The Socialist International recently held a meeting of its Commission on Global Financial Issues at the United Nations headquarters in New York with a special focus on a global overview of the current phase of the international financial crisis. Participants paid particular attention to the prospects for a turn-around in the US economy; the sovereign debt crisis in the eurozone and its regional and global impact; the emerging economies and their expanding role in the recovery; the urgent needs of the developing and poorest countries; the policies of the international financial institutions in shaping recovery; and strategies and priorities to place growth at the centre of the global agenda and other fundamentals for a progressive ‘out of crisis’ blueprint.
Participating in the meeting were the president and secretary general of the Socialist International and commission members, together with heads of international institutions, the chair of the US Financial Crisis Inquiry Commission, academics and leading economists attending as guests (list of participants
In introductory remarks, SI commission members noted that inadequate fiscal policies were responsible for prolonging the economic downturn, now in its fourth year, and hindering a more robust recovery. It was recognised that from the beginning the financial crisis was also a result of underlying problems in the global economy, namely the systemic problems in the banking and financial systems and macroeconomic problems of growing inequality leading to a deficiency in aggregate demand.
An important observation with regard to the current phase of the financial crisis is that today, according to recent data, inequality has got worse. Wages have stagnated or fallen and any growth of income coming out of the recovery has gone to the upper 1% of the highest earners. In the United States this 1% today take nearly a quarter of the nation’s income and control in terms of wealth 40%. This redistribution from the bottom to the top which is changing the face of society is also adversely affecting aggregate demand, as people at the top save more than those at the bottom.
Undoubtedly, this situation points clearly to the need for new thinking on how our societies are shaped and how our economies respond to, or serve, the needs of our citizens. Public spending and spending on social protection are not off the agenda – contrary to today’s conservative political agendas, they are not only in line with our ethics but are an economic necessity.
Increased wages bring an increase in aggregate demand without additional debt, and policies that would drive up wages would additionally be supported by the vast majority of people. In this area, it was suggested that the SI could work effectively to advance policies that would lead to coordinated rises in wages to stimulate recovery. The race to the bottom, where wages are slashed in a vain attempt to gain international competitiveness, must be stopped. It has been shown, for example in Brazil and in other economies, that a continuous increase in minimum wages in addition to reducing inequality has not been a barrier to continued growth, and has led to increased wages and purchasing power for those earning above minimum wage, whose income has risen in proportion to minimum wage increases.
Setting the record straight
There was an overwhelming sentiment among participants that conservatives across the developed world had had significant success in rewriting the history of the global financial crisis, intentionally overlooking its true causes in order to justify their ideologically founded austerity policies which are harmful to growth and recovery.
It is crucial to redress this approach, the acceptance of which has serious consequences for the prospects of getting out of the crisis. When objectively analysing the policies that precipitated the downturn, the facts bear out our arguments.
The financial crisis which began in 2008 was not caused by excessive government spending. It was not caused by waste and inefficiencies in the public sector. It was not caused by the cost of social security or people not working hard enough. It was not caused by too much regulation. The real causes of the financial crisis were deliberate high-risk policies and actions which directly precipitated the near collapse of the financial system.
Aggressive lending, many cases of fraudulent behaviour and a greatly changed risk profile were among the key contributors to the inherent instability. A lack of regulation of lending meant unaffordable loans were granted, often in the knowledge that they could not be paid back. Such unethical practices have directly led to misery and financial ruin for thousands of families who do not see any justice in the way financial institutions have been bailed out only to continue unchecked with the pro-cyclical policies of the past.
This has been compounded by the in-built scare tactics within the financial system, by which major financial institutions were labelled as ‘too big to fail’, leaving governments hostage to the threat of the collapse of the economy in the event that they were not given state support. Though there is a great deal of interdependence in the economy, global capital markets in many respects have very divergent interests to society and there is understandable anger that institutions were bailed out after having acted irresponsibly.
In the eurozone, the average deficit was only 0.6% of GDP just before the crisis in 2007; it is therefore clear that public spending cannot be blamed for current deficit levels. No democratic government has ever wasted resources on the scale of the trillions of dollars wasted through mismanagement in private sector financial institutions, yet the narrative we hear in no way reflects this.
Redefining the economy
Setting the historical record straight is only one part of the picture, and participants also addressed the need for progressives to get ahead of the pace of events and provide proactive solutions to the current challenges faced by the global economy. The focus should continue to be the goals of improving living standards and creating a better quality of life. Though globalisation was one of the contributing factors to the scale of the crisis, which has touched countries across the developed and developing world, it has made it easier to appreciate that people everywhere are after the same fundamental quality of life and desire the same basic standards of social protection, healthcare, job security, education and pensions.
With the facts firmly established and the causes of the crisis understood, the foundations will be laid for the implementation of policies that have the interests of people at their core. For decades it has been accepted by a large majority that profit maximisation is a precondition for growth, with profit pursued at the expense of the workforce – participants stressed this is a misconception that must be challenged. At this moment of low growth and high unemployment, it is crucial to expand investment, stimulating growth and ensuring that the economy is better prepared for the future.
