to deep integration with the American empire has loud resonance among ordinary Canadians.
Unlike John Kenneth Galbraith and Mel Watkins, truly sons of the soil of Canada, born and raised in rural Ontario, I came to this country in 1947, as a delayed war bride. Joe Levitt served with a Canadian Tank Regiment which suffered heavy casualties in Normandy and later fought in Italy. We met in London and married in Toronto in 1950. Joe became a Professor of History at the University of Ottawa and was an active member of Veterans against Nuclear War.
I am sorry that Jamie Galbraith could not be here. It is quiet true that we have much in common, among other things, we have illustrious fathers whose heritage of thought we attempt in our various ways to preserve and to promote. When I read Jamie’s account of his father’s work, I was struck by our common generational experience. Galbraith was an expert in two matters, the experience with price and wage controls during World War II and the effects of allied strategic bombing on the German war economy.
During the war, I was an undergraduate at the London School of Economics, evacuated to Cambridge, where we enjoyed freedom from archaic restrictions imposed on Cambridge students, while attending courses by Joan Robinson and other Cambridge personalities as well as our own LSE lecturers, largely comprised of European foreigners and so-called colonials. It was my great fortune that the introductory course in economics was taught by W. Arthur Lewis, and in the second year economics, the courses were given by Nicolas Kaldor and Friedrich Von Hayek.
In two long summer vacations, I worked in war factories operating a large semi-automatic lathe with six tools that in turn would shape long bars of steel into parts and components of airplanes, and rather enjoyed the atmosphere of sociability. In another summer vacation, I participated in a large survey organized by the Ministry of Food to monitor the nutritional levels of the industrial workforce. This was of course at a time when all men in good health were in the armed forces and the industrial workers were those who were less fit or who were older and of course women. Teams of students fanned out all over the country to designated towns where we had to negotiate permission from the management to physically weigh and measure the workers on scales whether available in the factories or at coin-operated machines in neighbouring pharmacies. My assignments were in Coventry and Nottingham. It was found that the nutritional levels of the population in wartime England, without the fittest and the youngest of its men, had improved. The explanation was that the rations system enabled the entire population to access basic good nutritional food, which was not the case before the war because many people were too poor. In addition to the ration, all other food items, when available, were strictly price controlled, as were clothing and other essential consumer goods. Vitamins and orange juice were available free of charge to expecting and nursing mothers and infants. The merchant marines who transported food across the dangerous seas of the Atlantic contributed significantly to the supply of food, but it was the effective implementation of the principle of equity in its distribution which achieved these remarkable results. I recently saw a documentary on the life of Roosevelt. It showed how under his leadership, the American economy was mobilized for the mass production of tanks, air crafts and ships as a contribution to the allied war effort. This extraordinary increase in output, with no inflation, was achieved by the administration of price and wage controls. The effective mobilization of resources in wartime Britain and the Unites States contrasted with the waste of mass unemployment of prewar years. Full employment became the principal economic objective of the post-war international order. This was a personal experience I shared with John Kenneth Galbraith and many millions of others.
This brings me to another, more exclusively shared experience of the study of the effects of Allied strategic bombing on the German war economy. As they swept across Germany in the spring of 1945, British and American forces seized the records of German war factories and took them respectively to London and Washington. The British study was directed by Nicholas Kaldor. The staff consisted of three persons: an experienced statistician, myself engaged in reading and recording the German records in microfiche, and a messenger/tea boy. Kaldor would appear from time to time and he resolved the aggregation problem of how to produce a production index of outputs varying from tiger tanks to small ammunition by simply adding up the weight in tons. The response of German war production to allied strategic bombing of industrial targets and populations was a steady increase in output. The American study directed by Galbraith had a larger staff and produced a more comprehensive report which arrived at the same conclusion. The more we bombed them, the more efficiently their industries were organized and the harder people worked. Just as in Britain, where a twelve-hour shift and seventy-two hour week were not uncommon. In the last few months of the war, German production declined not because of allied bombing but because they ran out of fuel when the Russians recaptured the oil fields and the Luftwaffe was grounded.
In James’ talk on the work of John Kenneth Galbraith, he referred to his father’s expertise on the subject matter of these studies as highly unfashionable. Perhaps, this is a pity because there are surely lessons to be learned about the effects of waging war against civilian populations and the infrastructure that sustains them.
These personal experiences made a profound impression more enduring than most of the lectures I attended as a student with a notable exception of a brilliant Introduction to Economic Analysis by Prof. Kaldor. In the last two years of the war, I was employed in the Research Department of the Amalgamated Engineering Union, located in one of the most bombed boroughs of London, whose small staff consisted of four women. My intention was to specialize in labour research after having completed my studies.
