|Globalization of the World Economy: ROBERT KUTTNER
14, 1998 at the Autumn Meeting of the American Philosophical Society.
Can the Global
Economy Be a Mixed Economy?
A great achievement of this century was the domesticating
of the brute power of laissezfaire capitalism. The nation state accomplished this task in
multiple ways. It pursued economic stabilization and steady growth through an active
macro-economic policy. It regulated the more self destructive tendencies of markets,
especially banks and financial markets. It empowered trade unions and put a floor under
labor, and later environmental, standards. It provided social income in various forms of
social insurance. And it made direct public investments.
All of this made for a more socially bearable, as well as a more economically efficient,
brand of capitalism. It tempered capitalism*s extremes, both the volatility and the
inequality. Increased stability also enhanced the political and economic bargaining power
of ordinary people, which rooted the mixed economy in a majority politics. In
principle, the shift to global laissez faire is an unmitigated good because of the
efficiency of the price system. From this perspective, the regulations and stabilizing
policies are mere "distortions," whose elimination will only produce better
allocation of economic resources. But this view ignores that the domestic policy
interventions were necessitated in the first place by irremediable market failures, in
sectors of the economy where market forces cannot by themselves optimize outcomes.
When critics point to the destabilizing tendencies of global capital flows, they are often
disparaged as simple protectionists or allies of special interest groups. But there is
something more fundamental at stake. The fact is that the mixed economy of the postwar era
was a magnificent achievement, and global free markets undermine the project of
maintaining a mixed, managed and regulated economy at home, in several reinforcing ways.
And it is an entire economic systemits institutions, its politics, as well as its
economics, that is undermined by the resurrection of laissez-faire, with great costs to
stability, security, opportunity, growth, and democratic citizenship.
Capital is mobile and labor is not. There is, of course, no global sovereign to regulate
and manage. Global laissez faire tends to price out of world markets nations that elect to
have policies of high wages and generous social benefits. It pulls capital into corners of
the globe where there is less regulation, which in turn makes it harder for the advanced
nations to police their banks, stock exchanges, capital markets, and social standards.
Globalism also influences the domestic political
balancein favor of the forces that want more globalism. Labor and social democratic
parties seem unable to deliver the benefits they once did of secure jobs, high and rising
earnings, good social benefits. Working people either stop voting, as they do in the U.S.,
or they, internalize the values of the new economy and conclude that the lower economic
horizons are their own problem. The slogan of the new economy might as well be, Anyone can
be Bill Gates, and if you*re not Bill Gates, it*s your own fault.
Investors, who are free to move money to locations of cheap wages and scant regulation,
gain power at the expense of citizens whose incomes are mainly based on wages and
salaries. That tilt, in turn, engenders more deregulation and more globalism. The global
money market, not the democratic electorate, becomes the arbiter of what policies are
"sound." In this climate, a Democratic president, a Labour prime minister, a
Social-Democratic Chancellor can snub the unions, but he*d better not offend Wall
Street or the City of London, or Frankfurt. So even the nominally left party begins
behaving like the right partywhich then alienates the natural base of the party that
is supposed champion of the mixed economy.
There is an emergent set of global regulatory authorities,
but they are stunningly undemocratic. Domestically, central bankers operate at one remove
from political accountability. Globally, the IMF and the World Bank operate at two
removes. The World Trade Organization addresses issues of fair play that concern
investors, but not workers or citizens. Even worse, the WTO lacks evolved rules of
evidence, due process, public hearings, and the strictures against conflict of interest
that characterize courts in mature democracies.
Increasingly, global quasi-official standard-setting authorities, dominated by private
business, are laying down the rules of global commerce. So the century-old project of
making raw capitalism socially bearable is undermined in countless ways by globalism.
Domestically, there are regulatory mechanisms, and political constituencies. These are
neatly swept away by leaving everything to markets in the name of free trade. The global
market trumps the domestic mixed economy.
At the Bretton Woods conference in 1944, the architects of
the postwar financial and payments system had a profound understanding of the deflationary
bias of private financial speculation. Countries subject to the pressure of private money
markets were under pressure to maintain sound currencies; they would respond with slower
domestic growth, and try to export their unemployment through protection and or
competitive deflation. At best, this would lead to global slow growth. At worse, as in the
interwar period, it would lead to depression and a backlash of desperation and
The IMF was intended to remove the business of exchange
rates from these private speculative pressures, and to create a bias towards expansion. It
is ironic in the extreme that an institution, the IMF, that was created precisely to
create a bolster against the irrationality of speculative private capital flows, has
turned into both a battering ram to make these countries havens for speculators playpen,
as well as an agent of gratuitous austerity.
