The Heavy Price of Economic Policy Failures

By Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Cross posted from The Frontline

A lot of the media discussion on the global economy nowadays is based on the notion of the “new normal” or “new mediocre” – the phenomenon of slowing, stagnating or negative economic growth across most of the world, with even worse news in terms of employment generation, with hardly any creation of good quality jobs and growing material insecurity for the bulk of the people. All sorts of explanations are being proffered for this state of affairs, from technological progress, to slower population growth, to insufficient investment because of shifts in relative prices of capital and labour, to “balance sheet recessions” created by the private debt overhang in many economies, to contractionary fiscal stances of governments that are also excessively indebted.

Yet these arguments that treat economic processes as the inevitable results of some forces outside the system that follow their own logic and are beyond social intervention, are hugely misplaced. Most of all, they let economic policies off the hook when attributing blame – and this is massively important because then the possibility of alternative strategies that would not result in the same outcomes are simply not considered.

In an important new book, Failed: What the “experts” got wrong about the global economy (Oxford University Press, New York 2015), Mark Weisbrot calls this bluff effectively and comprehensively. He points out that “Behind almost every prolonged economic malfeasance there is some combination of outworn bad ideas, incompetence and the malign influence of powerful special interests.” (page 2) Unfortunately, such nightmares are prolonged and even repeated in other places, because even if the lessons from one catastrophe are learned, they are typically not learned – or at least not taken to heart – by “the people who call the shots”.

The costs of this failure are indeed huge for the citizenry: for workers who face joblessness or very fragile insecure employment at low wages; for families whose access to essential goods and social services is reduced; for farmers and other small producers who find their activities are simply not financially viable; for those thrown by crisis and instability into poverty or facing greater hunger; for almost everyone in the society when their lives become more insecure in various ways. Many millions of lives across the world have been ruined because of the active implementation of completely wrong and unnecessary economic policies. Yet, because the blame is not apportioned where it is due, those who are culpable for this not only get away with it, but are able to continue to impose their power and their expertise on economic policies and on governing institutions. For them, there is no price to be paid for failure.

Weisbrot illustrates this with the telling example of the still unfolding economic tragedy in the eurozone. He describes the design flaws in the monetary union that meant that the European Central Bank (ECB) did not behave like a real central bank to all the member countries, because when the crisis broke in 2009-10 it did not behave as a lender of last resort to the countries in the European periphery that faced payment difficulties. Instead the most draconian austerity measures were imposed on these countries, which simply drove these countries further into economic decline and made their debt burdens even more burdensome and unpayable.

It took two years of this, at a point when the crisis threatened to engulf the entire EU and force the monetary union to collapse, for the ECB Governor Mario Draghi to promise to “do whatever it takes to save the euro”. And then, when the financial bleeding was stemmed, it became glaringly evident that the European authorities, and the ECB, could have intervened much earlier to reduce the damage in the eurozone periphery, through monetary and fiscal policies. In countries with their own central banks, like the US and the UK, such policies were indeed undertaken, which is why the recovery also came sooner and with less pain than still persists in parts of Europe.

Why could this not have been done earlier? Why were the early attempts at restructuring Greek debt not more realistic so as to reduce the debt levels to those that could feasibly be repaid by that country? Why was each attempt to solve the problem so tardy, niggardly and half-hearted that the problem progressively got worse and even destroyed the very fabric of social life in the affected countries? Why was the entire burden of adjustment forced upon hapless citizens, with no punishment for or even minor pain felt by the financial agents who had helped to create the imbalances that resulted in the crisis?

Weisbrot notes that this entire episode “should have been a historic lesson about the importance of national and democratic control over macroeconomic policy – or at the very least, not ceding such power to the wrong people and institutions”. (page 4) Unfortunately, the opposite seems to be the case, with the lessons being drawn by the media and others still very much in terms of blaming the victim. Indeed, Weisbrot makes an even stronger point, that this crisis was used by vested interests (including those in the IMF) to force governments in these countries to implement economic and social reforms that would otherwise be unacceptable to their electorates.

The significance of vested interests – finance and large capital in particular – in pushing economies to the edge to force neo-liberal reforms that operate to their favour, has been noted in many countries before, especially developing countries facing IMF conditionalities. The standard requirements: fiscal consolidation led by budget cuts in pensions, health and social spending; reductions in public employment; making labour markets more “flexible” by effectively reducing labour protection; cutting subsidies that benefit the poor like food subsidies while providing more tax cuts and other fiscal incentives to the rich, etc.

