On Monday the World Bank made it official that Paul Romer will be the new chief economist. This nomination can be seen as a big step back toward the infamous Washington Consensus, which World Bank and IMF seemed to have left behind. This is true, even though Paul Romer has learned quite well to hide the market fundamentalist and anti-democratic nature of his pet idea - charter cities - behind a veil of compassionate wording.
Romer won significant academic merits with his theory of endogenous growth. He modelled the production of new knowledge within his model rather than letting it drip from sky in convenient increments, as growth theory had done before. At first sight, this sounds like a good qualification for the task at hand. However, Romer has admitted in an interview that it is of rather little use for development economics, because it fails to discriminate between the production of new knowledge at the knowledge frontier, i.e. in highly developed industrial countries, and the adaption of knowledge, which is of particular importance for catch-up processes in poor countries. Still is honors him, that he knows and talks about the limits of his theory.
However, his focus has been on something only loosely related to endogenous growth theory in the last seven years, anyway. Since about 2009 he has been promoting so-called charter cities as a model for development. This earned him newspaper notoriety, but also a fair share of criticism. His proposal amounts to declaring enlightened colonialism to be the best (or even only) way toward development of poor countries, and a good substitute to development aid. I suspect this is the reason, why Romer did not mention the charged word charter cities in his text about the nomination, even though he does talk about his role in the Urbanisation Project of Stern School, where he heads the project on charter cities.
In his reporting on Romer's nomination, the Washington correspondent of Neue Züricher Zeitung, Martin Lanz, claims that Romer distanced himself over time from the libertarian ideas, which he inhaled as a doctoral student at the University of Chicago. However, his pet idea is only a tad less libertarian than homesteading phantasies of floating cities in international waters, of hedge fund billionaires like Peter Thiel who cannot stand the idea that they should be forced to live in a community with ordinary citizens and pay taxes for things they don’t care for. Even so, Lanz is amoung the rather few journalists who do not fail to notice and mention the colonialist spirit of Romer’s idea. He recommends that the World Bank, being already suspected of colonialist tendencies should not put too much stock in this idea, an advice that World Bank President Jim Yong Kim heeded in his public remarks on the nomination. He avoids the use of the expression charter cities, even though the idea is recognizable between the lines.
The name goes back to cities in the US who have availed themselves of the right that exists in some states to incorporate under their own statutes, independent from the laws that elsewhere govern the rights and responsibilities of city management.
Romer has in mind a version of the Hong Kong case, without the coercion. His cities are supposed to be extreme forms of free enterprise zones which some developing countries, including China, have been experimenting with for quite a while. The idea of the latter is to attract foreign investors by exempting them from certain regulations, duties etc. His charters cities go further. They build on the wholesale abrogation of all laws of the respective country. For countries with dysfunctional public institutions he suggested that they lease out the regions, where these charter cities are to be build, long-term to a consortium of enlightend industrial countries, which would do the management. What the British extracted at gunpoint from China, developing countries are expected to give voluntarily today. A World Bank manager commented on the idea in 2010 on the blog of the World Bank by quoting a magazine article, which called it “not only neo-medieval, but also neo-colonial”.
The libertarian spirit of the idea of the man who will be the World Bank’s chief economist from September reminds of the Washington Consensus that ruled into the 1990s. This is a name for the ideological position, enforced by World Bank and IMF, that the best and only way to development is the scrapping of government regulation and giving companies a maximum of freedom to go about their business. After the Washington Consensus evaporated during the Asian crisis and the dotcom-, Enron and similar upheavals, with Joseph Stiglitz one of the sharpest critics of the Washington Consensus held the office of chief economist. There was also the Chinese Justin Yifu Lin, a proponent of sector-specific industrialization planned and promoted by government.
There have not been too many takers of Romer’s idea so far. In Madagascar the government planned to introduce charter cities, but was ousted by an unexited populace before it could act on it. In Honduras, where the military installed a right-leaning government after a coup in 2009, the government changed the constitution to make charter cities possible. Romer was chosen as president of a transparency committee. The constitutional court declared the plans to be unconstitutional, since the laws of Honduras would not be valid in these regions. The government deposed the judges which had ruled against and put the plans back on the table. Romer withdrew and is not involved any more. Some household names of the republican establishment of the US are involved, though.
