Rethinking failure

Neoliberalism’s ‘unfailures’

Economic policies enacted under neoliberalism have often failed to meet their objectives, but have remained unchallenged. Why do certain policy failures have so little impact?

Political economists are fascinated by crises and the failures that they so often reveal: the collapse of the Gold Standard, the Great Depression, the stagflation crisis, the Great Recession. We see them as the inflection points in our economic history—the moments when the failure of one economic order is made visible and another takes its place.

Yet economic failures—even very big ones—do not always have this kind of political salience. The 2008 global financial crisis began as a massive, highly public failure for contemporary neoliberal theory and practice. A decade on, however, what is most striking is how little the very evident failures of neoliberalism have translated into meaningful changes.

This is not the first time that significant economic failures did not have the kind of political effects that we might expect. Such “unfailures” are actually a crucial, but often overlooked, part of our political economic history.

The late 1970s and early 1980s are a moment in time that is often seen as a resounding success for neoliberal theory and practice—when Margaret Thatcher and Ronald Reagan swept into power and turned their back on decades of Keynesian orthodoxy with a series of dramatic and ruthless policies that put Friedman and Hayek’s ideas into practice. Monetarism, supply side economics and the rational expectations revolution turned economic theory and policy upside down. Or did they?

In fact, this particular narrative of the early success of neoliberal ideas, which is not only common in popular accounts but also makes its way into many textbooks and serious political economy scholarship, is largely a fabrication. These ideas were all failures—and yet they have been rewritten as successes after the fact.

Why do some policy failures lead to dramatic changes in economic theory and practice, while others are ignored or forgotten? Why are some failures quiet, while others resonate loudly through history?

These are some of the central research questions that I tackled during my time as a Leverhulme Visiting Professor at SPERI. I communicated some of my initial findings on “unfailures” in a Leverhulme Lecture and the Annual IPE Lecture at the University of Warwick, and also continued to explore the issue through research at the National Archives in London during my stay in the UK.

What were the early failures of neoliberalism?

Monetarism was introduced with great fanfare and then quietly abandoned just a few years later. The early supply-siders’ promises that lower taxes would spark a massive spurt in growth without producing a large deficit quickly turned out to be wrong. Meanwhile, the quick shift in the public’s expectations that policymakers had counted on to provide a relatively painless transition to a lower inflation economy simply didn’t materialize. In other words, the three key theories underpinning the early Reagan and Thatcher economic revolutions—monetarism, supply side economics and rational expectations—all failed the initial transition from theory to practice.

What’s more, the archival record in both countries shows very clearly that policymakers were very well aware of these failures at the time, even as they struggled to understand them (and even if they denied them in later years).

One of the more entertaining letters that I found in the National Archives make it clear that although the Americans and the British were on the same ideological side, they were also quite capable of levelling the charge of failure against each other.

The US Treasury Secretary, Donald Regan, gave a speech to Congress in which he labelled the British efforts to control their money supply an abject failure, inspiring Sir Kenneth Couzens, a senior British civil servant, to write a very testy letter to his American counterpart. After enumerating the many obvious mistakes that Regan had made in describing the British economy (including suggesting that “practically 60% of the population in Great Britain … was working for the government”), he concluded:

“it is unhelpful, and also unrealistic to suggest that we have failed because of policy mistakes whereas you won’t because you won’t make any”.

Of course, the Americans did make lots of mistakes, and even admitted a few of them—mostly in confidential documents, although sometimes more publicly—at some personal cost. The US Budget Director, David Stockman, lost his job after he was quoted in The Atlantic arguing that, when it came to both the Reagan Administration and the Congressional Democrats’ budget proposals, “none of us really understands what’s going on with all these numbers.”

Why then did the failure of the early days of Thatcher and Reagan’s brave new neoliberal experiment not lead to the rejection of their economic vision?

Part of the answer lies with the success of key politicians’ discursive strategies of denial, rebranding and mythologizing. The US Undersecretary for Monetary Affairs, Beryl Sprinkel, a Milton Friedman student, gave speech after speech denying the failure of monetarism. His argument was identical to the one made by Ben Bernanke, after the global financial crisis—which was to argue that the problem was not the economic theory itself but its operationalization (although Sprinkel blamed the Fed Chairman of the time, Paul Volcker, whereas Bernanke, being the Fed Chairman himself, had to find someone else to blame).

In the UK, the preferred strategy deployed by Thatcher’s cabinet members was to rebrand monetarism as a more general belief in “sound money” which remained core to the Conservative’s mission, even as it gave up on actually targeting the money supply.

But no matter how silver-tongued the early neoliberal advocates may have been, they would not have succeeded if the world itself did not also change in important respects. Inflation did come down in the end. Not because of monetarism, supply-side economics or rational expectations – but because of massively painful and deflationary recessions in both countries—the worst since the 1930s.

Why should we care about the early days of neoliberalism today?

When we see the Teflon-like resilience of neoliberalism in the face of its very obvious failures, building a more sustainable and just economy can seem beyond reach. It is easy to start treating the rise, spread and persistence of neoliberalism as almost inevitable.

If we instead see neoliberalism for the messy, failure-ridden experiment that it was in its early days, we might also begin to understand its ongoing influence as contingent rather than inevitable—and to imagine a life after neoliberalism.

This blog was originally posted on the SPERI blog, 5 June 2019.

Political economy

How austerity measures helped fuel today’s right-wing populism

Ten years ago, on Oct. 3, 2008, United States President George W. Bush signed the “Troubled Assets Relief Program” (TARP) that promised $700 billion to support banks and companies that were hit by the global financial crisis.

