Category Archives: Global Political Economy

The ‘Myth’ of Taxpayers’ Rights

In April, US Representative Markwayne Mullin (R-OK) had a tough town hall.   Upset about the Trump legislative agenda, constituents called Mullin to task as a public employee.  His unscripted response was to complain about their questions and to argue that the idea that taxpayers pay his salary was ‘bullcrap’.   He went on: “I pay for myself…I pay enough taxes where before [sic] I ever got there, and continue to for [sic] my company and pay my own salary.” Mullin further claimed that his job as a public servant was an ‘honor’ and that his wealth and position as a business leader gave him a special freedom and independence from government.  This independence from financial ties, in turn, bolsters his credibility as a critic of government encroachment.

Is Public Service a Contract?

His argument opens an intriguing window on the way that public service (and, by extension, government) is being recast.   While there is a striking & stark contradiction between claiming to both represent taxpayers and to be free from accountability to them, Mullin kind of had a point—–Do ‘taxpayers’ (as a group, and aside from ‘citizens’) actually have rights? Is public service a kind of contract of service, in which representatives agree to provide a necessary ‘good’ in exchange for a fee (salary paid by taxpayers)?

I want to say no, that is not the essence of public service. Public service should not be reduced to little more than a commercial exchange or contractual relationship, it is also a relationship of trust.  Logically, then, to some extent I (gulp) agree with Mullin that it is a service and a privilege.  This is not to say that there is no contractual dimension to public service, however.  Ever since Rousseau wrote about the Social Contract in the 18th century, governments and citizens have expected a relationship of mutual accountability.  For Rousseau, however, the social contract was a metaphor for the larger relationship of mutual obligation that government rested upon; in particular the obligation of the state to its citizens. Therefore, the relationship between the public and public servants does have a contractual dimension. So, if it is not only a contract, what else is it?

The Origins of Taxpayers’ Rights

Prior to the widespread institution of income taxes as a primary revenue source for modern administrative governments, most governments gained the vast majority of their revenue from taxes on trade.  The famous Boston Tea Party protest was against the unfair tax rate on a commodity (tea) and the legitimacy of the Crown’s right to tax commerce without accountability to traders.   Eventually, of  ourse, taxes became imposed on other dimensions of economic activity, include labour and capital gains.  What drove governments to reach beyond trade to enrich their treasuries was war. War required governments to raise funds to field military forces at a competitive level to other states.  War also brought conscription, wherein the sons of the poor were required to invest their lives in the security of the state.  Conscription without representation was just as untenable as taxation without representation, however. With new demands from the state, the state also had to provide new opportunities for returning veterans, which in turn necessitated higher taxes to provide housing, care, education and a safety net.  In truth, the extension of the tax base to all income earners relieved business of the bulk of the tax burden, and business benefited from the security provided by the state.  Security provided great opportunity for economies to grow and globalize.

Paying taxes does and should produce a set of obligations on the part of the government to respect the public interest

Asking the people to expend blood and treasure on war meant that there was an implied responsibility on the part of the state to provide social services to the people.  Taxpayers could expect that public servants would expend public treasure for the public good, not for the interests of business alone.  Underlying the arrangement was a semi-contractual kind of language: taxpayers could expect to be able to exercise their democratic rights to ‘check’ irresponsible governments; and governments could expect citizens to be devoted to the support of the state in war, and in peace.

Clearly, this calculus has changed.  The reasons for this are numerous, not least that conscription has been eliminated and war is fought very differently, but it is still undeniably the case today that paying taxes does and should produce a set of obligations on the part of the government to respect the public interest.

Taxpayer Rights Versus Taxpayer Interests

Paying taxes does not only create a contractual relationship, it also binds taxpayers to their community, giving them a stake in a common future and ensuring thier engagement in public life.

