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Canada, Economics, Inequality, Political economy

Bidenomics signals the end of the Third Way in economic policy

Biden’s first 100 days clearly signals the end of the Third Way in economic and social policy. With massive investments proposed in social infrastructure and education, a willingness to take a positive sum approach to budget deficits, and a commitment to fund those investments partly through higher corporate taxes it’s clear that the Third Way is now truly dead.

For those who may not remember (or who have been all too happy to forget) the Third Way was a strategy cooked up by Centre-left parties in the 1990s who hoped to ride the coattails of a highly deregulated economy and booming stock market while also mitigating some of its damage through targeted social spending. It was called the “Third Way” because it sought to distance itself equally from conservatives and from social democrats. This was the policy style that defined Clinton’s “triangulation,” Tony Blair’s “New Labour,” and Jean Chrétien’s deficit-busting mantra.

The cost of these policy failures has become obvious in recent years, as we have witnessed the 2008 global financial crisis, growing inequality, and the rise of populist resentment—not to mention the discovery that cuts to the public health infrastructure may have trimmed a few government budgets over the year but at the cost of thousands upon thousands of lives (and a shuttered economy) today.

Although Joe Biden was a card-carrying member of the Third Way club in his earlier days, given the huge costs of these mistakes, it is little wonder that he has recognized that it is time for a different approach to the economy.

There are at least three key ways in which Biden’s economic policy breaks with the logic of the Third Way, each of which has important implications for Canadian economic policy.

First, Biden has proposed a massive increase in social spending. His Families Plan aims to invest $1.8 trillion over 10 years and includes support for free universal preschool, paid family and parental leave, investment in child care and education. As Adam Tooze has pointed out recently, the theme of investing in families is in fact central to all three of Biden’s major spending initiatives: the $1.9 trillion Rescue Plan, which has already been signed into law, included a significant, but temporary, family allowance system, while the $2.3 trillion Infrastructure and Jobs Plan includes major investments in elder care.

In a few short months, Biden has upended decades of doomed neoliberal efforts to economize on government spending by cutting social spending and offloading on women the cost of what feminist political economists call “social reproduction”—the work of raising children, keeping households going, and caring for the old and the ill—which the formal economy depends on to keep going.

Although women’s double burden helped families to eke out more from stagnant wages, it seriously affected women’s capacity to participate fully in the formal labour market. As Biden, Justin Trudeau and others from the Centre-left have finally recognized, the savings that deficit-busting governments gained from not investing in women and children was therefore always a false economy. As Quebec has made clear, affordable daycare more than pays for itself with the extra tax receipts earned when women are fully active in the workforce.

Second, Biden has finally given up on the Third Way faith in the virtues of balancing budgets and reducing debt. It was always particularly painful to watch Clinton and Obama Democrats, Chrétien Liberals and Blair’s Labour Party cut and cut and cut away all of the programs that they had once helped to create in the belief that this was the only way to get government back on solid fiscal ground. (Of course, Republicans from Reagan onward never believed in balancing their budgets, even as preached the virtues of the “Washington Consensus” on those in the Global South.)

It seems that Biden and his Treasury Secretary, Janet Yellen, like Trudeau and our Finance Minister, Chrystia Freeland, have finally recognized that the zero-sum logic of balanced budgets as an end in themselves is based on a fundamental fallacy. If a country cuts back too much on its spending in the name of austerity, it can create a downward spiral of less consumption, lower investment and increased unemployment, actually slowing the recovery (as we saw in Greece and the UK after the 2008 crisis). On the other hand, the build-up of careful, productively-invested debt can generate decades of growth that not only make a country wealthier but also ensure that the wealth benefits more of its population.

Finally, Biden has proposed that some of the additional spending should be paid for through higher taxes on the wealthy and on corporations. He seeks to double the tax on capital gains and raise corporate tax rates from 21% to 28%. This is a crucial shift after decades in which the Centre-left has gone along with the neoliberal myth that helping out investors and big corporations ultimately trickles down to the rest of us, while raising their taxes only hurts consumers. In fact, as the Tax Policy Centre notes, most corporate taxes in the US are paid for by investors—with 70% paid by the top 5% of income earners.

This is the one area where Biden is clearly ahead of the Trudeau Liberals in challenging the myths of the Third Way. There has been no sign of the current Canadian government wanting to reverse the Chrétien Liberals’ sharp reduction in the capital gains tax or to raise corporate taxes (which were also slashed under Chrétien, and then further cut by Harper). It appears that the Trudeau Liberals are not ready to discard their unhealthy relationship with big business and challenge the Third Way myth of corporate trickle-down.  

Although it’s hard to say how much of this ambitious plan Biden will get through Congress, what is clear is that by challenging the damaging myths of the Third Way, Biden has shown that it is possible to imagine a more just economy, not just in the US but around the world.

This blog was originally published on the CIPS Blog, May 31, 2021.

Banking, Canada, Economics, Finance

The Bank of Canada must seize the pandemic’s historic moment and embrace innovation

Peter Dietsch & Jacqueline Best

The Bank of Canada, like central banks around the world, is currently facing enormous upheaval and uncertainty due to the enduring COVID-19 pandemic.

