S&P: do what we want and no one gets hurt
Wray said that, in fact, different countries have responded differently, demonstrating that governments have multiple policy options that can produce very different outcomes.
S&P revised the economic outlook of Britain’s debt to negative from stable in May 2009. In 2010, a recently elected Conservative-led coalition in Parliament introduced drastic austerity measures. S&P immediately restored the U.K.’s economic outlook to stable.
But Eric Tymoigne, an economist at Lewis and Clark College, used the United Kingdom not as an example of a happy ending (S&P’s advice is followed, and the country, with an improving economy gets S&P’s seal of approval), but of the deeply negative impact that excessive austerity can have on a fragile economy. “They sacrificed their recovery,” he said. “If you try to introduce austerity in a recession you can end up with a lost decade.”
Baker pointed out that, notwithstanding S&P’s restoration of the “stable” label to the U.K.’s economic outlook, British citizens are still suffering from high unemployment, stagnant growth, and cuts in social services.
John Weeks said that by focusing on the perceived wishes of investors instead of the interests of citizens, British officials had made an essentially undemocratic decision. And the popular resistance to austerity cuts in the U.K. underscores that point, he said.
Wray used Japan as a counter example. S&P has downgraded Japanese debt several times in the last decade, citing its rising deficit. Japan has been struggling with low demand for decades, and officials did not implement austerity programs or significantly cut spending, Wray said. The result has been extremely low unemployment, as well as low interest rates.
Though Chang pointed out that most of the Japanese debt is owned internally, he agreed that Japan should serve as the model for the U.S. when responding to the S&P report and, more generally, when forming policies to respond to the recession.
Mitchell said that, in responding to the S&P report, the correct, and most democratic course, response would be simply to ignore it. Indeed, Mitchell added, “the refusal to introduce austerity is the only option the US government has if it wants to serve its workers and businesses responsibly.”
A vicious cycle?
In order to achieve greater democratic control of public policy, Chang said, it was necessary to “demarcate [the market] and prevent it from spilling into other areas. We need to start rolling the market back, like the government has been rolled back since the 1970s.”
In the short term, Chang said, the policy makers in the U.S. should refocus their attention on the needs of the public. In the long term, several economists interviewed stressed the importance of putting constraints on capital markets. Some argued that constraints were needed in order to limit the actual influence that bondholders have in the policy making process. Others, who were skeptical of the financial — as opposed to political impact — that the bond market can exert, still thought controls were needed to make clear to the public that elected officials had no justification for catering to the market’s desires.
John Weeks of the University of London said that the U.S. and the U.K. should institute currency controls and capital controls and should consider taxing financial transactions.
“Those are good things,” MacEwan agreed. “They limit the prerogatives of capital in a useful manner.”
MacEwan stressed that significant tension will remain between the democratic state and international capital as long as global institutions lack the will and the power to effectively regulate financial markets.
But John Agnew, a geographer at the University of California Los Angeles, stressed that the U.S. still has a huge amount of leverage in the global economy, and there was much that could be done domestically to influence the international regulation of markets.
“When the U.S. does something, every country in the world pays attention,” he said. “If we got a couple of the biggest, most powerful governments together, they can easily begin to regulate this.”
The starting point, MacEwan repeated, was to change an ideology that conflates and the presence of profits with the economic health of ordinary citizens. He described a “vicious cycle” at work in American policy making, in which a greater concentration of power in capital markets “results in decision making that reinforces that power, and leads to worse economic policies for the rest of us, and less democratic control over the economy.”
“The problem that we face is how to turn that vicious cycle into a virtuous circle,” he said.
In that sense, he said, regulating capital markets and the ratings agencies were just one part of the solution, and “the rest has to do with ideology.” To begin to change an ideology of conflating private and public interests, “We need to take advantage of all the different ways you can do things that involve public involvement.”
For MacEwan, that means locating areas where the economy can be brought under greater social control, whether it is empowering labor unions to represent the interests of the broader public, or providing universal social programs that, in his terms, create a “social wage” which is shared by all members of society and is not tied to income.
While on the surface, unions and social programs might seem disconnected from the influence of capital markets, MacEwan argued that the connection exists because they bring more of the economy under democratic control, thus helping to change the ideology that encourages officials to analyze policies on the basis of their effects on financial markets, and not on their effects on the public.
If we had begun to change this ideology years ago, MacEwan said, “Maybe we wouldn’t be in this mess in the first place.”