Progressives must underline that global growth is the way to improve living standards in both the developed and developing world to capture the enthusiasm of ordinary citizens. At a very fundamental level, there is a pressing need to question a system that is not working for most citizens, where a steadily growing economy does not result in reduced unemployment or increased living standards for the least well off, but more concentration of wealth in the hands of those who are most well off.
Austerity has failed to result in growth in all cases where it was explicitly tried as a policy, with even the IMF acknowledging that austerity alone cannot resolve the economic problems in the developed world. Today, this can be most clearly seen in the United Kingdom, where economic growth has stagnated under the current government's aggressive austerity policies. Though the facts show that austerity is not working, as a result of the way the debate has been framed, any government that acts on its own against this assertion will be crushed by the markets and ratings agencies. Common action is therefore needed to bring about a change from the failed austerity agenda, with proactive policies required to push central banks to be supportive of a growth agenda that is the only way to a sustained recovery.
There is a growing understanding across the political spectrum that GDP alone is not a good way to measure the state of the economy. The progressive movement must therefore be focussed not simply on growth, but on growth that benefits all of society. There is a danger that the so-called economic recovery will be a jobless one, in a structural transformation of the manufacturing sector whereby increases in productivity result in lower employment. In the US, for example, if the current pace of recovery is continued, full employment will not be reached before 2025.
The pursuit of globally coordinated reform of the financial regulatory system also remains vital, in light of the lack of progress achieved to date on regulation of tax havens, ratings agencies and risk-taking, the implementation of a financial transactions tax, ending the abuse of anti-competitive practices and ensuring the transparency of credit default swaps.
In the longer term, investment in the future is needed to create a more stable and resilient economy. Alternative forms of investment such as green investment are important, as is investment in infrastructure projects and education.
Many analysts have been eager to expound the idea of a trade-off in the economy, where equality and social justice is seen as incompatible with efficiency and growth. In fact, growing inequality reflects shrinking opportunity and a lack of social mobility, distortions in the economy which undermine efficiency, and under-investment in the areas of mutual benefit mentioned, such as infrastructure, education and technology.
As a result of policies which deepened inequalities, democratic politics is at stake, as increasing inequality is leading to disillusionment with the democratic process. We now see campaigning to strip away rights of workers in particular in the US, where workers' protection is lower than any other developed country, transforming this disillusionment into anger where workers' rights are threatened and employment protection is decreased.
Advancing the progressive agenda
Aware that the conservative response of cuts and austerity cannot lead to better living conditions for those most in need, participants discussed at length both the economic and political requirements for a coordinated plan of action to ensure that the social democratic responses to the crisis are heard and implemented.
The current dominance of conservatives and neo-liberals in government in the developed world makes it a challenging time for progressives to advance this agenda that will redress some of these imbalances. In the EU for example, there are only three socialist prime ministers, leading to European summits dominated by those who want to reduce investment and government spending at all costs in a continuation of the pro-cyclical policies of pre-2008. The sovereign debt crisis has highlighted a crisis of solidarity in the eurozone, in contradiction with the principles upon which the EU is built.
A particularly damaging consequence of the crisis has been a rise in inequality and corresponding decrease in social mobility in many developed economies where social protection is less firmly established. Those countries following the Nordic model have managed to maintain levels of social protection, with budget consolidation achieved by means such as the solidarity tax in Finland; the challenge for all governments must be to find just responses to the crisis that do not remove social protection from the most vulnerable. The unfounded argument that as a result of the crisis governments should cut back on social protection must be refuted wherever it is made.
Defining a new narrative will lay the foundation to take incremental steps that will redress some of the imbalances and help us move towards an economy that works in the interests of more than just a few. To prevent a return to the excessive risk taking and unethical practices that were rife in many financial institutions, blind, unsubstantiated faith in the ability of the market to self-regulate must be eradicated. In the US, the deep devotion to the ideology of deregulation resulted in an out of control financial sector, with those in charge ignoring the risks. More and deeper change is needed, to ensure that those everywhere who drove these policies are not left in charge of the recovery.
Coordinated action is needed as those with an interest in maintaining the status quo in the financial sector are a mobile elite, able to effectively organise internationally using their naturally existing network through corporations. To be successful the progressive agenda needs both to mobilise the grass roots and to enhance cooperation and joint action between progressive forces from different countries and regions. One possible backlash against globalisation and the interdependence of the world’s economies that must be avoided is a move towards protectionism, isolationism and economic nationalism through which the global problems faced by all economies cannot be solved. A key objective of social democrats must therefore be working to find common ground between democracy and globalisation.
The Commission will reconvene in advance of the XXIV SI Congress to further these ideas, build on these discussions and maintain the momentum behind these policies, working with the participation of finance ministers from SI member parties in both developed and developing economies to enable valuable cooperation to secure a just, sustainable recovery from the crisis.