Will its leadership seize the moment as an opportunity to innovate and respond to the challenges ahead, including rising inequality and climate change? Or will it treat the present crisis as a temporary exception, hoping to return to business as usual once the pandemic recedes?

This spring, the bank released the results of its consultations with Canadians as part of its current mandate review. This is a historic opportunity for our central bank and the federal government to make the bank work better for the Canadian people.

As academics specializing respectively in philosophy and economics, and politics, we’d like to highlight two key themes that emerged in the Bank of Canada’s consultations with Canadians.

Wealth inequality, climate action

First, many Canadians are deeply concerned about the increasingly unequal distribution of wealth in this country — particularly by the way it has been driven by skyrocketing house prices. Second, some Canadians would like to see the Bank of Canada take the threat of climate change seriously as it plays its key role in ensuring price and financial stability.

How could the bank do better in tackling these two core problems — the scourge of rising inequality and the future shocks of climate change?

On inequality, there are many useful models around the world. Although Canadians like to think that we’re more progressive than our neighbour to the south, the United States is actually well ahead in rethinking the role of their central bank. Its recent shift towards what’s known as average inflation targeting, a strategy that seeks to balance inflation and growth over the medium term, gives it more flexibility to promote employment.

Such a strategy, potentially combined with a dual mandate of price stability and employment, would allow the Bank of Canada to pay more attention to the needs of all Canadians. The bank’s consultations with Canadians suggest that there is in fact considerable support for such a move.

While this would be a first and important step in modernizing the central bank’s mandate, we need to go further and take a more careful look at some of the unconventional policy tools that the central bank has been using in the last year.

Quantitative easing

Since the COVID-19 crisis took hold, the Bank of Canada joined other central banks in engaging in what’s called quantitative easing, initiating massive purchases of financial assets. As a result, its balance sheet has increased by close to 500 per cent since March 2020.

Such liquidity injections by central banks are clearly necessary. The question is how this liquidity should be injected.

Suppose your doctor prescribes you a drug that is known to have serious side effects. Wouldn’t you want her to look into alternative treatments? The experience with quantitative easing since 2008 shows that it has two serious side effects, both of which speak to some of the core concerns of Canadians.

First, it exacerbates inequality. While the central bank may want to see a good portion of the injected liquidity used to stimulate real economic activity, this is not something it can control. Instead, a lot of the liquidity has ended up in stock markets and housing markets, benefiting wealthy asset owners and helping to push the cost of owning a house beyond the means of many Canadians.

As Mark Carney, then governor of the Bank of England, acknowledged in 2014, “the distributional consequences of the response to the financial crisis have been significant.” The same is true today.

Second, when quantitative easing includes buying corporate bonds, it facilitates access to capital markets for the firms in question. Central banks appeal to the idea of “market neutrality” and claim that an asset purchase that reflects current bond volumes on capital markets does not favour anyone in particular. But in countries like Canada, when you buy a basket of corporate bonds proportional to the outstanding bonds on the market, you inevitably reinforce the status quo with its many companies that have large carbon footprints. That inevitably slows the transition to a more sustainable economy.

Politics comes with the territory

Some will caution that independent central banks should not get involved with such deeply political issues. The answer to this is simply: It’s too late for that. Political decisions come with the territory of central banking today, and we better develop innovative policy instruments to reflect this reality.

Other central banks are adapting already. In December, the Swiss National Bank announced that its asset purchases will exclude all companies primarily active in coal mining.

Perhaps more significantly, since Christine Lagarde has taken over as president of the European Central Bank, the institution has vowed to take a more active stance on climate change.

Unconventional policies can also be used to alleviate — instead of exacerbating — inequality. One idea is to transfer money to citizens through so-called helicopter money, rather than rely on institutional investors to translate quantitative easing measures into economic stimulus. The policy response to COVID-19 actually provides an interesting blueprint for this.

The overall tone of the Bank of Canada’s consultations report seems to suggest that the bank is more comfortable with the status quo than with serious innovation. Although this may sound very Canadian, our central bank actually has a history of being an innovator in monetary policy. It was among the first central banks to adopt monetarism in 1975, and the second to adopt inflation targeting in 1991 when it was still an untested approach. To confront today’s many challenges, the Bank of Canada needs to rediscover that innovative zeal.

This blog was originally published on The Conversation, May 4, 2021.

COVID-19, Economic exceptionalism, Economics, Political economy

When it comes to COVID, our political leaders have been seduced by wishful thinking

When confronted by the very difficult decisions created by the second wave of the COVID-19 pandemic, our political leaders have been seduced time and time again into a dangerous kind of wishful thinking. Instead of acting decisively to save lives, they have wavered and delayed—fiddling around with different colour-coded regional schemes, holding off on requiring masks, or reopening restaurants, bars and gyms in regions in regions where case counts were still rising.  

What is it that political leaders treat as so important that they are willing to run this kind of risk with people’s lives? It’s the economy, of course.

And yet, this concept of “the economy,” which we are told to make so many sacrifices for, is actually a fiction – based on a series of longstanding narratives that must be challenged if we are to tackle the current crisis.

