I planned out this section of the blog back in early December, including 1 post on the Marshall Plan. When I started writing that post in February it quickly expanded to 3 posts, and I nearly ditched it altogether. But now, the analysis in this third part has immediate relevance to what is happening to our economy because of the coronavirus. I’ve had to expand the post considerably to add commentary on this, so work through it and you’ll find some of the guts of our financial system exposed.
In the previous 2 posts I introduced the Marshall Plan as a state-planned, state-funded approach to the economic development and reindustrialisation of Europe after the Second World War, and highlighted how it involved the redistribution of surpluses from trade (in this case of the US) to countries that were in deficit. This final post on the Marshall Plan will argue that we should not see such wealth transfers as “aid” or “charity”.
In both previous posts I have pointed out that the US instigated the Marshall Plan because it recognised that strong economies in Europe would assist – indeed were essential to – the health of the US economy, and therefore was willing to take and to fund concerted action in this regard. I also pointed out 2 weeks ago that the Plan had an explicitly political aim – to raise the well-being and cooperation between the participating countries as a bulwark against the spread of socialism and communism. Today, all nations need to recognise that the economic health of one nation is dependent on the health of the global economy as a whole. Sustainable economic growth and development in one nation depend on strong and stable economies in all countries in the world (a point made before in this post).
The economist most famous for advocating just such a global, unified, concerted effort to end world poverty is Jeffrey Sachs, in the context of the Millennium Development Goals agreed by all 191 member states of the United Nations. Sachs is no armchair economist, but has been actively involved in development economics in multiple countries in the world. His book The End of Poverty describes both his experience and his economic model.
He is revered by some as a champion of the cause of ending world poverty, and reviled by others. In particular, he is criticised for advocating “shock therapy”, in which countries rapidly embraced free markets, particularly in the former USSR. These criticisms are unfair, as he advocated no such thing – or rather, to the extent to which he did advocate rapid change, this was in the context of extensive funded interventions to manage this process. These included a fund of $15bn per year to stabilise the Russian currency, as well as significant debt relief and an aid programme to transform the economy (not unlike the Marshall Plan). The US government was simply not willing to fund these measures, and Sachs actually suspects that US officials did not want to see the economy of Russia rejuvenated for political reasons (page 140). Sachs did not coin the term “shock therapy” and did not advocate it in the way his critics suggest. Indeed, the failure of economic reform in Russia and subsequent rise of autocracy should be seen as a result of the failure to implement the policies Sachs advocated, not as the result of those polices.
But having cleared up the unfair criticism of Sachs so that it does not become a distraction, I would argue that his foundational model of economic development is nonetheless fundamentally flawed, in part because he has not learned the lessons of history described by Reinert (and briefly reviewed 3 weeks ago). I’m not going to go into a full analysis of Sachs’ model, but just want to draw out two elements that enable us to see how the Marshall Plan was different, and the distinctive lessons this therefore offers. Those elements, both ardently championed by Sachs, are the need for international aid and the need for foreign direct investment (FDI).
His focus on FDI is one way that he has not learnt the lessons of history, but rather succumbed to the myths of economic orthodoxy. As has been described in earlier posts, opening up markets to foreign investment attracted through deregulation and low taxation will lead to some local employment and infrastructure development, but this will not develop industries that “carry” economic development – increasing returns industries with scope for technological innovation. As described in the post on Reinert’s work, economic investment needs to be planned and focused to develop clusters of such industries. The most logical starting point would be industries utilising raw materials in which the nation is rich. Simply attracting FDI will not lead to this kind of investment – Sachs is clearly unaware of these lessons of history.
By contrast, the Marshall Plan was not about FDI, it was about direct state funding, largely going to companies in those industries that could stimulate wider economic development.
But surely this was just “aid”, and this supports another element of Sachs’ vision. The trouble with the term “aid” is that it conjours up connotations of someone graciously making a gift out of the kindness of their heart. And then we get into the debates about how much aid it is necessary or reasonable to give, and why we should be giving international aid when there are so many domestic problems that need addressing. Sachs makes impressively compelling arguments to justify the need for this aid,for the purpose of political security, of economic stability, and also because it is simply the right thing to do (chapter 17).