As U.S. Congress granted its support for the historic bill, it seemed like liberal democracy was rising to the challenge posed by the global financial crisis. Yes, the bill would be very expensive for American taxpayers, but the cost seemed justified in the face of the potential collapse of the global economy.

A decade later, the financial crisis is a distant memory, the TARP funds have been repaid with interest and stock markets are reaching new heights.

Yet switch from the business pages to the front page and a much darker picture appears: a particularly virulent strand of right-wing populism is popping up around the world, while Doug Ford and Donald Trump are wreaking havoc with our democratic institutions.

Exploiting weaknesses

It turns out that the greatest cost of the 2008 global financial crisis was not the bailouts — but rather the cost to our democratic system.

Conservative populists have been able to exploit a series of weaknesses in liberal democratic society — weaknesses that predate the global financial crisis, but were exacerbated by the failure of our political leaders to respond effectively to it.

In this Sept. 17, 2008, photo, a trader rubs his eyes as he works on the floor of the New York Stock Exchange. The financial crisis touched off the worst recession since the 1930s Great Depression. (AP Photo/Richard Drew)

In the decades leading up to the 2008 crisis, governments rejected the more cautious approach to economic management that had emerged after the Great Depression and the Second World War. Those traumatic historical events produced policies that focused on employment and economic stability, delivering a decrease in inequality and fuelling solid economic growth.

Those concerns were pushed aside in the 1980s and 1990s, as governments of all political stripes sought to focus on inflation rather than unemployment, and to roll back regulations in the belief that this would produce a more dynamic economy.

Cuts to social spending

The results were a massive growth in the size of the financial sector and a tolerance for increasingly risky investments with little genuine oversight — a recipe for financial disaster, as we saw unfold a decade ago.

As governments sought to get leaner and cut back on social spending, as the Jean Chrétien Liberals did in the 1990s, inequality grew and middle-class incomes stagnated. Many middle-class families adapted by dipping into their home equity with lines of credit or simply loading up on credit-card debt — another time bomb that exploded in the U.S., Britain and throughout Europe in 2008 but has yet to detonate in Canada.

Once the global financial crisis hit, it became much easier to see that the economy wasn’t working for everyone.

In the U.S., the Federal Reserve Bank of St. Louis estimates that nine million families lost their homes in that crisis — between 10 and 15 per cent of all homeowners. In the U.K., between 2008 and 2009, the sudden drop in housing prices, pension funds and equities translated into a loss of 31,000 pounds (or almost $50,000 Canadian) for every household.

Drowning in debt

The household debt that had seemed like a clever solution to stagnating wages suddenly became a huge problem for those families who found themselves with a house worth a lot less, one of their household’s jobs gone and debts still to pay.

Governments’ response to the crisis only made things worse. Sure, in the short term, they acted to shore up the financial system and used fiscal stimulus to reduce the severity of the recession. But by 2010, just about every western government, including Canada’s Conservatives, had changed their tune and shifted back to austerity, arguing that we couldn’t afford more fiscal stimulus.

Austerity measures land hardest on those who most need government help — like those families who were down one job and couldn’t make the payments on a mortgage that was worth more than their house.

A girl smiles after writing slogans on Whitehall during a protest against the Conservative government and its austerity policies in London in June 2015.(AP Photo/Tim Ireland)

It also turns out that this rapid shift to austerity was counterproductive —damaging the recovery in many countries and actually increasing debt-to-GDP ratios.

Inequality also grew after the crisis. As economist Branco Milanovic’s research shows, the stagnation in western middle-class wages expanded to include upper-middle-class earners. In fact, the only people who really benefited from the austerity push were the hyper-rich.

Meanwhile governments around the world billed their austerity measures as necessary and inevitable — denying any responsibility for the suffering these policies caused.

Economics helped fuel populism

Add it all up and you get ripe conditions for the kind of economic insecurity and frustration that is fertile ground for populist sentiment. Of course, the rise of soft authoritarianism cannot and should not be reduced to economic factors. But those factors do play a role.

After all, if political leaders tell us that they have no choice but to enact these painful economic policies — that these issues are beyond democratic control — why should we be surprised when someone like Donald Trump, Nigel Farage or Doug Ford comes along and promises to take back — and give them back — control?

In order to oppose the authoritarianism of these conservative populists and challenge their lies, we need to start by recognizing that the economic experiments of the last few decades have failed the ultimate test: building a prosperous and democratic society for all.

This article was originally published on The Conversation, October 1, 2018.

Finance in crisis

Why we aren’t ready for the next financial crisis

Ten years ago, as the global economy slipped ever-closer to a total meltdown, regulators were slow to recognize the severity of the problem because they were looking in the wrong direction.

The transcripts from the US Federal Reserve’s policy-making committee meeting that took place on September 16, just as the financial giant, Lehman Brothers, was allowed to fail include 129 mentions of “inflation,” and just five of “recession.” Not surprisingly, given their narrow focus on inflation, they voted to take no action to support the economy, just days before it began to go into free-fall.

We will never know how much the Federal Reserve’s obsession with inflation cost the global economy—not just through that delayed response, but also due to the previous decades of focusing on low inflation rather than jobs and growth.

In retrospect, the Fed’s lack of awareness of the wider economy in 2008 seems crazy. And yet, we are running the risk of doing something very similar today. As stock markets continue to a historically long bull market, we’re partying like it’s 2007, even as both Canadian and global economies edge into ever-more dangerous territory. And we simply don’t have the tools to respond when the next crisis hits.

Why are we acting like the 2008 financial crisis was a blip, when it should have been a wake-up call to transform our financial and economic systems?