Romer’s disgust about what the regime in Honduras has made of his idea seems honest. He seems to be a much more moral person than earlier Chicago Boys like Milton Friedman, who had no qualms about co-operating with a bloody dictatorship in Chile. Still, Romer does not want to see that it is far from coincidence that his idea is attractive only to autocratic, right-wing regimes. On some level, he knows it, as one can infer from his interview, in which he says that Chinese autocrat Deng Xiaoping used charter-city-like arrangements like Shengzen because he “wanted a way to open the Chinese economy that avoided long argument and contention about what types of change to pursue and how to pursue them.”
Romer has learned quite well to hide the anti-democratic nature of his idea, maybe even from himself. He stresses that charter cities should be created on a clean slate, such that nobody would be forced to change their ways.
“With a Startup City, you can propose something entirely new and let people choose whether they want to live under its rules, as embodied in its charter, the document that specifies its founding principles. People who want to try the reform can go there, and people who don’t, they don’t have to. With a startup, you can have reform without coercion.”
No-coercion is one key word, reform the other. In Europe, where decision makers are making excessive use of the words reform and structural reform, we have learned what this vague term means. It is used to hide the unpopular demand to shrink the government and to dismantle worker protections. Who would mind, if it works and it is voluntary, Romer would ask? If people don’t like it, they will not go into those new cities and they will fail.
This is pure window-dressing. The coercion is there, it is just depersonalized and farmed out to the market's forces. Almost all developing countries suffer from mass unemployment. Jobs will be filled, regardless of the level of worker protection. Those who do not take them, will have even fewer, less attractive and secure jobs to chose from and those will be affected too.
Romer is aware of such spillovers, and he wants them, even though he prefers to talk about emulation of successes, rather than a race to the bottom. He makes it clear that the “reforms”, that are introduced in the charter cities – without the annoying public discussion about which reforms to pursue – are expected to spread to the whole country.
„Here are my two tests for whether a policy is a reform or a concession: Would you be happy if this policy lasts forever? Would you be happy if this policy spread to the entire country? If the answer to both questions is yes, it is a reform.”
World Bank President Jim Yong Kim seems to hope for the same, as he says on occasion of Romer’s nomination:
“We're most excited about his deep commitment to tackling poverty and inequality and finding innovative solutions that we can take to scale.”
Replace “innovative solutions” by the skillfully avoided term charter cities and the plan is there to be seen.
In the interview, Romer says, that it is about trying out new forms of government. His earlier suggestion of long-term leases to foreign governments is one such form. However, when he is asked to give examples of possible reforms, he only talks about harmless technical stuff, like the management of traffic and energy production, things that do not require special ways of government and the abrogation of normal laws.
Paul Romer has obviously learned from past experience, what is better left unsaid.
The Research Network Macroeconomics and Macroeconomic Policies (FMM) celebrates their 20th Anniversary Conference this year, and this year’s conference is from Oct 20-22 in Berlin. The title is: "Towards Pluralism in Macroeconomics?" Arbeitskreis Politische Ökonomie, in cooperation with the German chapter of the World Economics Association, want to celebrate this by proposing a panel about "Rethinking Europe", concentrating on the dimension of macroeconomic policies and interdisciplinary approaches.
Why this topic?
Although it is often said that the European Union only deepens with a crises, the year 2016 seems to be decisively different, both by the amount of problems, and their depth, e.g.:
- For the first time ever the formal exit of a member state (UK) is a real possibility
- The deep recession in Europe is far from over, poverty, unemployment, and deprivation are very high in many regions
- The problem of over-indebtedness of some Eurozone member states (esp. Greece) is not solved
- Anti-democratic and nationalistic tendencies, especially in the Eastern countries (Hungary, Poland), are gaining momentum
- The EU position, on how to deal with refugees/migrants, is extremely unsatisfactory
- Central questions of legitimacy for far-reaching economic policies, e.g. how to proceed with CETA/TTIP, are not solved.