On arrival in Canada, it was expected that I would pursue graduate studies at the University of Toronto. But I found the institution to be quiet dreary, and the most enjoyable experience of that year was a teaching assistantship in a course on English economic history where the Professor was content to let me teach a good part of the course. As a means of escape, I lied about my educational attainment and obtained employment at the Acme Screw and Gear Company on Old Weston Road in Toronto, where the work and the social environment were familiar. I was a proud member of UAW-CIO Local 984, predecessor of the CAW. This pleasant experience did not last long, when it became known that I was trained in labour research. I was persuaded to leave the factory for office work. After several years in research, journalism and political activism, I returned to academic study as a graduate student at the Department of Political Economy of the University of Toronto in 1957.
It was here where I first met Mel Watkins as a junior faculty member. Watkins’ seminal article “The Staple Theory of Economic Growth,” published in 1963 remains the best concise summary of Harold Innis’ account of Canadian economic development. At that time, the influence of Innis in economics curricula had not yet gone into decline in the University of Toronto. I had to study in detail the history and the geography of the fur trade, the Atlantic fishery, and the role of timber and wheat in the construction of the Canadian national space as an export economy at the margin of civilization to use the terminology of Innis. Innis was complemented by Donald Craighton’s account of political development in the Commercial Empire of the St. Lawrence. Mercantilist ties from the Canadian colony to the English metropole nourished and fed a Canadian business class. The commercial nature of this Canadian elite was inherent in this pattern of development.
In addition to Canadian political economy, courses on mathematical economics; including input-output analysis and linear programming, and a course on economics of underdevelopment which may well have been the first such course in Canada, attracted my interest.
Professor Burton Keirstead conducted a stimulating seminar on capital theory. He was an original thinker and a challenging teacher. When I brought Joan Robinson’s recently published Accumulation of Capital into the class, he suggested it would be a good topic for a Masters’ thesis. When I ran into difficulties and sought help from Keirstead, his reply was “When you have understood the argument of the book, please come and explain it to me.” He was passionate about the Maritime Provinces of Canada, from whence he came. He encouraged me to study the Atlantic Provinces as a case of regional underdevelopment, a project which eventually became a major statistical study of inter-industry economic flows for each of the four Atlantic provinces. His most fateful influence on my professional trajectory, however, came in 1960, when he introduced me to the West Indies and encouraged me to accept an appointment in the Department of Political Science and Economics at McGill.
In the West Indies, the prospect of political decolonisation raised hopes and dreams of new trajectories. The participants in these animated discussions were principally economists. The question was how to transform these export-oriented economies, which produced what they did not consume, and consumed what they did not produce, to respond to the needs of the population. The essence of economic development in this view was to reduce the degree of external dependence; to transfer the locus of decision-making from metropolitan to local actors. None of the economic models on offer, whether neo-classical, Keynesian or Marxist, corresponded to the realities of these Caribbean economies dominated by the legacy of centuries of sugar and slavery, and the operations of large foreign companies. In collaboration with Lloyd Best, we sought to develop an economic planning model which could capture the mechanisms of the principal economic flows of a typical Caribbean economy. The legacy of the slave plantations has not been extinguished in the English speaking Caribbean: it hangs most heavily over Jamaica.
My principal contribution to Canadian political economy, Silent Surrender: The Multinational Corporation in Canada would never have seen the light of day without Mel. The project began when Charles Taylor asked me to draft a paper on the issue of foreign ownership for a policy committee of the, then recently founded, New Democratic Party. Influential economists close to the NDP argued that foreign capital of any kind was obviously beneficial because it would increase national output, and the gains of economic growth could be redistributed by fiscal measures. They maintained that concerns regarding the loss of cultural identity were misplaced because revenue from economic growth could enhance government support to Canadian cultural industries. The most influential proponent of this conventional wisdom was the Canadian, Harry Johnson, commuting between Chicago and the LSE.
In the course of several meetings, including a weekend retreat with members of the national executive of the NDP, I explained that the essential difference between incoming portfolio capital and foreign direct investment was one of control. A subsidiary or affiliate of a multinational corporation located in Canada is not simply a firm whose owners are non-resident. It is an integral part of a larger enterprise and subject to its strategic considerations. A Canada dominated by subsidiaries and branch plants of mainly American companies, could not undertake coherent long-term strategies of industrial development, and thus was destined to remain dependent on primary resource exports.
As I amassed more material to strengthen my argument, the initial policy paper became a small monograph published by my colleague Lloyd Best in 1968 in the New World Quarterly, under the title “Economic Dependence and National Disintegration: the Case of Canada.” This little known Caribbean publication began to circulate among Canadian students and was reprinted by Cy Gonnick in Winnipeg. With additional material it was submitted to Macmillan of Canada. The manuscript was sent to a University of Toronto economist, who rejected it with comments that it was ideological, it was not economics, and it had no value. By this time, the publisher rather liked the manuscript and asked me to name another reader. I suggested Mel Watkins and the rest is history. Mel wrote a wonderful introduction and a second one when the book was reissued in 2002.
