TripleCrisis

Era of Financial Vulnerability

The year 2016 started with a big bang, but the kind we would rather avoid. The Chinese stock market plunged for several days, causing panic around the world, with the markets also falling in many countries, East and West.

This is another wake-up call to alert us that finance has become inter-connected, indeed much too inter-connected, globally.

Many developing countries like Malaysia have been drawn into the web of the global financial system in manifold ways, and that has made them more vulnerable to adverse developments and shocks.

We are now in an era of financial vulnerability, which easily turns into vulnerability in the real economy of GDP growth, trade and jobs.

An immediate issue is whether the rout in China’s stock market will affect its real economy, in which case there will be serious effects.

One view is that it would contribute to a “hard landing” as the Chinese economy already has many problems.

Another view, more realistic in my view, is that the spillover to the real economy will not be significant. A paper by Brookings-Tsinghua Centre shows that the inter-connection between the stock market and the economy is limited in China.

In the United States, half the population own stocks and corporations rely heavily on funds raised in the stock market, but in China less than 7% of urban Chinese invest in the stock market and corporations rely much less than American companies on the stock market to raise funds.

Nevertheless, China’s economy is expected to slow down this year. Other factors also add to a pessimistic outlook for developing countries.

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China’s Looming Care Crisis

Barbara E. Hopkins

Barbara E. Hopkins is an associate professor of economics at Wright State University.

The Chinese Communist Party has officially abandoned the “one-child” policy and now allows all married couples to have two children. However welcome this policy shift, it is unlikely to fend off the worsening care crisis associated with an aging population. The New York Times reports that only 12% of eligible couples responded to a recent relaxation of the rules. In urban areas of China, in particular, many families consider a second child prohibitively expensive.

The Party remains concerned about a shrinking workforce. Any given productivity level will yield a lower GDP per capita when a smaller percentage of the workforce is of working age. Although China’s natural rate of population growth is .5% per year, new workers are not replacing aging workers. While the share of the total population over 65 is one-half that of Denmark, the size of the elderly relative to the working age population has increased from 8% to 13% in the last 35 years.

Denmark has more policy options than China. Because a large percentage of its workers are in white-collar jobs, it may be easier to persuade them to postpone retirement longer. In contrast, a significant share of the Chinese labor force engages in physically demanding manual labor that elderly workers may not be able to sustain. Denmark can encourage immigration from low-wage countries like Syria to meet some of its labor needs. In contrast, the Chinese population is probably too large to rely on migration. Further, net outmigration is significant, especially among educated workers.China has a brain drain problem.

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2015: Monetary and Fiscal Policy Discord

Ann Pettifor

This post is our second selection from “The Cracks Begin to Show: A Review of the UK Economy in 2015,” by Economists for Rational Economic Policies (EREP), sent to us by EREP co-convenor John Weeks. This installment is by Ann Pettifor, director of Policy Research in Macroeconomics, and author of Just Money. The full report, whose contributors include Weeks, Pettifor, Richard Murphy, Özlem Onaran, Jeremy Smith, Andrew Simms, and Jo Michell, is available here.

The British Prime Minister declared at Davos in 2012 that he (and his Chancellor) were “fiscal conservatives but monetary radicals injecting cash into the banking system and introducing credit easing measures to make it easier for small businesses to access finance.”

Doubt can be cast over the “fiscal conservatives” claim, as well as the claim that small businesses would benefit from greater access to finance. The major beneficiaries of the government’s lop-sided approach to monetary and fiscal policy are big corporations and the rich – owners of assets whose value are inflated by QE. But the biggest victim of the ‘fiscal conservative’ approach is the government itself. For as we argued in a paper written in 2010 – The Economic Consequences of Mr Osborne – “fiscal consolidation does not ‘slash’ the debt, but contributes to it, as the extent of economic recovery becomes increasingly uncertain.”

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What We’re Writing, What We’re Reading

What We’re Writing

Patrick Bond, Why South Africa Should Undo Mandela’s Economic Deals

Alejandro Reuss, Debt and Development

Matias Vernengo, On the Job Numbers and More at the Rick Smith Show

What We’re Reading

Prabhat Patnaik, The Liberal Defense of Capitalism

Jomo Kwame Sundaram, Should the World Emulate US Crop Insurance?