Aid and charity are wonderful things, but all these debates miss the point. Just as the US recognised that its own economic well-being benefited from the economic growth of Europe, the economic well-being of each individual nation depends on the stability and strength of the global economy as a whole. Our economies are now completely interconnected. Just as an injury or illness in one limb or organ of the human body affects the health and happiness of the entire person, economic distress anywhere in a single nation will ultimately have its effect on the world as a whole.
And the healthy functioning of our economy requires that we do not allow huge pools of wealth to gather in the hands of a small number of institutions or individuals. But such “institutional cash pools” are now a significant but little understood feature of our economy. They comprise the retained earnings (savings) of the large multinationals, who utilise international finance to avoid paying taxes altogether, and the national saving generated by countries with a trade surplus, as discussed last week. I wrote at length about these cash pools and their destabilisng impact on the economy in the “Financial Markets” section of the blog. Building on the theoretical framework in the “Production” section, I argued that this wealth needs to be directed to productive investment.
My recent posts on Reinert’s work and on the Marshall Plan now add to this argument and provide more detail on how such funding needs to be directed. We should not think of transferring such institutional savings (whether of multinational companies or central banks) around the world as “aid” or “charity”, but rather as simply the necessary steps to take to create a functional economy that provides enough for everyone, and from which everyone benefits.
This is not a trivial matter. In January 2018 Zoltan Pozsar published a wonderful analysis of where the 150 richest multinationals hold their savings. At that time this was an incredible $1 trillion in assets, with the 10 largest multinationals holding a staggering $700 billion of this. (Pozsar was tracking this simply because such phenomenal levels of savings held in assets have a profound impact on financial markets, not because he was making any political arguments about taxation.)
But how do I propose the transfer of this wealth take place? Are these multinationals meant to just donate it out of the goodness of their hearts? Is it simply about tightening tax legislation across the world to prevent tax evasion and tax avoidance? As I’ve stated before, I’m not going to offer trite armchair “solutions”. How to reform our economy is something that society and its institutions have to learn how to do (more on this below). The first step in this direction is to accept the principle that it needs to be done. Those companies and countries that currently sit on such surpluses should, in fact, welcome such steps and even advocate for them.
Of course, right now they wouldn’t welcome it, but the fundamental point I want to draw out is that they should. This transfer of wealth to productive investment in those countries most in need is necessary to create a stable economy, and everyone will benefit from the strong and stable economy that would result. If it were possible simply to tax the wealth of the largest multinationals regardless of where they declare their profits, and indeed to impose much higher taxation rates on those companies that have billions in profits not reinvested in the business, it would be in everyone’s interest to achieve this, and companies like Apple should welcome such an initiative and willingly pay this tax, because the impact on the global economy will be to everyone’s benefit, including Apple’s.
Similarly, it seems inconceivable that a country like China would willingly accept part of its accumulation of foreign exchange being redistributed for the purpose of building a stronger global economy. But this is exactly what is necessary. This blog is concerned with what a scientific analysis of economic phenomena suggests is necessary. If politics suggests that such steps are impossible, then it’s the politics that need to change Indeed, the main point of this section of the blog is to highlight how political beliefs lead us to make assumptions about the world such that we draw erroneous conclusions about how the economy functions and what steps need to be taken. The fact that right now such steps are politically unfeasible does not change the fact that such steps are what is needed.
(There is an obvious objection to this proposal – what if such transfers convert a surplus country into a deficit one? Well then that country becomes the recipient in this system of transfers. The system becomes a safety net for all countries, further contributing to economic stability.)
It is tempting to think of such transfers in crude terms as a “tax”, either on the large multinationals or on national trade surpluses. But in fact, any consideration of how this transfer of wealth could be achieved would need to be in the context of an understanding of the global foreign exchange system. As stated last week, I originally planned to write a section of the blog on this system, but then chose not to because it would just take too long. It is a highly complex system, but understanding it and the history of how it developed in such a deformed way is an essential prerequisite to understand how it needs to be transformed. I’m not going to begin any discussion of this, which would require a whole new section of the blog and weeks and weeks of posts.