Mel will surely remember Lloyd Best. We all met at the invitation of Chilean economist Osvaldo Sunkel at Hamburg in a remarkable workshop in 1970. Scholars from diverse places of the world who did not know each other but were working on one form or another with concepts of dependency were brought together: from Canada, Watkins, myself and the brilliant Stephen Hymer who died far too young in a tragic accident; Lloyd Best from the West Indies; Arghiri Emmanuel known for his “unequal exchange”; Giovanni Arrighi then recently returned from East Africa, and later associated with Wallerstein, Frank and Amin; and Froebel, Heinrichs and Krey, we called the three musketeers, who jointly published a pioneering study on the migration of manufacturing activity to the third world. It was the best workshop I have ever attended. There were no papers but just the excitement of the exchange of ideas. Stephen Hymer kept us up until three in the morning in animated discussion.
The chapter in Silent Surrender, entitled “From the Old Mercantilism to the New,” suggested that the foreign operations of multinational corporations resembled in some respects those of the old chartered companies in extending the territorial reach of the metropole into foreign lands, a comparison also made by other authors. Although foreign mining companies with concessions over vast territories employing private militias with de facto judicial power do indeed resemble the old chartered companies, the modern multinational company has no counterpart in the preindustrial era.
Historically, the United States was a high wage economy compared to Europe. The modern cooperation whether horizontally or vertically integrated was an innovative organizational response to these special conditions of continental expansion in the large domestic economy of the United States. Because labour was scarce in relation to land, businesses were motivated to undertake constant technological improvement, and unionized labour was able to share the gains of increased productivity. In the post war era, the typical multination manufacturing corporation engaged in Schumpeterian strategies of innovation in process and product, and the creation of new consumers for these products by advertising and marketing. Corporations had long-term planning horizons; strategies were designed to increase sales and market share; profits were generally reinvested; dividend payments were conservative; and shareholders of blue-chip stock considered it a long-term investment. Increased sales and market-share and not shareholder value of assets was the objective pursued by the managerial technostructure. This was well described in Galbraith’s then recently published The New Industrial State. What I found particularly interesting in this work was his insight into the mutually supportive relationship between the managerial technostructure of the corporations and their counterparts in the bureaucratic apparatus of the state.
These “mighty engines of capitalism” as they were once referred to by Mr. Henry Fowler with their networks of production facilities in many countries contributed positively to the US balance of payments by the backflow of profits and interest and the generation of demand for US exports. From the point of view of the host country, the outflow of interest and profit exceeded the inflow of FDI. Firms established as affiliates could not engage in research and development, they were not permitted to compete with the parent company and did not have the decision-making power to engage in national industrial strategies. My analysis of the effects of increasing foreign control over Canada’s manufacturing industries, was not essentially different from the Watkins’ report commissioned by Walter Gordon on behalf of the Privy Council of Canada. The Watkins’ report was shelved. Walter Gordon resigned and established the Committee for an Independent Canada. The national energy policy proposed by Prime Minister Trudeau was resoundingly rejected by the Canadian business elite. With few exceptions like Walter Gordon and Eric Kierans, the Canadian business elite did not have a long-term view of developing independent national industries or a coherent Canadian national economy. Nor did the labour movement.
By and large the Canadian labour movement did not support policies of economic nationalism. The Canadian subsidiaries of major U.S. manufacturing corporations, like General Motors or General Electric generated substantial employment at good wages. They were unionized. Workers could expect employment in one company for a lifetime; real wages increased annually. Working conditions in U.S. affiliates were usually better than those in Canadian owned companies. Leftist critics of Canadian economic nationalism saw no advantage in Canadian ownership or control of industry. A capitalist is a capitalist. What is the difference?
The Auto Pact of 1965 was a unique legally binding international agreement negotiated between the Big Three American automobile companies and the governments of United States and Canada. In this continental rationalization of production facilities, Canada secured provisions for 60 percent domestic content favouring the Canadian production of parts and components. Skilful negotiation and good luck in the choice of production of popular models in Canada yielded substantial gains for Canadian autoworkers. There was a large increase in Canadian production and exports of cars, trucks and parts accounting for approximately one-quarter of Canadian merchandise exports—exclusively to the United States.
But, the ultimate result of opting for a “special relationship” with the Big Three, rather than encouraging a genuine Canadian industry, was vulnerability to decisions by American companies to scale down their operations in Canada, with attendant loss of employment. The implicit decision not to opt for an indigenous car industry because it might have been more costly and risky, was characteristic of the mercantile nature of the Canadian business classes. Among developed countries, Canada is unique in not having even one national brand. Almost all the developed and many developing countries, much poorer than Canada, established genuinely independent automobile industries gaining a competitive advantage in the uniqueness of their products.