This is not, however, the same as saying that taxpayers per se have rights, over and above their interests as members of the public.   A ‘right’ implies a claim to greater respect and recognition over and above the interests of other groups.  A ‘right’ is a trump card that all other interests, and government, must respect.   Taxpayers as a group are entitled to a voice and to express their interest as a group.  An ‘interest’ implies a competition in the marketplace of ideas in which any one group’s desires may reasonably and fairly be considered over and above others, within the framework of laws that otherwise encourage respect for fundamental rights. Taxpayers, like retirees, patients, business owners, students, workers, and other groups, have interests, but not rights. Ethnic minorities, religious minorities, the disabled, the press, and the public, on the other hand, have rights that may override taxpayers’ interests, and that may necessitate that government prioritize these considerations over others.

The Recasting of Government in the New Agenda

What the new agenda overlooks is that paying taxes does not only create a contractual relationship, it also binds taxpayers to their community, giving them a stake in a common future and ensuring thier engagement in public life. This is what makes Mullin’s position so problematic. Mullin is not making his defence from the standpoint of a citizen with a common stake in the public good, nor even as a servant (despite his calming words about ‘service’ and ‘honor’). His defence is one of a taxpayer, and more particularly, as a business owner.  Ultimately the whole conversation ends up being an argument between taxpayers, not citizens.  Arguing that taxpayers have unique contractual rights essentially gives them permission to disengage from the social contract as a whole, especially those parts of it that don’t directly serve their interests.  In turn, and by extension, governments are then relieved of their obligations to the public, including the provision of security and welfare.  While taxpayers have the democratic right to defend their interests, they do not have the right to disrupt the social contract to this degree. When The Fraser Institute and the Canadian Taxpayer’s Federation argue that taxpayers either work for themselves or for the govenment, they feed in to the idea that taxpayers have special rights.

When citizens at the Town Hall demand that governments should respect taxpayers, then decision makers should listen. However, taxpayers should not have a louder voice than citizens.  Taxpayers ‘rights’ should not be extended to the degree they disrupt the larger social contract.  If they do, then the democracy is at risk of eliminating itself by undermining the contract of service and trust, and, incidentally, by bankrupting the state.  There is some evidence that the US has already begun to do this.  Since the language of taxpayers’ rights essentially marginalizes any public interest from the conversation, it is incapable of constructing a new social contract.  The language of taxpayers’ rights then becomes essentially self-destructive, since taxpayers will end up undermining, in the end, their own claims to the rights and benefits of citizenship.

Unsettled Balance: Ethics Security and Canada’s International Relations

Book Cover 2015

New Website for Unsettled Balance Book here!

Since 9/11, the wars on terror, economic crises, climate change, and humanitarian emergencies have led decision makers to institute new measures to maintain security. Foreign policy analysts tend to view these decisions as being divorced from ethics, but Unsettled Balance shows that arguments about rights, obligations, norms, and values have played a profound role in Canadian foreign policy and international relations.

Examining a wide range of events in Canada and abroad, the contributors to this volume collectively explore three key questions. What is the meaning of ethics and security, and how are they linked? To what extent have considerations of ethics and security changed in the twenty-first century? And what are the implications of a shifting historical context for Canada’s international relations?

Whether probing how Canada handles the tension between ethics and security when hosting large-scale international events, engaging in humanitarian aid initiatives, or entering into military operations, each chapter provides insight into key decisions in recent Canadian history. In a time of rapid change, this book is essential reading for anyone who wants to understand how Canada responds to the challenges of an increasingly volatile world and why it responds the way it does.

The Psychology of Wealth and the Social Contract

Credit: Flickr User Philip Taylor
Credit: Flickr User Philip Taylor

Social science is telling us that morality and generosity decline among the most well-off.   Ever since I heard about this study at UC Berkeley I’ve been curious to imagine how these findings might apply to political systems.  It seems that material wealth, or even the feeling of wealth, has a greater impact on one’s attitudes towards others than previously believed; possibly even a greater impact than previous political ideology, upbringing, or education!   Studies have shown for some time already that generosity is more marked among those who have fewer resources compared to those with more, but now it seems we’re starting to get results that reveal even more about the nature of these differences.  There are intriguing hints at the sources of these really surprising findings.