During the immediate aftermath of the crisis, of course, governments and central bankers did take bold action. They experimented with quite radical policies, particularly in the US and in Europe, including massive bail-outs, quantitative easing, and even negative interest rates. Yet, these changes were largely framed as exceptional—temporary aberrations rather than a sign that the tools needed to manage the global economy had changed for good.

Some more sustained efforts to reform the regulatory system have been successful. Big banks are better capitalized now than they were before the 2008 crisis and regulators have more power. But dig a bit deeper and it is remarkable how many things remain unchanged. The same big three credit rating agencies whose misleading evaluations helped to blow up the system still account for over 96% of all ratings. Big American financial institutions are using loopholes to move their riskier derivatives portfolios offshore where they aren’t regulated. And the real-estate market, which was at the heart of the last major crisis, is a ticking time bomb as interest rates slowly climb back up to more normal levels.

What happened to the big talk of reform that we heard in the early days of the crisis?  Policymakers discussed much higher leverage ratios (which would restrain the riskiness of banks’ financial bets), the comprehensive regulation of derivatives, and a financial transactions tax that would make it more costly for big investment firms to make very short-term, often destabilizing, financial bets.

But in the end, the reforms that were made were tweaks rather than major changes. Governments around the world failed to introduce the kinds of wide-ranging reforms needed to prevent and manage the major financial meltdown. When the next economic crisis hits (and yes, there is always another one), our central banks—and our governments—will face much higher levels of debt, far less room to lower interest rates, and few new tools to respond.

Who is to blame for this current dangerous situation, and our woeful lack of preparedness?

CIBC’s CEO, Victor Dodig, recently blamed central banks for the current instabilities in the global financial system—suggesting that they kept interest rates too low too long, creating distortions in housing markets and in the emerging market economies who borrowed cheaply and are now having to pay more than they can afford. Dodig is right to suggest that these are serious warning signs that the economy may be in trouble soon. But he’s pointing a finger in the wrong direction when it comes to allocating blame.

Central banks only kept rates this low because it was the only tool at their disposal to keep the economy going. The real blame rests with the many western governments, including Canada’s Conservatives, who didn’t have the political guts to do what was needed to reform the global economy. These governments flirted briefly with stimulus and discussions of more systematic reform, and then shifted all too rapidly to a package of austerity and a few minor reforms.

The heavy lifting for supporting a still-ailing economy was left to the central banks—who found themselves keeping rates low far longer than they had ever anticipated.

Higher rates without any government action to support the economy would only have made things worse, sooner. What we needed then, and still need now, is more systematic economic reform of the kind that was only briefly discussed and then ignored after the 2008 crisis.

It may well be too late to do much more before the next economic crisis hits. We just have to hope that the next crisis produces some more creative thinking and, above all, some braver political action to reform the global economy for the long haul.


This blog post originally appeared in the Ottawa Citizen on September 20, 2018.

Economic exceptionalism

Why nationalizing the Trans Mountain Pipeline is undemocratic

When Canadians woke up to learn that they were the proud owners of a run-down pipeline, many of them no doubt asked themselves, “Can the government just do that?” After all, nationalization hasn’t been a popular government pastime in Canada since the 1970s.

The answer is that of course the government can do that—and has done so in various ways over the past decades, through bailouts, subsidies, and all-out nationalizations when markets and firms run into serious trouble. Yet, the kind of emergency bailout that we are witnessing today should still raise alarm bells among those who believe that major economic decisions should be subject to genuine democratic debate.

Of course, the Liberal government has been quick to assure us that the nationalization is an entirely temporary measure, only necessary because of the current crisis, which requires a use of exceptional government powers to bail out a major economic sector that is vital to the Canadian economy.

If this language seems oddly familiar, it’s because it’s almost exactly the kind of exceptionalist rhetoric that we heard from the Harper Conservative government during the 2008 global financial crisis (as well as the Bush administration in the United States and the Labour and then Conservative governments in the United Kingdom, to name just a few).

Ten years ago, it was the major auto companies that received a government bailout of $13.7-billion in Canada, while in the US and the UK, auto companies, major banks, and financial institutions were the recipients of massive government injections, together with a few choice all-out nationalizations. The global insurance firm, AIG, alone received US$182-billion from the Federal Reserve Bank of New York.

While government intervention is a normal part of a market economy, not all such interventions are equally legitimate. When should a government break the normal rules of democratic deliberation and free-market economics and bail out big firms with taxpayer money?

A quick comparison with government responses to the 2008 global financial crisis helps to clarify what’s at issue here.

In both 2008 and today, the government’s actions were peremptorily announced and driven by the prime minister and cabinet without full democratic consultation. The justification then, as now, was that the needs of the market actors were too immediate to be subjected to the normal contentious processes of democratic politics.

Then, like now, we were told that these were temporary, exceptional government actions and were necessary because of the massive crisis that the economy faced.

Then, like now, we were also promised that the investment would be repaid, as the private sector regained its ground. (In fact, in the Canadian case, The Globe and Mail reported that the Harper government sold back its shares in the auto sector too quickly and the taxpayers took a $3.5-billion loss.)

Yet, that is where the parallels end.

In 2008, there was arguably a very legitimate concern about an imminent global financial meltdown. The US government had initially refused to take the bailout route and had let the financial firm, Lehman Brothers, fail. The firm’s failure produced a massive global market-wide panic, as banks wondered who would be next to go under and refused to lend to each other, nearly bringing the financial system to a halt. Although it is impossible to know what would have happened without massive government intervention in the United States, Canada, and around the world, there is a strong case to be made that the general public good was at serious risk as we faced the prospect of another Great Depression.

