Gerald Friedman, Guest Blogger

This is the second part of a two-part series on the reasons for the sluggish U.S. economic “recovery” since the Great Recession, by Gerald Friedman, professor of economics at the University of Massachusetts and author of Microeconomics: Individual Choice in Communities. This post, from Friedman’s “Economy in Numbers” column in Dollars & Sense magazine, focuses on the failings of various government policy responses to the crisis.

Government Policy and Why the Recovery Has Been So Slow

The recovery from the Great Recession has been so slow because government policy has not addressed the underlying problem: the weakness of demand that restrained growth before the recession and that ultimately brought on a crisis. Focused on the dramatic events of fall 2008, including the collapse of Lehman Brothers, policymakers approached the Great Recession as a financial crisis and sought to minimize the effects of the meltdown on the real economy, mainly by providing liquidity to the banking sector. While monetary policy has focused on protecting the financial system, including protecting financial firms from the consequences of their own actions, government has done less to address the real causes of economic malaise: declining domestic investment and the lack of effective demand. Monetary policy has been unable to spark recovery because low interest rates have not been enough to encourage businesses and consumers to invest. Instead, we need a much more robust fiscal policy to stimulate a stronger recovery.

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Ali Kadri

This is the second part of a five-part series by regular Triple Crisis contributor Ali Kadri, Senior Research Fellow at the Middle East Institute, National University of Singapore, and author of Arab Development Denied: Dynamics of Accumulation by Wars of Encroachment (Anthem Press).

The series is based on an interview he granted to the Center for the Study of Human Rights at the London School of Economics (LSE). The full interview is available here.

Part 2: How would you define neoliberalism? What effect has it had on the Arab world?

The neoliberal policy package depends primarily on the creation of an enabling environment for the private sector, freeing the goods and capital markets and implementing “good governance.” The story goes: If price distortions are removed, capital-gains taxes that inhibit the wealthy from investing are removed, labour laws that make the market “rigid” (enabling labour stability on the job instead of being precarious) are removed, and financial regulations that impede the flows of capital are removed—at some immense pain to the working class in the short term—then after a period of welfare retrenchment, the market spurs into action delivering much needed capital stock, rising productivity, and rising wages in the long term. One ought to note in passing that despite the dismal record of this “trickle-down” story, it remains central to mainstream policies. When these conditions prevail, the neoliberal “theory” says, development prevails. However, this is not much of a theory.

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John Weeks

Background

Unless you just returned from holiday in some ultra-remote region lacking newspapers, television or internet access (is there such a place?), you are aware that the government of Argentina defaulted on its external debt on Wednesday. A New York federal court provided the immediate cause of the default with a ruling that rendered illegal an agreement reached between the Argentine government and creditors holding over 90% of the country’s external debt.

The principal litigant bringing the case against the government holds less than US$2 billion of the Argentine debt, which by comparison makes a tail wagging a dog seem a credible anatomical interaction. MNL Capital, never lent a cent to the Argentine government (nor to any other). It acquired its one-billion-plus Argentine bonds on the re-sale market, purchasing them at far below face value.

Depending on your source of (mis)information, you will think that this default is 1) the result of an feckless, spend-thrift government failing to accept responsibility for its actions (argued for example, in Forbes),  2) the harbinger of deep economic trouble for the Argentines; and/or 3) the consequence of the predatory evil of vulture hedge funds.

Taking these three in order, they are 1) false, 2) probably false, and 3) true but not terribly important.

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Sunita Narain

Smart is as smart does. The NDA government’s proposal to build 100 “smart” cities will work only if it can reinvent the very idea of urban growth in a country like India. Smart thinking will require the government to not only copy the model cities of the already developed Western world, but also find a new measure of liveability that will work for Indian situation, where the cost of growth is unaffordable for most.