Nick Powdthavee, an author of a study of the effect of lottery winnings, found that greater wins tend to make people more right-wing and inegalitarian.  He declared:

“We are not sure exactly what goes on inside people’s brains but it seems that having money causes people to favour conservative right-wing ideas. Humans are creatures of flexible ethics.”

Also in this study, the authors speculate about the effect on democracy, arguing that self-interest trumps morality in decision making.

This last point is where I depart a bit in interpreting the meaning of these studies.  Moving to the right may mean supporting an effort to protect one’s own ‘hoard’, but it is only ‘self-interested’ on an individual level, not necessarily on a social level.  Democracy is to some degree about keeping these tendencies in check and allowing a public good to emerge from the apparent conflict of interest created between the rich and the poor.   The paradox, of course, is that the wealthy MUST be on board the project of contributing to the social good at the very point when they are the least motivated to do so (due to their wealth, apparently).   As the wealthy opt out of the social contract that makes things better for everyone, they undermine themselves by eroding the means by which the social fabric is maintained.

 The paradox, of course, is that the wealthy MUST be on board the project of contributing to the social good at the very point when they are the least motivated to do so…

I assume, of course, that the wealthy are still in some way part of that social fabric.  Wealth seems to offer a way out of social obligations and norms [for example, by letting people think they can drive faster with a more expensive car, even if they end up paying a ticket].   But why do people choose to opt out, even if it becomes more expensive, and actually less rational, for them to do so? Why send your kids to private school, pay your taxes to another country, or get your healthcare from a boutique provider, when comparable services can be obtained much more cheaply by paying your fair share to the common pool?  It’s not exactly self-interested in the rational, economic sense, to do this.

I’m wondering if the answer has to do with the psychological need to control the environment, something that money provides unequivocally in a capitalist society.  What one loses in material cost [private school is more expensive than public, paying a ticket is more expensive than driving according to the rules, for example] is made up for in control over the process. If it is about control rather than about wealth, it has implications not only for what the rich do individually, but how they act toward the political system as a group.  For if the tendency to protect one’s own extends to the effort to control the society as a whole, it means the wealthy will make social laws and rules for everyone else that reflect their particular interests.

Fostering empathy in the minds of the wealthy may not be the way to go, as this article in the Atlantic suggests.  A considerable amount of energy is spent in encouraging charity among the wealthy, which has had little impact on the mindset.  Indeed, what is interesting is that most Americans have experienced poverty in their lives, if only temporarily, at one time or another.  This means a significant number of wealthy individuals, and yes, even members of Congress or Parliament, have also experienced poverty.  If the above studies are correct, it seems unlikely that this experience can trump the psychological effects of wealth, and the tendency to be less egalitarian or generous, that goes with wealth. It doesn’t seem likely that human nature will change.

Credit: Flickr User Brent Granby
Credit: Flickr User Brent Granby

Bridging the psychology of the individual with the need for a public good means bolstering institutions that supercede and limit the tendencies of the wealthy to opt out and to control the process. Unfortunately, many democratic institutions have been put in place to do exactly the opposite: to control and limit the worst excesses of the general public [see the Canadian Senate].

Public education, public health care, parental leave, elder care, social services, and even sewers and parks have often been thought of as contingent on ‘affordability’ (Yes I’m looking at you, BC Liberals!)  In fact, by highlighting the idea of the public good, these institutions remind us of the vulnerability of the social contract to the psychology of wealth. Now that we know more about the effects of wealth on our thinking  (and by that I mean everybody’s thinking) social planners should be better equipped to make the case for the defence of that social contract.  That defence should strongly state the need for everyone, but especially the wealthy, to be included in the social project from which we all benefit.

Climate Change: Deconstructing Conservative Fatalism

Photo Credit: Thinkstock
Photo Credit: Thinkstock

Recent comments about climate change policy from conservative world leaders Stephen Harper and Tony Abbott suggest an important shift in conservative thinking about climate, science, and the role of country governments in tackling the problems of climate change.  Having lost the public relations fight about climate knowledge, conservatives now either vacate the field or adopt a discourse of what Stephen Colbert might call ‘truthiness’.