Canadian autoworkers and communities dependent on the industry are now paying the price of the special relationship. In the course of the past ten years, there have been plant closures, and major reductions in employment. In Ontario, where most of the industry is located, 30,000 jobs have been lost since 2001 with 10,000 more scheduled to disappear. The share of transportation equipment in Canada’s exports has decreased from 21 percent in 2003 to 16 percent in 2007. Within this total, all the sub-sectors of the industry have declined. There is speculation that in the future there may not be a single assembly plant remaining in Canada. Only the independently owned auto parts industry has a chance of survival. The desperate situation of the Canadian auto workers was signalled by the recent agreement between the CAW and the largest auto parts producer, who guaranteed security of employment in exchange for the abrogation of the right to strike.
Ontario has suffered a loss of 200,000 manufacturing jobs in the past four years and the trend continues. Ontario, the industrial heartland of Canada, with the largest population, has historically been the richest province. No longer so. Its GDP per capita is now $1000 below the national average; $30,000 below that of Alberta, and $12,000 below Newfoundland. For years, Ontario attracted migrants from poorer provinces. For the first time since records were kept, there has been a net out migration from Ontario to other provinces. Some people maintain that the loss of manufacturing jobs is no cause for alarm because there has been a compensating growth of employment in the service sectors, which now employ more than 5 million people in Ontario. But no country can sustain a decent standard of living for its working population without dynamic, nationally owned, enterprises engaged in manufacturing. The recent sale of what is left of iconic Canadian business to foreign megacorporations or private equity funds is cause for serious concern. The critical importance of policies favouring nationally owned enterprise is the lesson of successful economic development both in Europe and in Asia. In countries which have succeeded in maintaining employment in manufacturing, governments have engaged in strategic industrial policies which offer assistance to innovative technological development in business and educational institutions. This is better understood in Quebec—which has successfully nurtured Quebec-based world-class manufacturing and engineering corporations—than in the rest of Canada. Indeed, it is questionable whether Canada still has a national economy in any meaningful sense of the term. We have to ask how it can be that Canada, the largest supplier of petroleum to the United States at a time when oil prices are at record high, is experiencing a melting down of its industrial heartland? In any rationally organized national economy, the rents from the resource sector would be invested in the long term development of human resources and cutting edge technologies of manufacturing activity.
The Canadian national economy constructed in the nineteenth century on an east west corridor, was a political project known by historians as the Canadian National Policy. Its three principal instruments were a trans-continental railway, commercial policy to promote industrialization in Ontario and Quebec, and assisted immigration and land grants to develop the agricultural resources of the Prairie. Over the years, this east west economy based on a special relationship with Britain was transformed by north south links of trade and investment with the United States along the 3000 miles of shared border. The political fragmentation implied in these changing patterns of trade required deliberate policy measures by the federal government to counteract the disintegrating effects of the pull of economic forces. Canada emerged from the second world war with a strengthened industrial base in Ontario and Quebec. The introduction of social security measures including old aged pensions and universal health care, financed by progressive taxation; transfer payments from richer to poorer provinces; welcoming immigration policies; federal expenditures on communication and the arts, including the National Film Board and the Canadian Broadcasting Corporation; and participation in all aspects of the United Nations system, gained Canada international respect. Expo 67 marked the high point of Canadian post war achievement.
This model of ‘embedded liberalism’, which yielded three decades of high growth, was underpinned by an institutional framework which regulated and restricted both the power and the mobility of capital. Finance was subservient to production. Financial institutions channelled savings to investment and were strictly regulated. Central banks served as instruments of the government, with full employment as primary objective; price stability was secondary. Banks were not permitted to charge more than six percent interest on loans or to engage in mortgage or investment banking. There were exchange controls, and no private trading in foreign currencies. Social expenditures were financed by progressive income taxation. In Canada, the highest tax brackets was 80 percent; in the United States it was even higher at 94 percent.
From 1945 to the mid 1970s, the distribution of income in North America was more equitable than ever before or since. At that time, in the United States, the average earnings of the super rich 0.01 percent of families was only (sic) 200 times greater than the earnings of 90 percent of American families. In the 1980s, this measure of income disparity increased from 300 to 500, and continued to increase throughout the 1990s. In 2006 the income of the super rich was 976 times greater than that of 90 percent of American families. Income inequality is now even more extreme than it was in 1929 (892), on the eve of the Great Crash, which precipitated the world economic crisis of the 1930s. In the United States, median family income has not increased since 1980. In Canada, trends are similar, although not as extreme. Statistics Canada reported that median earnings of full-time wage and salary earners have not increased in 25 years since 1980. Median earnings of the top quintile rose by 16 percent, while that of the bottom quintile declined by 21 per cent. In these 25 years, GDP has doubled, but the gains from economic growth have largely accrued to high income earners, while low income earners have been impoverished.
So what has happened to good unionized jobs in iconic corporations like General Motors or General Electric, because these companies today are not the same as they were in the 1960s and 1970s? For all the faults we found with them those times were good compared with the present. How has the power of labour so declined that the once mighty UAW/CAW has negotiated a no-strike agreement? Why does productivity increase no longer result in higher labour income? How have the gains of labour been rolled back since the 1980s? How has the distribution of income so deteriorated, with similarities to the ‘dance of the millions’—now billions—which preceded the crash of 1929? How have we arrived at a financial crisis which threatens to project the real economy into a deflationary spiral of rising unemployment and increasing poverty? Why have democratic institutions in Canada and the U.S. failed to protect the economic security of the majority of the population?
