Smarties

With President Obama in China and the issue of the dollar-renminbi exchange rate presumably on the agenda, there has been a great deal of commentary about the threatening peril of the Chinese savings glut¹. Here was Paul Krugman late in October on how the savings glut — the condition and a leading cause of the 2007-2008 financial crisis — remains unabated, continuing to propagate its distortions throughout the world economy²:

Until around 2001, you could argue that [the target value of the yuan was reasonable]: China's overall trade position wasn't too far out of balance. From then onward, however, the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre. First of all, the dollar slid in value, especially against the euro, so that by keeping the yuan / dollar rate fixed, Chinese officials were, in effect, devaluing their currency against everyone else's. Meanwhile, productivity in China's export industries soared; combined with the de facto devaluation, this made Chinese goods extremely cheap on world markets.

The result was a huge Chinese trade surplus. If supply and demand had been allowed to prevail, the value of China's currency would have risen sharply. But Chinese authorities didn't let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.

Many economists, myself included, believe that China's asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China's insistence on keeping the yuan / dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it's getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that's a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere.

For thirty years now the prevailing grand social bargain in the United States has been that outsourcing and offshoring will be the means whereby capital will capture an increased portion of national income and the resultant consumer goods price deflation will substitute for the also resultant wage stagnation. In shorthand, this might be called the Reagan Revolution, though Reagan only brokered the deal. The conditions that gave rise to parties militating against the preceding post-war social bargain lay much deeper in the structure of the post-war international order. This social bargain is the basis of the financial problems of the U.S. as well as of the China problem.

The savings glut is not merely a problem with China, but in its Chinese component it is driven by two factors, neither of which is likely to be resolved by U.S. action. First, owing to population growth and the massive migration from rural farms to urban wage labor, China needs to create around 25 million new jobs per year. The memory of Tiananmen Square demonstrations of 1989 remains potent in the mind of Chinese Communist Party officials. It is widely believed among Chinese officials that preventing a repeat of the unrest of 1989 and hence the survival of the Party depends on the ability of the Chinese economy to provide jobs for these millions, preventing them from becoming a mass of disaffected urban unemployed. Second, the savings glut exists as a part of China's long-term grand strategy of pursing peaceful development first and regional political realignment only once they have attained sufficient economic and military weight. For the U.S., the G-8, the IMF or whoever to ask China to abandon its policy of undervaluing the renminbi is to ask the Chinese government to commit suicide and to accept their second-tier world-political status; it is to ask them to run the highest order of political risk as an act of charity to the rest of the world. We cannot rely on China doing the U.S. any macroeconomic favors here. The only way to eliminate the macroeconomic conditions of the next financial crisis is to get our own house in order.

On the right and amidst the Lou Dobbs crowd you here these constant sidelong remarks about China holding the strings of America's economic future. But this is not the result of some insidious plot on the part of China to acquire a financial WMD stuffed full of T-bills for deployment against the U.S. at some opportune occasion (like a WMD, to actually use it would result in mutually assured destruction). This is result of the Wal-Mart low-wage, low prices, long supply chain model of doing business (surprise: the day-to-day purchasing decisions of millions of people reach up to the commanding heights of world finance). We can try to brow-beat China to forego the opportunities of the system that we have created, but the origin of that system reaches down into what is now, under the midwifery of the right, claimed as the American way of life. And perhaps we have decided that getting off on a bad foot with the world's next superpower is preferable to confronting our own economic culture.

Notes

1. Dominique Strauss-Kahn, the Director of the IMF, made a speech on the subject in Beijing,
   The International Monetary System: Reforms to Enhance Stability and Governance, International Finance Forum, Beijing, 16 November 2009; Krugman, Paul, "World Out of Balance," The New York Times, 16 November 2009, p. A25; Wolf, Martin, "Grim Truths Obama Should Have Told Hu," Financial Times, 17 November 2009.


