Part XI: An Economic Alternative
There are various fields of economic policy that I have not examined (healthcare, energy, labour law, immigration, trade, etc.) and some I barely touched (tax policy and education), but I want to offer an overall alternative view. Obama said when he took office, unemployment had reached 8.5% and would go higher; employment was probably the most important segment of economic policy. However, I will not be analyzing how to reduce the rate as much as use it as an indicator of failed policies.
When Obama left office, unemployment had dipped to the lowest level in decades, 4.7% in the last quarter. Obama had inherited a disaster and, not only turned the economy around, but sent if forward on an upward projection. In Donald Trump’s last quarter, the unemployment rate was 8.4%. But in 2019, it had dropped to 3.5%, 1.2% lower than when Obama left office. However, Donald Trump’s totally calamitous handling of the COVID-19 pandemic sent unemployment back up to 8.3% and required a tremendous federal financial economic injection to save the economy.
But what about Trump’s few signature economic accomplishments? He is credited with lowering corporate tax rates – which he did – and which resulted in less not more funds available for the treasury and greater discrepancies between the wealthy and the poor. He is credited with eliminating regulations which had been burdensome to business so that their removal contributed to a more robust economy. But the laxity in regulations during the Bush administration and the ignoring of regulations during the Trump administration, especially the use of regulations to control and minimize a pandemic, meant a terrible tsunami of deaths – over 400,000 thus far. Systems of testing, providing safety equipment, monitoring etc. were ignored and even discarded.
Trump is credited with forging a new trade pact with Mexico and Canada. He also got Congressional support to approve it. But the improvements over the North American Free Trade Agreement (NAFTA) were very modest. The route to getting there was very destructive to U.S.-Canada and U,S.- Mexico relations. And, in any case, the best parts were simply plagiarized from the Trans-Pacific Partnership from which Trump had withdrawn America. The latter was very destructive to a growing international economic order. What was even worse was the absence of any initiatives in this sphere. International organizations need legal and economic frameworks to facilitate more trade that benefits more and more countries so that more people can participate in the global economy. Trump sent this trend line into a downward spiral.
Obama left the country in far better economic shape than the situation that he inherited. Trump left a disaster contrary to a reputation of at least being an economic president. No decent minimum wages, increased poverty and a resumption of high levels of mortgage foreclosures without adequate protections and remedies, were just part of his destructive legacy.
Obama from his very first reforms also kept his eye on improving the international economic system. As he wrote, increasing the “GDP would have important implications for global-governance arrangements.” Obama saved the market system on which the international economy was based. “First and foremost, we needed to restore some semblance of market confidence so that investors who’d fled to safety pulling millions of dollars in private capital out of the financial sector, would return from the sidelines and reinvest.” (276) While Trump promoted nationalism, unilateralism, and isolationism, Obama defended and tried to reinforce and strengthen internationalism, multilateralism and engagement with overseas partners.
However, both GDP and the rate of productivity improvement, both domestically and internationally, had been falling over the last two decades. To reverse low productivity and slow growth required much more fundamental changes to the structure of the American economy. Neither Obama’s promotion of globalization nor Trump’s stress on protectionism and nationalism dinted this overall pattern.
In this blog, I want to concentrate like a laser beam on the financial sector. In doing so, I want to try to answer several questions that should bother any close reader of Obama’s memoir. Why did he not use his leverage over the banks to better effect when they were really on the ropes? Though he was put off by the sense of entitlement and the disdain of the bankers (296-297), and he suspected that they did not know what they were talking about, why did he not strong arm them when he had the chance? Why was he really not able to do anything about banker and insurance executive huge bonuses (on top of enormous salaries) at the very same time that they were being bailed out by the government? If I can answer these questions, I believe I might get closer to understanding why Obama allowed 1 of 6 homeowners under financial stress to lose their homes.