The advantage is that there is no agreed definition of smart city. Very loosely it is seen as a settlement where technology is used to bring about efficiency in resource use and improvement in the level of services. All this is needed. But before we can bring in smart technology, we need to know what to do with it. How do we build new cities and repair groaning urban settlements to provide clean water to all, to manage the growing mountains of garbage, to treat sewage before we destroy our rivers and to do something as basic as breathing without inhaling toxins?

It can be done. But only if we have our own dream of a modern Indian city. We cannot turn Ghaziabad, Rajkot, Sholapur, Tumkur or even Gurgaon into Shanghai or Singapore. But we can turn these cities into liveable models for others to emulate.

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Timothy A. Wise

Can land grabs by foreign investors in developing countries feed the hungry? So says the press release for a recent, and unfortunate, economic study. It comes just as civil society and government delegates gather in Rome this week to negotiate guidelines for “responsible agricultural investment” (RAI), and as President Obama welcomes African leaders to Washington for a summit on economic development in the region.

At stake in both capitals is whether the recent surge in large-scale acquisition of land in Africa and other developing regions needs to be better regulated to ensure that agricultural investment contributes to food security rather than eroding it by displacing small-scale farmers.

The recent study paper will not advance those discussions. It is the kind of study that gives economists a bad name. Economists like the one in the oft-told joke who, shipwrecked on a deserted island, offers his expertise to his stranded shipmates: “Assume we have a boat.”

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Gerald Friedman, Guest Blogger

This is the first part of a two-part series on the reasons for the sluggish U.S. economic “recovery” since the Great Recession, by Gerald Friedman, professor of economics at the University of Massachusetts and author of Microeconomics: Individual Choice in Communities. Originally published in Dollars & Sense, this post focuses on the basic shape of the recovery—wage stagnation, increased profits, and growing inequality. The second part will focus on the reasons for the persistent weakness in demand and economic growth, and the failings of various government policy responses.

Weak Employment, Stagnant Wages, and Booming Profits

The 2007-2010 recession was the longest and deepest since World War II. The subsequent recovery has been the weakest in the postwar period. While total employment has finally returned to its pre-recession level, millions remain out of work and annual output (GDP) is almost a trillion dollars below the economy’s “full-employment” capacity. This column explains how high levels of unemployment have held down wages, contributing to soaring corporate profits and a remarkable run-up in the stock market.

There was a sharp fall in output (GDP) at the onset of the Great Recession, down to 8% below what the economy could produce if labor and other resources were employed at normal levels (“full employment” capacity). Since the recovery began, output has grown at barely above the rate of growth in capacity, leaving the “output gap” at more than 6% of the economy’s potential—or nearly $1 trillion per year.

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Ali Kadri

This is the first part of a five-part series by regular Triple Crisis contributor Ali Kadri, Senior Research Fellow at the Middle East Institute, National University of Singapore, and author of Arab Development Denied: Dynamics of Accumulation by Wars of Encroachment (Anthem Press).

Dr. Kadri is an affiliate of the Laboratory for Advanced Research on the Global Economy at the London School of Economics (LSE). The series is based on an interview he granted to the Center for the Study of Human Rights at LSE. The remaining parts will appear once a week for the next four weeks. The full interview is available here.

Part 1: What role do oil prices play in the global economy and why might it matter to human rights?

If one were to consider the sensationalised view of oil or the opinion that holds that oil is an uniquely suitable source of energy, then the case may be that the expansion of the world’s population—from around 2 billion in 1925 to 7 billion (currently)—could not have been possible without the energy that oil had provided. However, that is a perspective that bestows upon oil, the commodity itself, a life of its own.

In fact, our dependence on oil is ordained by a set of social relationships that necessitates the use of oil for profit making as opposed to alternative sources of energy that respect social and environmental concerns. When our way of reproducing society (maintaining the needs of society from one period to the next by social measures) shifts from being dictated by the profit criterion to the social value criterion (as in goals which are common to society as a whole), research into the employment of other sources of energy may lead to equal or maybe better sources of energy.

