Hamburg Summit

The end of the G20’s days as a premier forum for international economic cooperation”?

Jesse Griffiths

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

The strangest aspect of the G20 communiqué, and the part that has dominated media coverage, is the section on the Paris climate agreement.  The strangeness arises not because of the topic—the G20 has always played second fiddle to the UN on climate issues—but because, for the first time, a whole paragraph is devoted solely to one member, the USA, explaining why it doesn’t agree with the others, followed by a paragraph by the others explaining why they will go ahead without the USA anyway, including through agreeing a “G19” action plan on energy and climate for growth.

The climate change issue is a jarring symbol of the G20’s difficulty in reaching agreement. However, the Trump administration’s “America first” stance and resulting lack of movement on economic issues—the raison d’etre of the G20—is evident throughout the document.

Two things stand out.

Firstly, many key economic issues receive very little attention. The opening paragraphs on the global economy, trade and investment are masterpieces of bureaucratic obfuscation, offering something for everyone, while saying very little, and presenting no new initiatives. Financial sector reform—an issue at the centre of G20 work since the global financial crash of 2007/8—merits one short paragraph, with no new promises. The Action Plan which accompanies the communique has a more detailed summary of work in this area, highlighting that the G20 has essentially outsourced this work to the Financial Stability Board (FSB)—a worrying development given the major governance problems with that institution. In addition to being one of the least transparent and accountable international financial institutions, the FSB replicates the flawed G20 governance model, but makes it worse by adding the financial centres of Switzerland, Hong Kong, and Singapore to the G20 membership list (as well as Spain and the Netherlands).

Secondly, the continued expansion of G20 interest into a whole host of issues outside its traditional mandate is striking, with the G20 concerning itself with, for example, health, women’s empowerment, food security, rural youth employment, and marine pollution.

Debt problems, what debt problems?

Shockingly, despite developing country debts reaching record levels, and a significant number of countries being in debt distress, not a single mention was made of the need to tackle current and future debt crises in the communiqué. This came after the Finance Ministers earlier this year ignored the strong work being done at the UN on the need for a fair and transparent debt workout mechanism to rapidly resolve and help prevent debt crises, preferring instead to endorse a two page Operational Guidelines for Sustainable Financing that simply emphasises better information sharing informal methods of creditor coordination. They are a step backwards when compared to existing guidelines such as the UNCTAD Principles on Promoting Responsible Lending and Borrowing, which have already been endorsed by the UN General Assembly.

The G20’s Action Plan also fails to mention the UN’s work on multilateral sovereign debt restructuring frameworks, and offers only one new initiative—a Compass for GDP-linked Bonds. While it makes sense to focus on linking debt repayments in bond contracts to the ability of the borrower to pay, the vast majority of low-income country debt does not involve bonds: countries suffering from debt crises need a comprehensive approach which deals rapidly and fairly with all kinds of debt. The way the G20 deals—or fails to deal—with debt issues faced intensive critique by Eurodad members and partners at a major event that took place alongside the Hamburg Summit.

The German government had hoped to make management of international capital flows a central issue at this G20, but, as Eurodad predicted, the issue merits barely a mention in the communiqué, due probably to long-standing differences between some developed countries that are keen to further liberalise international finance, and emerging markets, who are rightly wary of this agenda.

As noted previously by Eurodad, promises to conclude governance reform of the IMF by 2019 shows how glacial progress is, given that the last of these “every five year” reforms was concluded in 2010 (though only implemented in 2016).

Tax—a blacklist of one

G20 efforts to tackle tax dodging by multinationals continue to centre on the flawed OECD Base Erosion and Profit Shifting (BEPS) initiative. Eurodad has already noted the major flaws of BEPS—it lacks transparency, contains significant loopholes, and has failed to incorporate the needs and interests of developing countries, the vast majority of which have had little meaningful participation in decision-making.