Jeronim Capaldo and Alex Izurieta with Jomo Kwame Sundaram, Trading Down: Unemployment, Inequality and Other Risks of the Trans-Pacific Partnership Agreement

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The Heavy Price of Economic Policy Failures

Jayati Ghosh

A lot of the media discussion on the global economy nowadays is based on the notion of the
“new normal” or “new mediocre” – the phenomenon of slowing, stagnating or negative
economic growth across most of the world, with even worse news in terms of employment
generation, with hardly any creation of good quality jobs and growing material insecurity for
the bulk of the people. All sorts of explanations are being proffered for this state of affairs,
from technological progress, to slower population growth, to insufficient investment
because of shifts in relative prices of capital and labour, to “balance sheet recessions”
created by the private debt overhang in many economies, to contractionary fiscal stances of
governments that are also excessively indebted.

Yet these arguments that treat economic processes as the inevitable results of some forces
outside the system that follow their own logic and are beyond social intervention, are hugely
misplaced. Most of all, they let economic policies off the hook when attributing blame – and
this is massively important because then the possibility of alternative strategies that would
not result in the same outcomes are simply not considered.

In an important new book, Failed: What the “experts” got wrong about the global economy
(Oxford University Press, New York 2015), Mark Weisbrot calls this bluff effectively and
comprehensively. He points out that “Behind almost every prolonged economic malfeasance
there is some combination of outworn bad ideas, incompetence and the malign influence of
powerful special interests.” (page 2) Unfortunately, such nightmares are prolonged and even
repeated in other places, because even if the lessons from one catastrophe are learned, they
are typically not learned – or at least not taken to heart – by “the people who call the shots”.

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Neoliberal Capitalism, Its Crisis, and What Comes Next

David M. Kotz

David M. Kotz is a professor of economics at the University of Massachusetts Amherst and the author of The Rise and Fall of Neoliberal Capitalism (Harvard University Press, 2015). This article originally appeared in the January/February 2016 issue of Dollars & Sense magazine.

Neoliberal capitalism had, at its core, a basic contradiction: Rising profits spurred economic expansion, but at the same time the source of the rising profits—the suppression of wage growth—created an obstacle to expansion. With wages stagnating, and with government spending rising more slowly, who would buy the output of an expanding economy? For a while, this simmering “demand problem” was forestalled, as risk-seeking financial institutions extended credit to the hard-pressed families whose wages were stagnating or falling. Debt-fueled consumer spending made long expansions possible despite the stagnation of wages and of government spending. Big asset bubbles provided the collateral enabling families to borrow to pay their bills.

The economic crisis of 2008 marked the end of the ability of the neoliberal form of capitalism to promote stable economic expansion. In the wake of the massive housing-bubble collapse and financial crash, the previous debt-and-bubble-based growth machine cannot be revived. The banks continue to find new speculative ventures and corporate profits remain high, but this process no longer brings normal economic expansion.

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What We’re Writing, What We’re Reading

What We’re Writing

James K. Boyce, What’s Behind Global Emissions Decline, GDP Increase (Real News Network Interview)

Listen also to the related Triple Crisis blog interview with James K. Boyce, “Present-Day Benefits of Climate Policy,” available here.

C.P. Chandrasekhar, Financial Services Under WTO: Disciplining Governments and Freeing Business

Sunita Narain, Let’s Respect the Other

Matias Vernengo, The Strange and Misunderstood Reasons for the Brazilian Crisis

What We’re Reading

Shouvik Chakraborty, Explaining the Rise in Agricultural Prices: Impact of Neoliberal Policies on the Agrarian Economy

Prabhat Patnaik, Imperialism’s New Trade-Negotiating Strategy

Franklin Serrano and Luiz Eduardo Melin, Political Aspects of Unemployment: Brazil’s Neoliberal U-Turn

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

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TTIP and Climate Change: Low Economic Benefits, Real Climate Risks

Matthew C. Portersfield and Kevin Gallagher

Matthew C. Porterfield is Deputy Director and an adjunct professor at the Georgetown University Law Center’s Harrison Institute for Public Law. Kevin P. Gallagher is Professor of Global Development Policy at Boston University’s Pardee School for Global Studies, where he co-directs the Global Economic Governance Initiative.

Climate change governance should inform global governance more broadly, including international trade and investment policy. One of the most important trade and investment agreements is the Trans-Atlantic Trade and Investment Partnership (TTIP)—currently under negotiation between the European Union and United States—given the role the agreement will likely play in establishing rules for the global economy in the 21st century.
The current model that the TTIP is based on will increase carbon dioxide emissions and jeopardize the ability of Europe and the United States to put in place effective policies for mitigating climate change. Trade and investment treaties should be used to help achieve the broader climate change objectives of Europe and the United States, not hinder them.