Probably the most pernicious fiction is the idea that the economy is so important that it trumps politics as usual, allowing the suspension of liberal democratic norms in the name of its survival.

This is an assumption that I’ve described elsewhere as a form of economic exceptionalism. We saw it over and over again in the aftermath of the 2008 financial crisis, when all sorts of exceptional measures were justified in the name of the survival of the economy: first bailout packages and then austerity measures were rushed through legislatures, while unelected central banks took on huge new powers—all in the name of responding to the economic emergency.

Decisions about how to respond to a crisis don’t affect everyone equally. Yet it is easier to talk about saving “the economy” than to explain why a government should help some folks (like those who benefited from the bailouts) rather than others (the ones who were asked to do the belt-tightening later).

Yes, major crises like wars, economic crises and pandemics justify some exceptional measures. But we should be very wary when our political leaders tell us that we must suspend our norms and make sacrifices for the sake of “the economy.”

This logic of sacrifice depends on another powerful fiction: the idea that a “sound economy” is some sort of abstraction that can be separated out from the lives of the people who make up that economy.

This is an idea that has risen and fallen in popularity over the centuries. It dominated economic thinking in the laissez faire nineteenth century, when the Global North relied on the gold standard to ensure “sound money” and free trade. Yet even as these politicians did whatever they could to protect the integrity of their own economies, they were also ruthlessly extracting resources from the Global South through colonialism. The term “free trade imperialism” nicely captures this hypocrisy – a term used by the British to justify their use of gunboats to force China to continue the opium trade.

The idea of the economy as an abstract thing began to fall out of favour during the Great Depression, when it became all too clear that efforts to protect a sound economy by imposing austerity only made things worse. After living through that terrible experience, politicians and economists alike recognized there is no such a thing as a “sound economy” apart from the men and women trying to find work to support their families. Their creation of the welfare state and policies like unemployment insurance, public education and health care were all based on their recognition of the importance of treating economic health holistically. 

Yet, in the 1980s, as Margaret Thatcher told us that “there is no such thing as society,” we began to forget many of those lessons, and to treat the economy as a separate entity with the principle of “sound money” once again trumping employment as the dominant objective.

The final fiction that we’ve heard in the last months is the ill-fated idea that it’s possible to take a “balanced approach” to the pandemic response, as Alberta Premier Jason Kenny and Ontario Premier Doug Ford have both argued. Mr. Ford outlined his government’s version of this approach in a recent statement, in which he noted, “the number one priority is health and safety, and right beside that is the economy.”

At the core of this strategy is a false opposition between “health and safety” and “the economy” – as if it were possible to balance so many dollars in an economy on one side of the equation, and so many illnesses (and needless deaths) on the other.

Of course, as even the Ford and Kenney governments have finally begun to recognize with their latest U-turns, there is no trade-off between health and safety and the economy – particularly in the medium to long term. It is only by giving up on economic wishful thinking and taking decisive action to restrain the spread of the virus that we can ensure that we have a healthy population capable of rebuilding the economy in the months and years to come.

The economy is not a separate thing. Nor is it a god that must be placated through our sacrifices. It is us. Only us. And we must be healthy, safe, and supported by a capable government if we are to continue to thrive together.

A shorter version of this blog appeared in The Globe and Mail, November 29, 2020.

COVID-19, Varieties of ignorance

Unmasking Ignorance Reveals the Exercise of Political Power

By Jacqueline Best and Michael Orsini

It’s not the kind of statement that comforts the faithful.

Dr. Theresa Tam, Canada’s Chief Public Health Officer, told a press conference last month that we are “steering in uncertain waters. No one knows exactly what is going to work, so there’s a grey zone and people are doing slightly different things.”

Although in more recent weeks, Tam has been a lot more definitive about the need for a strong and systematic response across the country, she and other public health officials and politicians are grappling with the challenge of acting decisively in spite of imperfect information as the scientific understanding of COVID-19 continues to evolve.

Tam’s nod to uncertainty might not be welcome by most Canadians grappling with the unfolding pandemic and the reality of lockdowns and red zones. Yet it speaks to a core challenge of our fractured politics: evidence-based policymaking must confront the varieties of our ignorance.

One of the bravest and most necessary things that policymakers such as Tam can do is acknowledge what they do not know. Too often, however, we have seen politicians mobilize ignorance for their troubling ends. 

As a public, we demand that our political leaders and policymakers take definitive action based on expert advice. But what if knowledge does not hold the “master key”? What if an emerging feature of policymaking consists of expending considerable effort to mobilize ignorance and strategically position the art of unknowing? When all of our attention is focused on amassing knowledge or expanding the scope of the available evidence, we tend to lose sight of the need – the imperative in some cases – not to know.

In some cases, ignorance consists of actively denying or contesting knowledge and evidence in the public sphere. As sociologist Linsey McGoey argues in her book, The Unknowers, “knowing the least amount possible is often the most indispensable tool for managing risks and exonerating oneself from blame…”  Think of the calculated efforts by leaders such as Jair Bolsonaro in Brazil and Donald Trump in the US to contest the science on social distancing and mask-wearing to combat the COVID-19 pandemic, not to mention their deliberate refusal to recognize the dangers associated with hydroxychloroquine.