In March, Finance Ministers called on the OECD to prepare a blacklist of countries not meeting “agreed international standards of tax transparency.” The result was that the OECD—a body that boasts well known tax offenders such as Luxembourg, Switzerland, the Netherlands and the UK amongst its members—produced a blacklist naming only tiny Trinidad and Tobago as “non-compliant” with international standards. Almost comically, the G20 chose to see this as a sign that all was well, and asked the OECD to repeat the flawed exercise for the next summit. Finally, the G20 leaders noted the work they are doing on “enhancing tax certainty” which previous Eurodad analysis suggests is an effort to shift attention away from ensuring that multinationals pay taxes in the country where they do business, to a focus on ensuring they don’t receive any surprises—in other words, protecting the status quo.

Private finance

There is remarkably little in the communiqué on previous G20 pushes to increase the role of private finance, particularly for infrastructure. However, the leaders endorsed the Joint Principles and Ambitions on Crowding-In Private Finance, which Eurodad has previously raised concerns about, including its emphasis on mechanisms to “de-risk” private finance—a euphemism which can often mean the risks are not actually reduced, but simply transferred to the public sector.

As one centrepiece of its presidency, the German government had launched a new Compact with Africa initiative, aimed at encouraging foreign private investment in Africa, but this is not mentioned in the communiqué. Instead, the G20 groups a number of smaller initiatives under the umbrella of an Africa Partnership. Perhaps this downplaying of the Compact was due to the small number of African countries that signed up—only seven are listed in the communiqué—or it may be a response to the substantive criticism of the Compact and the real motives behind it. For example, Eurodad’s sister organisation, Afrodad, launched a comprehensive critique of the initiative, after consultation with groups from across the African continent. While noting that “the initiative could be beneficial,” Afrodad goes on to highlight major concerns, including noting that developed countries that support such initiatives are “in search of space for their expansionism” and that the end result may be “how to integrate Africa into the global division of labour … with Africa playing the same old role of raw materials provider.”

The “digital economy” was a particular focus of the German G20, which published a “G20 Roadmap for Digitalisation.” The G20 promise to “constructively engage in WTO discussions relating to E-commerce” is a warning flag for critics of the WTO’s work in this area. A recent analysis by the think tank the Center for Economic Policy Research (CEPR) found that current e-commerce proposals being considered by the WTO “are designed around a borderless, digitized global economy in which major technology, financial, logistics, and other corporations like Amazon, FedEx, Visa and Google can move labor, capital, inputs, and data seamlessly across time and space without restriction. They also want to force the opening of new markets, while limiting obligations on corporations to ensure that workers, communities, or countries benefit from their activities.”

Finally, green finance, a major topic of China’s presidency, seems to have been sidelined: it is not mentioned in the communiqué, though both the accompanying G20 Hamburg Action Plan and the Climate and Energy Action Plan take note of the work of the G20 study group on green finance, and the recommendations of the Task Force on Climate-related Financial Disclosures.

The lack of concrete outcomes in the G20’s core areas as the self-proclaimed “premier forum for international economic cooperation” underlines the governance shortcomings of the G20. As an informal club with no permanent secretariat and which operates by consensus, its ability to reach agreement can be held to ransom by powerful countries, such as the U.S., refusing to cooperate. This governance problem is inherent in the G20 design, which is one reason Eurodad and others have called for its replacement by an Economic Coordination Council elected by all UN member states, as proposed by the UN Commission of Experts on reforms of the international monetary and financial system.

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Overcharged: The High Cost of High Finance

Gerald Epstein and Juan Antonio Montecino

Gerald Epstein is a professor of economics and Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst. Juan Antonio Montecino is a doctoral student in economics at the University of Massachusetts Amherst. This is an excerpt from a report Epstein and Montecino wrote for the Roosevelt Institute. The full report is available here.

A healthy financial system is one that channels finance to productive investment, helps families save for and finance big expenses such as higher education and retirement, provides products such as insurance to help reduce risk, creates sufficient amounts of useful liquidity, runs an efficient payments mechanism, and generates financial innovations to do all these useful things more cheaply and effectively. All of these functions are crucial to a stable and productive market economy. But after decades of deregulation, the current U.S. financial system has evolved into a highly speculative system that has failed rather spectacularly at performing these critical tasks.