This short brief outlines how the TTIP can increase emissions and restrict the ability of nations to adequately mitigate and adapt to climate change and offers a set of recommendations that would make EU–U.S. trade policy more consistent with global climate change goals.

TTIP will Increase Carbon Emissions

Given that the United States and Europe already enjoy a strong trade and investment relationship, the economic benefits of the treaty are projected to be relatively small. The most cited studies in the European debates are by Ecorys, the Centre for Economic Policy Research (CEPR) and Tufts University. The first two studies find that the treaty will boost GDP among the parties by less than 1 per cent for the United States and Europe, though the Tufts study finds that the impacts on GDP will be slightly negative in the EU.¹

Despite the small projected economic gains of the treaty, the Ecorys study projects that it will increase emissions by 11 million metric tons. The increase in emissions is just 0.07 percent from the baseline, smaller than the 0.47 increase in GDP projected by Ecorys. When multiplied by estimates of the social cost of carbon, carbon emissions would cost the European Union USD1.4 billion annually.²

This finding is consistent with the broader literature. According to a comprehensive assessment of the literature conducted by the World Trade Organization and the United Nations Environment Programme, most trade and investment agreements tend to increase carbon emissions.³ It should be noted that the Ecorys study is only a partial one because it does not look at the environmental impacts of many “nontariff barriers,” such as certain domestic subsidies. There has also been inadequate consideration of the potential impact of TTIP provisions that could limit the ability of governments to design and implement effective climate change policy. As we will see, it is the deregulatory aspect of the TTIP that poses the highest risk to climate change policy.

Regulatory Risks of the TTIP

The TTIP could jeopardize the ability of the European Union and the United States to put in place the proper regulations to meet climate targets. The legal effects of the TTIP could take a variety of forms, including broad restrictions on regulatory authority under investor-state dispute settlement (ISDS) provisions, limits on carbon intensity standards, modifications of the U.S. fossil fuel export regime and restrictions on renewable energy programs.

Broad Restraints on Climate Regulations under Investment Rules

The TTIP’s investment chapter will likely provide investors with certain broad rights, including “fair and equitable treatment” and compensation for regulations deemed to constitute acts of “indirect expropriation.” These rights would be enforceable by private corporations, including fossil fuel companies, through the controversial ISDS process, which could be used to challenge a wide range of government measures affecting climate change.⁴ Similar rules under other treaties have been used to challenge environment-related measures, including a claim under the Energy Charter Treaty based on Germany’s regulation of a coal-fired power plant⁵ and a pending challenge under the North American Free Trade Agreement (NAFTA) to Quebec’s moratorium on hydraulic fracturing or “fracking.”⁶

Limits on Carbon-Intensity Standards

Regulations that limit the carbon intensity of transportation fuels could also be targeted under the TTIP. United States Trade Representative Michael Froman has reportedly used the TTIP negotiations to pressure the European Union to weaken the carbon intensity standards of the EU’s Fuel Quality Directive (FQD) in order to facilitate the export of high-carbon-intensity oil.⁷ Although the European Commission subsequently modified the FQD proposal to accommodate the dirtier oil,⁸ the TTIP negotiations could be used to impose restrictions on future efforts to implement carbon intensity standards for fuel.⁹

Modification of the Fossil Fuel Export Regime

One of the European Union’s principal objectives in the TTIP negotiations is to secure “a legally binding commitment . . . guaranteeing the free export of crude oil and gas resources [from the United States] by transforming any mandatory and non-automatic export licensing procedure into a process by which licenses for exports to the EU are granted automatically and expeditiously.”¹⁰ Creating an “automatic” and “expeditious” process for U.S. crude oil and gas exports could result in more greenhouse gas (GHG) emissions than projected in quantitative analyses by promoting the production and consumption of these fuels.

Although natural gas is widely viewed as a lowercarbon alternative to other fossil fuels such as oil and coal, expanded exports of liquefied natural gas (LNG) could actually increase GHG emissions for several reasons. Liquefying, transporting and regasifying natural gas is energy-intensive, causing exported LNG to be approximately 15 per cent more carbon-intensive than natural gas that is used domestically. In addition, increased LNG exports will raise the price of natural gas in the United States, potentially resulting in the use of more coal to produce electricity. Expanded LNG exports will also encourage increased fracking for the production of natural gas, which could cause increased accidental releases of natural gas, known as “fugitive methane emissions.”¹¹ Given that methane is a much more powerful greenhouse gas than carbon dioxide, “any climate benefits from increased natural gas use internationally could be dwarfed by accelerated warming caused by fugitive methane emissions.”¹²

Restrictions on Renewable Energy Programs

The TTIP could also conflict with efforts to address climate change by imposing new restrictions on policies designed to promote renewable energy. Trade rules are already being used to challenge alternative energy programs. Since 2010 about a dozen disputes have been brought over renewable energy programs.¹³ The European Union has indicated that it intends to use the TTIP negotiations to seek new restrictions targeting renewable energy programs that contain local content requirements.¹⁴ Proponents of local content provisions argue that they are essential for developing the political support that will be necessary to maintain and expand renewable energy programs.

