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Thursday, January 7, 2010
(Our look back at 2009 is stretching out into January a little, but I'm not quite finished with the stock-taking exercise. Our soap box, our rules)
Around this time last year, I pointed out that, if nothing else, 2008 drove home a fundamental lesson of IPE: the economy drives politics. Many of the best laid plans of early 2008 were sucked down the toilet along with the global economy, leading to some surprising outcomes.
My question for 2009 was therefore: how hard would politics push back? Because push back it did: countries that once championed free market principles quickly turned inward in order to protect their interests and respond to popular outrage. Let's have a look back:
Protectionism
As discussed below, the spectre of protectionism was haunting us early in 2009. In Britain, we suddenly saw shades of populist xenophobia from Gordon Brown (pray tell us, Gord, what exactly constitutes a British worker? shall we ask the BNP?). In the USA there was the noxious "Buy American" clause, the auto-bailout, and some other hilarious examples. India banned Chinese toys for six months. But the most gregarious example of all comes from China itself: the undervaluation of the yuan, and its consequences for everyone else, is probably the biggest protectionist story of the year.Tobin Tax
While not exactly a crackpot policy proposal, the Tobin Tax (explained here) is still a bad idea. Unfortunately, because it was re-introduced by Lord Turner of the FSA in a widely-publicized report, it got a lot of media play. Thankfully, the US made it clear that they weren't interested so the idea was stillborn (er, maybe not).
[Don't get me wrong - sometimes capital controls are a good idea, especially for emerging markets facing massive inflows of capital, but more on that later.]
While not exactly a crackpot policy proposal, the Tobin Tax (explained here) is still a bad idea. Unfortunately, because it was re-introduced by Lord Turner of the FSA in a widely-publicized report, it got a lot of media play. Thankfully, the US made it clear that they weren't interested so the idea was stillborn (er, maybe not).
[Don't get me wrong - sometimes capital controls are a good idea, especially for emerging markets facing massive inflows of capital, but more on that later.]
Pay czars! Wait, Pay czars?
Somehow the use of the term "czar" here just doesn't inspire confidence. Here we have liberal, democratic, relatively free and competitive societies appointing pay czars to set limits on the compensation of a particular subset of society. I get that skewed pay incentives led to excessive risk-taking, but there were much bigger factors at play.
However, as one astute observer pointed out, the job description of the pay czar is not to curb bankers' pay but rather to curb public anger at bankers' pay. I hope it worked, since I'll bet there were some Frenchmen dusting off their guillotines... just in case.
However, as one astute observer pointed out, the job description of the pay czar is not to curb bankers' pay but rather to curb public anger at bankers' pay. I hope it worked, since I'll bet there were some Frenchmen dusting off their guillotines... just in case.
SuperTax 2009
Further caving to popular anger, the UK and France introduced the SuperTax 2009. I feel no sympathy for the uber-rich bankers traveling in their Mercedes to the Human Rights Tribunal to plead their case. But why stop at bankers? You should at least be consistent.We Still Like Capitalism, Though, Right?
We need only ask John Maynard Keynes, a first-hand observer of how bad the backlash can be. An astute observer of history and human psychology, Keynes had the following to say about pre-WWI Europe:
The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly.Those advantages collapsed spectacularly in 1914. We spent the next seven decades sorting out the mess. Now, I'm not suggesting that pay czars and supertaxes are the first steps towards a return to communism or fascism or whatever - not by a long shot. But try to remember how unlikely those things would have seemed a couple of years ago. Things change in a hurry.
The lesson that I take from all of this is as follows: the liberal market economy is a fragile social experiment - it is not a naturally occurring phenomenon. We need to keep this message in the back of our minds as we take stock of recent events. This little project of ours requires safeguarding, not hysterics. So let's tone down the ideology and tone down the populism and instead focus on pragmatic ways to keep it going a little longer.
Labels: capital flows, markets, protectionism, Psychology
