Pursuing Profits – or Power?

James Boyce

Do corporations seek to maximize profits? Or do they seek to maximize power?

The two may be complementary—wealth begets power, power begets wealth—but they’re not the same. One important difference is that profits can come from an expanding economic “pie,” whereas the size of the power pie is fixed. The pursuit is a zero-sum game: more for me means less for you. And in corporations, the pursuit of power sometimes trumps the pursuit of profits.

Take public education, for example. Greater investment in education from pre-school through college could increase the overall pie of well-being. But it would narrow the educational advantage of the corporate oligarchs and their privately schooled children—and diminish the power that comes with it. Although corporations could benefit from the bigger pie produced by a better-educated labor force, there’s a tension between what’s good for business and what’s good for the business elite.

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The First World Keynes Conference: A Follow Up

Erinc Yeldan

The First World Keynes Conference convened over the heated days of June 26-28 at the Izmir Economics University.  Given the current impasse in mainstream economics over the ongoing great recession, it is no surprise that the Conference attracted quite a few dissident voices from many alternative paradigms and fields of research.

It is quite clear to all social scientists able to maintain their sense of scientific clarity that the causes of the global crisis lie beyond the rhetoric of toxic assets, in the realm of what should be called Toxic Economics Textbooks[1].  As the opening lines of the Conference Invitation attest,

“The vastly dominant mainstream model –New Consensus Macroeconomics (NCM) and the related Dynamic Stochastic General Equilibrium (DSGE) model – has not only suffered a severe blow by the eruptions of the recent world financial crisis but must be seen as part of its cause: the quasi-religious believe in super-efficient markets and the self-regulatory capabilities of the representative agent, the main assumption of the framework, pursuing relentlessly its own egoistic interests has distracted most professional economists from investigating the unthinkable: a violently unstable economy. The uncritical acceptance of very restricted formal models as a good approximation of reality has led many economists to produce tools which reinforced organic instability.”

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When Foreign Investors Sue the State

Martin Khor

In the recent public debate surrounding the Trans-Pacific Partnership Agreement (TPPA), an issue that seems to stands out is the investor-state dispute settlement system (ISDS).

It enables foreign investors of TPPA countries to directly sue the host government in an international tribunal.

In most US free trade agreements, the tribunal most mentioned is ICSID, an arbitration court  hosted by the World Bank in Washington.

The ISDS is a powerful system for enforcing the TPPA’s rules. Any foreign investor from TPPA countries can take up a case claiming that the government has not met its relevant TPPA obligations.

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Gas, Found and Lost

Sunita Narain

Natural gas as fuel has environmental benefits, particularly when compared to burning coal for power generation or using diesel for vehicles. So when the government increases—in fact, doubles—the price of domestically produced natural gas it has far-reaching implications for air quality and public health. But these benefits do not matter at all in the price-benefit calculations. Government’s rather simplistic logic is that if the price is increased, Reliance Industries, which has monopoly over gas fields and, therefore, holds all the cards, will put in more money in drilling for gas and this, in turn, will mean more gas for use. Simple. But equally simply stupid.

The fact is that if natural gas becomes so expensive that it cannot compete against coal and diesel then it will not be used. In the case of power plants, roughly 20,000 MW of capacity is lying idle for want of gas. Now, even if gas is produced—and there is no guarantee that at the doubled rate Reliance will find more gas—its use in power plants will raise tariffs, rendering power unaffordable. Dirty coal will win.

But we should not be surprised. The health advantage of gas is nobody’s concern.

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What It Takes To Deliver Midday Meal

Sunita Narain

The tragic loss of 23 young lives because of contaminated food in a Bihar school is unacceptable. But it is also a fact that the Mid Day Meal Scheme, under which cooked food is compulsorily provided to children in government schools, is too important and critical to give up on. The only questions that matter are: why does the scheme not work as well as it should and what can be done to fix it?

The answers are complicated. Providing nutritious food to children in schools helps address two key problems; hunger and education. Progressive political leaders found the answers in their states. In 1982, M G Ramachandran, the then chief minister of Tamil Nadu, set up the nutritious meal programme. It is legendary that he took deep interest in the working of the scheme. Former district officials will tell you of his surprise trips to schools and his fury if anything was found out of order. This was top priority, so it worked.

In the mid-1990s, the Central government adopted these ideas coming from different states and framed a national midday meal scheme. But nothing much happened. In 2001, the Supreme Court directed all governments to provide cooked food to all children in primary schools. Since then the scheme has evolved. The Central government agreed to provide free grain (rice and wheat) and funding for transport, cooking cost and recently even an honorarium for the cook. The state government is required to top up this funding; pay for vegetables and pulses; provide infrastructure in schools and manage affairs.