Putting Climate Change First

At the Paris Summit and in the newly crafted Sustainable Development Goals (SDGs) at the United Nations, the world’s nations have pledged to “take urgent action to combat climate change and its impacts.”¹⁵ The TTIP must not undermine this goal.

Both the European Union and the United States have made strides in prioritizing climate change in other areas of global economic governance, but not in international trade and investment policy. The European Investment Bank and the European Bank for Reconstruction and Development—the EU’s multilateral development banks (MDBs)— significantly restrict the financing of fossil-fuelintensive economic activity. The United States also has executive orders that restrict the ability of the United States to support the financing of coal projects through MDBs of which it is a member, and mandates that all projects be climate resilient. Such an approach is urgently needed in the TTIP.

The negative economic and regulatory impacts of the TTIP on climate policy noted above are not inevitable. A bold approach could be put forth where the TTIP excludes climate mitigation measures from ISDS, protects renewable energy programs and carbon-intensity standards, and discourages the production and consumption of fossil fuels.
As first steps in striking a new economic relationship that enhances our climate change goals, the United States and the European Union should commit to three principles: (1) The potential economic and regulatory impacts of the TTIP on climate policy should be carefully studied. (2) The provisions of the TTIP should be fully compatible with and supportive of climate policy objectives. (3) The TTIP should, at a minimum, not result in a net increase in GHG emissions—which is to say, the TTIP must be carbon neutral or better.

As the SDGs articulate, “climate change is a global challenge that does not respect national borders. Emissions anywhere affect people everywhere. It is an issue that requires solutions that need to be coordinated at the international level.”¹⁶ Trade and investment policy should not be an exception.

Originally published as an International Institute for Sustainable Development Commentary. The authors would like to acknowledge the Wallace Global Fund for providing the support that made this policy brief possible.

Notes

1. Despite the small projected economic gains of the treaty, the Ecorys study projects that it will increase emissions by 11 million metric tons. The increase in emissions is just 0.07 percent from the baseline, 1 See Ecorys, 2009, Non Tariff Measures in EU-US Trade and Investment –An Economic Analysis, ECORYS Nederland BV; and CEPR, 2013, Reducing Transatlantic Barriers to Trade and Investment, Centre for Economic Policy Research, London; for a discussion of the limits of CGE modeling see Ackerman, F., and K. Gallagher. 2004. “Computable Abstraction: General Equilibrium Models of Trade and Environment.” In The flawed foundations of General Equilibrium: critical Essays on Economic theory, ed. F. Ackerman and A. Nadal, 168–80. New York: Routledge and Ackerman, Frank, and Kevin P. Gallagher, 2008, “The Shrinking Gains from Global Trade Liberalization in Computable General Equilibrium Models”, International Journal of Political Economy, vol. 37, no. 1, Spring, pp. 50–77.

2. EC Staff Working Document, Impact Assessment on the Future of EU-US Trade Relations (2013)(“EC Impact Assessment”) at 49, available at http://trade. ec.europa.eu/doclib/docs/2013/march/tradoc_150759.pdf. On the social cost of carbon (SCC), 11 million tons is multiplied by the average estimate in this comprehensive review of estimates J.C.J.M. van den Bergh and W.J.W. Botzen (2014), “A lower bound to the social cost of CO2 emissions,” Nature Climate Change 4, 253-258.

3. World Trade Organization & United Nations Environment Programme. (2009). Trade and climate change, (p. vii). Retrieved from https://www.wto.org/english/ res_e/booksp_e/trade_climate_change_e.pdf.

4. See Gus Van Harten. (2015). An ISDS carve-out to support action on climate change. Osgoode Hall Legal Studies Research Paper No. 38/2015. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2663504; Meredith Wilinsky. (2014, August 7). Potential liability for climate-related measures under the TransPacific Partnership. Retrieved from http://web.law.columbia.edu/sites/default/files/ microsites/climate-change/wilenskytranspacificpartnership8-7-14_-_revised.pdf.

