Refuting “A refusal to face reality”

Spencer Fernando had me at, “As the world recovers from the global financial crises, governments are beginning to realize that there are deeper flaws in our system [ . . . ].” He lost me when he clarified “of social services.”

Fernando argues that with populations increasing in age, resulting from smaller families and longer life expectancies, we will be “forced to pay for their continued standard of living.” The reality is that GDP is growing quite a bit faster than social security expenditures. For instance, in the U.S., where the deficit hawks rant that social security is unsustainable, the GDP is expected to be 40 per cent larger in 2040 and the adjustment in taxes needed to maintain social security means that average incomes will only be 37.64 per cent higher than current levels. Shoring up social security is cheap. You will need to have your social security number ready when applying for social security benefits. Retirees have just seen the value of their houses collapse; this represents most of a middle-income retiree’s wealth. Lowering retirement age when there is an oversupply of people looking for work only increases the supply of unemployed persons. Older workers given the pace of change in high tech economies are also disproportionately strapped with physically intensive work.

The deeper flaws in our system have nothing to do with social welfare programs. The recent economic crisis was brought on by lean and mean U.S. capitalism. The capitalist system as a whole was in its glory under the post World War II period dominated by Keynesian economists. During the Keynesian era, governments intervened to ensure demand in the form of both wages and social spending kept pace with increases in productivity, as well as intervening to stabilize against economic fluctuations. The Center for Economic Policy Research compared economic growth and growth in social measures among countries at differing economic levels and found overall whether measuring GDP growth, literacy, changes in life expectancy, infant mortality, educational spending, primary and secondary school enrollment, that in the present conservative era we are doing comparatively much worse.

The Keynesian era ended as the price of oil and wage inflation led to general inflation. Innovation in both transportation and communication increased international trade, which increased pressures on national governments to ensure that their exports remained competitive, which meant cutting wages, regulations, social services, and benefits. It meant labourers worked under the constant threat of offshoring their jobs. Those that resisted the pressure often saw their jobs leave, and so workers were turned against unions and other regulations. The fact that only certain jobs were protected from international competition led many low-income earners to become frustrated with those who were protected under domestic union jobs. Despite the conservative attack on domestic wages, they could never fall to international levels and so first low-tech, then high-tech manufacturing and finally even services left.

Wage-led consumption has been replaced with debt. Because rich people invest a higher proportion of their incomes, this lead to the financial sector growing even larger. Predatory lending through pay-day loan sharks and credit card debt exploded. Without wage demand and because transaction costs fell with computerization, money could be made on short-term gambling rather than long-term investment. The U.S. financial sector grew from 16 per cent of corporate profits in the mid-80s to 36 per cent. From 1970 until 2007 overall debt in the U.S. has gone from 1.5 times the size of the economy to 3.46 times. In Canada, consumers’ debt to income ratio is at 144 per cent, the highest among the Organization for Economic CoOperation and Development.

Conservatism and unregulated trade has made real production unprofitable. The way out of the current crisis involves a return to the real economy. The banks, not social services should bear the brunt of the crisis. They not only owe back the cost of the bailouts, but the costs of rising unemployment and declining output. The banking sector needs to shrink both in terms of being too big to fail, but also in terms of the overall size of finance. This can be done through small financial speculation taxes that would make betting on the short-term for fractional gains impossible and so encourage long-term real investment.

International trade also needs to be regulated. The economic problem is wages. Minimum wages need to be set relative to productivity among trading partners. One way of doing that is trading predominately with countries at similar places in their development and with similar regulations, developed countries with developed and developing countries with developing. Another way is simply ensuring that international corporations have wage guidelines set relative to productivity. Maximum wages should also be regulated.

The conservative era also ensured that environmental regulation did not keep pace with increasing scientific awareness. We have to find ways of pricing environmental costs and restricting growth to more efficient use of already exploited natural resources. We need better distribution rather than higher income and to learn to take efficiency gains through increasing leisure rather than consumption, as well as regulating the power of corporations against creating wants.

Fernando concludes with “the foolish attitude of thinking you can consume more money without producing more value will hit a dead-end called bankruptcy.” Exactly. The financial industry has grown incredibly wealthy without producing real value and it has led the economic system to the point of collapse. Real “foolishness” is thinking that you can produce more without allowing wages to rise in order to consume what is being produced. Foolishness is thinking that finance is the real economy that leads to the dead end of financial instability, increasing indebtedness and long-term stagnation.

Peter Zylstra-Moore has a degree in International Development Studies from Canadian Mennonite University, and is currently working on a pre-Master in Economics at the U of M.