Weisbrot notes that such policies are neither necessary to emerge from a crisis (in fact in most cases they are counterproductive) nor are they conducive to long term development. He provides concrete examples of countries that did things very differently, and were successful as a result. The most important such example he provides is that of China, a country that systematically followed a state-led heterodox strategy for industrialisation, with the state controlling the banking system and a huge role for state-owned enterprises. The unorthodox policies it followed brought about the fastest growth in history, lifted hundreds of millions of Chinese people out of poverty and also pulled along other developing countries because of its rapidly growing demand for imports.

Weisbrot identifies other successful examples of heterodox policies that helped countries to emerge from crisis and improve living standards for their people, such as Argentina in the mid 2000s and a range of other explicitly progressive governments in Latin American countries that followed alternative approaches to increase wage incomes and formal employment through active state intervention. One important reason they were able to implement unorthodox economic policies was the relative decline in the power of the International Monetary Fund (IMF) in this period. Weisbrot argues that the IMF began to lose influence in the wake of the Asian crisis of 1998, when it so clearly got both its assessment of the problem and its proposed solutions completely wrong. The geopolitical and economic changes that this loss of IMF influence enabled were hugely beneficial for the citizenry in these countries – and point to the huge costs still being paid by those forced to live under neoliberal economic orthodoxy.

Weisbrot ends his book on a positive note (other than for the eurozone, where he forecasts continued pain for the near future). He believes that “in the developing world, economic policy and the rate of increase of living standards are likely to show improvement in the foreseeable future”. (page 236) This is largely because of his belief that the existing multilateral arrangements and institutions that forced orthodox policies upon developing countries will continue to decline, and they will have freedom and ability to pursue heterodox policies that served them well in the recent past.

Unfortunately, this belief now seems over-optimistic. In the past year we have witnessed “emerging markets” in retreat as global finance has pulled out of them, and the reinforcement of institutions and arrangements (in trade and investment treaties and other financial agencies) designed to dramatically reduce the autonomy of national policy making. We are seeing political changes in several countries that suggest a renewed dominance of neoliberal market-driven economic approaches that privilege the interests of large capital. And even in China, there are signs of confusion, as the growth process runs out of steam, with recent moves towards more financial liberalisation that could have huge implications in terms of future viability of independent economic strategies.

This is somewhat depressing, but it makes Weisbrot’s main argument even more important and compelling. The standard economic policy model fails, and the costs of such failure are huge – so it is critically important for more people across the world to be aware of them and to demand that their governments opt for more democratic and just economic strategies.

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  1. Carla

    “In countries with their own central banks, like the US and the UK, such policies were indeed undertaken, which is why the recovery also came sooner and with less pain than still persists in parts of Europe.”

    The peoples of the US and the UK do not seem to be enjoying our respective “recoveries” very much.

      1. Ray Phenicie

        I believe you’re taking the comment out of context. Is it not rather the case that we’ve avoided the pounding that Southern Europe has been swept up into? I don’t see 50% of our professional class fleeing, or almost all of our college graduates looking overseas. We are doing as well as we are (granted way below what might be) because of the stimulus that was put in place.

  2. JohnnyGL

    Good points, we should be given a chance to “throw the bums out” on economic policy, too. Unfortunately, the move toward independent central banks in the last several decades has given us LESS, not MORE democratic control over policy. I’d rather see the Fed held accountable to some kind of democratic control, whether through Congress or some other means.

    Direct elections of FOMC members? Board of Governors? Not sure I like the idea, but can’t be that bad, can it?

    1. craazyboy

      No Paulson/Congress approval bank bailout would have been a start. Congress passing real bank reform after the dust settled would have been some nice follow up. Then the Fed telling Congress that interest rate policy by itself won’t adequately fix all our ills(and eventually blow more bubbles) would have been some nice counterpoint going the other direction.

      Changing the structure of the system won’t help when the entire system gets captured.

  3. sierra7

    It seems if my memory serves me, in around April of 2009 the rules of the game for the banks in the US were changed; i.e., all those “investments” that became trash (bad mortgages etc.) they had on their “books” could be re-classified and held, “off the books” for the duration….as long as it would take to recover their investments…..which could take decades….
    At that time, around April 2009, the “market” made a turnaround and “climbed” back into the stratosphere…..
    Anybody else remember this episode?

  4. MaroonBulldog

    Fifty years ago, I was taking a couple of economics courses in college. Forty years ago, I was taking a few more in a business school. Lately, I have come to see that the economics I learned in school no longer works: by “no longer”, I mean “never during any period when I have been observing.” There may be an economics that does work, but it’s not any economics I ever learned, if working requires some congruence between stated aims and outcomes.

    Sierra7 asks if anyone remembers the April 2009 episode. The lesson I drew from that is this: even if economics no longer works, fraud and deception still do, at least until fraud and deception are pointed out and called by their true names, and sometimes even thereafter.