We want to discuss such challenges from a structural perspective. We especially welcome contributions about the institutional shaping of a better future for the EU. We need fresh answers for questions such as:
- Is the institutional setting of the EU (Councils, Commission, Parliament) still appropriate?
- Tax competition is a serious problem, but where are the viable solutions?
- The incomplete Eurozone: dissolve it or deepen it – and in both cases how?
- Do we need autonomous EU taxes, and debt?
- How much financial solidarity is appropriate between richer and poorer member states?
- Is there ground for common social standards?
- The refugees/migration crisis won’t be over. Any solutions?
By John Komlos.* The media is inundated with pundits analyzing the unexpected rise of demagoguery. I would like to add my own: the establishment’s utter loss of credibility. It has been fooling most of the people for more than a generation and Abraham Lincoln’s warning, “you cannot fool all of the people all of the time” has now come back to haunt them with a vengeance.**
It took Everyman on Main Street some time to figure out that they’ve been had and finally revolt: thirty five years to be more precise. There has been no shortage of big promises since “Its Morning again in America” but in the end they all left the middle class staring into thin wallets while their manipulators were living high on the hog. The failed big ideas began with Reaganomics. While the stimulating effect of its tax cuts was supposed to “trickle down” to the masses, the flow had the viscosity of molasses and stuck with the rich and the ultra-rich. The taxes of the rich were cut sharply: by about half. Consider a millionaire who was paying $700,000 in taxes in 1970s and whose taxes were cut to $350,000. What was she going to do with the $350,000 windfall? Sure, some spent it on conspicuous consumption but many decided to fund think tanks and hire economists to support their ideology. Others used the windfall to buy politicians in order to change the laws and thereby further their cause. So the tax cuts became a vicious circle that led from the windfall to political power and the ability to influence the public’s worldview and thereby gain further profits and additional power.
Then came Bush Sr. and initiated the North Atlantic Free Trade Association (NAFTA), eventually signed into law by Bill Clinton. He promised that it will “promote more growth, more equality,… and create 200,000 jobs in this country by 1995 alone.” Of course, he failed to mention how many hundreds of thousands of jobs will be destroyed but few noticed such nuances at the time. His economic team was headed by Bob Rubin CEO of investment mega-bank Goldman Sachs. (Goldman Sachs is well represented in DC. It also sent Hank Paulson to help out the Bush Jr. administration.) No one ever said that NAFTA would be good for everyone. Together with globalization including the opening up of China, the trade policies devastated the U.S. manufacturing sector and the middle class with it. And the treaty has a long reach: just last month air conditioning manufacturer Carrier announced that it will move 1,500 jobs to Mexico to its employees’ bitter disappointment.
Deregulation of the financial sector was yet another big idea that was supposed to be good for Americans. And again it was, but only for the elite. Begun in earnest by Reagan, the process was continued by Clinton who declared the FDR-era laws “antiquated” and abolished the Glass-Steagall act that kept commercial banks from speculating on Wall Street with other people’s money and backed by the taxpayers. The new law was supposed to be a “major achievement that will benefit American consumers, communities, and businesses of all sizes”. Note the conspicuous absence of American workers from the list of beneficiaries. At the signing ceremony Clinton said with amazing shortsightedness that we’re “modernizing the financial services industry, tearing down these antiquated walls.” And so we were inching toward the Meltdown of 2008 which wrought havoc among so many members of the middle class.
Bush Jr.’s policies were in a similar spirit. He continued deregulation, lowered taxes to the benefit of the 1%, and closed his eyes to the brewing crisis. When the Meltdown came the establishment lavished favors and billions on the big banks and its CEOs without any strings attached. Nothing left for Main Street. It had to fend for itself. They lost jobs, they were evicted, or had to take low-paying jobs and work two jobs in the gig economy. No one took pity on them.