Historically, center-left parties have been in favor of a managed economy at home and
mostly free trade internationally. While some on the left believe that it is free commerce
in goods and services that undermines high-paid jobs at home, free commerce is on the
whole beneficial though all commerce rests on a prior legal structure of runes. The more
serious problem is the laissez-faire regime in capital and currencies, for it creates both
speculative instability and a systemic bias toward slow growth.
During the Bretton Woods era, there in fact was not free trade in currencies, there was
the legacy of capital controls, there were all kinds of non-tariff barriers, and there was
emergent freer trade within the Europe of the six, but far less pressure to admit low wage
imports. It was easier to profess support for free trade in that era, because we did not
have free trade. And somehow, we had high growth and full employment. Was that a
We need, in short, a kind of global economic regime allows the mixed economy to flourish
at home. Does this mean adding labor rights to the WTO? Does it mean regional free trade
within a North Atlantic area that has roughly the same regulatory and social standards,
but a retention of some barriers between this free trade area and areas that do not
respect basic social standardsa shift from the principle of unconditional Most
Favored Nation treatment (MFN) to a new form of conditional MFN intended to prevent a
"race-to-the bottom"*? Do we need the re-regulation of global financial
markets, to slow down their speculative aspect? What might we do to reclaim the IMF as an
agent of expansion rather than austerity?
The neo-liberal story would have us believe that the current, moderately benign economy,
is the only possible one. In the U.S., deregulation of labor and product markets, freer
trade and freer global capital movements, are given credit for the improving trade off
between inflation and unemployment. If that is true, and we follow the neo-liberal recipe,
the income gaps will only widen, and we will continue to lose the levers of management of
a mixed market economy. But the dirty little secret of the new economy is that economic
performance, even on average, is far below its potential, even leaving aside the economic
extremes of wealth and poverty in the US and the high unemployment in Europe.
In the mixed economy of the postwar era, for the first time in the history of capitalism
ordinary working people had rising living standards coupled with social supports and
economic security. Our task is to reinvent a mixed economy for a new era, and to figure
out what kind of global economic context is compatible with a managed market economy at
home, and what kind of politics is necessary to support that project.
Center-left governments now simultaneously govern in every major European nation for the
first time in historyLondon, Paris, Rome, and Berlin. Of the 15 nations of the
European Union, no fewer than 13 are governed by democratic-left parties. Liberal
democrats also occupy the executive branch in Washington and Ottawa.
This stunning convergence entails a double irony. Supposedly, this is the supreme
capitalist moment. Yet in nation after nation, voters evidently don*t like the
effects of capitalism in the raw.
At the same time, however, it is not at all clear that these very de-radicalized leftists
can do much to temper the market. For the most part, their policies are slightly more
benign versions of the same neo-liberal policies put forth by their center-right
predecessors. Indeed, many on the left have moved to the center not so much out of choice
or even political tactic, but because globalized capitalism seems to leave them little
alternative. Left programs can no longer deliver, absent a radical change in the rules of
the global market economy.
The question, then, is whether they will muster the will and the strategy to change those
ground rules, to reclaim space for national policy. Europe offers an alternative social
model, but unless Europeans act in concert to challenge constraints of the global market,
they do not have a viable economic model.
Intuitively, the recipe commended by neo-liberals seems attractive: let markets set
prices; let free trade and free movements of global capital work their efficient magic. If
voters don*t like the social consequences, use the state to temper the extremes and
give those the displaced new opportunities and skills. But this view is naive. Tempering
the excesses of the market requires public outlays and regulations. Yet if the world is
one big free market, capital tends to avoid nations that impose burdens on it. Moreover,
as the founders of the postwar financial system at Bretton Woods grasped, leaving currency
values and capital movements to financial speculators leads to competitive devaluations
The collapse of the Bretton Woods system of managed exchange rates, in 197 1-73, ushered
in a period of slow growth. Francois Mitterrand learned painfully, as the first Socialist
president of France during the early 1980s, that a nation that tries to grow faster than
its neighbors is rewarded with a run on its currency. Since then, the market has only
grown more powerful and the policy levers of nation states more stunted. Even in a nation
with fiscal discipline, tough regulatory strictures, or generous social benefits and the
taxes required to pay for them, will frighten away investors.