Like the child in Hans Christian Anderson’s tale of the Emperor’s New Clothes, the conservatives under Stephen Harper have ‘called out’ the world over inaction on climate change.  This strategy has had some success.  Harper stated recently that “no country is going to take actions that are going to deliberately destroy jobs and growth in their country. We are just a little more frank about that, but that is the approach that every country is seeking.”

In this way, conservatives can claim to be the real ‘truth tellers’ who can then freely take the low ground of inaction.  By doing this, they make common cause with critics of climate politics while also maintaining a distance from the more extremist deniers [who quite frankly are starting to look rather foolish]. This discursive strategy is nothing new to the Harper conservatives, who have had some success in using it to justify pulling out of the international effort to negotiate a new agreement.

In Hans Christian Anderson’s tale, a child is the only one who sees that the Emperor is not wearing rich clothes but is indeed wearing nothing.  The child has done what none of the Emperor’s advisors dared to do, and so has credibility because of his/her relative freedom from social constraints.  These constraints restrict what subordinates may say to the Emperor, and so make it difficult to oppose his views.  The child, unrestricted by expectations, has the ability to speak their own mind without fear of the consequences.

Much is forgiven when a speaker can be said to be ignorant and unsophisticated, and the moral of the story is that wisdom and social value can come from the mouths of innocents not captured by the oppressive dictates of social expectations.

Peaceful and productive international relations thrive on the mushiness of language in describing aspirations and expectations.

However, taking a ‘truth teller’ role in international relations has many more risks and is far more complicated.  Peaceful and productive international relations thrive on the mushiness of language in describing aspirations and expectations.  Norms are built in the space created by uncertain statements, blurry commitments and nondescript agreements.

Social expectations and norms in other settings can become a straightjacket of nakedness, as the moral of the Emperor’s New Clothes suggests.  But international relations is different.  In IR, social expectations and common norms are flimsy and weak.  The risk of defection from any common enterprise is so high that the appearance alone of cooperation (nakedness) is often the only thing carrying the projects of climate change agreements forward, and making progress possible.  Bravery means a willingness to be at least a little bit naked, and aware of one’s own vulnerability.

For this reason, Conservative ‘truth telling’ should be seen for what it is:  first, it is an unabashed instrumental rationalist strategy for defecting from a common effort to address climate change.  It is not a cowboy-esque statement of independence worthy of respect for its pluck and grit.  It is not brave.  It is not radical.  It is not inspirational.

78806802Second, using ‘truth telling’ as a political tactic obscures the fact that defection imposes costs on all of the other countries seeking a means of fairly distributing the disastrous effects of adaptation to climate change.   Defection means cheating.  Any common benefits that come from an agreement, such as a reduction in emissions, will be enjoyed by all, whether they have paid any part of the cost of adjustment.

Conservative ‘truth telling’ is not brave.  It is not radical.  It is not inspirational.

Canada and Australia, as wealthy developed economies, will be enjoying the benefits of the economic adjustments imposed on poorer, less developed economies.  Canada is not the weak ‘child’ calling out the powerful Emperor, but rather, Canada is like the Emperor exploiting the helplessness of his subjects for his own vanity.

Any real effort to ‘tell the truth’ about climate change needs to demonstrate a willingness to pay a price for the achievement of real emissions reductions.  No one is saying that countries aren’t reluctant to take on that price.  To say so is not ‘truth telling’ but a recognition of the difficulty of achieving agreement.

To recognize the difficulty and then back away from it reveals a self-serving policy that celebrates weakness and apathy, not strength and independence.  Conservatives are banking that their celebration of ‘do-nothing’ policies will play on peoples’ fatalism and fear about climate change.  Let’s not let the Emperor succeed in this vain pretense.

