The Global “New Normal” Is Not New– But it is still a real concern

 

C.P. Chandrasekhar and Jayati Ghosh

Many different explanations have been proffered for the “new normal” of “secular stagnation” in the global economy ever since the Great Recession. This is supposed to be exemplified by low growth, verging on stagnation, in the advanced economies, now combined with slower growth in the developing world.

Certainly the recovery from the Great Recession of 2008-09 has been anaemic at best, even as it has failed to generate much employment outside of the US (and even there it has created mostly casual, part-time and poor quality jobs). Deflation has persisted in Japan for many years now, and has become evident in the Eurozone and the US as well. Financial markets are febrile and display nervously erratic behaviour, often without proximate cause – such as in the recent collapse in bond yields across the advanced economies.

But purely in terms of GDP growth, are the last five years really so very different from past patterns of global capitalism, even compared to the supposedly more dynamic period of globalisation? Chart 1 tracks annual GDP growth in developed and developing/transition economies from 1990. The period from 2002 to 2007 does show acceleration of growth across economies, but that came to end in the collapse of 2008-09, and since then GDP growth rates have been similar to those of the 1990s.

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Facing Up to the World’s Health Crises

Martin Khor

The global health situation is facing many critical challenges, and urgent action is needed to prevent crises from boiling over. This is the impression one gets from this year’s World Health Assembly (WHA) in Geneva last week.

The WHA is the world’s prime public health event, attended by 3,500 delegates, including Health Ministers from most of the 194 countries.

In her opening speech, World Health Organisation director-general Dr Margaret Chan gave an overview of what went right and what is missing in global health.

First the good news: 19,000 fewer children dying every day, a 44% drop in maternal mortality, the 85% cure rate for tuberculosis, and 15 million people living with HIV now receiving therapy, up from just 690,000 in 2000.

Then Chan described how health has become a globalised problem, with air pollution becoming a transboundary health hazard, and drug-resistant pathogens being spread through travel and food trade.

The recent Ebola and Zika outbreaks showed how global health emergencies can quickly develop. The world is not prepared to cope with the dramatic resurgence of emerging and re-emerging infectious diseases.

Chan said the global health landscape is being shaped by three slow-motion disasters: climate change, antimicrobial resistance and the rise of chronic non-communicable diseases.

She described these as man-made disasters created by policies that place economic interests above health and environmental concerns.

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And Now, Price Deflation in India and China?

C.P. Chandrasekhar and Jayati Ghosh

Ever since the Global Financial Crisis, advanced economies have been grappling with the spectre of deflation. While this was very clearly a reflection of the downswing in economic activity in the aftermath of the crisis, such price deflation has proved remarkably impervious to the most expansionary monetary policies and liquidity expansion that the world economy has yet seen. This has had adverse consequences in terms of producers’ expectations, which in turn have kept investment low. It has not benefited working people because wages have stayed low or continued to fall. And it has generated tendencies of the debt deflation-type that Irving Fisher had warned against, whereby the real value of debt and of debt servicing keep rising because of falling prices, and make it harder for debtors to deleverage or to increase their spending.

All this has been true of the developed economies at the core of global capitalism for some years now. But in general it was presumed the developing countries, especially the more prominent emerging markets, were less prone to such tendencies. Indeed, because the developing world as a whole continues to grow faster than the North, and because some large emerging economies like China and India continue to experience recorded GDP growth rates of 6 to 7 per cent, it was perceived that they would also have inflation rates that would show rising or stable prices. In countries such as India that are still hugely affected by agricultural cycles affecting food prices and other forms of sectoral supply bottlenecks, there seemed to be no reason for prices to fall, beyond the secondary impact of the global fall in prices of primary commodities like oil.

However, it now appears that this too was a misconception about the new economic patterns emerging in the Global South, including in economies like those of China and India. Recent trends show a remarkable – and worrying – convergence of producer prices in these countries with those in the advanced economies, where price deflation has become rampant.

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What We’re Writing, What We’re Reading

What We’re Writing

C.P Chandrasekhar, No Clue to the Furture

Martin Khor, Facing Up to the World’s Health Crises

Sunita Narain, Garbage is About Recycling

Léonce Ndikumana and Mare Sarr, Capital Flight and Foreign Direct Investment in Africa

What We’re Reading

Pablo Bortz, A Novel Capital Controls Proposal

Arthur MacEwan, Do Trade Agreements Foreclose Progressive Policy?

Robert Pollin, The Green Growth Path to Climate Stabilization

Argeo Quiñones-Pérez and Ian Seda-Irizarry, Politics, Primaries, and Crisis in Puerto Rico

Triple Crisis welcomes your comments. Please share your thoughts below.

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The Trans-Pacific Shell Game

Jomo Kwame Sundaram

The Trans-Pacific Partnership (TPP) trade agreement is being portrayed as a boon for all 12 of the countries involved. But opposition to the agreement may be the only issue that the remaining US presidential candidates can agree on, and Canada’s trade minister has expressed serious reservations about it. Are the TPP’s critics being unreasonable?