Where are the major risks to the public good today? Arguably, in this case, they are those identified by the people arguing against the pipeline: the very real risks of oil spills on the West Coast and the potentially catastrophic costs of climate change.

There is no massive economic crisis in the offing. Yes, there is significant uncertainty surrounding the pipeline, but any firm in this business should know by now that pipelines are immensely political, and build that into their business plan. Yes, Alberta’s economy would take a big hit from losing the pipeline deal – and it will face significant economic challenges in the future as the province and the country make the necessary shift toward a low-carbon economy. These are serious policy challenges that require genuine public debate and innovative public and private investment – not an imperious bailout.

A crisis needs to be serious, and the threat to the public good very clear, for a government to legitimately bypass normal democratic processes. The Kinder Morgan Trans Mountain pipeline nationalization clearly does not meet this threshold. As such, it represents a particularly undemocratic form of economic exceptionalism.

This article was originally published by the Globe and Mail on 7 June 2018.

Political economy

Why we need to stop letting economic crises go to waste

There’s a popular adage that we should never let a good crisis go to waste. Yet, arguably, that’s what we’ve been doing for decades now. We’ve avoided facing the genuine political challenges that economic crises present us and lost these opportunities to build a more equitable, effective society.

Although we seem to have dodged the bullet of another economic meltdown, recent gyrations in the stock market remind us that economic crises always come back. We have not been so lucky politically, and are now in the throes of a major democratic crisis, with the rise of right-wing, xenophobic, broadly anti-democratic forces in the United States, Europe, and beyond.

These may seem like very different crises, but they are connected. The last few global economic crises all have something in common. Although they were politically dislocating — producing major winners and losers — most governments responded by pretending that they had technical-economic fixes. Our governments contributed to the wider technocratic trend of narrowing political debate by pushing many of the most pressing questions — like inequality, which many of these policies ended up increasing — off the table.

As political critics and philosophers like Michael Sandelhave argued, this distancing of major economic decisions from democratic debate — and the resultant narrowing of the political debate — have played crucial roles in the current democratic crisis.

I have spent much of my career trying to make sense of economic crises and the politics of our responses to them. (I suppose this makes me something of an academic ambulance chaser!) While I began optimistically about how we could learn from our mistakes and make constructive changes, over time I have seen a depressingly familiar pattern emerge.

I went back to grad school because of the 1994 Canadian debt crisis. I was a parliamentary intern at the time, working on the Hill, trying to make sense of why Chrétien’s Liberal government was pursuing an austerity agenda that threatened so much of the social infrastructure that the (first) Trudeau Liberals had put into place. Back then, Canada was a bit like Greece (but on a smaller scale, happily).

After the Mexican peso crisis, the bond markets were skittish, and the level of federal and provincial debt began to look worrying. To regain bond market confidence, we were told, the government must slash its debt through austerity measures. We had no alternative. This was simply a matter of necessity, not up for political debate.

Of course, these decisions did have profound political consequences. As a recent TD reportshows, 1990s federal cuts to transfer payments — money that the provinces used to support health, education, and welfare — sharply increased the level of inequality in Canada. But we were told that economic decisions were not political choices.

The Canadian government was not alone in adopting this response to a crisis brought about by global economic pressures. This same mantra of economic necessity trumping political debate was also at the heart of Bill Clinton’s and Tony Blair’s political strategies throughout the 1990s.

The 2008 global financial crisis should have laid to rest any delusions about the unquestionable superiority of Western hyper-globalization, as Dani Rodriklabels it. This, many of my colleagues and I hoped, would finally be the crisis that would lead to some more fundamental rethinking of the current global economic order.

Briefly, it looked like more transformative changes would be adopted. There were discussions about a global “Tobin Tax” on international capital flows. There was talk of imposing much more realistic capital requirements on banks to make them less reliant on taxpayer-funded bailouts. It even became possible to talk about inequality — a problem that had been sidelined before, even at the World Bank, where discussing absolute poverty was far more politically palatable. And of course, there was the Occupy movement and wider social pressure to acknowledge and challenge growing inequality.

In the end, though, as Eric Helleinerhas put it so convincingly, this was a “status quo crisis.” The big questions were pushed off the agenda, and very little actually changed. Economic necessity trumped political possibility once again.

Ironically, President Obama’s chief of staff, Rahm Emmanuel used the phrase “you should never let a good crisis go to waste” to describe the 2008 global financial crisis. And then that administration ultimately went right ahead and let it go to waste. Western liberal democratic governments not only failed to seize the moment to try to fix what was going wrong with economic policies, but they also missed their chance to narrate the crisis as one that could be resolved through genuinely open, democratic political and economic reforms.

Anti-democratic forces of the right and the far-right have jumped into that void and filled it with their own dark stories that paint globalization in racist and anti-Semitic terms and treat democracy as being broken beyond repair.

If we are to challenge these hateful narratives, then our political and economic leaders must let go of the narrowly technical language of efficiency and necessity. Instead, they must start talking about the politics of economics. They must acknowledge that there are always winners and losers. They must see economic efficiency as a means to endhuman flourishing rather than as an end in itself. And they must reinforce, promote, and protect our key democratic values.

If we do so, next time we’re hit by a crisis (and we will be), rather than letting it go to waste, we may just be able to use it to tackle these problems in a genuinely democratic forum.

This blog post was originally published on the CIPS blog, April 30, 2018.