Recent examples suggest that various forms of ignorance are far more central and useful to policymaking than we tend to assume. Climate change denial is a potent example of the political appeal and enormous danger of contesting widely accepted knowledge. Even then-U.S. Supreme Court nominee Amy Coney Barrett sidestepped the issue when asked by Senator Kamala Harris if climate change is occurring. “I will not answer that because it is contentious,” Barrett responded. Is that type of response a dog whistle for climate change deniers, such as President Trump, who blamed the California wildfires on forest mismanagement?

Ignorance comes in many varieties. It can take the less deliberate form of wishful thinking, as policymakers underestimate the very real possibility that their policies will have serious, unintended consequences. The last few months have revealed just how pervasive and powerful a hold this kind of wishful thinking can have on policymakers. For instance, Ontario Premier Doug Ford ignored Toronto’s Medical Officer of Health, who had urged his government to impose new restrictions in Toronto, only to backtrack a week later. And it was recently revealed that the Ford government rejected advice from their in-house experts when creating a new colour-coded plan for COVID restrictions.

These forms of willful and wishful ignorance can prevent political leaders from acting on some of the key problems facing our societies. Why, for instance, is Canada still lagging in terms of race-based data on the health inequities revealed by the COVID-19 pandemic? Although data alone cannot transform racist institutions or magically improve health outcomes for Canada’s most marginalized communities, the power to ignore data that connect the dots between racism and health outcomes can be a convenient cover for policy inaction. This “will to ignore” should be challenged vigorously by Canadians interested in equity and justice; equally important, however, knowledge about marginalized communities must be protected from forms of “algorithmic racism”.

The answer to this instrumentalization of ignorance, however, is not to pretend that we have all the answers. That kind of wishful thinking is also dangerous.

How do we govern in the face of uncertainty and ignorance? By walking a very fine line. Policymakers and experts must identify gaps in our knowledge and work to redress them. Citizens must uncover those instances when ignorance is mobilized as a cover for inaction. And all of us must acknowledge that there is still much that we don’t know.

Originally posted to the CIPS Blog November 18, 2020.

COVID-19, Economic exceptionalism

We are entering another state of exception – but this time it’s economic too

From http://www.koco.com

     In the last few weeks, governments all over the world have been declaring states of emergency to deal with the coronavirus. Given the remarkable powers that governments at all levels have been acquiring through these measures, it’s not surprising then that both state leaders and commentators are talking about this moment being akin to a state of war.

     Although this comparison is powerful—and in many ways correct—it only tells part of the story. Yes, governments are invoking emergency powers and imposing a state of exception of the kind that we usually see in wartime. Yet, if the goal is to save the lives of citizens against and attack, as it is during wartime, then why would government leaders like British Prime Minister, Boris Johnson, have delayed social distancing measures so long for fear of their economic consequences? And why does President Trump continue to flirt with the idea of opening the economy back quickly in some parts of the country in spite of the likely impact on the number of COVID-related deaths?

     The answer to this puzzle lies in the fact that the kind of exceptionalist policies that we are seeing being put into place are, for some leaders at least, as much about protecting the economy as it they are about ensuring the public’s security.

     Although we often forget it in calmer times (remember those?), liberal democratic governments do reserve for themselves the power impose a state of exception in times of crisis, such as a war. Such exceptionalist measures are designed to temporarily suspend normal liberal democratic rights and processes in order to respond to a supreme threat to the state and its people. The last time we saw this occurring on a broad basis was of course after 9/11, although many have also drawn parallels to the Second World War.

     In many ways, the current emergency declarations and measures do bear important resemblances to these wartime measures. Governments have acted with extraordinary speed, rushing legislation through or using executive powers to give themselves the flexibility to act to fight the virus’ spread. They have partly sealed off their borders, turning inwards and actively seeking to manage the supply of essential medical equipment. We are also beginning to see the adoption of subtler, more technocratic measures that are closer to those we saw after 9/11, like the use of data surveillance in South Korea and other countries to map, track and control populations deemed a danger.

     All of these exceptionalist measures suspend or constrain normal democratic processes and liberal civil rights in the same of the security of the state and its people.

     Yet there are also several key ways in which the exceptional measures being proposed and introduced today are different from these war-time emergency policies. This time around, governments are simultaneously seeking to secure their population’s health against attack while also protecting their economy from ruin.

     Governments have historically invoked states of exception not only to fight wars but also to tackle economic crises. Confronted by the ravages of the Great Depression, President Roosevelt famously argued in his inaugural address in 1933 that he was willing to use “broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.” During the 2008 global financial crisis, political and economic leaders again called for exceptionalist measures ranging from bailouts to stimulus measures in order to respond to what they described as an economic emergency.

     This time around, governments are facing two existential threats at the same time—a public health threat to their citizen’s lives which can only be treated through a series of measures that themselves pose an existential threat to the economy. The Second World War’s mobilization of a wartime economy helped to rescue western states from the prolonged crisis of the Great Depression. This time around, mobilizing against the health threat means partly suspending the economy, not energizing it. These two sets of emergency responses are necessarily in tension with one another.