2. Krugman, Paul, "The Chinese Disconnect," The New York Times, 23 October 2009, p. A35

Paul Krugman devoted his column two weeks ago to the conduct of economic punditry as if the economy were a nineteenth century morality play: sermons about "debasing" the currency, longings for gold, fretting over inflation at the nadir of an economic crisis, a masochistic enthusiasm for "belt tightening" ("Misguided Monetary Mentalities," The New York Times, 12 October 2009, p. A23). Taking off from this, Matthew Yglesias makes the point about the degree that class-parochial interests play in purportedly objective economic analysis ("The Monetary Hawks," ThinkProgress, 12 October 2009):

... I would suggest that divergent analysis is in part driven by things that have relatively little to do with analysis. ... if we have four or five years of near-zero inflation and 9-10 percent unemployment that will be fine for prosperous middle aged people and devastating to the interests of the poor and the young. Conversely, if we have four or five years of modest unemployment with four or five percent inflation, that will be fine for young people and poor people but potentially detrimental to the interests of wealthy people sitting on large piles of savings. Ultimately, I don't think it helps the progressive cause to ignore the class / ideological elements to this dispute and just pretend to be engaging in a neutral technocratic dispute about the correct application of the Taylor Rule. What we're talking about, after all, is decision-making under conditions of moderate uncertainty. What the hawks are proposing to do is to implement a policy that's extremely attentive to minimizing downside risk to the currently wealthy whereas Krugman is proposing a policy that's [attentive] to minimizing downside risk for people with below-average labor market prospects.

The problem is that we've adopted a manner of speaking about economic issues denuded of any mention of interest. The language of popular economics today is categorical: a strong dollar is good, a week dollar is bad; stable prices are good, inflation is bad; low unemployment is good, high unemployment is bad; rising house prices are good, stagnating or falling house prices are bad; et cetera. But none of these factors are categorically good or bad (few things in life are). What is omitted is the "for whom" of these characterizations of good and bad. Low employment may be good for job seekers, but high unemployment is good for employers: they have their pick of workers when hiring and they hold the majority of the bargaining power in wage negotiations. A strong dollar may be good for Wal Mart and their customers, but it's bad for General Motors and their employees.

Real estate maintains some knowledge of contraposition with their talk of a buyers' market versus a sellers' market. We do not speak with a similar respect to the value of the dollar: of an investors' dollar (strong) versus a producers' dollar (weak) or an importers' dollar (strong) versus an exporters' dollar (weak). Or in employment, some people might think getting a raise or ease in finding a job are good, but these are what someone else might call labor price inflation (bad).

Economics isn't free of the language of interest per se, so much as of one particular set of interests. The propaganda victory of the economic interests of Wall Street, the investing class, large business is so complete that their economic preferences have become de facto the whole language of economics. The awareness of the interests of all other economic actors has been totally expunged from the language of economics — well, not totally: there is the disciplinary ghetto referred to as heterodox economics, an exception that proves the rule.

To have asserted control over the linguistic territory is to have banished the political dispute; to have disappeared from the lexicon is to have ceded political legitimacy. Disputes over the political mixture of the interests of one economic class versus those of another are no longer about one set of economic relations versus another, but now take place in the frame of a rational economic order versus chaos, unreason and decline.

A firm separation between economics in its positivist, scientific role and economics in its normative, polemical and political role should be vigorously policed. Or perhaps economics is simply to value-laden, too embedded in the hurly-burley of human affairs for such a division to be tenable. Perhaps we should dispense with the notion of economics as a hard science in favor of a thoroughgoing political-economy. Even if we admit the possibility of a purely positivist economics, all that economics can do in our political deliberations is serve as a speculative tallyman of the opportunity costs of various policy options. The primacy of politics should come to the fore whenever economics crosses over from the academy to the public realm.

Target values for economic factors represent a political compromise between contending societal factions. The most well known of these is the NAIRU, the trade-off between inflation and unemployment codified in the statutory guidance of most of the world's central banks. But inflation isn't an unqualified evil. Its primary evils are that it has a tendency to run-away and, related, that it breeds uncertainty (a certain anticipatable regularity to the future is necessary to the function of capitalism). It used to be well known amidst the working (and indebted) classes that a certain amount of inflation served their interest and that "sound money" was merely the rallying cry of the investor class. The class conflict of easy versus sound money used to be a significant fault line separating progressive from conservative, populist from whig. Hence the advocacy of arch-populist William Jennings Bryan of an inflationary policy of bimetallism or "free silver" in the election of 1896.