What has this flawed financial system cost the U.S. economy? How much have American families, taxpayers, and businesses been “overcharged” as a result of these questionable financial activities? In this report, we estimate these costs by analyzing three components: (1) rents, or excess profits; (2) misallocation costs, or the price of diverting resources away from more productive activities; and (3) crisis costs, meaning the cost of the 2008 financial crisis. Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.

First, we estimate the rents obtained by the financial sector. Through a variety of mechanisms including anticompetitive practices, the marketing of excessively complex and risky products, government subsidies such as financial bailouts, and even fraudulent activities, bankers receive excess pay and profits for the services they provide to customers. By overcharging for products and services, financial firms grab a bigger slice of the economic pie at the expense of their customers and taxpayers. We estimate that the total cost of financial rents amounted to $3.6 trillion–$4.2 trillion between 1990 and 2005.

Second are misallocation costs. Speculative finance does not just grab a bigger slice of the pie; its structure and activities are often destructive, meaning it also shrinks the size of the economic pie by reducing growth. This is most obvious in the case of the financial crisis, but speculative finance harms the economy on a daily basis. It does this by growing too large, utilizing too many skilled and productive workers, imposing short-term orientations on businesses, and starving some businesses and households of needed credit. We estimate that the cost of misallocating human and financial resources amounted to $2.6 trillion–$3.9 trillion between 1990 and 2005.

Adding rent and misallocation costs, we show that, even without taking into account the financial crisis, the financial system cost between $6.3 trillion and $8.2 trillion more than the benefits it provided during the period 1990–2005.

On top of this is the massive cost of the financial crisis itself, which most analysts agree was largely associated with the practices of speculative finance. If we add conservative Federal Reserve estimates of the cost of the crisis in terms of lost output ($6.5 trillion–$14.5 trillion), it brings the total amount of “overcharging” to somewhere between $12.9 trillion and $22.7 trillion. This amount represents between $40,000 and $70,000 for every man, woman, and child in the U.S., or between $105,000 and $184,000 for the typical American family. Without this loss, the typical American household would have doubled its wealth at retirement.

These excess costs of finance can be reduced and the financial sector can once again play a more productive role in society. To accomplish this, we need three complementary approaches: improved financial regulation, building on what Dodd-Frank has already accomplished; a restructuring of the financial system to better serve the needs of our communities, small businesses, households, and public entities; and public financial alternatives, such as cooperative banks and specialized public financial institutions , to level the playing field.

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In Finance, Even Business as Usual Comes at Too High a Price

Gerald Epstein

A healthy financial system is crucial to a stable and productive market economy. But after decades of deregulation, the U.S. financial system has turned into a highly speculative system that has failed spectacularly at doing its job. My new report, Overcharged: The High Cost of High Finance,” written with Juan Montecino and published by the Roosevelt Institute, describes in detail the massive costs of this failed financial system.

The evidence of overcharging is all around us. The most obvious, of course, is the catastrophic financial crisis of 2007-2008 that wiped away $16 trillion—24 percent of household net wealth, led to more than 5.5 million home foreclosures, and caused skyrocketing, hope-crushing unemployment rates. When the government picked up the pieces and committed more than $20 trillion of taxpayers’ money to bail out the largest financial institutions, millions of Americans were left high and dry, angry and frustrated.

But the failures of our financial system don’t just arrive in one big bang. They occur on a daily basis, in more mundane ways, often hidden from sight. Asset managers overcharge and underperform. Private equity (PE) general partners earn massive incomes but pay low returns to pension funds and other investors while enjoying unjustifiable tax breaks such as the carried interest exclusion. They do this while, at times, breaking companies and laying off workers for no other reason than their pursuit of short-run capital gains. Payday lenders charge upwards of 400 percent annual interest because many poor people have nowhere else to turn. Meanwhile, many of these payday lenders themselves are tied to the major Wall Street banks.