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Demographic Transitions, Malthusian Traps and Supply-Constrained Growth

Matias Vernengo

Gregory Clark’s book The Farewell to Alms re-popularized the Malthusian model (for the relevant chapter go here). The basic idea is that population dynamics and the so-called demographic transition do have an important impact on economic growth. Robert Malthus’ idea is relatively well known, even if there is an incredible amount of confusion in the way it is explained by modern neoclassical authors.

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At the TPPA Open Day

Martin Khor

Last Thursday I took part in an unusual Open Day on the Trans-Pacific Partnership Agreement in Kuala Lumpur.

A thousand people turned up at the event, showing how this trade agreement has aroused great public interest and concern.

The organiser of the half day event was the Ministry of International Trade and Industry (MITI), which had been criticised by several citizen groups as not revealing enough information about the TPPA.

It was unusual because the Trade Minister Datuk Seri Mustapa Mohamed spoke frankly of a “trust deficit” on TPPA between MITI and the public.

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Should China Deregulate Finance?

Kevin Gallagher

Rumor has it that China is set to accelerate the de-regulation of its financial system.

China is “too big to fail.” Nobody in the world can afford for financial liberalization to fail there.

For years, China has restricted the ability of its residents and foreign investors to pull and push their money in and out of the country.

While that may be illiberal, there was a sound reason for this restriction: Every emerging market that has scrapped these regulations has had a major financial crisis and subsequent trouble with growth.

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The Next Federal Reserve Chairperson

Thomas Palley, Guest Blogger

Some months ago it became known that Federal Reserve Chairman Ben Bernanke was likely to step down as the end of his second term of appointment drew near. Initially, Federal Reserve Vice-Chair Janet Yellen appeared the favorite to succeed Bernanke, but now it seems as though Larry Summers has become the Obama administration’s preferred candidate. Summers’ candidacy raises grave political and policy concerns.

The case for Larry Summers rests on claims that he is a seasoned, crisis-tested, and known policy maker. His experience includes a stint as treasury secretary in the late 1990s and a stint as director of the National Economic Council from 2009-2011, where he oversaw the stimulus and recovery program. He is also a known quantity on Wall Street, where he has earned millions in speaking and consulting fees. Add in his academic credentials as an economics professor at Harvard, and Summers appears to be a model candidate – experienced in government and trusted by financial markets.

But digging deeper, the flaws begin to show. Many critics have pointed out that Summers led the charge for financial deregulation in the 1990s. Worse yet, he opposed updating regulation to deal with financial innovation, as exemplified by his opposition to derivatives regulation in 1998.

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Larry Summers and the End of Political Shame

Jonathan Kirshner

Larry Summers, campaigning to become the next Chairman of the Federal Reserve Board, has a rap sheet that would make Anthony Wiener blush. In the 1990s he led the charge for the deregulations that contributed to the financial crisis. In the 2000s, willfully blind to the growing systemic risk metastasizing throughout the banking system, he became a very well-paid consort of the financial sector (firms over which the Fed Chair is the ultimate supervisor).  With lines on his resume like “Enron Advocate,” and “villain of the Asian Financial Crisis,” Summers has a vast and remarkably robust reservoir of self-confidence, but no practical experience in central banking, a notable detail given that Fed Chair is not an entry-level position.

At the Clinton Treasury Department, Summers was the enthusiast of the rapidly growing, largely unsupervised, and enormously profitable markets in financial derivatives. Brushing aside reports from the Government Accountability Office that raised concerns about the risks inherent in such markets, Summers browbeat into submission subordinates who shared them instead of embracing regulatory reforms that might catch up with new developments. Working in concert with libertarian Svengali Alan Greenspan at the Fed, and friend-of-finance Senator Phil Gramm of Texas, he championed the Commodity Futures Modernization Act, which prohibited the government from regulating derivatives markets—including of course, the credit-default swaps that would play a central role in the 2007-2008 financial crisis. Before the crisis Summers boasted of this fiasco as “one of his great achievements as Secretary of the Treasury.”

During his ill-fated Presidency of Harvard University from 2001 to 2006, Summers’ enthusiasm for financial exotica never flagged. People still debate whether he is to blame for the reckless bets on interest rate swaps that cost Harvard’s endowment a fortune, but his continued cheerleading for the geniuses who had mastered a brave new world of riskless finance is beyond doubt. In 2005, when Raghuram Rajan, chief economist of the IMF, presented a paper that raised cautious concerns about the stability of the financial system, Summers led a chorus of cat-calls from the business-class seats. “We should not be lulled into complacency by a long period of calm,” Rajan argued. With a “myriad of complex claims written on the same underlying real asset,” small problems could quickly get out of hand, and “may create a greater (albeit still small) probability of a catastrophic meltdown.” He proposed some modest reforms. Summers derided the paper as “misguided” and dismissed Rajan as a Luddite.

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