As a result, most center-left governments are mainly reduced to accepting the discipline
of the global market, and tinkering around the edges. Their first priority is to reassure
capital markets. In the U.S., the Clinton Administration is enjoying the effects of a
modest and uneven boom based on very orthodox fiscal policy aimed at winning the
confidence of the Federal Reserve and Wall Street. Expensive new social programs are off
the table. Existing social programs such as Medicare and Social Security are in
In Britain, the highly popular Tony Blair is consciously emulating Clinton. Most of the
Blair*s energy has gone towards modernizing Britain*s institutions of
government. Fiscal and monetary policy are entirely orthodox; indeed, Blair went the
Tories one better by privatizing the Bank of England. Privatization is accelerating,
including even plans to partially privatize the London Underground. While Blair is
modestly increasing social spending, he is selling off public assets in order to find
money to spend on public investments that he can*t finance via taxation or public
On the continent, where unemployment remains stuck around 12 percent, most left-of-center
governments are placing their bets on conservative fiscal policies combined with
heroic measures to improve education and training. They hope to partially deregulate labor
markets and reform taxes that discourage job creation so that industry will take on more
workers. However they are somewhat more venturesome in their willingness to revise
the rules of global capital flows.
Everywhere, deficit reduction and relatively slow growth are the order of the day. In the
U.S., the slow growth takes the form of wage stagnation for the bottom half of the
workforce. In Europe, where a variety of regulatory and redistributive policies still
militate against U.S.-style inequality, the slow growth takes the form of high
unemployment. The prevailing, feeble form of social democracy is not likely to change this
economic trajectory very much. And if tinkering is their only contribution, the current
spate of moderately left governments will likely be repudiated by the voters.
Is there no alternative? Is policy essentially dead?
There is certainly nothing wrong with "supply-side" policies aimed at improving
the quality and productivity of the workforce. All western nations can benefit from better
educated workers, lifetime learning policies and other measures to make the labor market
work better. It would also be smart to reduce payroll charges, which are now over 20
percent in the U.S. and over 60 percent in some of Europe. But these policies have their
limits. For example, the French Socialists under Lionel Jospin and the German SPD
are promoting measures such as a shorter work week. Yet as European employers emulate
their American counterparts and turn to temporary workers and outsourcing, the assumption
that the state can legislate a "normal" workweek is unrealistic. With slow
overall growth, mandating a 35 hour week with 40 hours of pay will produce inflation. But
a mandatory cut in both hours and pay, while non-inflationary, will produce moonlighting,
and defeat the whole purpose. Shorter working time is the fruit of higher growth, not the
Labor market policies, by themselves, do not add up to higher growth rates. They can work
as complements to more a expansionary macroeconomic policy, not as substitutes. The
Swedish Keynesians figured this out more than four decades ago. The recipe is to run as
hot a macroeconomic policy as you dare without triggering inflation, and then
complement it with active labor market policies to match well trained workers with
employers. When unemployment gets down to a level that runs the risk of wage inflation,
you enlist the unions in voluntary wage restraint, and soak up the remaining joblessness
with retraining sabbaticals and public employment.
But Swedish Keynesianism doesn*t work very well any more. The culprit is the global
economy. Global growth is held hostage to creditors and financial speculators. And
countries with good wages and expensive social outlays find themselves priced out of the
There is, I think, an alternative to simply accepting a downward convergence of wages and
benefits as an inevitable price to be paid for the "efficiency" of the global
market. But this alternative will require a fundamental shift in how center-left
governments view global capital. For the most part, American liberals and European social
democrats have not challenged the neo-liberal view that all prices are efficiently set by
markets. Yet there is a surprisingly strong dissent being heard from mainstream economists
who hold that there is one major exception to this rulethe price of currencies and
the flow of global capital.
In the past two years, such mainstream economists as Jeffrey Sachs of Harvard, Paul
Krugman of MIT, Barry Eichengreen of the University of California at Berkeley, Joseph
Stiglitz, formerly of Stanford and now chief economist of the World Bank, and Jagdish
Bhagwati of Columbia, formerly economic advisor to the Director-General of the GATT, have
all challenged whether free flows of capital and laissez-faire setting of currency
parities actually optimize outcomes.
In the May-June 1997 issue of Foreign Affairs, Bhawati, former chief economic advisor to
the GATT and one of the most eminent and passionate of free trade economists, wrote a
startling article contrasting trade in goods with trade in capital and currencies.
"Only an untutored economist will argue," Bhagwati wrote, "that free trade
in widgets and life insurance policies is the same as free capital mobility." The
reason is simple. Trade in ordinary goods and services tends to reach equilibrium. But
global capital markets often tend to overshoot, pricing currencies wrong, pouring capital
in and yanking it out, doing serious damage to the real economy.
A good case in point is the Asia crisis. Foreign capital seeking super-normal returns
abruptly swamped these newly liberalized capital markets. When overbuilding ensued and
returns began sagging, the capital rushed out, devastating the currencies and economies.
Bhagwati wrote, "When a crisis hits, the downside of free capital mobility arises. To
ensure that capital returns, the country must do everything it can to restore the
confidence of those who have taken the money out. This typically means raising interest
rates..." But higher interest rates only deepen local recession. Investors are
"reassured" at a devastating cost to the real economy.