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Taking the Blinders Off, Part 2

Susan Schroeder is a lecturer in the Department of Political Economy, University of Sydney, Australia, and author of Public Credit Rating Agencies: Increasing Capital Investment and Lending Stability in Volatile Markets (Palgrave Macmillan, 2015). This is the second part of a three-part article, originally published in the July/August 2016 issue of Dollars & Sense magazine.

Susan Schroeder

Instability in Capitalist Economies

A market economy is not completely unpredictable—it does have gravitational tendencies, such as a tendency towards a falling rate of profit. Those tendencies are created by the day-to-day activities of firms and consumers, and are further shaped by the contexts in which they are embedded, such as institutional configurations and social norms.

What is the source, then, of instability in capitalist economies? It emanates from firms’ quest for profit. Capitalism runs on profit. To enhance their profits, firms adopt production techniques that lower their per-unit production costs. As this occurs, each firm’s structure of production changes relative to industry norms. Firms that use lower proportions of labor relative to other inputs are deemed to be more efficient and will earn a better rate of return on their capital than firms that do not adapt.  Firms also switch from one industry to another, or enter new industries, in a quest for higher returns. Firms must change in these ways in order to survive, and thrive, in a competitive market economy.

Changes to productive conditions within an industry and capital flows between industries, however, are major sources of instability. The mechanization of the production process, for example, increases the presence of capital relative to labor. This process is also facilitated by mergers and acquisitions. As each firm changes its production process, the average conditions of production for each industry change. Capital flows between industries will also affect the industry averages as weaker firms exit.  Firms can never be exactly sure how they compare against the industry average at any point in time. The best they can do is try to lower the unit cost of output faster than their competitors. Moreover, economists have demonstrated that these activities create a third source of instability—a tendency towards a falling profit rate for the entire economy.

Debt exacerbates this instability. Firms use debt, supplementing their own retained profits, to finance investment that improves their structures of production. However, improvement comes at the expense of the increasing weight of debt service. As firms become increasingly fragile, collectively, the economy becomes less resilient, and more vulnerable to a debt-deflation process.

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Paul Krugman Crosses the Line

Gerald Epstein

In his recent New York Times opinion column, “Sanders Over the Edge” (4/8/16), economist Paul Krugman offers his readers a basketful of misinformation on important economic matters about which he should – and probably does – know better. The column contains a large number of snipes and a great deal of innuendo against Bernie Sanders and his supporters, but here I focus on his claims about “Too Big To Fail” (TBTF) banks, their role – non-role, according to Krugman –  in the financial crisis, and Sanders’ understanding of the policy tools available to deal with them. Krugman’s claims about these issues are misleading, almost certainly wrong, and, in my view, call into question the credibility of his New York Times column as a source of economic information and analysis.

Krugman starts here:

“Bernie is becoming a Bernie Bro.” I’ll leave it to others to dissect this one. Moving on:

“Let me illustrate the point … by talking about bank reform.

“The easy slogan here is ‘Break up the big banks.’ It’s obvious why this slogan is appealing from a political point of view: Wall Street supplies an excellent cast of villains. But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises? Many analysts concluded years ago that the answers to both questions were no.”

As you can see by following Krugman’s link here, this is not, what Krugman suggests it is: it is not a link to an article quoting multiple analysts presenting strong arguments with evidence that large banks were not responsible for the crisis. It is a link to an opinion piece by Paul Krugman himself. Period.

And, moreover, in this linked piece, Krugman is far more circumspect and uncertain of the answers than if implied in his statement “that many analysts concluded years ago.” So, who are these “many analysts”? On what basis did they reach their conclusions?

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Lessons from Iceland’s Financial Crisis

Nina Eichacker

Nina Eichacker is a lecturer in economics at Bentley University. This blog post summarizes her recent Political Economy Research Institute (PERI) working paper “Too Good to Be True: What the Icelandic Crisis Revealed about Global Finance.”

Iceland’s 2008 financial crisis should have been foreseen. By 2006, banking and economic data described an overheating financial sector and aggregate economy, and analyses by private and public researchers had reports describing those trends and their likely consequences. However, many were still surprised by the onset of Iceland’s large financial crisis. These events point to the dominance of neoliberal theories about the necessity of financial liberalization, and an assumption that a northern European country would have the institutional sophistication to avoid financial crises like those observed in developing countries that rapidly liberalize their financial sectors. A wider adherence to Keynesian and Minskyian theories of financial crisis would have helped predict Iceland’s crisis, and future such episodes.