Suffice to say, the transformation of this system would need to include the means by which pools of wealth from international trade can either be prevented in the first place or systematically redistributed. One aspect of this new system would almost certainly be the end of the US dollar (or any national currency) as the currency of foreign exchange.
When I wrote the first draft of this post several weeks ago, at this point I wrote the following paragraph:
Right now, this might seem impossible to achieve, but don’t worry, this entire system will tear itself apart at the seams eventually, possibly quite soon. The great financial crisis was, at its heart, a crisis in the Eurodollar system (US sub-prime mortgages were just the final straw, not the root cause). Eventually the system will collapse, with a degree of suffering on a global scale quite possibly unprecedented in the history of the human race. Then everyone will realise that this system needs to be reformed, so that’s something to look forward to.
Since then, we’ve seen the collapse of all financial markets caused by the oil-price crisis and coronavirus. The coronavirus pandemic has become so all-consuming, it’s easy to forget that the original market crash was caused by the oil-price crisis. The system has been on the edge of implosion for a long time, it just needed a trigger.
One feature of the current crisis is that the value of all foreign currencies have plummeted against the US dollar. This isn’t because the US is the most effective country at dealing with the crisis! It’s because the US dollar is the established currency of international trade – it will always be in demand and that makes it the safest financial asset on the planet.
To try to stabilise the foreign currency market, on 15 March the Federal Reserve announced coordinated action with the 5 other major central banks to lower the price and lengthen the maturity of their standing swap lines. Then on 19 March it announced new temporary swap lines with a further 9 central banks. (I’ve written about swap lines and their significance before.) But the system keeps struggling. This article by Carolyn Sissoko, literally published today, is a brilliant explanation of what is happening in the market right now and why. And by next week no doubt more rot and decay will have been revealed as the markets’ innards ooze out of the gaping wound torn open by the on-going crisis.
It’s amusing to note that just two days before the 9 additional swap lines were announced, Zoltan Pozsar had published another of his “Global Money Notes”, urging swap lines to be created with 8 of these 9. It’s not far-fetched to suggest that the Fed pays attention to Pozsar, that’s exactly what happened. Not so amusing is that right now there are no swap lines for currencies in emerging markets. As their currencies plummet, all their international debts soar in value (because they’re denominated in US dollars), as do the cost of imports (such as oil). These markets need the kind of emergency measures to prevent bankruptcy we see being provided by Western governments to their own domestic markets.
On 25 March a letter was published in the Financial Times, signed by over 150 economists and international lawyers, urging decisive action to protect these economies (including swap lines and several other measures). (The FT is behind a paywall, but the text of the letter can be read here.)
As the system unravels at this time of crisis, it is literally exposing all the flaws that were wrapped up inside it. I can’t possibly cover this in detail – even adding these few comments has expanded this to being by far the longest post I’ve ever written. But I will come back to this in future weeks.
In summary, the Marshall Plan is an example of a collaborative effort between many nations to target resources to industries that are vital to industrial development and economic growth. It was willingly funded by a surplus nation because it recognised that strengthening other economies was, in fact, the best way to strengthen its own. This is the model of how the whole human race and national governments need to approach the question of providing enough for everyone. Now more than ever, it is necessary for us to learn how to do this. The vast pools of wealth that exist in the world need to be expropriated and directed to the reconstruction of the global economy as a whole. The governments of the world need to create the legal framework to make this possible.
But they won’t. And we will all suffer as a result: every member of the human race.
Indeed, 70 years of free market ideology has meant that global society and its governments are completely clueless at how to do this, and we will now pay a heavy price for this as we emerge from the current crisis. As I keep emphasising, there isn’t a perfect economic model or theory or political ideology that we can simply implement and fix everything. We have to learn how to do this – our governments need to learn, but we all need to learn, as societies, as communities and as individuals.
And this call for a process of learning is not a vague and empty appeal. There is vast literature and experience in organisational learning, and over the next 3 weeks I’m going to highlight a few examples of how these could be applied to a process of societal learning about the economy. This will bring us back to considering how the flaws in the current system are being exposed by the impact of the current crisis, and what we can therefore learn from this.