The International Monetary Fund, which comes in to "restore confidence" (and
supervise a fire sale) often serves as a handy scapegoat. But the deeper problem is the
neo-liberal regime and its encouragement of short-term speculative capital flows to
fragile economies in the first place. And those same speculative capital movements
constrain the policy options of advanced economies.
Systemically, the effect of free capital mobility is not just periodic crises but a
deflationary bias for the system as a whole, as nations competitively manipulate interest
rates and exchange rates to reassure investors. In a downturn, this can take the form of
competitive devaluations, as in Europe in the 1930s and Asia in the late 1990s. In an
inflationary period, it can take the form of high real interest rates, as in Europe and
America in the 1980s. The common effect is needless instability, creditor hegemony, slow
growth, and pressure on nations to jettison high wages and decent social benefits.
ln a limited sense the critique is also tacitly shared by Robert Rubin and Alan Greenspan.
For although global capital flows are more or less free and currency values are more or
less set by market forces, governments and central bankers do recognize, if only through
periodic ad hoc interventions, that the stakes are simply too high to let speculative
capital and currency swings determine the fate of the real economy.
Five times in the past two decades, the U.S. and the other great powers have intervened in
very significant ways to counteract the impulsesand the damageof speculative
forces in capital markets. These included the concerted intervention in late June 1998 to
prevent the Yen from crashing and taking the Asian economy with it; the Mexican rescues of
1983 and 1995; the Louvre Accord of 1988 to stabilize the dollar against the Yen, and the
Plaza Accord of 1985 which produced a period of coordinated reductions in interest rates.
Note that three of these occurred under the Reagan Administration, which elsewhere was
fiercely committed to free markets. Note also that the recent coordinated moves to shore
up the Yen were undertaken out of fear that a weakening Yen would trigger a chain of
devaluation throughout Asia and very serious recessionmore market irrationality. The
western powers have pressed the Chinese to continue pegging the Hong Kong dollar to the
U.S. dollar and to continuing defending the Chinese yuantwo more violations of the
idea that currency values should be set by market forces.
But while Western governments are willing to engage in ad hoc interventions to contain
crises, they are uneasy about returning to a more regulated regime for private capital
flows and exchange rates. However, re-regulation of capital flows is precisely what is
needed if left-of-center governments are to reclaim the capacity to pursue policies of
high growth and social justice.
Casual students of U.S. history read of the centrality of the "money issue" in
19th century American politicsthe fringe parties, the battles over gold, silver and
greenbacksand wonder whether our great-grandparents were afflicted by some kind of
collective financial hysteria. In reality, the underlying issue was whether credit would
be cheap or dear, whether capital markets would be run for the advantage of creditors or
ordinary people; and whether periodic financial panics and depressions would be contained
or seen as the inevitable side effects of progress and efficient markets. Precisely the
same issues arise today globally.
By the same token, casual observers of the mid-century economy fail to appreciate the
importance of the Bretton Woods system. Bretton Woods fixed exchange rates. But by
committing central banks to collectively support the fixed rates, it also precluded
speculative currency trades or capital movements. The latter was its more important
achievement. Regulation of global capital thus created shelter in which it was
possible for national governments to build high-employment, high-growth welfare states,
free from the downward competitive pressure of global money markets.
Happily, the advent of the Euro will make it easier to begin restoring something like
Bretton Woods. It is very likely that the relative values of the three major
currenciesthe Dollar, Yen, and Eurowill be tightly managed by their respective
governments. The run-up to the Euro has already resulted in lower interest rates, and an
associated economic boost, for many of the European nations with historically weak
currencies, such as Italy.
The question is whether the concert of center-left
governments will take the next step and also pursue strategies to limit speculative global
capital flows. For example, Professor James Tobin's proposed tax on financial
transactions, long scorned by free-market economists, is getting a respectful second
hearing, as analysts look for ways to rein in private global moneymarkets. Another good
idea was devised by Chile, certainly no enemy of free markets. The Chileans required any
foreign investor to place thirty percent of the amount of the investment on deposit with
the Chilean central bank for a year, as insurance against capital flight. They suspended
this requirement in 1998, because their more laissez-faire neighbors were successfully
competing for capital. But a global regime that rewarded longer term cross-border
investments and punished purely speculative ones would be salutary. Such measures move the
world back toward regulated capital markets. Removing currency values and capital
movements from purely speculative swings and resulting recessions such as the current Asia
panic would allow both higher growth and more managed national economies.
The world*s governments need to take these question seriouslyboth to create
more domestic room for policy and to allow the world a higher rate of growth. The ancient
question of how market forces need to be tempered for the greater good of the economy and
the society is now a global one. Either the irrationality of global capital flows will be
tempered once again by democratically elected governments, or those governments and their
democratic electorates will continued to be enfeebled by the world*s money markets.
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