For the last two hundred years and most spectacularly in the three decades following the Second World War, investment in productive capacity achieved remarkable increases in the material standard of living. Although profitability was the criterion for success in the private sector, it was by innovation in the production and marketing of useful goods and services that profit was earned and reinvested. Capital had a stake in the communities, indeed in the countries, in which its production facilities were located.
Since the early 1980s we have witnessed a reversion to accumulation by dispossession, reminiscent of the old days of the mercantilist era that preceded industrial capitalism. Transnational corporations, once established in manufacturing, have increasingly secured monopolistic control over markets on a global scale. In some respects, they are more powerful than governments. The largest of these companies, such as Monsanto, do indeed resemble the old chartered trading companies. Millions of farmers are in bondage to this and similar companies and thousands have been dispossessed of their land. In the industrialized world, transnational corporations have outsourced production to cheap labour countries, and millions of workers have been dispossessed of good jobs. This is reflected in the declining contribution of manufacturing, and the increasing contribution of finance, distribution, and business services to GDP, most dramatically in the United States and Britain. Progressive financialization of capital has substituted short-term market based considerations of shareholder value for the long-term strategic planning horizon of corporations producing for mass markets. Finance has become decoupled from production, and the capital market has lost its useful function of judging the long-term productive capabilities of different firms. Once the criterion of shareholder value became the objective of good management of the company, the capital market became a gigantic casino where people attempted to guess the market with confidence that it would maintain a secular rising trend. Of all the aspects of globalization, it is the financialization of the capital, which has had the most profound consequences in the West.
Galbraith’s most important book was The Great Crash. I suggest that the transformational process, which has unravelled the institutional framework that sustained the good times of the 1960s and 1970s, might be called The Great Financialization. It had its origins in the dissolution of the Bretton Woods financial order, gathered momentum in the 1980s, and exploded since the mid 1990s. Ever since dollar convertibility to gold was abandoned, the United States was able to sustain an ever-increasing external deficit by issuing ever larger amounts of dollars. International liquidity increased and deregulation of financial intermediaries encouraged the progressive expansion of credit. Central banks were now concerned with protecting creditors from inflation rather than managing anti-cyclical monetary policies of the national governments. Soon, cross border capital movements and trading in foreign currencies greatly exceeded the requirements of trade in goods and services. Short term capital movements rather than trade determined exchange rates, and have contributed to financial and banking crises in Mexico, Argentina, Brazil, Turkey, East Asia and Russia. These crises were more severe than anything previously experienced. Millions were plunged into poverty and private and state assets passed into foreign hands at fire-sale prices. In all of these cases overexposed international financial institutions were rescued by central bank and IMF intervention. The Asian Crisis did not affect the stability of the global financial order or continued economic growth in heartlands of capitalism. The real costs of capital account liberalization were born by the rest of world.
In the 1970s, inflationary pressures reduced the profitability of financial investment and full employment increased the bargaining power of labour. As anticipated by Michael Kalecki, Keynesian solutions became inoperative. These economic trends combined with rising radicalism in the Third World, and the defeat in Vietnam, were countered by a political decision to institute an economic regime change to restore the discipline of capital over labour. Princeton economist and New York Times columnist Paul Krugman drew attention to the imbalance of political power within American democratic institutions which enabled a small number of conservative, wealthy activists, backed by antiunion businesses to redefine the policy direction of the government. Neoliberal policies, introduced by Thatcher and Reagan, were designed by economists in university research institutes and think-tanks financed by business interests. They were crafted with political skill and bated with promises of tax reduction. The doctrine of supply-side economics, which maintained that a reduction of income tax rates would induce an increase in output and thus increase total tax receipts, was a seductive ideological construct with populist appeal.
Public expenditures were increasingly financed by the sale of securities to domestic and foreign creditors, and public sector savings were negative. Household savings were also negative and consumer expenditures were sustained by an increasing volume of mortgage and household finance including credit cards at usurious rates of interest. The volume of debt further ballooned by financial innovation of derivative debt instruments. If financial liberalization was the primary mechanism undermining the Keynesian historic compromise of capital and labour, the erosion of progressive income taxation both contributed to financialization and exacerbated inequality.
The burden of taxation was shifted from corporations and the wealthy to middle and lower income groups and regressive sales taxes were introduced. High-income earners had greater discretionary income to spend or invest in financial assets. This distributional shift generated pools of capital seeking returns in emerging markets and other financial investments. Investment in infrastructure and productive capacity of the real economy stagnated, as returns in global financial markets exceeded those in the domestic economy. Iconic American corporations, which once engaged in mass production for mass consumption increasingly derived income from distributional, financial, and other business services associated with the import of manufactures from countries where labour costs are substantially lower. Wal-Mart, which directly produces none of the vast array of products it retails, and does not tolerate unions, is at the extreme end of this model. The prosperity of the United States was increasingly driven by military and consumption expenditures, financed by mountains domestic and foreign credit, and American consumers became the driving force of the world economy.