One factor that contributed to the Icelandic financial crisis was the lack of financial market transparency. Organizations that could have reported on the conditions of the Icelandic financial marketplace and the state of the Icelandic economy did not. Despite positive reports by Frederic Mishkin and others citing Icelandic institutions’ integrity, (Mishkin and Herbertsson, 2006), the Icelandic state threatened to defund public Icelandic institutions and agencies that published reports contradicting the narrative of a robust financial infrastructure and growth. Iceland’s Chamber of Commerce paid economists like Mishkin hundreds of thousands of dollars to write favorable reports about Iceland’s financial sector and overall economic growth prospects. (Wade and Sigurgeirsdottir, 2010) The Icelandic news media consistently underpublished reports critical of the Icelandic financial sector, while publishing many stories that praised Iceland’s big three banks (Andersen, 2011). Sigurjonsson (2011) identified the root cause of this disparity as the cross-ownership of media company shares by Icelandic financial actors and institutions and financial corporation shares by Icelandic media institutions. The interconnectedness of these industries created conflicts of interest for all involved. The under production of criticism, and the over production of praise for Iceland’s banks skewed public understanding of the nature of Icelandic banks’ activity.

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Turbulence and Stability in Financial Markets: China in Recent Times

Sunanda Sen, Guest Blogger

Sunanda Sen is a former Professor of Economics at Jawaharlal Nehru University, New Delhi.

Liberalisation of financial markets, as observed in different parts of the world economy, has never contributed to stability—avoiding unforeseen and unbridled movements in prices and quantities—in those markets. Discontinuation of state-level restraints, in deregulated markets, always generates an atmosphere of uncertainty, which itself has been instrumental in generating turbulence, and then leading to crises. Crises in different financial markets across the world are usually preceded by booms, fed by destabilising financial activities in opened-up markets.

The current downslide in China’s stock markets has followed this familiar pattern, with the crash that took place between June and July 2015 foreshowed by an unprecedented boom which came with the fast pace of liberalisation in the financial sector.

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From “Boring” Banking to “Roaring” Banking, Part 3

Gerald Epstein

This is the final installment of a three part interview with regular Triple Crisis contributor Gerald Epstein, of the Political Economic Research Institute (PERI) at the University of Massachusetts-Amherst. This part focuses on why there have not been more significant reforms since the financial crash and Great Recession, and on a reform agenda for today. Parts 1 and 2 are available here and here.

Dollars & Sense: Of course, bubbles burst and exacerbate the severity of downturns. One of the amazing things about the aftermath of the recent crisis has been the apparent imperviousness of the financial sector to serious reform—especially in contrast to the Great Crash of 1929 and the Great Depression. How do you make sense of that?

Gerald Epstein: You have to use a political economy approach to understand the sources of political support for finance. I call these multilayered sources of support the “bankers’ club.”

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From “Boring” Banking to “Roaring” Banking, Part 2

Gerald Epstein

This is the second part of a three part interview with regular Triple Crisis contributor Gerald Epstein, of the Political Economic Research Institute (PERI) at the University of Massachusetts-Amherst. This part focuses on the performance of the financial sector, against the key claims that are made by mainstream economists about its socially constructive role, during the era of “roaring” banking. Part 1 is available here.

Dollars & Sense: How does the performance of the financial sector measure up, during this most recent era of deregulated finance?

Gerald Epstein: If you look at the textbook description of the positive roles that finance plays, basically it comes down to six things: channel savings to productive investment, provide mechanisms for households to save for retirement, help businesses and households reduce risk, provide stable and flexible liquidity, provide an efficient payments mechanism, and come up with new financial innovations, that will make it cheaper, simpler, and better to do all these other five things. If you go through the way finance operated in the period of “roaring” banking, one can raise questions about the productive role of banking in all of these dimensions.

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