 

The Sources of Inequality: Why Globalization Matters

1Photo Credit: Rangan Halder 500px “Materialism Versus Materialistic Capture” http://500px.com/photo/8540236

In his speech to the Rock ‘n Roll Hall of Fame, Chairman of the Council of Economic Advisers Alan Krueger offered up some food for thought regarding the sources of inequality in American society, and globally. Krueger focused on four factors that help to explain income inequality: technology, scale, luck, and the erosion of social pressures for fairness. In this post, I want to focus on scale, and I’m going to also refer to the Atlantic’s reprint of the key points of Krueger’s talk to expand on a factor that Krueger mentions but does not develop in enough detail, in my view: globalization.

The authors discuss the music industry as an example. As they point out, the music industry creates a ‘star economy’ focused on a few ‘winners’ or ‘stars’ who are able to drive growth in the system. The ‘star economy’ in music has produced a skewed income curve. If you look at incomes across the industry, the greater benefits are concentrated at the top. However, if one considers not just the artists (who are essentially the workers producing the product) but the entire ecosystem of label CEOs, CFOs, managers, R & R people, the marketing department, etc. then one gets a better idea of the scope of the real economy of music. In fact, music industry bloggers and observers have been criticizing the inequality in the music industry for a long time: As Bob Lefsentz points out in a recent post, the corporate labels, the entertainment mega-giants like Sony and Universal, are the real structural beneficiaries of the sharper inequalities imposed upon all musicians, just as the fat cats in the garment or manufacturing industry are the real beneficiaries of inequality in those economies.

The power of the music industry has grown in lock-step with globalization, offering command of larger and larger shares of music consumption. The incomes of the music industry managers have survived the recent purge caused by the technological challenges. They have survived for a reason: it is their machines that generate the wealth, rather than the luck or talent of the artists. Ultimately, as Krueger suggests, ‘luck’ and the perception of popularity have a huge impact on success in the music industry, but ‘luck’ is not some impartial uncertain or random arbiter of fortunes, since success comes through the perception of popularity, which is heavily influenced by these industrial complexes.

As Salganik et. al. have discovered through experimenting with a controlled ‘music market’, social perceptions of the popularity of songs increase the degree of inequality among them (although they don’t make it any easier to predict success). Frankly, no matter the uncertainty caused by the internet or disruption of the industry by downloading, any artist that can command the attention of the marketing machine and the vast resources of a label can succeed beyond their wildest dreams through these social effects. Many high-quality and deserving artists don’t succeed, while a few poor quality and undeserving artists succeed beyond their wildest dreams. Youtube doesn’t ‘make’ you a star, but the attention that Youtube brings can make you popular. Attention from the music elite (increasingly, from successful artists) or from a label with a hyper-marketing machine behind it makes you a star, since you can then marshal the resources necessary to maintain that attention.

Globalization has had one important impact on the 1% that should not be downplayed: it has vastly expanded the freedom to disengage from local economies and impose conditions upon all other economic activities. What matters is the decisions made by the elite to affect the market, and these decisions are not based on luck, fairness, or even on quality. In political science this is termed ‘structural power’: the ability to not only win the game, but to affect the rules of the game for all other players. The inequality of today arises from specific decisions made by earlier masters of the universe in the 1980s to protect the interests of their class. Krueger hints at some of these decisions in his article: the demise of labour unions, the deliberate erosion of the minimum wage policy, and changes to taxation. These factors cannot be explained by the impartial workings of a global market or by luck, rather, these are conscious government policies aimed at expanding the scope and freedom of movement for the wealthy.

I would allow that there is some room in this analysis for what might be termed ‘unexpected’ consequences in the form of a severe recession and political backlash against perceived unfairness. Krueger’s analysis seems to suggest that the erosion of a social commitment to fairness in income distribution is some kind of ephemeral byproduct of historical forces and global and cultural change. However, I would argue that society has always appreciated the importance of fairness. Indeed, when elites overreached in their efforts to influence the public’s perception of fairness, it created the present global backlash and protests against inequality.