5. Nathalie Bernasconi-Osterwalder & Rhea Tamara Hoffmann (2012). The German nuclear phase-out put to the test in international investment arbitration? Background to the New Dispute Vattenfall v. Germany (II) (p. 4). Retrieved from http://www.iisd. org/pdf/2012/german_nuclear_phase_out.pdf.

6. Lone Pine Resources Inc. v. Canada (UNCITRAL), Notice of Arbitration, paras. 48–52 (Sept. 6, 2013). Retrieved from http://www.italaw.com/sites/default/files/ casedocuments/italaw1596.pdf.

7. From Inside U.S. Trade (2013, September 19). Froman pledges to preserve Jones Act, criticizes EU Clean Fuel Directive: Froman raised concerns about trade impacts of the FQD “with senior European Commission officials repeatedly, including in the context of the . . . TTIP negotiations.”

8. From Inside U.S. Trade (2014, October 14). EU backpedals on vehicle fuels policy in face of U.S., Canadian pressure.

9. From Inside U.S. Trade (2014, October 14). EU backpedals on vehicle fuels policy in face of U.S., Canadian pressure: “[O]utgoing EU Climate Action Commissioner Connie Hedegaard . . . signaled that the EU was leaving the door open to directly targeting tar sands . . . for penalties in the future.”

10. Council of the European Union. (2014, May 27). Note for the attention of the Trade Policy Committee: Non-paper on a Chapter on Energy and Raw Materials in TTIP. Retrieved from http://www.scribd.com/doc/233022558/EU-Energy-Nonpaper.

11. World Resources Institute, (2013, May 20). What exporting U.S. natural gas means for the climate. Retrieved from http://www.wri.org/blog/2013/05/whatexporting-us-natural-gas-means-climate.

12. Ibid.

13. Cathleen Cimino & Gary Hufbauer. (2014, April). Trade remedies: Targeting the renewable energy sector (p. 19). Retrieved from http://unctad.org/meetings/en/ SessionalDocuments/ditc_ted_03042014Petersen_Institute.pdf.

14. European Commission. (2013). EU–US Trade and Investment Partnership, raw materials and energy: Initial EU position paper (p. 3). Retrieved from http://trade. ec.europa.eu/doclib/docs/2013/july/tradoc_151624.pdf.

15. United Nations. (n.d.). Goal 13: Take urgent action to combat climate change and its impacts. United Nations Sustainable Development Goals. Retrieved from http://www.un.org/sustainabledevelopment/climate-change-2/.

16. Ibid.

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Dollar Dominance

Arthur MacEwan

This article is excerpted from the January/February 2016 issue of Dollars & Sense magazine.

Change Without Change

The Bretton Woods rules of the game worked fairly well for twenty-five years. In fact, from the perspective of the United States one might say they worked too well. While the Bretton Woods system promoted U.S. commerce, opening up trade and investment opportunities around the (capitalist) world, it also provided a stability in global affairs in which firms based elsewhere—in Japan and Europe—were able to also expand and ultimately challenge the dominant position of U.S firms.

A critical juncture in global commercial arrangements then came in 1971: the Bretton Woods system fell apart. A combination of heavy spending abroad by the U.S. government (on the Vietnam War), the economic challenge from other rich countries, and inflation in the United States led the U.S. government to drop its promise of redeeming dollars for gold. Yet, while the system fell apart, there was surprisingly little change in international trade and investment. The relative economic and military power of the United States, though not as extreme as it had been in the immediate post-World War II era, continued. And the perceived threat of the Soviet Union served as a glue, binding the world’s major capitalist powers in Europe and Asia to the United States, and leading them to accept continued U.S. economic, as well as military, dominance.

After 1971, various new arrangements were put in place—for example, a system of partially managed “pegs” was established. Yet the dollar remained the central currency of global commerce. Prices of internationally traded goods—most importantly oil—continued to be set in dollars, and countries continued to hold their reserves in dollars.

Although 1971 marked the beginning of a new era in international financial arrangements, the dollar retained its dominant position. Regardless of the various economic problems in the United States, the dollar has remained both relatively stable and in sufficient supply to grease the wheels of international commerce. Indeed, an ironic example of the continuing role of the dollar came in the Great Recession that began in 2008. Even while the U.S. economy was in the doldrums, businesses and governments elsewhere in the world were buying U.S. government bonds—a principal means of holding their reserves in dollars—since they still considered these the safest assets available.

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