Then came Barack Obama who made big promises of change but essentially continued many of the policies of his predecessor. He hired Tim Geithner, for instance, a Bush Jr. appointee and a crony of Goldman Sachs CEO Bob Rubin, and who now earns an estimated $5 million salary on Wall Street. Obama provided generous backstop to Wall Street which by the time the tsunami subsided amounted to trillions of dollars which were supposed get the economy going again. But yet again the middle class was betrayed. To be sure, Jamie Dimon, CEO of JP Morgan Chase continued to collect his compensation of some $17 million for 2009 at tax payers’ largesse but the benefits failed to trickle down. Never in the history of Mankind has so few benefited so much at the expense of so many: not even at the time the pharaohs built the pyramids.
The graph below shows vividly this development. Each bar on the left represents the post-tax (inflation adjusted) income of 1/5th of the 120 million households of this country including transfers such a food stamps and unemployment checks. So each bar represents 24 million households (roughly 64 million people). The graph shows clearly that the top fifth experienced the greatest and only meaningful increase in income during this time span. A tiny bit did trickle down to the 4th fifth (i.e., those whose income was situated above 72 million families but lower than the 96th million). This is the upper-middle class but an income growth of 0.5% per annum is not really noticeable. It amounted to a gain of some $300 per annum: hardly enough to feel a great increase in satisfaction.
The poorest 20% of the population (the first bar) did continue to receive their food stamps so they were not allowed to starve because that could have led to a dangerous destabilization of the society but with an average annual income of $18,000 they had nothing but discontent. That is the cost of sending a child to a state university. They could only afford to send their child to the University if they spent nothing on anything else.
Obviously the two middle-class groups between the 21st and 60th percentage of the population fared the worse: their income growth is hard to distinguish from zero. In fact, the middle middle class (41-60%; the third bar) gained but $32 per annum in the 32 years under consideration.
While the hollowing-out of the middle class is evident on the left side of the graph, its right side breaks down the top 20% into four groups. This makes it clear that the top 1% was the primary beneficiary of economic growth. To be sure some of the growth did trickle down but only to the rest of the three groups of the top 20%. That’s where the trickling became molasses. The upper-middle class did receive some morsels but that was all.
However, the anger that fuels Adolf D. Trump’s candidacy runs even deeper than this graph indicates. The reason is that as far as the anger is concerned, it is relative income that matters and the utter unfair bailouts of 2008 that rescued the 1%. It is one thing not to be able to afford an iphone if no one else has an iphone but an entirely different feeling if the super-rich flaunt not only their latest model but their $3,000 handbags, private jets, yachts, and the other accoutrements of conspicuous consumption. Then envy turns into desperation especially if you’re anxious about your job security, behind on credit card payments, still have a lot to pay off on your student loans, behind on the electric bill, just had to pay $35 overdraft fee, all while working part time or in the gig economy. Hence, I think that the graph below is a more accurate reflection of the welfare of the five income groups. Psychologists have shown that how we feel about our life--our life satisfaction--is reference dependent: relative deprivation matters a lot as we compare our welfare to that of others. The graph below assumes that people use the fifth 20% group as reference and compare their own income to that of the top group.
This graph is the real clue to Trump’s success: the growth rate of welfare is negative for all groups except the superrich. It is as simple as that.The rest of the society was left behind for more than a generation.
In sum, we have had a long string of BIG promises from Reagan to Obama. Tax cuts, trickle-down economics, deregulation, globalization, and NAFTA which all conferred tremendous financial benefits on only one group: the ultra-rich, and led to the “hollowing out” of the middle class. So wealth and its concomitant, political power, became as concentrated as it was during the era of the Robber Barons at the turn of the 20th century.
Now you know why so many have turned on the establishment to support Adolf D. Trump. The establishment was good at making big promises but in the end left few crumbs on the table for the middle class. The establishment is now surprised. They do not understand because they were out of touch with the heartthrob of the nation. This is a generalizable rule: elites are endangered by excessive greed. And being out of touch to the last minute is not uncommon at all. Louis XVI proclaimed prior to his execution that he “always acted from my love of the people.” And Mitt Romney deludes himself to think that the American people will still listen to him. Unbelievable!
* John Komlos is Professsor Emeritus of Economic History at LMU Munich. He is author of What Every Economics Student Needs to Know and Doesn’t Get in the Usual Principles Text.