Given the true nature and extent of the cultural power that elites have garnered over the last 50 years, their expectation of being able to manage the change to a more unequal society was not unrealistic. And they may still succeed! Leaving out the element of cultural power, and the broader impact of corporate globalization and the effects of structure, neglects one of the key explanations for the continuation of inequality. The perception that success comes from luck or from effort, and not from the structure, is central to the perception of inherent fairness in the system that allows inequality to persist.

So, Krueger’s piece gives us much to think about: technology, scale, luck and the erosion of fairness have played their parts in the rise in inequality. I would put the focus on scale and the rise of globalization, which has fundamentally altered not only the rules for economic acquisition, but also the rules for social, political, and technological relationships. The change in these rules has helped to produce the profound social and economic inequalities we see today.


What Kind of (In)Equality Do We Want?

Photo Credit: Jessica Tam Flickr

When analyzing any phenomena, it helps to have a good idea what we want to achieve. In political science as in life, equality has great significance. Analysts tend to think quite differently from the general public, however, about what constitutes equality and how we should use the term. Let’s consider a thought experiment to sort out the difference between ‘equality of opportunity’ and ‘equality of condition’.

If we imagine that equality of opportunity and equality of condition are kinds of ideal types at opposite poles, with a spectrum of variations in between, then the picture might look something like this: under ‘equality of condition’ everyone would experience the same life outcomes: equal incomes, equal standards of living, and equal levels of education, health care, and work. How would things differ? Likely inequality would creep in through limited means: for example, some may work longer hours, have more or less education, spend more or less time skiing, etc.

What is wrong with this picture? The most common criticisms of this ‘absolute equality’ are:

It reduces the incentive to succeed, and 2. It distorts the value of things, leading to scarcities and gluts in supply.

Society involves differential treatment.

But these are practical criticisms, not questions of justice.   Would absolute equality actually be ‘just’?  Assuming for the moment that such a system could be workable (and I’m not saying it is) then an argument could be made that it actually creates injustice by failing to differentiate among people with ascribed or inherent differences who deserve differential outcomes.  Those who work harder or are more creative or who are disabled or ill should be treated differently.  Some may deserve preferential access to resources either as a result of their extra effort, their accomplishment or contributions, or by virtue of need.  Tellingly, the right more often argues for differential outcomes based on effort and accomplishment, while ‘need’ tends to take second place. It is sometimes said that such a system would be communistic.  However, under Marx’s vision of communism, the ideal form of equality actually allowed for differential rewards focusing on need rather than accomplishment or contribution. Contrary to popular belief, Marx did not advocate absolute equality of condition. Indeed, nobody has, in all seriousness, ever really proposed that large-scale industrial societies impose absolute equality of condition.  This is because serious thinkers would quickly realize that equality of condition, even in its ideal form, would inevitably raise both practical and fairness questions since there would still need to be some argument for different treatment of some people.  Nobody is average.

Now, what about equality of opportunity? That sounds like something we can all get behind: everybody can try or fail equally well, and those with the greatest accomplishments and talents will rise to the top. This is kind of what Paul Summerville argues when he says:

Equality of opportunity is a virtue when it is twinned with unequal outcomes. It is meaningless without it. What is the point of equality opportunity if success is discouraged by custom, law, or taxation?

But, to respond to this, how can we be sure that everyone actually has an equal opportunity to try, and to win? Inequality all by itself is not evidence of equality of opportunity. What if the winners try to ‘kick the ladder out’ from behind them, blocking the upward advance of others? What if they use their newfound positions to favour their heirs and families and friends rather than allow their loved ones to fail? Perhaps when we see that some are able to climb up to the top from the very bottom of the social ladder without artificial assistance from the state, then we can say that equality of opportunity exists. But how many of these examples are sufficient to prove it? One? One in ten? One in a thousand? The fact is there is no natural or inevitable level of inequality that can tell us when everyone truly has an equal chance. We can point to clues: perhaps when the top 1% is as diverse and representative of the entire society, or when every member of the top group can claim to have climbed out of the gutter, but that seems as unlikely as the ideally equal society discussed above. The question of fairness rises again: even in a society in which opportunities are purely equally distributed, there will be unfairness due to the same factors mentioned above: What about those disadvantaged by illness or age or poor upbringing? What about highly talented or accomplished individuals who don’t manage to make it through no fault of their own? why value some talents more than others?