The concentration of financial capital and incomes deriving from financial markets is most extreme in Britain and the United States. It is reflected in changes in the relative contributions of manufacturing and finance, insurance and real estate to GDP in the past 30 years. In Britain, value added by manufacturing declined from 32 percent in 1971 to 14 percent in 2006, while in the United States it declined from 23 percent to 13 percent in the same period. Income derived from finance, insurance, and real estate in the United States increased from 15 percent in 1970 to 21 percent in 2007. The relative contribution of finance to GDP in Britain is even greater. In the US, Finance and insurance alone doubled from 4 to 8 percent of value added to GDP; as a proportion of manufacturing, it increased from 18 percent in 1971 to 65 percent in 2007. The huge increase in incomes derived from financial services, including real estate, contributed significantly to GDP growth, but not to production in the real economy.
Once capital markets were deregulated, the initiative of macroeconomic policy passed from national governments to financial markets. Central banks were reconfigured to be “independent” of Ministers of Finance; they henceforth became instruments for the protection of creditor interests of financial institutions and debtors, including governments who became more sensitive to their credit rating than to opinion polls or election results. Contending political parties dance to the same tune. Democracy is now in suspense, effectively hostage to financial markets.
Governmental and business elites fearing that Canada would be left out in a world of competing economic blocks, called on the “special relationship” with the U.S. to obtain exemption from American protectionism. Canada initiated negotiations for a Free Trade Agreement to secure American markets for Canadian products, which eventually resulted in the Canada-U.S. Free Trade Agreement of 1988. It is not accidental that Canada, the first industrialized country to host a massive inflow of U.S. direct investment, was also the first to negotiate an a new kind of free trade agreement, which went far beyond conventional commercial agreements to protect the interests of foreign investors from the exercise of sovereignty by the host governments. Canadian export dependence on the U.S. market increased from 65 percent in the mid-70s to some 85 percent by the end of the century, and American ownership of Canadian industry also increased significantly. My colleague, Dorval Brunelle has suggested that the Canada-U.S. Free Trade Agreement was the template for globalization.
The dynamics of trade liberalization are significantly different from financial liberalization. Whereas the liberalization of capital proceeds by stealth as a progressive process of unilateral reduction of national regulatory constraint, the liberalization of trade proceeds by negotiated agreement between governments. Where negotiations take the form of free-trade agreements, they are legally binding international treaties of indefinite duration. Victory of the West in the Cold War gave a tremendous political lift to the doctrines of market fundamentalism. There appeared to be no alternatives to compliance with the demands for capital and trade liberalization. A new institutional regime of multilateral and bilateral treaties, was launched in 1994 with the signing of the NAFTA, the initiation of a Free Trade Area of the Americas, and the transformation of the GATT into the WTO.
The GATT was an institutional framework within which developed countries negotiated mutually advantageous reductions in tariff and non-tariff barriers to trade. It was generally acknowledged that economic development in developing countries required higher levels of protection and non-reciprocal agreements. The purpose of the WTO, by contrast, was to provide a unified regime regulating world trade, with mechanisms to enforce compliance by member countries. Developing countries were expected to grant reciprocal trade concessions, albeit with some time period for adjustment to liberalization.
Trade liberalization has forced developing countries to open their markets to cheap-often subsidized- imports which had a destructive effect on their agricultural and industrial capacities and cut short the promises of development. Flourishing rice cultivation of Haiti was destroyed by subsidised American rice and food aid. Since signing NAFTA, Mexico once an exporter of maize has tripled its imports of cereals displacing two million agricultural workers and leaving two million hectares of land idle. Liberalization conditionalities attached to successive IMF programs, have almost completely destroyed the once flourishing domestic manufacturing industries in Jamaica. Factory shells are now warehouses where containers of imported products are repackaged for sale on the domestic market. Many developing countries have experienced similar loss of industrial capacity.
Trade liberalization is not the only, or perhaps not even the most important, element in efforts to open economies to trade and capital flows. Concessions obtained in structural adjustment programs imposed on debtor countries, and in bilateral free trade agreements, guaranteeing the rights of investors, have gone far beyond WTO rules. Large and powerful developing countries, including Brazil, India, and South Africa, have refused to sign onto a WTO agenda which would include: granting national treatment to foreign investors, intellectual property rights, limitations on government procurement, and so-called unfair competition by state enterprises. The new style of free trade agreement, of which the Canada-U.S. FTA was the template, secures all of the above for foreign investors.