     While political leaders’ willingness to sacrifice some individuals’ lives for the sake of the economy may strike us as a fresh horror, it actually has a long history. Over a decade ago, I wrote an article entitled “Why the Economy is Often the Exception to Politics as Usual,” in which I suggested that neoliberal international institutions, like the International Monetary Fund and the World Bank, had proven willing to suspend the political rights and freedoms of the citizens of poorer countries in the name of re-establishing a sound economy. In these countries, the supreme goal of economic stability, not political security, was treated as a sufficient ground for exceptionalist measures, even if the consequences were often extreme poverty and deprivation—and yes, very likely, death—or some.

     In the Global North, while we remain on average the lucky ones, these recent twin crises have revealed just how vulnerable we have made some of our population in our pursuit of a mythic “sound economy”— including those in the gig economy, without secure employment, and working in essential but unrecognized jobs. These crises have also shown just how willing some political leaders are to require the ultimate sacrifice of some of our citizens in the name of that same “sound economy.”

    Responding to these twin public health and economic crises, while also ensuring that we come out the end of this process in something that still resembles a democracy, will not be easy. What’s clear, however, is that those who insist that that the economy’s survival trumps the right of its people to life are mobilizing a particularly vicious form of economic exceptionalism—one that must be recognized and resisted.

This post was originally published on the SPERI blog on April 17, 2020.

COVID-19, Political economy, Varieties of ignorance

Why it’s important to acknowledge what we don’t know in a crisis

Why it’s Important to Acknowledge What We Don’t Know in a Crisis
from http://www.cips-cepi.ca

      How do we act effectively when there is so much that we simply do not know about what lies ahead? This is the challenge that policymakers face today on two very different fronts: public health and the economy. There is so much that public health officials don’t yet know about COVID-19, but they have to act nonetheless. As the current economic crisis deepens, economic policymakers must also take steps while facing huge uncertainty about what the consequences will be.

      While this double dilemma is alarming, the comparison between these two challenges is also instructive.

      I spend a lot of my time studying how economic ideas and expertise work, particularly in the context of crises. As I have been watching the current public health crisis unfold, day by day and hour by hour, I have been struck by the parallels and differences in how economic and public health policymakers deal with what they know and, more importantly, what they don’t know.

      It turns out that there are some common takeaways for how to develop policy—and communicate about it—in the context of extreme uncertainty.

1. Wishful thinking and denial are dangerous

      In both public health and economic cases, we can see the both the temptation and the danger of engaging in wishful thinking and denial. Although Donald Trump is the most obvious and egregious example of this kind of willful ignorance, he is not alone. Just look at the UK government’s extremely optimistic (but short-lived) embrace of the theory of “herd immunity” as a way of coping with the pandemic without having to pay the social and economic cost of social distancing.

      Economic policymakers aren’t immune either to the temptations of willful ignorance. We also saw a lot of wishful thinking and denial about the huge economic risks being taken in the early 2000s, which led to under-regulation and helped precipitate the 2008 financial crisis. Today, we need our policymakers to avoid wishful thinking about how bad things could easily get, and take dramatic and decisive steps to support the economy.

2.   Policymakers need to find ways of admitting what they don’t know

      If you pay attention to reputable news outlets and the quickly growing number of scientific papers being published on COVID-19, what you discover is a frank and evolving discussion of what is and isn’t known about the virus and the best way to respond. News sites provide updates on both what we do know so far and what we don’t know yet. In a public health crisis, scientists and policymakers alike are willing to both admit their ignorance and build it into their response.

      When it comes to economic crises, things tend to work differently. Most economists have very definite ideas about how the economy works and how to fix it when it’s ailing. In recent decades, many economists have become convinced that the way to make the economy work best is imposing simple rules—monetary rules for central banks and fiscal rules for government. Added to that is the belief that for a policy to work it must be credible—which means sticking to your guns in following the rules, come what may.

      Of course, during the 2008 economic crisis, policymakers were forced to break the rules in their response. Even the most orthodox of economists (usually) become pragmatists in a crisis. Yet within a couple of years, policymakers treated this response as an exception and have sought to return to “normal” ever since then (good luck with that).

      In theory, a central banker or finance minister isn’t allowed to say “I don’t know” for fear of markets’ panicked reaction.  Yet, in practice, central bankers like our own Governor, Stephen Poloz, have admitted (long before this current crisis) that they are often confronted by extreme uncertainty. We need economic policymakers to take a page from the world of public health and find better ways of communicating both what they know and what they don’t know today.

3.   We need a flexible and contextual response

      Much contemporary economic thinking assumes that the basic rules governing economic behaviour never change. This is a recipe for rigidity, not resilience. It ignores the fact economic dynamics are always social and historical. They depend on how people act, which changes over time. What works in response to one crisis, or in one national context, may not work in another.

      In the public health debate there is a much greater awareness of the fact that the effectiveness of a given policy response depends on how people respond. Because the coronavirus’s spread and mortality rate also depend partly on how we react to it, answers to key questions about how to respond have to be contextual and evolving.

      Although it’s scary to admit our ignorance, it also turns out that it’s vital—whether we’re talking about the novel coronavirus or its effects on our economy today.