Given differences, how can we be sure that equality of opportunity exists?
Given differences, how can we be sure that equality of opportunity exists?

Again, the argument to treat some people differently in order for equality of opportunity to be realized is present. But, the same question arises: what should be the basis for differential treatment? Here, the differences between the two poles start to disappear: the essential argument is not about equality at all, but about the basis and rationale for differences. Both sides work toward an ideal world that is impractical and unfair, yet both sides argue for ‘differential’ treatment on the basis of different individual characteristics. The right argues that differential treatment should be based on talents or contributions, while the left focuses on compensating for special needs and other (class) disadvantages.

The world we actually live in is of course far more complicated. Equality before the law, which is the dominant discourse of equality in Canada and other Western liberal democracies, is actually a fall-back position avoiding both of the options described above. It doesn’t guarantee equality of opportunity and it doesn’t mitigate inequalities of condition. At most, it provides a measure of our progress toward some compromise on fairness and practicality. It’s not irrelevant, far from it! The legal guarantees of the Voting Rights Act or protections for gay marriage or for equality between religious beliefs do matter, but not for the reasons we think. They matter less because they create equal opportunities, and more because they clarify the legitimate grounds for treating people differently. The fact that people are all, in some way, treated differently by society still needs to be acknowledged by all participants in the equality debate.

The next two blog posts will address the sources of present-day inequality in globalization, and the basis for differential treatment and its centrality to equality.

Further Reading: Tax the Rich (More)!

For those attending the Munk Debate livestream on May 30th:

Munk Debates   The DebatesPaul Summerville, University of Victoria economist, recently wrote a series of blogs on the topic of equality and inequality.  You can find them here:

“Guest Post: A History of Equality” May 14th, 2013 The Inside Agenda Blog 

“Guest Post: The Difference Between Decreasing Inequality and Increasing Equality” May 22nd, 2013 The Inside Agenda Blog 

“Guest Post: Why We Need Winners and Losers” May 28th, 2013 The Inside Agenda Blog 

David Miller responded:

“Guest Post: The Economic and Democratic Harms of Income Inequality” May 29th, 2013 The Inside Agenda Blog 

The Globe and Mail also has run a series of blog articles by debaters, you can find them here: 

Can currency wars lead to real wars?

Are we in a potential inflationary moment?

Imagine the following:  China secretly buys up gold futures in the hopes of stockpiling a war fund to fight inflation caused by US ‘quantitative easing’.  If the US goes too far in trying to fund its stimulus by debasing the dollar, China triggers a crisis by buying up gold.  The ultimate statement of lack of confidence in the US dollar (which is the key currency for all international trade and capital reserves) leads to a catastrophic run on the dollar and a collapse of globalization as each country tries to ‘beggar’ its neighbour with cascading tit for tat devaluations.  In his book Currency Wars: The Making of the Next Global Crisis, Jim Rickards presents several scenarios by which the world could come to the brink of collapse as a result of governments’ efforts to manipulate their currencies, thereby stimulating their economies at the expense of their trading partners.  Indeed, it is not hard to imagine how the monetary underpinnings of globalization could easily come crashing down given the wobbliness of the top currency, the high level of US debt, and the lackluster response of the US consumer, traditionally the world’s growth engine, in recovering from the 2007 recession.  Indeed, one could argue that even a much less complicated scenario might lead to crisis:  what if China simply decided to use it’s so-called ‘nuclear option’ and stop buying US treasuries, triggering a cascading dive of confidence in the world’s reserve currency?  What if politics really did take over economics?