With turbulence in financials markets, funds moved into commodities, including petroleum, copper and other minerals and more recently into food. Whereas biofuels have contributed to a secular rising trend in food prices, only speculative forward purchases can account for the spike since 2007. People in industrialized countries have surely been affected by the food crisis but it is poor people in developing countries, whose food expenditure total on averages 70% of their income, who are bearing the brunt of the increased prices of food staples. Food riots have erupted in 33 countries and the World Bank has raised concerns about social stability. The FAO considered 37 countries in need of food aid, but the UN had difficulty in meeting its target of $500 million. Contrast this with the fact that Cargill posted a profit of 1.3 billion in the first quarter of 2008. This reflects the dominance of multinational agribusiness in world markets. They control access of farmers to high yielding seeds, pesticides and fertilizers; they control access to markets including processing facilities, and their profits greatly exceed the incomes of agricultural producers. This is the case in Canada, but the disparity between agricultural incomes of farmers and the mega-profits of corporations are very much more extreme in developing countries. India and many other developing countries have suspended the export of food to met domestic demand, and food security has become a primary objective of developing countries. Programs to increase domestic production will require land reform and protection from the destructive effects of the imports of subsidized food and food products. The food crisis of 2008 has plunged 100 million people into poverty according to the World Bank. It has far exceeded the gains of poverty reduction programs and it has put the entire free trade agenda into question. According to Fred Bergsten, trade liberalization has come to a “screeching halt.” Developing countries blocked the FTAA; they have suspended the WTO Doha round; and the objectives of food self-reliance will require some reversal of economic liberalization.
There are questions to be asked about the responsibility of economists and the relevance of economics. There are two fundamental propositions of mainstream economics: markets efficiently allocate resources and free trade is mutually beneficial to all countries. Over the past 25 years in which capital and commodity markets have been liberated from regulatory constraint, and corporations and high-income earners have been relieved from contributing to the fiscal resources of governments, income inequality within and between nations has greatly increased. Specifically, we must ask what has been the real contribution of the recipients of the explosive growth of financial incomes? We note that the market considers the services of top hedge fund managers as forty times more valuable than those of top CEOs of the largest U.S. corporations, and roughly 12,000 times more valuable than the top members of Congress, who earn just under one million dollars. The apparent contribution of financialization has been the ability to sustain economic growth by the ever-increasing volume of debt, facilitated by easy money from the Federal Reserve. The permissive condition has been the willingness of the rest of the world to finance the external payments deficits of 6-7% of GDP by purchasing U.S. securities and holding increasing amounts of dollar reserves. This situation is plainly unsustainable and is unravelling. According to George Soros the “current crisis is the culmination of a super-boom that has lasted for more than 60 years,” and was aided by authorities who intervened to rescue the global financial system whenever it was at risk.
We need to rethink economics. Why has no nation succeeded in economic development by practising free trade? More fundamentally, we have to rethink the real value of goods and services. The feminists have drawn our attention to the fact that the market assigns no value to the useful services performed in the household, principally by women. Just as personal services of caring are grossly undervalued, financial services have become grossly overvalued. We need to return to some basic questions of use-value and exchange value. Economics should abandon its a priori deductive methodology. It should study real economies in the context of the societies in which they exist and the power relations between private and public authority. This was the approach of John Kenneth Galbraith.
Costing the Liberal Platform
The Liberals released a “costed” platform today.
http://www.liberal.ca/platform_e.aspx
There’s a lot to like here in terms of the Liberal Party’s programmatic commitments to child care , support for manufacturing investment, green job creation, public health care, student aid, basic infrastructure, dealing with poverty, and so on – but I stand by my earlier argument that they can’t balance the Budget, deeply cut corporate taxes, oppose new taxes (outside the internally consistent green shift package) AND make major new spending promises outside the green shift – all in the context of a slumping economy.
The costing here is dubious at best.
We get four year spending and tax reduction totals with little or no detail on timing. No adjustment is really made for slowing growth and rising unemployment.
Clearly a lot of the good new stuff outside the green shift is shunted off to the future. As a key case in point, last week the Liberals promised to bring in a $1.25 Billion per year national child care program. Today, that program is costed at $1.5 Billion over 4 years. That’s a slow phase in, to say the least. Another case in point is municipal infrastructure spending, which barely increases over the status quo for the next four years.
We get a modest dose of Reaganomics and supply-side tax cut magic. Cutting the tax rate on income trusts will supposedly raise $1 Billion in new revenues.
The Liberals actually raise the ante on balanced budgets, promising Martin era determination to run surpluses to pay down debt. They promise to restore the $3 Billion Contingency Reserve – to my mind implying spending cuts “come hell or high water” even if we go into recession.
That’s bad enough, What is worse is that their fiscal plan depends on unspecificed cuts of $12 Billion over 4 years – a not inconsiderable sum after continuing rounds of “program review.”
Last but not least, they say they will borrow $25 Billion to fund post secondary education, but this will somehow be done outside the Government of Canada spending envelope and promised debt reduction.
Notes on a Meltdown
I wrote this article for The Tyee, looking at the US financial crisis with a view towards the Great White North. Their version has much nicer formatting and a funny cartoon.