Finance, Inflation

Don’t panic! (at least not about inflation)

As financial markets have been showing their panicky side in the last few weeks, we’ve been hearing various accounts of what’s driving the volatility. One of the key narratives goes something like this: 1) wages are moving up in the United States, and 2) inflation is starting to increase, which could well 3) produce a spike in inflation as was seen in the 1970s, which means that it’s likely that 4) central banks will start have to raise interest rates more quickly, potentially slowing the economy; ergo: 5) the sky is falling!

Although there are some reasons to be anxious (particularly if you’ve been betting on low stock market volatility or are having a hard time making your mortgage payments), the underlying narrative about the inevitability of a return to high inflation levels is highly suspect.

So, before we all start stocking up on gold and canned goods, let’s take a more careful look at each piece of this logic.

Yes – wages are finally starting to move up in the US, after almost a decade of stagnation. In January, US wages rose at a faster rate than they have since the recession, while the Federal Reserve predicts that inflation will continue to move up this year towards their goal. This is welcome news, given that the long recovery from the 2008 global financial crisis has not translated until now into reasonable wage gains.

In Canada, where I live and work, the story is more complicated: unemployment is lower than it has been since 1976, and inflation is moving slowly upwards towards the Bank of Canada’s 2% target, but wage pressures remain modest.

And in the UK, even though the Bank of England signaled its move into hawkish territory in February with inflation currently above the 2% target, inflation has started to slow again and wage growth is still tepid.

Yet, while the first two parts of the inflation narrative hold true, at least in the US, the next leap of logic, which warns of a sudden takeoff in inflation like that seen in the 1970s, is far less persuasive.

For those who are either too young to remember this decade (or aren’t quite as fascinated as I am by this period in economic history) it’s worth explaining that the 1970s are a bogeyman for investors and central bankers. Between 1971 and 1980, the post-war monetary order of fixed change rates was dismantled, the US dollar was delinked from gold, there were two OPEC oil crises that more than quadrupled the price of oil, and inflation rates got close to 15% in the US and Canada, and topped out over 25% in the UK.

At the end of this decade-long crisis, the central bankers decided to give monetarism a go—trying to slow the expansion of the money supply and raising interest rates dramatically. In the US, Federal Reserve Chairman Paul Volcker pushed the bank’s target rate close to 20%, while in Canada, mortgage rates went as high as 21%. Although the UK did push the bank rate up as high as 17% in 1979, Margaret Thatcher ultimately backed away from this particular strategy and turned to austerity as a way of squeezing inflation out of the economy through a painful recession.

While monetarism ultimately proved to be a failure, and there is still a great deal of debate about what caused and ultimately solved the 1970s’ “Great Inflation,” this traumatic experience paved the way to the current “new monetary consensus” in inflation-management policy, with its unwavering faith in central bank independence and very low inflation targets. Now, any sign that low inflationary expectations are becoming unanchored (i.e. people are receiving more reasonable wage increases), can produce panic.

Of course, no one wants to go back to the 1970s (and not only because of the dodgy haircuts). But how real is the risk that we might end up repeating history?

There several good reasons why we should be skeptical of such leaps in logic.

For one thing, inflation not only depends on people’s expectations of where prices are headed, but also depends on their ability to act on these expectations—by, for example, demanding wage increases. In the 1970s, workers had considerable power to make those demands, with roughly twice as many unionized in the UK and the US than today. As the recent recovery from the 2008 crisis has made very clear, employers now have far more power in determining wages than workers.

It is also worth remembering that the 1970s experience of high inflation was linked to a series of massive shocks—most notably the OPEC crises.

If we aren’t likely to see a return to the inflationary spikes of the 1970s, then what should we be looking for central bankers to do today? Should they double down on inflation targets as many hawks have suggested and move aggressively to pre-empt any jumps in inflation?

The short answer is no.

Just because inflation is finally moving towards the target after nearly a decade of trying to get it there doesn’t mean that inflation targets actually make sense—particularly the extremely low targets that have recently become the orthodoxy.

As I have argued in a Foreign Affairs article, making very low interest rates the only goal of monetary policy has considerable political costs—costs that become very apparent when even the most modest of wage increases for hard-working families becomes a sign that we need another round of monetary austerity.

Yet that doesn’t mean that we are quite out of the economic woods.

Although inflation isn’t likely to skyrocket, even a modest increase will tend to lead to higher interest rates, which will reduce the easy credit that has been making stock markets so bubbly of late. Since stock markets are prone to panics as well as manias, it’s likely to be a rough ride for some time.

A modest rise in interest rates will still pose some very real risks for those economies (like Canada’s) with significant household debt.

With interest rates still extremely low and government debt levels already high, we have fewer tools for coping with the next major bump in the economic road.

And, of course, Donald Trump is still the President of the United States and Brexit remains a source of seemingly boundless economic uncertainty.

So, feel free to panic—just not about inflation.

This blog was originally posted, in a slightly different form, on the CIPS Blog and on SPERI.comment.


Bring Politics Back to Monetary Policy

The current battle over the liberal world order seems to be about trade, climate, and security policy. But monetary policy has also become an increasingly important arena of conflict. Populist leaders seem to love nothing more than denouncing central bankers and challenging the legitimacy of the current monetary order, as Donald Trump famously did during the U.S. presidential election campaign when he accused central bankers of “doing political things” by keeping interest rates low.

In responding to this challenge, it is tempting to point to central banks’ independence from politics as a defense against the dangers posed by erratic leaders. Yet that would be a risky move. It turns out that decades of appeals to technocratic exceptionalism — the idea that monetary policy should be shielded from democratic oversight — have had costs. Indeed, this exceptionalism can lead to the very politicization of monetary policy that it seeks to avoid.