This post was original published on the CIPS Blog on March 25, 2020.

Banking, Canada, COVID-19

Can the Bank of Canada come to the rescue again?

Bank of Canada headquarters.
Bank of Canada headquarters – from globalnews.ca

Like central banks around the world, the Bank of Canada has cut its target interest rate in order to tackle the economic effects of the novel coronavirus.

Does that mean that central bankers are once again our knights in shining armor coming to save the day in an economic crunch? Or is this finally the right time to recognize that we can’t keep counting on the Bank of Canada to do all of the economic heavy lifting in a crisis?

This rate cut does signal the central bank’s willingness to do what it can to counteract the economic consequences of the virus’s spread. Yet there is only so much that lower rates can do. They can make it easier for people and businesses to borrow and they will reduce payments on a flexible rate mortgage. But low rates won’t help companies continue to make the products that rely on parts made in hard-hit countries like China and South Korea, and they won’t help people afford to take time off of work if they get sick.

While it isn’t yet clear yet how serious the economic effects of the virus will be, this is a good time to take stock of what tools we have to respond to the next economic crisis.

Ever since 2008 financial crisis, the Canadian government, like governments around the world, has relied an awful lot on the super-powers of the central bank. G7 politicians decided that they didn’t want to have to keep using fiscal policy to stimulate the economy and started treating central banks like “The Only Game in Town,” as former Bank of England Deputy-Governor, Paul Tucker, put it.

Yet the last decade has made it clear that there are very real drawbacks to assuming that central banks can always save the day.

The Bank of Canada has had to keep interest rates very low for a very long time to keep the economy going. While this has worked, to a point, it has had perverse consequences. Canadians took advantage of the low interest rates to go on a spending spree—building up debts worth as much as 177% of their annual income. This borrowing binge and the housing bubble that has gone with it has limited the Bank of Canada’s options moving forwards: by cutting rates, they run the risk of pushing debt even higher, but by increasing rates they could precipitate a crisis for the many families who can barely make their interest payments.

Given these limits, one option for the Bank of Canada would be to pursue unconventional monetary policy. In doing so it would be following the lead of the US, Japanese, British and European central banks that have dabbled in more esoteric monetary policies after the 2008 crisis, including “quantitative easing,” which has central banks creating new money to buy up government and private sector bonds and securities.

While these unconventional tools may be useful and even necessary, they do produce winners and losers. Top-down strategies like quantitative easing have actively contributed to growing inequality (by increasing the value assets that are mostly held by the wealthy), and has accelerated the climate crisis by disproportionately investing in carbon-intensive firms. On the other hand, bottom-up strategies, like “helicopter money,” where the central bank distributes new money to individuals, have been overlooked to date.

Politicians had hoped in the last crisis that they could avoid making difficult political decisions by passing the buck to central bankers who are insulated from the democratic process. Unfortunately, this past decade has taught us that there is no such thing as an apolitical solution to an economic crisis. Whatever role the Bank of Canada plays, it needs to be guided by democratic—and not just technocratic—priorities.

We do need central banks to play their part now—and we will need them again in the future. But we also need to make sure political leaders stop waiting for their knight in shining armor to come to the rescue and take responsibility for their own role in responding to economic shocks.

This blog post was original published as an opinion piece in the Ottawa Citizen on March 11.

Economic exceptionalism

Economic exceptionalism past and present: or whatever happened to normal?

Exceptionalist policies can play a critical role in changing norms and perceptions of what constitutes the status quo. What role does exceptionalism play within our society today?

 

Whatever happened to normal? You remember: a normal neoliberal political economy in which the democratic process sort of works and we have reasonable growth combined with some wage increases and interest rates around 4-5%. Of course, this “normal” economy excluded a huge number of people from its benefits, depended on lower and middle income earners maxing out their credit cards and lines of credit to keep afloat, relied on using carbon at an unprecedented scale, and produced a massive and unsustainable asset bubble. But it seemed normal (at least when compared with where we are today).

Not long after the 2008 financial crisis blew this system up, there was a lot of talk about returning to normal. But once Trump was elected and the long slow Brexit train wreck began, we seem to have given up on normal altogether.

Scholars have found a number of ways of describing this disruption of “normal” politics and economics. Ian Bruff, Burak Tansel and others have pointed to the rise of authoritarian neoliberalism in many countries. We are also witnessing what Peter Adley, Ben Anderson and Stephen Graham have described as “the proliferation of emergency as a term” and an increasing effort to govern through emergencies.

My work has focused instead on the growing role of economic exceptionalism in recent years. During my time as a Leverhulme visiting professor at SPERI at the University of Sheffield, I examined how useful this concept is for understanding how “the normal” has been suspended or disrupted today—as well as in the past [Spoiler alert]. As it turns out, the usefulness of the term depends a lot on what time frame we are looking at—but more on that later.

I first became interested in understanding this kind of break from the “normal” in the wake of the 2008 global financial crisis. I became increasingly angry at the Canadian Prime Minister, Stephen Harper, for repeatedly making claims along the lines of: “Normally, we wouldn’t be doing this (running a deficit, imposing austerity measures in a counter-productive attempt to reduce said deficit, denying airline workers the right to strike) …but because we are living in exceptional times, these measures are not only legitimate but necessary”. This language of exceptionalism was widespread at the time. In the UK, we saw politicians justifying bailouts, austerity measures and highly exceptional forms of monetary policy as necessary suspensions of normal politics in a time of crisis.