The alarmism over a coming hyperinflationary crisis appears to be growing, and it’s not without some foundation.  Fiscal stimulus appears to have met its match in the global system of monetary exchange, where politics and economics do not just interact, but essentially meld.  However, at least some of the alarmism should be taken with a grain of salt.  The calls for curbing the US fiscal deficit (quite apart from the debt) are at least in part motivated by an ideological discomfort with government’s influence on the market as well as a moral panic over Americans’ dependency and perceived complacency.  This view tends to see the world as a dangerous, zero-sum place where countries await any and every opportunity to force an advantage over their competitors.  However, economic competition is not exactly the same as political rivalry, and should not be equated.  While it is not impossible for countries to mutually try to obliterate each other (see the Great Depression) it is not likely given the availability of much more palatable options.

Economic and political 'wars' should not be equated
Economic and political ‘wars’ should not be equated

It is important to remember that unlike real wars, currency wars that result in hyperinflation are not really deliberate—they result from governments’ fumbling and lack of effort to cooperate or lead rather than from single-minded plans to dominate the world.   They are tragedies (or tragicomedies) rather than evils.  They are not so much caused by politics as by a lack of politics.  Because of the uncertain results of currency manipulation, it is a very blunt and unpredictable instrument of policy indeed.   As with nuclear deterrence, mutual deterrence is more likely than not to push countries to cooperate and to head off crises before they get out of hand.  Indeed, this is exactly what has been happening for the last (almost) 42 years.   The players may change, but the game will remain: keep the poker face on and ensure the world continues to have a world reserve currency with some usefulness to everybody.   The alternative is just too awful to contemplate.

Entanglement: The Enmeshment of the Economy and the Government

In quantum physics, there is the idea that a single particle can have an effect on a different particle many light years away.  Einstein called this ‘spooky action at a distance’.  In today’chicken_or_egg_400_clr_10064s globalized world, economic activity shows similar ‘spooky’ characteristics, indeed, it is virtually a truism to say that what happens in one industry or segment of an economy will inevitably affect others at great distances.   What is often overlooked in ideological debates between the right and the left, however, is the entanglement of the free market economy with the activities of government.  They are separate, just like particles separated by great distances, but they are so closely entangled. Action in one sphere will unavoidably affect the other. arrow_halves_join_400_clr_9621

Take, for example, the encroaching effects of the ‘fiscal cliff’.  An increase in taxes coupled with spending cuts, could potentially cause a drop of as much as 1% of GDP growth in the US.  The resulting reduction in economic activity would then impact government revenues, cutting into revenues just as measures to reduce the deficit kick in.  This makes these measures, therefore, essentially self-defeating.  Even a more measured response to deficit reduction that allows for some spending increase could potentially trigger inflation, since it will unavoidably give the impression that the government will just keep printing money to pay its debt. Inflation could also reduce economic activity and jeopardize growth, although it seems unlikely in the short term, by undermining investor confidence and leading to capital flight.  The result, as with the fiscal cliff, is the same: a hit to government revenues and a self-defeating policy.

The first step to breaking the cycle is to recognize that the favoured solutions of both the right and the left are both inappropriate in the present context.  Reducing taxes to stimulate the economy without accompanying measures to induce spending and investment just doesn’t work, there is no evidence of it ever having worked, and it does severe damage to the government’s ability to raise revenue.  At the same time, government spending does not have the growth-inducing impact as in the past because thuncle_sam_holding_money_pc_400_clr_1727e implied willingness to spend and borrow undermines investor confidence.

The solution lies in the awareness that government is both an economic actor and an economic hedge.  Contrary to the arguments on the right, government cannot just ‘get out of the way’ and let the market grow.  For one thing, it might grow somewhere else.  For another thing, markets need government to backstop their activities and stop them from imploding on themselves.  The sooner that people stop thinking of governments as part of the problem, and realize that free markets require governments to make decisions for the common good, the better off both the economy and the government will be.  Governments and markets are not the same thing, their purposes are different and their instruments are different, but they are irrevocably enmeshed together.