In a word, no. To be sure, the TPP might help the US to advance its goal of containing China’s influence in the Asia-Pacific region, exemplified in US President Barack Obama’s declaration that, “With TPP, China does not set the rules in that region; we do.” But the economic case is not nearly as strong. In fact, though the TPP will bring some benefits, they will mainly accrue to large corporations and come at the expense of ordinary citizens.

In terms of gains, one US government study on the topic projected that, by 2025, the TPP would augment its member countries’ GDP growth by a meager 0.1% at most. More recently, the US International Trade Commission (ITC) estimated that, by 2032, the TPP would increase America’s economic growth by 0.15% ($42.7 billion) and boost incomes by 0.23% ($57.3 billion).

But TPP advocates have largely ignored these results, preferring to cite two studies by the Peterson Institute of International Economics, a well-known cheerleader for economic globalization. In 2012, the PIIE claimed that the TPP would boost total GDP in member countries by 0.4% after ten years. In January, it declared that TPP would augment total GDP by 0.5% over the next 15 years. In a World Bank study released the same month, the authors of the PIIE research projected a 1.1% average increase in GDP in TPP member countries by 2030.

Something is clearly amiss.

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Societal Involution in the North

Jayati Ghosh

The term “involution” – which means to turn into oneself, or to shrink, or to reverse a process of evolving – may seem like a strange one to apply to societies. Yet that is the term that increasingly comes to mind when considering recent social and political trends in the United States and in some parts of Europe.

Consider the United Kingdom, currently in the throes of a heated debate before the referendum that will be held about whether or not Britain should stay in the European Union. Many issues and concerns have been raised on both sides, and politicians and business leaders inside and outside the country, from top financiers to US President Obama, have pitched in with their own views and warnings about the implications of “Brexit”. But within the country, public discussion appears to be focussed essentially on only one issue: immigration.

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Free Trade in Rhetoric, Not in Practice

Martin Khor

Western countries commonly proclaim the great benefits of free trade and the evils of protectionism.

In reality, many developed countries practise double standards, insisting on free trade in areas where they are strong, whilst using protectionist measures in sectors where they are weak.

In the worst case, within the same sector they have designed rules that impose liberalisation on developing countries but allow themselves to maintain high protectionism.

An outstanding example is in agriculture, in which the rich counties are not competitive.

If “free trade” were to be practised, a large part of global agricultural trade would be dominated by the more efficient developing countries.

But until today, agricultural trade is dominated instead by the major developed countries.

For many decades they got an exemption for agriculture from trade liberalisation rules.

This exemption ended when the World Trade Organisation (WTO) was crea­ted in 1995 and the rich countries were expected to open their agriculture to global competition.

But in reality, WTO’s agriculture agreement allowed them to have both high tariffs and high subsidies.

The subsidies have enabled far­mers to sell their products at low prices, often below production cost, yet allowed them to get adequate revenues (which include the subsidies) that keep them in business.

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Inversion Acceleration, Part 3

Roger Bybee

Roger Bybee is a Milwaukee-based writer and activist who teaches Labor Studies at the University of Illinois. This is the concluding part in a three-part article, originally appearing in the May/June issue of Dollars & Sense. Parts 1 and 2 are available here and here.

The Pushback

In an age of fast-eroding economic security, corporate inversions have stirred vast public anxieties and outrage over corporations that seem both rootless and ruthless. Public anger over inversions is mounting, as household incomes continue to fall for tens of millions of Americans and worry about the offshoring of capital and jobs becomes more widespread. An August 2014 poll by Americans for Tax Fairness revealed that more than two-thirds of likely voters disapprove of corporate inversions— 86% of Democrats, 80% of independents, and 69% of Republicans.

Surprisingly, one of the loudest voices to emerge against inversions has been Fortune’s Allan Sloan. Sloan penned a cover story titled “Positively Un-American,” warning, “We have an emergency, folks, with inversions begetting inversions.” Even though Sloan advocates long-term changes that would tilt the tax system further in a pro-corporate direction, he called for immediate action by the Congress and President Obama to stem the tide of inversions. “I still think we need to stop inversions cold right now,” he wrote, “to keep our tax base from eroding beyond repair.”

Besides the drain to the U.S. tax base, Sloan expressed concern about the impact of inversions on Americans’ view of corporate America: “It also threatens to undermine the American public’s already shrinking respect for big corporations.”

The recently announced Johnson Controls inversion dealt a major blow to public trust in America’s largest corporations, reflected in calls by Democratic presidential candidates Bernie Sanders and Hillary Clinton for stiff regulation on inversions.

Johnson Controls’ announcement gave Sanders and Clinton a chance to tap a strong vein of public sentiment. Lashing out at the company in a January 25 media release, Sanders called it and its new partner Tyco “corporate deserters.” Sanders declared, “Profitable companies that have received corporate welfare from American taxpayers should not be allowed to renounce their U.S. citizenship to avoid paying U.S. taxes.”

