Arthur MacEwan is professor emeritus of economics at the University of Massachusetts Boston and a co-founder and associate of Dollars & Sense magazine. This is the part two of a three-part series on the era of economic globalization, the distribution of power worldwide, and the current crisis. It was originally published in the January/February issue of Dollars & Sense, commencing the magazine’s year-long “Costs of Empire” project. Part 1 is available here.
Arthur MacEwan
Financialization and Crisis
There is also the international financialization phenomenon— the rising role of financial markets and financial institutions in the operation of the economy. The global amount of debt outstanding grew from $45 trillion in 1990 to $175 trillion in 2012, increasing from almost 2¼ times global GDP to almost 2½ times. (The most rapid growth took place before the Great Recession, followed by a slow-down in subsequent years.)
The economic instability associated with financialization became apparent in the Asian financial crisis of 1997. The rapid exodus of capital from countries where economic problems were developing greatly exacerbated the downturn. The financial crisis that emerged in the United States in 2008 and 2009, then spread to Europe and elsewhere, exposed the full and devastating force of global financial activity. The great size and extensive web of connections among financial institutions created a severe threat to the world economy. “Free market” ideology was put aside, and the U.S. government intervened heavily—with a huge bailout of the banks— to keep the economy from imploding.
Financialization created, and continues to create, a vast increase in debt levels in many counties. “Debt … is an accelerator,” notes University of Massachusetts economist Gerald Epstein, “that enables the financial system to generate a credit bubble.” The bubble allows financial institutions (banks, hedge fund, private equity firms, etc.) to extract wealth form from non-financial firms and individuals, and can also quicken the pace of economic activity more generally. Bubbles, however, burst, leading to economic distress, deflation, and bankruptcies.
Beyond instability and crises, financialization appears to impede economic growth by diverting resources from productive activity into financial speculation. Also, financialization harms economic growth by contributing to extreme income inequality, which is increasingly recognized to have a negative impact on growth. Furthermore, though perhaps in a more extreme form, large financial firms present the same problems that arise with other large firms operating internationally, namely that the many options created by their global operations— to say nothing of their political influence— make them difficult to tax and regulate.
Free Trade? Only in the Rhetoric
Even with U.S. trade-and-investment agreements, reduction in restrictions on international commerce, technological changes, and the WTO rules of operation, many aspects of world commerce remain contested terrain. U.S. financial and nonfinancial firms, along with firms from other countries, want not only trade and investment access, but also as much assurance as they can get for the right to access. So under the banner of “free trade” the United States pushed forward to establish the Trans-Pacific Partnership Agreement (TPP), with eleven other countries along the Pacific Rim, and the Transatlantic Trade and Investment Partnership (TTIP), with the European Union. These agreements would expand the share of U.S. trade and investment taking place within realms where the “rules of the game” are firmly established—and those rules would essentially be rules promoted by large U.S. firms and the U.S. government, but of course with the cooperation of large firms and governments elsewhere. With the ascendancy of Donald Trump to the presidency, however, the TPP now seems dead, and the future of the TTIP and other agreements is unclear. A key to understanding these and earlier tradeand- investment pacts is to recognize that they are not “free trade” agreements. These agreements, while removing some barriers to international trade and investment, have focused on creating protections. This is most clear in regard to patents and copyrights—so-called “intellectual property rights.” As Dean Baker, the co-director of the Center for Economic and Policy Research has written:
The TPP is not about free trade. It does little to reduce tariffs and quotas for the simple reason that these barriers are already very low. …In fact, the TPP goes far in the opposite direction, increasing protectionism in the form of stronger and longer patent and copyright protection. These forms of protection for prescription drugs, software and other products, often raise the price by a factor of a hundred or more above the free market price. This makes them equivalent to tariffs of several thousand percent.
Patents and copyrights are alleged to encourage innovation, but there is no reason to think that the particular—especially high—U.S. system of protections promoted in these agreements is a good way to accomplish this end. There are more effective ways to promote innovations, but few more effective ways to promote profits for large pharmaceuticals and software firms.
Furthermore, while these agreements assure the unrestrained movement of capital—establishing rights for foreign investment in the participating countries—they do not provide for the movement of labor. People are inherently less mobile than capital, regardless of immigration restrictions. Yet, removing restrictions on capital mobility and doing nothing to facilitate the movement of labor or protect labor increases the power of firms over workers. Power depends on the availability of options. These agreements give greater options— and therefore greater power—to businesses. This power shows up in the stagnation, and in many cases the decline, of workers’ wages, as their jobs are shifted to lower-wage countries and they are forced to accept lower wages in other employment. Even when firms do not actually move abroad, the threat of movement is sufficient to weaken workers’ bargaining power.
Power to businesses is also provided—in these agreements, in NAFTA and the more recently proposed agreements—through provisions that give foreign investors the right to sue governments in private international arbitration (not the courts). These provisions are known as “investor-state dispute settlement,” or ISDS. ISDS allows a firm to sue, claiming that new financial regulations, environmental laws, worker protections, food and health safety standards, or other laws and regulations threaten their profits. A recent example of the use of ISDS is the case filed in 2016 by TransCanada, claiming that the U.S. government’s blocking construction of its Keystone XL pipeline violated its rights under NAFTA and seeking $15 billion in compensation. The danger of these agreement provisions is not only that the suits will be costly, but that they will inhibit the establishment of important laws and regulations. (There is, by the way, no provision for workers to sue when new laws or regulations harm their livelihoods.) The ISDS provisions and the patent and copyright protections in these various international agreements belie the rhetoric that they are free trade agreements.
In reality, there is no such thing as free trade, if the term is taken to mean international commerce without any impact from government actions. Governments’ involvement in economic activity is ubiquitous and their impact on their countries’ international commerce is affected by far more than tariffs, import quotas, and direct subsidies for export activity. Perhaps the best example is government expenditures on education and research. If these expenditures are high relative to other countries’, the country has a trade advantage in goods and services that rely on highly skilled labor. These expenditures are, in effect, an indirect, though important, subsidy to certain kinds of exports. A particular and historically important case is that of government support of agricultural research and extension activity, which has long-placed U.S. agriculture in a strong position in international trade. More recent examples are the U.S. Defense Department’s grants for information technology development and the National Science Foundation’s support for activity biotechnology. Clearly, such expenditures, as well as the broad government support of public education, have profound effects on countries’ international commerce.
The point here is not that governments should stop all economic engagement that affects international commerce, an impossible task that even celebrants of free trade themselves do not advocate. Instead, we should recognize that choices must be and are being made regarding the nature of a country’s trade. Those choices are bound up with all sorts of other choices about governments’ engagement with their economies. The matter of how international commerce should be organized cannot hidden behind the rhetoric of free trade.
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