On a personal level, in financial matters, one should follow the 5M’s of prudence:
- Money, money, money makes the world go ‘round
- Math – keep track of the numbers
- Manage the money – budget
- Mind your habits – differentiate between needs and wants
- Measure the benefits.
For the system as a whole, all those elements apply, but one must understand each conceptually and how they work together. Take money. Aristotle, as did the early Christians and the Muslims, viewed money as simply an instrument to facilitate exchange. What you had difficulty doing directly, you did indirectly using money. Therefore, the amount of money circulating should be restricted to the inherent value of things in the economy. However, that meant that things or property had value but social capital (e.g. past reputation) or human capital (future potential of individuals) or even inherent value in a new technology, were not given a monetary value. Further, lending money bearing interest was immoral because that attributed value to money itself. (What else can you expect from philosophers who imagined themselves as aristocrats and disdained the value of labour.) Instead of seeing the fault in this conceptualization, moralism was projected onto money and the economy was seen as a circulatory system with a fixed amount of blood to make and distribute goods and services. Excess was dangerous, and perhaps more so, than an insufficient supply.
Adam Smith, the father of laissez-faire economic theory in opposition to mercantilism, a theory of self-regulation versus external manipulation, offered a “reflux” theory of money. The demand for money was fixed at a nominal value. In contrast to Aristotle, although agreeing that the total amount was fixed, he proposed that, instead of being based on substantial essential value, the quantity of money in circulation was based on a nominal quantity. Excess was impossible and, therefore, the value of money could not influence employment rates, salaries or prices of goods and services.
I remember when, as a student, I first read Adam Smith’s 1776 white covered thick volume, An Inquiry into the Nature and Causes of the Wealth of Nations. Just when I was finishing the book, there was a bulletin given out by the Royal Bank branch at the north-east corner of Harbord Street and Spadina Avenue in Toronto. In that printed bulletin, the head of the bank had a long article on Adam Smith’s espousal of competition determined by supply and demand and unfettered by regulation. I wrote the president of the bank a six-page letter citing Smith and his earlier work, The Theory of Moral Sentiments, and suggested that he hire a better hack to write his essays, someone who actually read Smith. Two weeks later, I received a call from my bank manager asking if I could come to see him. “I’d be delighted,” I replied.
I went to his office and learned that he had not called me to discuss my loan. The president of the bank had called to inquire about the “radical” customer who had written him a letter. The manager wanted to warn me not to do anything to jeopardize my credit. I said that I was not worried. Since he looked very worried, I suggested he look at the bright side. If not for my letter, the president would probably never know he existed. “Take advantage of the opportunity and endear yourself to him.” I left his office with the glee of self-satisfaction of a very minor enfant terrible.
I tell this story that I believe is amusing because it illustrates how much Smith is used as a caricature to misrepresent capitalist theory. This is not the place to even tip a toe into the thesis, but Adam Smith’s conception of capitalism is supposedly not interested in the well-being of individuals, but only the satisfaction of their needs and wants. Demand determines supply and price; money is simply the nominal means of representing the exchange value of labour, goods, services and even capital – hence the justification for interest. What is omitted in this caricature of capitalism is regulation, something that should have been suspected simply by reading his earlier work on the importance of moral sentiment. The invisible hand is not a given as a natural law, but a balanced system of demand and supply, a system that must be protected (rather than individuals in high places) by institutional laws, regulations and guides, ones that not only ensure the smooth working of the system, but facilitates the expression of moral sentiments for the benefit of those who are deprived.
However, in Adam Smith’s theory of money, we can see how both he and Aristotle were fixated on fixidity, though Smith broke away from Aristotle’s essentialism. It would take later writers and thinkers, especially John Maynard Keynes, to break through the idea of fixidity itself altogether.