I have a number of colleagues and friends who work on critical security studies, and I kept thinking about their work on securitization and the logic of political exceptionalism in the post-9/11 era. They found that there has been an increased tendency of liberal governments to invoke states of exception in times of crisis. They achieve this by claiming that a given existential threat to the state has made the suspension of normal liberal rights necessary; in order to protect the public.

What if, I asked myself, this logic of exceptionalism is not only political but also economic? Without getting into the theoretical details of why this absolutely the case (which you can read in my Security Dialogue and International Political Sociology articles on the topic), a quick survey of history made it clear that yes, in fact, liberal states have often used emergency powers to address economic crises and have also justified them in exceptionalist terms. This has included the repeated use of martial law in the US and UK to put down strikes in the late 19th and early 20th century as well as President Franklin Roosevelt’s use of the “Trading with the Enemy” Act to put through some of the key measures of the New Deal in the 1930s.

One of the goals of this research project is to understand when and why these kinds of exceptionalist claims are used to justify particular  responses to economic crises. When I defined my initial hypotheses, I expected to find that the early New Right governments of Margaret Thatcher and Ronald Reagan both relied heavily on exceptionalist claims in the early 1980s in arguing for the necessity of their radical and often very painful strategies for reducing inflation. But this is not what I discovered. In fact, I seriously considered titling this blog “A funny thing happened on my way to a conclusion,” because it is in many ways about what happens in research when we start out with one particular hypothesis and end up finding something quite unexpected.

Going back to the 1970s, when both American and British governments first began describing inflation as a major crisis, I found plenty of evidence of exceptionalist language. Nixon declared an emergency in order to address the postal workers’ strike in 1970 and again when he imposed wage and price controls in 1971. In the UK, the Conservative Prime Minister Edward Heath declared a national emergency and imposed a three-day work week in 1973 when striking miners threatened the national energy supply. All of these measures were framed as temporary exceptions to normal politics that were necessary because of the grave threat to the national economy.

In stark contrast, the Reagan and Thatcher governments avoided using exceptionalist language when they first came to power. In the US case, Reagan’s first Budget Director, David Stockman, had written an open letter calling on the government to declare an emergency in order to tackle “an economic Dunkirk,” but his arguments were rejected.

Two very different responses to national strikes, less than a decade apart makes it clear the difference in these two disruptions of normal politics. Nixon called in the National Guard in 1970 when postal workers went on strike but ultimately granted them their demands of a wage increase and a right to bargain over wages. In contrast, when Reagan faced the air traffic controllers’ strike in 1981, he not only declared the strike illegal but then fired all of the striking workers and banned them from public employment for life. If we look at Thatcher’s response to the miners’ strike in 1984-85, we find a similar pattern of using extraordinary measures not to address a temporary crisis, but to permanently reduce the power of the miners in particular, and labour unions more generally. These were extreme actions but they were not justified as temporary or exceptional. Instead, they sought to use emergency powers to establish a new normal.

What do these historical findings tell us the disruption of the “normal” today?

After the 2008 global financial crisis, most political leaders were using a language of exceptionalism, telling us that we just had to suspend normal political and economic rights and processes temporarily to deal with the crisis. Yet, in many cases, that suspension has blurred into a new kind of normal, which has had all sorts of troubling consequences.

Today, it seems like the Trumps and the hard Brexiters of this world have given up even pretending that this is about a temporary suspension of the normal. It looks instead like they’re calling for a more radical disruption and a very different kind of normal. Both kinds of claims are troubling—but it’s the second kind that is truly worrying.

This is the final blog in a three-part series posted on the SPERI Blog, reflecting on the major research themes that I explored while a Leverhulme Visiting Professor there. You can also read Part 1 and Part 2 of the mini blog series.

Varieties of ignorance

A beginner’s guide to economic ignorance

Ignorance is not the antithesis to knowledge, but is part of it. Wishful thinking, muddling through and other forms of ignorance play a crucial role in shaping economic policy and its effects on society.

We hear a lot about the power of economic expertise—whether it’s the news media calling on the latest expert to tell us where the economy is headed, or a populist critic arguing that experts are out of touch with the real world.

While it is certainly true that governments and international organisations rely on economic expertise to get their job done, there is a lot that these institutions simply don’t know. Sometimes that ignorance is inconvenient, sometimes it’s dangerous, and sometimes it’s politically useful.

Just take a look at some the economic arguments being made in favour of Brexit in the UK, or the willful denialism underpinning Canadian provincial and federal Conservatives’ attacks on carbon taxes, and you can find plenty of evidence of the political uses of economic ignorance today.

It turns out that economic ignorance has a long pedigree. I became interested in the role of ignorance in economic policymaking while doing archival research into the internal policy debates in the early 1980s in the United States and Great Britain, when Margaret Thatcher and Ronald Reagan first came into power.