** This text may be re-published without permission. Translation into German would be appreciated by the author. Please contact the author or the Editor of this weblog before publishing an edited or translated version. Thank you.
For years, former treasury secretary and Harvard-professor Larry Summers has been the most prominent voice in favor of getting rid of cash. For years, he has ignored all ethics rules of professional organizations, which demand of professional academics to disclose any information about potential conflicts of interest whenever they publish their findings or take a stand in public discussion. Now, finally he came clean.
When Larry Summers started the campaign for abolishing cash and moving to a cashless society, as in his speech in front of the IMF in 2013 the argument was, that cash was in the way of interest rates going as low as needed in a stubborn low-growth environment. In the current debate, in which the German government and the ECB have chosen to use the argument of illicit financing of terrorism and tax evasion to justify a planned ban on larger cash transactions and the abolishment of the 500-Euro-note, Summers is opportunistically switching to the same argument in his quest for the cashless society. In a column that appeared on February 16 in the FT, the Washington Post and others, he argued for abolishing the $100-bill. He pointed to a “study” by a Harvard Professor Peter Sands, which purports to show, but simply claims with the most superficial evidence, that getting rid of large denomination banknotes would reduce crime significantly.
It turns out, if you look into it a little more closely, that Sands is a sacked former bank CEO with no academic credentials, who received shelter last summer in Summers Harvard-department and was quite obviously put to work by Summers to put together this piece of propaganda, which Summers then used to justify his push to “kill the $100-bill”.
Neither in Summers blog, nor in the “study” do Summers or Sands disclose Sands’ recent role as the CEO of an institution, which might benefit from the move to a cashless society. However, one does learn in the acknowledgments, that “many politicians, central bankers and senior officials from various governments … were enormously generous with their time and wisdom as I prepared this paper.”
In a new column published on February 25, Sands and Summers jointly defend their proposal. This time, both the FT and the Washington Post run a disclosure that says that Sands was CEO of Standard Chartered and, even more interesting, that Summers “serves as an adviser or board member to a number of financial technology and payments companies”.
The Washington Post on their website also retroactively included this disclosure as an addendum into the first column.
If had let it be known earlier, that the main proponent of moving to a cashless society is an advisor to or board member of “a number of” the institutions who stand to benefit the most financially from such an endeavor, many people would have seen his proposal in a whole different light.
Summers role in the tight inner circle of anti-cash-campaigners, all tightly linked to the Group of 30, Harvard, MIT and the International Financial Institutions in Washington is explored in my forthcoming book (in German on April 11 by Quadriga) "Die Abschaffung des Bargeld und die Folgen" (The Consequences of Abolishing Cash)
Corporate Europe Obversvatory. The European Commission’s “new” investor protection proposal brings the same controversial corporate super rights back from the dead according to a new report by Corporate Europe Observatory and 16 other organisations.
The study’s release comes just before talks on this controversial issue resume in Brussels for the first time after a two year halt.“The zombie ISDS – rebranded as ICS, rights for corporations to sue states refuse to die” shows how the push for foreign investor privileges in EU trade talks such as the proposed EU-US TTIP2 deal continues as the Commission attempts to rebrand the politically untenable investor-state dispute settlement (ISDS) as an “Investment Court System” (ICS). An unprecedented Europe-wide controversy over the democratic threat posed by ISDS led to last autumn’s rebranding of ISDS as ICS in an attempt to get around the enormous public opposition to legal privileges for multinational corporations.
However, the report shows that under ICS, liability and financial risks would multiply for EU member states as 19 more EU countries could directly be sued by US investors, compared to only nine with an investment treaty with the US today. Over 47,000 companies would be newly empowered to sue (compared to around 4,500 today) and TTIP could invite the launch of nearly 900 US investor lawsuits against EU countries as opposed to 9 claims known under existing treaties.
The report also includes a case study on the stunning US$15 billion damages claim against US President Obama’s rejection of the controversial Keystone XL oil pipeline by Canadian pipeline developer TransCanada.3 It shows that TransCanada’s lawsuit – like other investor claims against measures to protect health, the environment and other public interests – would be perfectly possible under the ICS as it includes the same far-reaching investor rights relied upon by TransCanada in its claim against the US.