Central banks play a paradoxical role in today’s liberal democracies. Their work is highly technical, yet the consequences of their actions are inevitably political, producing big winners and losers. They wield great power in democratic societies, and yet they are unelected — because of the fear that politicians tend to push up inflation to appease their bases unless interest rate policy is insulated from democratic pressures.

The underlying tensions in central banks’ technocratic exceptionalism became particularly evident in the aftermath of the 2008 global financial crisis. In recent years, the banks’ entire mission has become unclear: for decades, they have been focused on fighting inflation, yet since the crisis there has been no inflation to worry about despite massive central bank interventions. In fact, the opposite fear — this time, of deflation — has driven extraordinarily loose policies and a great deal of experimentation, ranging from massive bailouts to quantitative easing and ultra-low (even negative) interest rates. Although more normal conditions appear to be on the way at last, the decade of exceptional policies has taken its toll on the legitimacy of the current global monetary order.

The loudest critics of central banks have been on the populist right: Victor Orban’s regime in Hungary, pro-Brexit forces in the United Kingdom, Marine Le Pen’s Front National in France, Tea Party Republicans, and even President Donald Trump in the United States. Riding the growing wave of public skepticism about experts and elites, these illiberal populists have identified central bankers as among the worst offenders.

To save the current monetary architecture from such challenges — an absolutely vital task in a world in which the reliable circulation of money serves as the foundation for economic and political stability — monetary policy needs to have a more robust form of democratic accountability built in. Only then can nations ensure that central banks genuinely meet the needs of those for whom they work: the people.

Of course, with the forces of populist illiberalism on the rise, it is hard not to be relieved that at least some aspects of economic policy are insulated from political oversight. If central bank independence is supposed to protect monetary policy from excessive political pressure, then what better example of its merits than the fact that at least a little of the economy is off-limits to the Orbans and Trumps of the world?

Yet there is a peculiar irony at work here: this argument suggests that our best response to illiberal tendencies is an equally illiberal strategy of excluding monetary policies from democratic accountability. Although technocratic exceptionalism is tempting, especially in the face of the threat of illiberal democracy, it is also quite dangerous, since it reduces accountability even as it never quite succeeds in getting the politics out of monetary policy. This disconnect with the public ultimately fuels the kind of populist backlash the world has recently seen, further politicizing monetary policy with potentially very worrying consequences.

In the short term, we may well be relieved to know that the norms of central bank independence and rule-based policy provide a measure of protection from populist tendencies under the Trump administration and elsewhere. But when Trump ideologue Steve Bannon criticizes capitalism for its amorality and invokes the concerns of middle-class and working-class people, all the while defining the alt-right as their champion, we need to come up with a better answer than to encourage people to have faith in the two percent inflation target.

The feature-article-length versionof this blog was originally published by Foreign Affairson 6 December 2017. It is now also available as a chapter of the e-book A New Financial Geopolitics? The U.S.-Led Monetary Order in a Time of Turbulence.

Accountability, Canada, Inequality, Political economy

Scrooge in Paradise: Why Private Wealth is a Public Issue


As global inequality grows to “extreme levels” — as revealed in the just-released World Inequality Report — it is hard not to wonder what it bodes for the health of liberal democracy — around the world and here in Canada.

Even though our growing levels of inequality may not come close to those in the United States, recent conflict-of-interest stories about both Liberal and Conservative MPs, a growing reliance on tax havens, and cash for access scandals all raise serious concerns about the influence of the wealthy in Canadian politics.

If money talks, then the rich are now deafening the democratic system. As economist Branko Milanovic explains, “the higher the inequality, the more likely we are to move away from democracy toward plutocracy.”

One of my favourite recent New Yorker cartoons shows two men in business suits looking out from a lavish corner office, as one says to the other, “Part of me is going to miss liberal democracy.”

Although we’re not quite there yet, the dark tone of the cartoon reminds us that the economic “haves” can be just as likely to become disaffected with democratic politics as the “have-nots” often singled out as the source of populist pressures (in fact, elites have historically been the most important factor behind de-democratization, as Charles Tilly notes in a recent book).

Reading that New Yorker cartoon, it is hard not to imagine that at least one of those businessmen is likely to be a good friend of President Trump’s. He’s turning conflict of interest into performance art, talking up his daughter’s clothing line and getting national park gift shops to sell Trump branded wine.

Yet, while Trump and entourage demonstrate a particularly brazen willingness to blur the line between public office and private gain, the problem is a much wider one — with echoes here in Canada.

The Paradise papers revelations, the cash for access scandals, and the use of “loopholes” in ethics screens are all legal strategies for giving the wealthy an unfair advantage in a system where we are all supposed to be equal as citizens. Each of these strategies works in a different way to undermine the democratic culture that makes our political system work. In the process, they further blur the line between public good and private gain, eroding the trust that makes democratic politics viable.

Cash for access is the most straightforward. It takes the existing informal advantage that the wealthy have to ensure that their voice is heard politically and weaponizes it. Why bother voting as an ordinary Canadian when politicians will spend their time listening to someone paying $10,000 for a rubber chicken dinner?

The “loopholes” in ethics screens that various Liberal cabinet ministers have admitted to using, as well as the failure of certain Conservative MPs to disclose business ties to China, work more subtly. They create the possibility that public office holders will be swayed by their private assets as they make decisions designed to serve the public good. Why bother being an engaged citizen when you don’t know whether those making the decisions are pursuing their own interests or ours?

The Paradise papers tell us that many of the public figures who speak and act in the name of the public good use tax havens to avoid paying their fair share. Why bother buying into a democratic system requiring that we all do our part by paying taxes when those with the most power are actively avoiding doing so?