I had begun the research expecting to find an unmatched display of economic expertise. After all, these were the years when the fathers of neoliberal economics, Friedrich Hayek and Milton Friedman were directly advising policymakers as they and the politicians of their time sought to put neoliberal theory into practice.

Yet what I found when I started to read through the various internal memos and minutes was a great deal of confusion, uncertainty—and, yes, down-right ignorance. This finding led me to ask three key questions: What kinds of ignorance do we find in economic policymaking? What roles does ignorance play? And what are the political stakes involved?

Understanding the varieties of economic ignorance became one of the three key research themes for my time as a Leverhulme Visiting Professor at SPERI and the basis of one of my Leverhulme Lectures on February 6, 2019.

Here are a few of the things that I have learned about economic ignorance (so far).

  1. Ignorance is more complicated—and more interesting—than we generally admit.

Rather than being its opposite, ignorance is always a part of knowledge. As researchers, we begin with a question, not an answer. And even once we begin to answer that question, ignorance remains somewhere in the background. One the tricks of knowing anything well is to figure out what we don’t need to know (this, of course, is one of the greatest challenges in writing a PhD thesis – or just about anything else of significance).

There is always so much more that we do not know than that we do actually know. This should be blindingly obvious, and yet it’s also somehow deeply unsettling for us as scholars (and “experts”) to admit.

  1. Ignorance is always political—even when it’s not strategic

Ignorance can play a strategic role in some cases, as Linsey McGoey has pointed out. Although ignorance does sometimes pose serious practical and political difficulties for policymakers, it can also be quite useful for them to ignore or deny knowledge of certain inconvenient facts.

Yet even when it isn’t strategic or willful, ignorance is immensely political: what forms of ignorance we use, what kinds we avoid, and whether we admit to the limits of our knowledge all have profound consequences for how we act or fail to act.

  1. Ignorance is central to economic theory

It may seem odd to talk about ignorance in the same breath as economics. After all, much conventional economic theory is based on the assumption that markets efficiently use all available information.

In fact, ignorance plays a foundational role in economic theory. When we dig a bit deeper into different economic theories, we find a whole host of assumptions about what is knowable and what isn’t and who should remain ignorant. For example, as both Will Davies and Melinda Cooper have argued, most neo- and new-classical economic theory is premised on the belief that the government not only cannot but should not know too much about the economy. Economic theories like these seek to map out a kind of distribution of ignorance and knowledge that is based both on efficiency and morality.

  1. There are (at least) four different varieties of economic ignorance worth paying attention to.

In digging through the archival records for the early Thatcher and Reagan years, I found four distinct but related forms of economic ignorance at work. Here are a few helpful definitions for those interested in tracking the role of ignorance in past (and present) economic policymaking:

Wishful and magical thinking

Definition: Willfully ignoring how ridiculous an idea is.

Example: In the 1980s, policymakers in both the UK and the US argued that the magic of rational expectations theory meant that it was possible to reduce inflation without the usual pain of a major recession as long as the government’s commitment to controlling the money supply was credible.

Cluelessness

Definition: Genuine confusion about what is going on (particularly when your ridiculous idea doesn’t work).

Example: Once it became clear (about a year into each government’s term) that a) neither the UK nor the US government could control the money supply, and b) recessions of historic proportions were underway, confusion, cluelessness (and finger-pointing) ensued.

Fudging and muddling through

Definition: Doing what you can a) to make your magical thinking seem more believable, and b) in spite of your cluelessness.

Example: Both the British Chancellor and the American Budget Director rejected the economic forecasts produced by their bureaucracies (because they contradicted their magical thinking) and either proposed their own highly inaccurate one (in the American case) or largely ignored it (in the British case). When they were presented by staff with inconvenient facts about the contradictions in their proposals, they resorted to various “presentational” fudges to make them less obvious.

Denial

Definition: Blissfully ignoring all of the above and pretending that it’s someone else’s fault when things go wrong.

Example: This is precisely what both British and American governments did in the years following the abject failure of their early attempts to put their policies into place, denying that these were “real” monetarist experiments or rebranding their efforts as “political monetarism” when actual monetarism turned out a dud. It is also, of course, what we are living with on a daily basis right now, as so many of our political leaders deny responsibility for the failure of our economic thinking and practice over the past decades—and for the resulting damage to economic justice, to our democracies, and to our planet.

  1. It’s not dangerous to admit our ignorance—in fact the opposite is the case.

Although it’s natural to respond to the obvious dangers of many of these forms of economic ignorance by seeking a return to a purer, more absolute kind of expertise, this would be a mistake. Yes, we must be attuned to the ways in which willful ignorance can blur into mendacity and call it out as such. But to pretend that we can avoid ignorance altogether is itself a dangerous kind of wishful thinking.

Instead, we need a more humble and reflexive kind of expertise that acknowledges its limits and recognizes the value of a healthy kind of ignorance—the kind that leads us to recognize what we don’t know, that spurs us on to ask new questions, and that prompts us to find better answers.

This is the second in a series of blogs originally posted on the SPERI Blog on June 14, 2019, outlining the major themes that I explored while a Leverhulme Visiting Professor at the University of Sheffield.

 

 

 

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.