Free market economics

Preface

In a few hours time, Northern Ireland will host  the Group of 8 global leaders. The eyes of the world will focus on Enniskillen and Lough Erne.  
Before they begin, this blog sets the scene and raises issues that they should be considering.  

Introduction

Every weekend the newspapers entice and provoke our inquiring minds with stories both topical and familiar.   

They add spice by presenting a new angle or investigating an example of a current issue that should concern us in some way.   

These worthy journalistic endeavours include everything that matters from the state of the National Health Service, to immigration, Europe, climate change, Syria and the Middle East, poverty, and most regularly, the economy.

The downturn

With the G8 being hosted in County Fermanagh (where I worked for five years), the reporting of more evidence about the efficiency of Europe’s pre-eminent member of that exclusive club is well-timed.   

Germany’s position as the economic powerhouse of Europe has become more apparent in recent years.   

Judging by a reported case-study (Observer 01062013) from North Rhein Westphalia (where my daughter now lives and works), Germany - unlike the UK - did not run down the supply side of its economy in the 1980’s, remaining a manufacturing economy.   
One German commentator is quoted as saying that his country was criticised in the 1990’s in that:

“it had become old-fashioned.  Worse, Germany's economy was highly regulated. Power was locally held. Employers had obligations to their workforce and the local community. Wages were high and workers had the right to influence decisions and sit on boards. In Britain and America, that way of organising things was seen as a death sentence for the economy."

Wind forward to June 2013 and the same report reveals that in Germany

“wages are rising while those in the rest of Europe and America stagnate; economic growth, though affected by the crisis, continues; and unemployment is half that in France.  In a depressed, recession-haunted eurozone, Germany is the last economy left standing, following the hurricane of the debt crisis.  And in flat-lining Britain, where the search for sustainable economic growth has become the question of the age, the alluring calls of the German model have become deafening.”

The end of monetarism

Everybody is well aware of the consequences of the abject failure of those in power to manage national finances, not just in the UK and Ireland but in the USA and most of Europe as well.  Since the inception of the crisis in the USA, beginning with the sub-prime mortgage crisis and the collapse of financial institutions such as Lehman Brothers, and the rapid spread of the contagion to Europe, Governments have had to reconsider the economic policies introduced in the late 1970’s.

The UK and Ireland together with most of southern Europe have embarked on regimes of slashing interest rates to historic lows and to cutting public spending - the policy imperative being to reduce national debt.  

Two others (and who are key members of the G8), notably Japan and, to a lesser extent, the USA have resorted to the policy of stimulating depressed demand, the priority being to promote employment and create economic growth (Belfast Telegraph14062013 p33 Robin Wilson).

As if to reflect this as an alternative to a policy of austerity, experts in the International Monetary Fund have recently expressed doubts about the Europe’s new policy, seemingly based on the impact on social cohesion.   

The measures have led to riots in some countries and the collapse of some Governments, there has been selective migration from many countries, most are experiencing record levels of youth unemployment, and crucially, the stinting of economic growth has become a conundrum.

The model of free global markets which is held up as the only option for development remains under serious scrutiny some five years after the beginning of the euphemistically described downturn.  

People are aware that in spite of five years of cut-backs, prospects remain poor for breaking out of a spiral of falling living standards.

Political fall-out

The democratic process itself is under some measure of threat.   

Voter ill-feeling has registered itself in a rise in support for small and often extreme smaller political parties and individuals, and in some countries voter apathy has affected turn-out at elections.  

Europe cannot countenance a repeat of history as happened after the previous collapse of the system.

Bankers as well politicians have become unpopular.  A major consequence of the financial turmoil is that ordinary people have lost faith in the highly-paid experts and elected guardians in their ability to manage our economy.

Bankers’ perks

It can come as no surprise to those in authority including the G8 leaders that ordinary people are genuinely shocked when they listen to the justification made by business executives for the enormous incentives bonuses, packages and perks which, even now, are still being paid to senior staff by banks.   

At the same time, people are aghast at their continuing extravagance if only because many of these dysfunctional institutions have been saved from collapse by Governments using taxpayers’ money.

Last week we learned that the chief executive of the Royal Bank of Scotland (which was bailed out at a cost of £45 billion and is 82% owned by the government), is receiving an enormous pay-off when he leaves his job in the autumn (Belfast Telegraph 13062013 p41 Clare Weir).   

We also learned that Lloyds Bank has, to date, paid out £4.3 billion in compensation to 1.3 million customers (BBC TV news) arising from the mis-selling of PPI (payment protection insurance on loans and credit cards).

Tax evasion and avoidance

People also wonder at the ability of multi-national companies to manage their affairs enabling them to claim that paying little company tax is legitimate.   

The use of such power at a time of Government indebtedness galls ordinary citizens and local companies which pay their fair dues.  

People feel cheated and let down by politicians who cut spending on public services, but who have tolerated inexplicable behaviour by banks and global companies at a time of financial stringency. 

Other policy issues for G8

Upsetting as are the behaviour of banks with their perks and global companies with their fiscal arrangements, there are many other fundamental issues that are repugnant to ordinary people.   