There's talk today about how vile it would be for the government to attempt to inflate away its debt ("debasing the currency" they call it), but the government doesn't only inflate away its debt, it inflates away all dollar-denominated debts. A couple of years of higher than target inflation might be good for a country that has seen twenty years of galloping gains for the investor class, but racked up unsustainable amounts of debt among the middle and working classes. The investing class would scream bloody murder, but not because 3-5% inflation would be the end of economic reality as we know it, but because it would be a wealth transfer from creditor to debtor.

The standard narrative of the stagflation of the 1970s is the one that the right has advanced. The left has no countervailing narrative. In that of the right, the economic doldrums of the '70s can be squarely hung round the neck of liberals: in the simplified version, because of the welfare state, no further explanation required; in the more complicated one, the inability to choose between the guns of Vietnam or the butter of the Great Society, of Keynesian fine tuning and oil shocks resulting from liberal pussyfooting around in foreign policy. The hero of this narrative is Ronald Reagan who unwound twenty years of leftist regulation and redistribution, unleashing the U.S. economy to do what it does best.

As a liberal, this is the narrative against which I must justify my policy preferences, but more basically, I think it just simplifies a much more complex story. As an example, when Reason, a right-of-center libertarian publication, decides to hold a colloquium on the renewed threat of stagflation, which president do they put on the cover as the personification of the memory of the inflation of the 1970s? Gerald Ford:

Poor Gerald Ford: an honorable man whose best association is Chevy Chase spoofs from Saturday Night Live of him tumbling down the airstairs.

It should be recalled that Reagan's first run for the presidency consisted of his failed challenge to incumbent Ford for the 1976 Republican nomination, and that the real bête-noire of the Ford-Kissinger foreign policy was not the Democrats or the left, but the anti-détente, anti-arms control neoconservatives and elements of the right who found their political figurehead after Barry Goldwater in Ronald Reagan. It should also be recalled that the policy maker credited with the defeat of the inflation of the 1970s is then Federal Reserve Chairman Paul Volcker, a Carter appointee, rather dishonorably shown the door for his efforts by President Reagan in favor of Alan Greenspan.

On Friday, 24 July 2009 I went to see a New America Foundation panel discussion of The Power Problem: How American Military Dominance Makes Us Less Safe, Less Prosperous, and Less Free, by Christopher Preble, the Director of Foreign Policy Studies at CATO. Mr. Preble is, along with Andrew Bacevich, Robert Jervis, Christopher Layne and others, a member of the Coalition for a Realistic Foreign Policy. It was a very Coalition-y event, with a panel comprised of ideological misfits amidst our ill-representative bipolar political spectrum. At one point Mr. Preble felt it necessary to state that people think he's a Republican because he works at CATO, but that he is not.

I'm a fan of Mr. Preble, and a swath of other of the Coalition for a Realistic Foreign Policy thinkers. I have previously made Preble's point with respect to Gareth Porter's book, Perils of Dominance: Imbalance of Power and the Road to War in Vietnam ("Militarism: Loose It or Use It," 3 February 2008). Mr. Porter's book is a specific case study of Mr. Preble's point with respect to the Vietnam War era.

What interested me most about this discussion was Michael Lind's comments. When his turn came, off the cuff Mr. Lind spun one of the most trenchant, compelling and unified analyses of the last century of U.S. grand strategy I've ever encountered. Without saying it in so many words Mr. Lind shows how the present economic crisis is a systematic crisis resulting from the evolutions of an international system that is the product of a U.S. grand strategic and international political-economic bargain decided upon coming out of the interwar crisis years and the outbreak of the Second World War.¹

A transcript of the relevant sections of Mr. Lind's comments, as well as editor's notes, are below the fold (Mr. Lind's comments are 0:43:03-1:00:15, I excerpt his comments starting at 0:45:11):

=> Read more!