Pia Eberhardt, Corporate Europe Observatory:
“Like a zombie back from the dead, for the first time in two years ISDS will be back on the TTIP negotiation agenda next week. But what the Commission proposes is exactly what people have already rejected: extreme privileges for corporations, which will empower them to claim billions in compensation when laws and regulations undercut their ability to make money. The egregious investor attacks against the public interest, which have provoked public opposition to ISDS would be perfectly possible under the new Commission proposal.”
“Some MEPs want to update the EU-Canada CETA4 deal with this ‘new’ ISDS approach. But the Commission’s ‘new’ ISDS model is as dangerous for democracy, public interest legislation, and taxpayer money as the ‘old’ model enshrined in the EU-Canada CETA deal. The rebranded version contains the same dangerous investor privileges, often in wording identical to the CETA text. We must not be fooled by falling into this PR trap – special rights for multinationals and the rich are unacceptable, in whatever disguise.”
A central bank governor in Athens conspires with the President of the Republic to sabotage the negotiation strategy of his government to weaken it in its negotiations with the European Central Bank. After the government has capitulated, this governor, who is a close friend of the new finance minister and boss of the finance ministers wife, and the President of the Republic travel together to the ECB to collect their praise and rewards. This is not an invention, this is now documented.
On 19 January the German Central Bank in Frankfurt informed the media that the Greek President Prokopis Pavlopoulos visited the ECB and met with ECB-President Mario Draghi, and that he was accompanied by the President of the Greek central Bank, Yanis Stournaras.
Remember. When the Syriza-led government in Athens was in tense negotiations with the European institutions, the ECB excerted pressure by cutting Greek banks off the regular financing operations with the ECB. They could get euros only via Emergency Liquidty Assistance from the Greek central bank and the ECB placed a strict limit on these. Finance minister Yanis Varoufakis worked on emergency plans to keep the payment system going in case the ECB would cut off the euro supply completely.
It has already been reported and discussed that a close aide of Stournaras sabotaged the government during this time by sending a memo to a financial journalist, which was very critical with the governments negotiation tactics and blamed it for the troubles of the banks, which the ECB had intensified, if not provoked.
A few days ago, Stournaras himself exposed a conspiracy. He bragged that he had convened former prime ministers and talked to the President of the Republic to raise a wall blocking Varoufakis’ emergency plan.
In retrospect it looks as if Alexis Tsipras might have signed his capitulation to Stournaras and the ECB already in April 2015, when he replaced Varoufakis as chief negotiator by Euklid Tsakalotos, who would later become finance minister after Varoufakis resigned. In this case the nightly negotiating marathon in July, after which Tsipras publicly signed his capitulation, might just have been a show to demonstrate that he fought bravely to the end.
Why would I suspect that? Because I learned in a Handelsblatt-Interview with Tsakalotos published on 15 January 2016 that he is a close friend of Stournaras. Looking around a bit more, I learned that Tsakalotos wife is “Director Advisor” to the Bank of Greece.
This is the Wikipedia entry:
„Heather Denise Gibson (Greek: Χέδερ Ντενίζ Γκίμπσον; born in Glasgow) is a Scottish economist currently serving as Director-Advisor to the Bank of Greece (since 2011). She is the spouse of Euclid Tsakalotos, current Greek Minister of Finance.”
At the time she entered, Stournaras was serving as Director General of a think tank of the Bank of Greece.
The friendship of the trio goes back decades to their time together at a British university. They even wrote a book together in 1992. (Heather D. Gibson, Yannis Stournaras, Euclid Tsakalotos: The Real and Financial Sectors in Southern Europe: Catch-up, Convergence and Financial Institutions, University of Kent, Canterbury 1992.)
Thus: The former chief negotiator of the Greek government is and was a close friend of the central bank governor and the central bank governor was the boss of his wife. The governor of the Bank of Greece, which is part of the Eurosystem of central banks, gets his orders from the ECB, i.e. the opposing side in the negotiations. He actively sabotaged the negotiation strategy of his government.
If this does not look like an inappropriate association for a chief negotiator, I don’t know, what would.