Of course, the line that we draw between public and private in a liberal democracy is always something of a fiction. Liberal political thought tells us that everyone is an equal citizen in the public domain, with an equal right to participate politically. Liberalism is also based on the premise that we should be free to pursue wealth accumulation in our private lives, meaning that we will often be quite unequal in economic terms.

In theory, this private inequality should not affect our formal public equality as voting citizens. In practice, things are rather different, as wealth often translates into a greater political voice — as any government that has tried to put a halfway house into an affluent neighbourhood or to reduce tax advantages for doctors incorporated as small businesses will tell you.

To keep a democracy alive, and to ensure that everyone has a meaningful voice and stake in the political system, we must do two things. We must work to keep those private inequalities from getting too large (via public education, social programs, a progressive tax system, etc.). And we must work to minimize the ways in which private inequalities translate into unequal influence (via election financing laws, conflict of interest provisions, etc.).

In Canada, we have made progress on some of these measures, but we have also fallen behind in many respects. As recent census data shows, earnings inequality has continued to grow in Canada over the last decade, while the top 1% increased their share of total income in 2015.

When trying to figure out how we got here, there is blame enough to go around. The Chrétien Liberals began the trend towards growing inequality when they gutted transfer payments for social programs in the 1990s. Inequality grew under the Harper Conservatives, who also eroded some of the other bulwarks against buying political influence, notably through reversing changes to election financing laws, making parties more reliant on private donors once again.

Although the Trudeau Liberals have clearly stated their desire to reduce inequality, and have begun to tackle some of these problems, their own recent conflict of interest scandals suggest a very long way to go before the political culture in Ottawa starts to change.

As that New Yorker cartoon reminds us, unless we start taking the problem of inequality much more seriously now, we may soon find ourselves thinking nostalgically of the “good old days” of liberal democracy.

This blog post originally appeared on the CIPS Blog on December 19, 2017.


Why Trump’s recent actions should cause us all to rethink our policies

silent-majority-690x450As Donald Trump makes it clear that he is intent on pursuing his rash and racist agenda come what may, we might be tempted to stand back, count our blessings and try to minimize the damage.

We need to be bolder than that. Not only in the short-term, as we counter his hyper-nationalist rhetoric, but also in our longer-term thinking.

The fact of Trump’s victory, like the Brexit vote and the rise of the extreme right in Europe should for us to rethink many of our policies today. How did we let this happen? This is the kind of question that was asked over and over again after the Second World War, as scholars and political leaders tried to understand how populations could elect fascist leaders.

This time around, we need to ask ourselves these questions before things get any worse, and be open to rethinking our policies in significant ways. And, like those political leaders who sought to build a better world after the Great Depression and World War II, this means thinking holistically about the political and economic lessons that we can draw today:

1) Don’t be smug.

It’s far too easy to sit back and feel morally superior in the face of the growing racism and intolerance in the United States. We do moral superiority very well here in Canada. We played that card after the 2008 global financial crisis, and we’re quite likely to do it again. Yet, we need remember that Trump didn’t need (or get) a majority to be elected. He just needed enough support in the right places.

If we go back to the last Canadian election—or the current Conservative leadership race—we can find a lot of nasty, divisive rhetoric being bandied about. In fact, as Thomas Homer-Dixon argued very effectively, the debate about the niqab in Quebec played one of the most decisive roles in ensuring that the Liberals were elected, by making it clear that the NDP wouldn’t win Quebec, and allowing all of the anyone-but-Harper voters to coordinate their preferences around the Liberals.

That’s not a particularly strong mandate for smugness.

And that means that we have to work hard to make sure that we don’t go down the same xenophobic route that our American cousins are on right now.

2) Learn from history

There are no simplistic causal arrows linking the neoliberal economic policies of the past few decades to the rise of Trump, Brexit and the hard right in Europe—these events have complex origins.

Nonetheless, we would be foolish to ignore the parallels with the 1920s and 1930s, the last time in modern history that we saw the level of economic deregulation and inequality that we see today. The rise of fascism came hard on the heels of the Great Depression, making it abundantly clear to those who sought to rebuild after the Second World War that global and domestic political stability ultimately depend on economic stability and security—for everyone.

The results of those reflections were some of the most important changes in the way that we organize our economy on a global and domestic level, including the creation of multilateral financial institutions (the International Monetary Fund and World Bank—rather different creatures then than they are today), the regulation of financial flows, the development of the welfare state, and the broad commitment to full employment as the primary economic policy goal.

Fast-forward to today, and we find that many of the policies introduced in that post-war period have been eroded, dismantled or reversed. While the last few decades’ deregulatory binge may have afforded us a measure of economic growth, it was not without its costs. If the 2008 global financial crisis made the economic costs all too apparent, the rise of intolerance and protectionism should make its political consequences very clear.

3) Reduce inequality, and work to build a dynamic and inclusive economy

As we seek to respond to the challenges of a newly protectionist US and a still-lackluster economic recovery, we need to see the reduction of inequality and the creation of an inclusive economy as a key priority—not a luxury.

This means that we need to do better than we have in the recent past, when the Canadian government has given in too quickly to external pressures and accepted greater inequality as a necessary cost of economic survival.

The Conservative government’s response to the 2008 global financial crisis is a case in point, as stimulus measures gave way to austerity far too quickly (even in the face of IMF recommendations to the contrary).

The Chrétien Liberal government made a similar mistake, in the mid-1990s, when they found themselves at the mercy of bond markets that believed that the Canadian debt was too high and cut social transfers so severely that they started us on the current trend towards growing inequality.