These are matters which shake public confidence in the system of global economics even further.

Even if the G8 surprise us and resolve the conundrum of reconciling national debt with economic growth, even if they reach an agreement on a fair system for taxing global companies, on how to tackle the issue of tax evasion, tax havens and off-shore bank accounts, and even if they address the rapacious greed of bankers, they might usefully spend time reflecting on other problems endemic to global business.

Example – one nation, one world

The following are just some examples gleaned from the pens of assiduous journalists in recent times.   

The first example exposes the difference in outlook between those who insist that the free market creates the wealth needed for growth and development and those who argue that wealth does not trickle down.   
This article is typical, and I quote:

“The North-South divide has become a chasm since the recession with the split growing at its fastest rate since the Second World War, Britain’s leading expert on the subject has warned.... Since 2010 the divide has widened massively in lots of different ways... Danny Dorling, professor of Human Geography at the University of Sheffield, said that the country was in danger of pulling itself apart.” (The Times 15062013 p 14).

In similar vein, figures have been published in support of the argument that fact that the rich are getting richer does not benefit the wider UK economy.   

Since 2010, 38,000 more people have moved into the £150,000-£500,000 wage band and another 6,000 into the £500,000-£1,000,000 band.

Britain now has more people earning over £1,000,000 since records began.  

Over the last 10 years wages have been falling in real terms (set against inflation).  

The same research suggests that by 2020 the average family in the UK will be living on 15% less than it was in 2008, the first year of the current crisis.

A journalist on the Scotsman newspaper who discussed the north-south divide on BBC's Question Time programme made the point that the gulf is one argument that persuades her to vote for an independent Scotland in next year's referendum.
Another example of the political, and potentially constitutional, consequences of economic policy.

The American Nobel prize-winning economist Joseph Stiglitz says that it is the working and middle classes who are more likely to spend to keep the economy moving and hence produce jobs.   

More wealth for the wealthy, he argues, generates more frequent and severe boom and busts.

The rich/poor division, however, is not limited to the boundaries of one country such as the UK.  An Oxford University professor, Paul Collier, is advising the PM David Cameron on the G8 agenda.   

Writing about the need to help the world’s poorest countries and the need for global tax co-operation, he says (Observer 16062013 p11) that:

“if all the companies operating in Africa paid reasonable taxes, most countries would no longer need our aid.”

Example – health and safety

Two months ago, 1127 workers were killed in the collapse of a clothing factory in Savara, a suburb of Dhaka in Bangladesh.  

In a second and less reported incident last month, 8 people were killed in a factory producing clothes for western companies such as Primark.  

The Observer (02062013) reports that since 2005, at least 1,800 Bangladeshi garment workers have been killed in fires or building collapses.

Apart from issues such as building and planning regulations, these instances highlight the shocking human cost of the free market’s desire to supply the insatiable demand in the west for cheap clothing.

When I witness such heart-rending tragedies on television, I wonder where examples like this leave the UN’s declaration on the need for sustainable development.  Has it been consigned to the dustbin of the pervious Secretary-general?

Example – environmental exploitation

The west’s growing demand for “toilet paper, cream cheese, bio-fuels, margarine and chocolate” is being met by destroying the rainforest. (The Guardian 24052013) http://www.guardian.co.uk/global-development/video/2013/may/24/sumatra-indonesia-rainforest-video

“The rainforest of Sumatra in Indonesia is steadily being turned into a giant industrial plantation that can neither support the wildlife that lives there nor the native human population. Environmental groups estimate that at the current rate of deforestation, the natural rainforest will be all but gone within 20 years, and little is being done to stop it.”

The report says that the rhino, orang-utan, elephants and tigers face extinction and that Sumatra is racing towards a human and ecological disaster.

I haven’t even mentioned the major environmental versus economics debate that is occupying the G8 hosts, the people in Fermanagh.  

The process of fracking to extract shale gas raises concerns about the conflicts between exploitation of nature and job creation.

Similarly, the debate about UNESCO’s criticism of the UK’s planning regime allowing development which, they claim, will threaten 4 UK World Heritage Sites (one being the proposed golf course at the Giants Causeway) raise the same issue.  (Observer Comment 09062013 p 36).   

Apparently only 2 of the 962 sites have ever been removed from the list.   

One of the 4 endangered UK sites is the Palace of Westminster.  

Perhaps the monetarist tenet that regulation is a burden for business still holds sway.

Conclusion

As the G8 leaders and their expert teams meet in scenic tranquillity in one of my favourite places, cut off from the outside world by razor wire, they have a duty to re-establish trust and to show genuine leadership. 

Is it asking too much that they take effective action which will make the global financial model more responsible and effective?  

Is there any reason to be optimistic that they will address one, some, even all of the issues I have raised in this blog? 

Why resort to rhetorical questions when I have the ideal quotation ready to fire.  

Prove me wrong Angela, Barak, David, Shinzo, Francois, and Vladimir, but the George Bernard Shaw line about economists (that might also apply to politicians in this instance) takes on a new and urgent resonance:

“If all the economists in the world were laid end to end, they still would not reach a conclusion.”

©Michael McSorley 2013