Keynes’ 1936 masterpiece, The General Theory of Employment, Interest and Money focussed on the growth of an economy as central. Stability was not the goal; economics studied a dynamic system. Demand determines supply; there is no system of simply matching a given demand to a limited supply. That means that money theory must necessarily be expansionary. In times of weak demand, government investment in infrastructure, unemployment and other social benefits was meritorious, but even in the demand for consumer necessities, such as a roof over one’s head. Government intervention did not need to be restricted to collective goods and services.
How does it work? The government borrows money and infuses it into the economy. A depression was the result of inadequate demand and loss of confidence in the value of things. Debt itself was a vote of confidence in the future. Money, rather than representing the values placed on an exchange, was more fundamentally a positive vote on the future, namely that the future would be better than the past. Hence, more debt and greater collective wealth in the future. Hence, theoretical support for government spending in general, and for budgetary deficits and monetary intervention.
Though the 16th-century price revolution and profit inflation against the previous mercantilist system played a crucial role in the primitive accumulation of capital and in the birth of capitalism, following the second industrial revolution of the first three decades of the twentieth century, the Keynesian revolution with its stress on the sophisticated growth of capital and the preservation of capitalism was perhaps of even greater importance than the factors influencing capitalism’s origins. The third industrial revolution, the digital age, absolutely requires and is developing a very different conception of the economy, and once again more specifically of money.
The following guidelines need to be followed based on the following 5 C’s:
- Complexity must be translated for clarity in communications (in contrast to what happened in the sub-prime mortgage crisis of 2008-2009)
- Costs, all costs, including the resupply of fresh air and water and the depletion of the earth, increasing risks of forest fires, must be included in pricing and price should not be based simply on demand, at the same time as reductions in pricing must be continuous using modern technology
- Charges for fees and services, including differential interest rates, must be readily apparent and transparent – that is, nothing can be hidden
- Conversability is a requirement – transferability to different currencies and debt instruments must be accessible and easy
- Candor entails complete honesty based on both a fair and forthright system that is guileless and impartial, disinterested and dispassionate, without any insertion of moralism or sentimentalism.
Fortunately, new online banks are directly addressing this challenge. With transparency, accessibility, simplicity and cost reductions, the new online banks are mounting a real challenge to the old-line banks which are desperately trying to change and adapt to remain competitive. Obama ran for the presidency to restore the people’s trust – trust in its civic and political institutions and in its financial ones. (276) With respect to the latter, the above strictures are a necessity, but ones never imposed by the Obama (and certainly not by the Trump) administration. Instead, most environmental and social costs remain unaccounted for. Instead of transparency, one finds only opaqueness. Instead of ensuring that technology is translated into cost cuts derived from that technology, often created because of government investment, enhanced value is accumulated to foster monopolies and control pricing. Conversability on all levels becomes more difficult rather than easier. And candor is totally discarded along with the moderating role of moral sentiment.
In the third digital age industrial revolution based on the internet, networking, shared use of many more assets than just sidewalks and roads, in an age where renewable energy is replacing the depletion and destructiveness of fossil fuels, mobility both vertically and horizontally must be enhanced. The communications, transportation and energy sectors must be coordinated by government to foster the growth of the new economy.
The potential was presented to Obama to facilitate the beginning of such an evolution creating a distributed and networked system in which, literally, no one is left out or left behind. Obama failed to do so. Not only did millions of homeowners pay the cost, but so did the advance of the economy as a whole. Instead of a neoliberalism which promotes privatization, but where that benefit goes to a smaller and smaller percentage of the population which can afford to own a home, instead of promoting austerity, beneficence for all should be viewed as the goal. Instead of deregulation, what is required is the correct and constant regulation and certainly not the crisis interventions of the Obama years. Instead of government withdrawal from the economy, a much more activist presence of the government in the governance of the economy is required. Instead of reduced government spending, we need increased government investment, including partnerships with homeowners in their personal and most important asset, their homes if and when they get into trouble.
An opportunity missed must be used at the very least as an opportunity to understand.
Next week: Obama’s Foreign Policy