Today, we know that the supposed trade-off between equality and growth is an illusion. There is a great deal of research out there that shows that inequality is bad for growth, and that reducing inequality can make growth oriented policies much more effective.

4) Prepare for the next crisis

When the next recession hits (as it is very likely to do in the next four years), the odds are that we will find ourselves in real difficulty. With our conventional monetary policy tools already mostly tapped out, and Canadian consumer debt levels at an all-time high, the pain of the next recession is likely to be more widely felt (as it was in the US and the UK last time).

Combine that with the kind of xenophobic rhetoric that we’re seeing in the current Conservative leadership campaign, and the risks of a rise of intolerance here is very real.

Which is why that we need to take the political and economic lessons from Trump’s election very seriously indeed, and start to think more creatively, bravely and inclusively about the kind of inclusive society that we can build in Canada.

This blog was originally posted on the CIPS blog.

Accountability, Banking, Economics, Measurement, Political economy, Uncategorized, Uncertainty

Why we need better central bank accountability

As pundits debate whether the US Federal Reserve will raise interest rates again this summer or fall, we are reminded of just how much of the economy’s direction hinges on central bankers’ decisions.

Since the 2008 financial crisis, the power of central banks has grown, as they have used unorthodox tools to stimulate the economy, taken a greater role in financial regulation, and put themselves in more politically sensitive positions, including the tough debt negotiations with Greece.

In spite of this powerful role, central bankers are remarkably insulated from democratic oversight. As a recent “Buttonwood” column notes in The Economist, “Janet Yellen and Mario Draghi are very important players in the world economy, arguably more important than the US President or the German chancellor. And yet they are not elected; if voters do not like the job they are doing, they cannot get rid of them.”

There is a great deal at stake in decisions about monetary policy, as I suggest in a recently published article in Ethics & International Affairs. Central banks not only define the broad direction of the economy but also create winners and losers. Consider, for instance, the disparate reactions of a prospective first-time home buyer and a retired couple living on their savings to the prospect of yet another drop (or increase) in the interest rate.

Central bank independence in its current form is relatively recent. Elected leaders exercised considerable influence over monetary policy in the post-war era, seeking to achieve the right “trade-off” between full employment and inflation. It was only in the 1980s that policymakers moved away from this kind of Keynesianism and embraced the ideas of Milton Friedman, who advocated the creation of an independent monetary authority.

Friedman and other economists believed that if governments were given any discretion over monetary policy they would adopt inflationary policies because these were more likely to be popular with the electorate. They argued that the only way to ensure price stability was to radically limit the government’s influence over monetary policy by making central banks autonomous and requiring them to stick to a simple rule, such as an inflation target. By the late 1990s, central banks in over thirty countries had gone down this path and were using some form of inflation targeting.

The current model of central bank governance does provide for a certain kind of accountability—but only a very narrow one. Ensuring accountability generally involves three elements: broadly-agreed upon standards, information on whether they are met, and sanctions if they are not. Because the principle of central bank independence involves a very limited set of standards—specifically, the achievement of an inflation target—and very few opportunities for sanction, the main mechanism for accountability is provided by publishing information about the bank’s activities. Hence we have seen the rapid expansion of central banks’ commitment to providing more and better information about their models and decisions in recent years.

Unfortunately, while this informational form of accountability may have worked during the stable years of the “Great Moderation” (from the mid-1980s to the 2008 crisis), it is no longer up to the task in the volatile post-crisis era.

Bank of Canada Governor Stephen Poloz and US Federal Reserve Chair Janet Yellen have both suggested that growing economic uncertainty has reduced the effectiveness of simple models and rules. What these bank governors have not acknowledged (unsurprisingly) is the challenges that this growing uncertainty poses for existing forms of accountability.

If uncertainty limits the effectiveness of rule-based policy, then it ultimately requires greater discretion on the part of policymakers. This is not a problem in itself (here I would disagree with those Republican lawmakers who would bind the Fed even further with more stringent rules). More discretion does, however, require a more robust form of accountability.

There are three basic principles that should underpin any such reforms.

1) Fostering more deliberation and dissent

While the informational model of accountability obligates decision-makers to explain their actions, it reduces this process to a simple publication of data. What is missing is the back and forth of question and answer—the process of genuine debate and deliberation. By the mid-2000s, central bankers were being treated like oracles, with Alan Greenspan as the most revered among them. There must be more room for dissent—both among those with the power to set monetary policy and in the wider society that is affected by those policies.

2) Ensuring that central banks are answerable to the wider public

Because financial issues are complex and their impacts are often diffuse, monetary policy questions rarely become salient enough to mobilize public action. In this context, the power of sanction actually shifts away from the two groups to whom central bankers should be accountable—the government and the public—and toward financial actors, who can impose very serious sanctions on central banks if they disagree with their policies. Without overly politicizing monetary policy, we need to find creative ways of ensuring that central banks are more accountable to the wider public.

3) Broadening the objectives against which their actions are judged

One way of ensuring that monetary policymakers are accountable to the public is to ensure that the issues that affect citizens are reflected in the standards that guide bank policy. At present, most of these issues are not officially on the agenda, which is constrained by the goal of achieving a very low level of inflation.

A number of commentators have recognized this dilemma and have suggested that today’s inflation targets may no longer be appropriate. A recent Federal Reserve working paper suggests that increasing the current inflation target and supplementing it with a nominal GDP target makes economic sense. Such moves to broaden the objectives used to guide central bank decisions would also go some way toward increasing their accountability.

As central banks take on an increasingly powerful role in our political and economic lives, it is time to find new ways of ensuring that they are more fully accountable.

This blog first appeared on the Carnegie Council’s Ethics & International Affairs website.