Nevertheless, oil and fuels represent the foremost traded commodity globally. Oil is also important because variants on the initial commodity make up the inputs of nearly all the manufactured commodities. But oil is a strategic commodity because countries that depend on oil imports for their energy and have no immediate sources to replace oil become extremely vulnerable on the security front, if and when oil shortages arise. Hence, for the hegemonic powers, especially the U.S., controlling the sources of oil in the Arab world, by subjugating or subverting the governments of oil-rich countries, can become a source of immense power and/or a weapon of strategic value. For the U.S., the power emanating from hegemony over oil resources underwrites the issuance of the world reserve currency, the dollar, and many other imperial rents wrought as a result of its imperial status.

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Erinç Yeldan

As the recession in Europe painfully proves all attempts at austerity to be dead-ends, the search for the miraculous “silver-bullet” continues. The European Central Bank (ECB) has initiated a negative “nominal” interest rate. That means the ECB, the first monetary authority to ever take such an action in a common currency zone, will be charging commercial banks for the funds they deposit (overnight) rather than paying them interest.

The ECB is pursuing an inflation target of 2% with a dogmatic belief that “this is he rate at which agents [read this as financial speculators and the rentiers] will not be affected in their economic decisions.” To this end, it utilizes three sets of interest rates: (1) the marginal overnight borrowing rate of the banks from the ECB; (2) the basic rate for their re-financing operations; and (3) the rate that is applied to the banks’ deposits at the ECB. In order for the monetary interventions of the ECB to have any effect, the rates on these interests ought to be differentiated. Until very recently, the ECB rate on deposits was set to zero, and the rate on the re-financing operations was 0.25%. The decision of the ECB has now been to reduce the latter rate to 0.15% and  the deposit to negative 0.10%. The textbook explanation for this unusual negative interest rate on money deposited by banks rests on the expectation that they should be now motivated to lend their funds instead of keeping them in reserves. Hopefully, this will restore eurozone economic growth by encouraging more lending for “real” investment.

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Anton Woronczuk of The Real News Network interviews regular Triple Crisis contributor Gerald Epstein, co-director of the Political Economy Research Institute (PERI) and professor of economics at the University of Massachusetts. Epstein argues that, on the fourth anniversary of the passage of the Dodd-Frank financial reform law, which was intended to rein in certain kinds of risky financial practices, implementation is going “much more slowly than one would have hoped.” The United States will need both a more complete implementation of Dodd-Frank and more far reaching regulation, Epstein concludes, to prevent the kinds of financial risk-taking that detonated the global economic crisis.

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GDAE’s Timothy A. Wise and Jeronim Capaldo wrote the following op-ed for Al Jazeera, based on Wise’s work on the WTO’s conflict over food security (see articles hereherehere, and here) and Capaldo’s work on the exaggerated gains from trade facilitation (see articles here and here). See GDAE’s other work on the WTO.

Timothy A. Wise and Jeronim Capaldo

The General Council of the World Trade Organization begins a two-day meeting in Geneva today, with India and other developing countries threatening to block implementation of an agreement on trade facilitation. They would be justified in doing so.

The potential gains from that agreement, reached last December in Bali, Indonesia, are vastly overstated, and they flow primarily to rich countries and private sector traders. Meanwhile, the United States and other developed countries have made little effort to resolve the legitimate demands that developing country food security programs be exempted from archaic stipulations of the WTO’s Agreement on Agriculture (AoA).

India has threatened to withhold its support for trade facilitation, which would effectively scuttle the deal in the WTO’s consensus-based process. The Indian government charges that there has been no serious movement on a re-tabled proposal from the so-called G-33 group of developing countries (which now includes 46 nations) to renegotiate parts of the WTO’s agreement on agriculture so that government efforts to buy and distribute food to the poor are not treated as illegal agricultural subsidies.

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