Clinton blasted Johnson Controls on January 27 at an Iowa campaign stop, stating “I will do everything I can to prevent this from happening, because I don’t want to see companies that thrive, use the tax code, the gimmicks, the shenanigans … to evade their responsibility to support our country.” She also began using a TV commercial aired in Michigan and elsewhere, showing her speaking in front of the Johnson Controls headquarters to denounce the corporation’s inversion.

A Cure Worse Than the Disease

Up until now, conservative Republicans’ control of the House of Representatives has blocked even modest legislation from gaining any traction, despite public outrage against inversions. Using the standard Republican soundbite about the high corporate tax rate driving U.S. firms and jobs overseas, Sensenbrenner, wrote in an op-ed in the Milwaukee Journal Sentinel: “Despite the negative effects the departures of these companies are having on the American economy, it is difficult to blame corporate leaders when you crunch the numbers.”

Similarly, influential hedge-fund tycoon Carl Icahn, although acknowledging the dislocation and insecurity generated by inversions, exempted corporations from any obligation to the United States and laid the blame at the feet of Congress for failing to cut corporate taxes. “Chief executives have a fiduciary duty to enhance value for their shareholders,” he argued in a New York Times opinion piece. “The fault does not lie with them but with our uncompetitive international tax code and with our dysfunctional Congress for not changing it.”

Icahn expressed hope that the public’s sense of urgency about stopping inversions could be shunted away from its current anti-corporate trajectory and instead stampede Congress into lowering corporate tax rates this year. He wrote in the New York Times, “How will representatives and senators, with an election year approaching, explain to their constituents why they are out of work because their employers left the country, when it could so easily have been avoided?”

In pressing for lower corporate taxes in the name of heading off more inversions, corporate and financial figures like Icahn and Republicans are backed by some influential Democrats and self selfdescribed liberals who share an elite consensus on corporations’ absolute “right” to switch their nationalities and to offshore jobs and capital. New York Times business columnist Jeffrey Sommer summarized this consensus in 2014, inadvertently illustrating the vast gulf between elite opinion and majority sentiment. “At this stage of globalization,” Sommer declared, “… most American consumers, investors and politicians have tacitly accepted that if a company is profitable, doesn’t violate the law and produces appealing products and services, it can operate wherever and however it likes.”

Treating corporate investment decisions as sacrosanct regardless of their impact on the public welfare, key Democratic figures like Sen. Charles Schumer (D-N.Y.) and Senate Minority Leader Harry Reid (D-Nev.) are calling for a “tax holiday” on the foreign profits of U.S. corporations. They essentially seek to replicate the holiday declared in 2004 to encourage corporations to “repatriate” foreign profits to the United States by giving them a radically discounted tax rate. The “tax holiday” idea is a particularly counterproductive measure. First, tax holidays reinforce corporations’ use of tax deferrals as they create an incentive for the companies to wait for Congress to capitulate and offer discounted tax rates.

Second, these top Democrats’ backing of a new corporatetax holiday is particularly indefensible given the disastrous outcome of the 2004 holiday. “Advocates said it would create 660,000 new jobs,” pointed out David Cay Johnston. “Didn’t happen. Pfizer brought home the most, $37 billion, escaping $11 billion in taxes. Then Pfizer fired 41,000 workers.”

A Real Solution

If corporate tax avoidance is to be stopped, the most immediate step is ending corporations’ ability to endlessly defer taxes on income which they claim to have generated overseas.

Offshore tax havens enable corporations to routinely engage in a practice called “profit stripping.” With this practice, taxable earnings in the United States are stripped—with costs allocated to the U.S. units and earnings attributed to firms’ foreign subsidiaries. “This kind of accounting alchemy actually works, turning the black tax ink of profit into red ink of debt,” Johnston explained. “You appear as a pauper to government but valuable to investors.”

“Most of America’s largest corporations maintain subsidiaries in offshore tax havens,” reported Citizens for Tax Justice. “At least 358 companies, nearly 72 percent of the Fortune 500, operate subsidiaries in tax haven jurisdictions as of the end of 2014.”

This means a loss of an additional $90 billion to the Treasury, according to Citizens for Tax Justice, apart from the cost of inversions.

It is relatively easy to envision reforms that would give the U.S. tax code a badly needed updating— suited to the current era dominated by the global operations of multinational corporations— to foreclose maneuvers like inversions and the deferral of taxes on foreign earnings.

But serious action on inversions and major loopholes will likely prove impossible as long as our political democracy continues to be eroded by a torrent of campaign contributions from the multinational corporations exploiting the existing tax system.

Until that link—between those who write the big campaign checks and those who write our laws and tax code—is irrevocably broken, our political system will remain impervious to majority sentiment for stiffer taxes and restrictions on corporations’ inversions and the offshoring of capital and jobs.

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