Update: Check out this week’s This Modern World.
US Meltdown Puts Heat on Canada
By Marc Lee
Watching the turmoil in financial markets this past week, the question is no longer whether there will be a meltdown, but how much melting is left to go. So what’s next, and what does this mean for Canada?
It’s worth reflecting on just how far up we climbed. The back-story is now familiar: The lowest interest rates since the 1960s that prevailed in the aftermath of 9/11/2001 reduced the cost of holding a mortgage, and led many people to buy into the real estate market. As prices went up, others wanted to get in on the action “or get priced out forever”.
Before long, bullish sentiment overwhelmed rational thinking: real estate prices went through the roof, with doubling and in some cases tripling of resale prices between 2001 and 2007 in Vancouver.
On the way up increasing asset prices created a “wealth effect” – those lucky enough to see the value of their home go up so much were more inclined the spend money, thereby stimulating the real economy. Moreover, rising home prices led to spectacular new residential construction, providing more jobs and more income to keep the party going.
This particular party was a real bender, and now it’s hangover time. Our southern neighbours went even wilder – everyone was invited – and they are now feeling a world of hurt. But even though our Canadian party did not rock as hard, there was plenty of liquid refreshment, and it went well into the wee hours.
The jaw dropping events in the US are the gears thrown into reverse: a vicious cycle of falling home prices, with homeowners sitting on mortgage debt that is worth more than the market value of their home. New residential construction is at half of 2005 levels, undercutting employment, and home prices are down about 25%.
In Canada, we have been lagging developments in the US. But new investment in residential construction fell in the first half of 2008, and average home resale prices in August fell by 5% compared to a year earlier.
Because the US is so much bigger than we are, and our economies so interconnected after two decades of increasing integration, their downturn will hurt Canada, too. Their drop in residential construction, in particular, hurts wood product sales from our forestry sector, and their overall slowdown undercuts our exports across the economy.
The unwinding is complicated by actions in the US financial sector, which repackaged dubious mortgages, and made out like bandits. Once the value of homes started to come back down, it exposed a lot of bad wood underneath the veneer. What is becoming clearer by the day is that this can only be solved by major write-downs of those “toxic mortgages” that are clogging up the balance sheets of big financial corporations.
An irony of the current situation is to see a right-wing US government engaged in massive government intervention in order to prevent a meltdown – except they are bailing out the people who caused the problem in the first place. Brokers and dealers made millions – worth decades of real work by real people – en route to the current financial crisis. The next step appears to be having the US government take on much of this bad debt off the hands of the banking sector. Privatize gains and socialize losses is the rule.
If only governments these days were as committed to protecting the security of regular working folks. It would be far better for the government to step in and take over mortgages from families, so that they could stay in their homes with greater certainty through this period of turmoil.
In Canada, how far down is the bottom is anyone’s guess. What’s troubling is a federal government whose answer to every problem is a tax cut. An economic downturn has already begun in Canada, with economic growth stalling in the first half of 2008. Canada’s economic fundamentals are anything but sound, despite mantras to the contrary.
That downturn is pushing the federal budget towards deficit, but having rejected deficits outright, the Harper government will have to cut spending to balance its budget, thereby making economic problems worse. This is precisely the type of thinking that turns recessions into depressions.
Yet, while recent developments invoke the spectre of the Great Depression, a full-blown collapse is unlikely. A better modern example is Japan, the miracle economy of the 1980s (just as the US was in the 1990s and naughties). Following a collapse in its stock and real estate markets in the early 1990s, it took Japan the better part of a decade to get back on track.
The prospect of this downturn taking several years to unwind is a realistic one, given how overextended Canadians are in terms of debt. Statistics Canada recently reported that Canadian households are sitting on $1.25 in debt for every dollar they have in income. And that’s going into a slowdown/recession.
The crisis may also mark an end to the notion that “investing” means guaranteed annual double-digit returns (far in excess of income growth) without having to do any real work. This is painful news if you were planning on retiring soon, and have stock portfolio as your keystone to financial security. Ditto if you bought real estate in the last two or three years (perhaps more depending on how far things fall). Many households out there will soon understand the term “negative equity”, where debts exceed the value of assets.
In the meantime, we need a plan, not glib reassurances. Most good fiscal policy recommendations have started with the notion of getting money quickly into the hands of those who will spend all of it. In the short-run would primarily work through EI, but one could also imagine souping up the GST credit, the Canada Child Tax Benefit and Old Age Pensions, not to mention provincial welfare systems.
In addition to this, a timely intervention would be to fund a major public works campaign for climate-change-related infrastructure. Huge public transit investments. Energy efficiency retrofits. Alternative power. These are all things we need to be doing anyway, given the climate challenge. As employment drops these projects could be brought on line quickly if the pre-planning was already in place.
As John Kenneth Galbraith famously noted, bubbles do not burst in an orderly manner. This ride is far from over, and more than any time in recent decades we need an activist government to make sure that families are not wiped out.