A roundup of some recent thinking on the hegemony of neoliberalism:

1. Taking off from what Matthew Yglesias calls "Prestige Cross-Pollination"¹ and Ezra Klein "The Tyranny of the Economists,"² Mike at RortyBomb relates of the,

   ... "credibility gap" between sociologists and economists, even when they deploy the same methods, when it comes to the public debate over the issues we face.³

   It helps to have a paradigm, and in recent years economics has rather forcefully acquired one.⁴





2. In his review of Steven Teles's new book, The Rise of the Conservative Legal Movement,⁵ Henry Farrell makes a brief assessment of the state of the tyranny of the bureaucracy:

   If you win the technocrats (and [the law and economics movement] arguably has won the technocrats), then you very nearly have won the entire game.⁶

   This strikes me as about true. The shift rightward of the economics and policy intelligentsia since the New Frontier / Great Society heyday of Keynesian fine tuning has played a significant part in the general right-ward drift of the polity. There aren't exactly dais upon dais of unreconstructed Keynesians offering policy makers intellectual cover on the Sunday morning shows.





3. Via Charles Mudede⁷, Steven Shaviro reacts to Peter Ward's new book, The Medea Hypothesis: Is Life on Earth Ultimately Self-Destructive?⁸ Using the purported instability of ecological systems — one of the paradigm cases of self-organization — Mr. Shaviro sets himself against emergence, evolution, complexity, network theory, et al. He identifies Friedrich Hayek as one of the key thinkers of self-organization — the market would be one of the other paradigm cases —

   But the most significant and influential thinker of self-organisation in the past century was undoubtedly Friedrich Hayek, the intellectual progenitor of neoliberalism. ... inspired by both cybernetics and biology, Hayek claimed that the "free market" was an ideal mechanism for coordinating all the disparate bits of knowledge that existed dispersed throughout society, and negotiating it towards an optimal outcome. Self-organization, operating impersonally and beyond the ken of any particular human agent, could accomplish what no degree of planning or willful human rationality ever could.⁹

   Friedrich Hayek, cyberneticist.

Combine these three and where are we for policy making and policy debate?

1. Yglesias, Matthew, "Prestige Cross-Pollination" Think Progress, 2 June 2009


2. Klein, Ezra, "The Tyranny of the Economists," The Washington Post, 2 June 2009


3. Mike [full name unknown], "Economists, Methods and Government," RortyBomb, 3 June 2009


4. "The Future of Economics is Here: The Arational and the Irrational," This is Not a Dinner Party, 28 September 2008


5. Teles, Steven, The Rise of the Conservative Legal Movement: The Battle for Control of the Law (Princeton, NJ: Princeton University Press, 2008)


6. Farrell, Henry, "Fabians and Gramscians in Law and Economics," Crooked Timber, 30 April 2009


7. Mudede, Charles, "Self-Made," SLOG, The Stranger, 28 May 2009


8. The Medea Hypothesis: Is Life on Earth Ultimately Self-Destructive? (Princeton, NJ: Princeton University Press, 2009)


9. Shaviro, Steven, "Against Self-Organization," The Pinocchio Theory, 26 May 2009

Well of course — this is just the media pushing its left-wing agenda. I doubt it. The media has their finger to the wind. During the Bush years they shamelessly kowtowed to Ari Fleischer's admonition to watch what they write and now that the times are a' changing, the media is putting up sails for new seas. The mood questioning capitalism is welling up from the ranks with the media wondering how to be relevant. Witness:

"Until 2004, we sold less than 100 copies of Das Kapital per year," Schuetrumpf [managing director of the Berlin-based publishing house Karl-Diez Verlag, publisher of the German edition of Marx's collected works] said. "In the 10 months of 2008, we have sold more than 2,500 copies. It is clear that people are interested in learning what Marx has to say about why capitalism does not work." (Godoy, Julio, "Economy: Turning the Pages Back to Marx and Keynes," Inter Press Service, 7 November 2008)

And from the picture above, apparently Borders thinks there's enough interest amidst their customers to turn the Marx collection face-out.

Craziest of all, according to a recent Rasmussen survey, a whopping 20 percent of Americans currently believe that socialism is superior to capitalism ("Just 53% Say Capitalism Better Than Socialism," 9 April 2009).

During the Cold War, Americans' strongest association with socialism was the Soviet Union, and after the collapse of communism we were told that left-wing economic ideas had been roundly refuted by events. So the right currently believes itself to be effectively tarnishing the program of President Obama by labeling him a socialist. But it turns out that the existence of the Soviet Union wasn't just culture jamming socialist ideas, but the negative associations that it generated was lending undue credibility to right-wing ideas as well. The collapse of communism may end up not so much taking left-wing ideas down with it, as depriving those of the right of their cudgel of existent socialism. The association of socialism with Stalinism has lost its effectiveness now that the Soviet Union has become just another historical anecdote. This might explain the even more pronounced positive view of socialism among young respondents in the survey (33 percent of young people favor socialism versus 20 percent among the general population).

Republicans would be advised that in constantly pointing to the popular President Obama as the primary exemplar of socialism, the outcome isn't so much to tarnish President Obama so much as to burnish socialism in the minds of the young generation. "If Obama is socialism," they think, "I guess that makes me a socialist." (Yglesias, Matthew, "The Declining Unpopularity of Socialism," ThinkProgress, 9 April 2009).

Out of character for the city, there have been a number of lefty signs around. Some of my recent favorites are the two above. The one on the right is for a Mayday immigrant march. Notice that the flag in the hands of the native American is the United States as a tree with its roots in the shape of the rest of the world. The little plaque on the man's chest reads both "Sise puede" and "Yes we can." And the rally is meeting in Malcolm X Park, the unofficial name for Meridian Hill Park (Google Maps | Wikipedia).

I love the socialist conference poster. "Marx is back!" One may wonder where he ever went. I guess some people though that Marxism went into remission after the end of the Cold War. But everyone is on notice that he's back now.

With Newsweek going beyond declaring us merely Keynesians now and portraying George Bush, Jr. in the style of Che Guevara, Foreign Policy putting Marx on the cover of their "Big Think" issue ("Why he matters now"), BusinessWeek making Ben Bernanke look like Lenin and including Henry Paulson in Stalinist Soviet style collages and Richard Posner titling his current book A Failure of Capitalism, things are feeling positively European.

But the return of Marx is more than just media camp. With respect to national security, Charles Krauthammer referred to the liberal internationalism of the Clinton years as a "holiday from history" (The Washington Post, 14 February 2003, p. A31). Robert Kagan is now referring to the post-1990s as The Return of History and the End of Dreams. Supposedly September 11, 2001 and the ensuing clash of civilizations has woken us up from our Fukuyam-esque ex-historical state. Similarly, we might refer to the phenomena of "Marx is Back" as the return of history to the economic sphere after 20 years of economic dreams (given that the current crisis has wiped out nearly 15 years of stock market value, it does seem as if it was all a dream). Just as September 11, 2001 broke the exclusive claim of liberal internationalism upon the thinking of the foreign policy establishment and showed that the future would be one of continuing world-historical ideological contention, so the holiday of political-economy that was the Washington Consensus has been knocked askew. The future of the economy will be one of political conflict.

But I kid myself. The legitimacy of capitalism within a given polity has nothing to do with the soundness of ideas and little to do with events. It is primarily a function of the Gini coefficient: the more money there is sloshing around in the upper social strata, the more inassailable the reputation of capitalism. And since that's hardly going to change in the current crisis, I doubt that the Washington Consensus will emerge with anything more than a few fast forgotten slights.

In this regard the conservatism of the Obama administration should be noted. They are doing whatever they can to handle the current situation with as little enduring systematic change or publicity as possible. And I guess I'm in favor of this. While I may sympathize with dialectical materialism and Marx's critique of the corruptions of capitalism, he was grossly wrong in his assessment of capitalism as ineluctably hell-bent-for-crisis. I'm essentially an advocate of Keynesian tinkering in a mostly stable system. And besides, alienation is a feature of capitalism, not a bug. The last thing I want is to be railroaded into a syndicate with a bunch of hippies. Those guys are fascists.