    Keep on pointing and calling, Naked Capitalism, keep on pointing and calling!

    1. Central Scrutinizer

      Eric Holder called them by name.In response they called him to New York for a job interview.He now enjoys a high 6 figure salary at a respectable law firm in Manhattan.
      The Department of Justice has now switched gears with the incoming successor.She has decided that European soccer league corruption is at the top of the American people’s prosecutorial agenda.You may ask why? The answer is very simple.Just realize that the human condition has never really changed much in our so-called civilization.We are still greedy power hungry little animals,that hold base animal pleasures in our highest personal regard.5 star hotels throughout Europe can be quite pleasurable for an up and coming legal team when the credit card has no limit.After all,the American people demand justice,right?

      The same greedy little animal argument can be made for Obama’s soon to be outgoing administration.They are all maneuvering for high paying jobs in the health insurance industry.
      This career positioning is not however exclusive to the Obama administration,or to democrats for that matter.People are so quick to point the finger at either political party,when this has nothing to do with politics or party affiliation whatsoever.I’m sure that the Bush people have transitioned nicely into various military contracting positions,or possibly the oil industry.

      The point is that this(or any that I have seen)form of government doesn’t work,when business and industry merely wave the carrot,and the influence is bought.Without rules the greedy little animal in ALL of us cannot help but be corrupted.

      It is who we are

      1. Vatch

        Quite true. I just have one correction. Holder won’t be receiving a mere 6 figure salary at Covington & Burling. All the reports that I read say that it will be a 7 figure salary, and maybe even a low 8 figure salary. The New York Times reported that Holder’s former subordinate at the DoJ, Lanny Breuer, now gets $4 million per year from C & B.

  5. RBHoughton

    My desperate hope for my grand-children is that Russia will supply the energy and China the money and between them will accumulate a sufficient following in South America, Africa and Asia to stem the progress of great capitalists and their army of accountants, lawyers and economists and bring about some real democracy, genuine people power. Amen.

    1. MaroonBulldog

      History gives us not much reason to hope or believe that Russia and China will bring democracy to the world. These two empires were among the foremost in giving the world the concept of “oriental despotism.”

      1. Russell Scott Day/Founder of Transcendia

        According to the book Farewell, Reagan was successful at cutting off access to technological innovations Russia was able to steal covertly from the US.
        Some complaint has been made to the Chinese about their propensity to appropriate intellectual property without paying for it.
        Both nations limited free speech, which is apparently an economic multiplier in and of itself.
        I theorize that since no US innovators can maintain more than 6 months of lead in the markets as a result of the fast loss of intellectual property, this helps drive short term financial planning.
        Distribution of benefits of all that makes for a civilized life for the most people possible in the world cannot be achieved when those systems necessarily designed to affect long term prosperity are road blocked by well placed individuals unconcerned with no one other than theirs.
        Actions of the European Union dominated by the German Nation are said to have ended up with the German banks securing the lions share economic benefits of the policies imposed on all other nations of the EU.
        Mearsheimer says that since there is no Government of Governments to call when one nation threatens another it behooves the leaders of any nation to secure for themselves the weaponry necessary for them to participate in War by Threat afforded by nuclear weapons.
        Economic warfare between the US and Russia has expanded now as I judged Putin’s move into the Middle East was a move intended to eliminate what appeared to me the reason that Kerry visited the Saudis followed by lowering of oil prices possible for the Saudis to cause cutting back on ISIS profits in both Syria and Turkey.
        It is a complex world and we seem to still be able to grow enough food for the billions on it.
        However it does appear that unless we do began to co-operate and install more equitable distribution systems long term, internationally, the predicted crisis overload will overwhelm us before Elon Musk can colonize Mars.

  6. Steve


    It was actually March 2009 when Paul Kanjorski (D PA) and his cohorts coerced the FASB to recind FASB157 the “mark to market” rule allowing banks to “mark to model” sometimes reffered to as “mark to fantasy”… Thereby making transmutation possible.
    Coincedentally starting the turnaround in the stock market.

  7. washunate

    I think this post demonstrates why failed is an inaccurate framework. Western society generally and the Anglo-Americans in particular are not characterized by bad ideas and incompetence. Empire is what our leaders want.

    This is what some intellectuals seem to continue refusing to confront: fascism is not an accident or a misunderstanding. Our power structure likes inequality and domination.

    1. Norb

      Your point is key and needs to be stressed repeatedly . A similar argument concerning the “stupidity” of the elite or politicians is also constantly made to similar effect. It is the immediate feel good response to the tragic consequences of Empire. It takes assuming responsibility to accept that you are being played the fool and the default position is to deny responsibility and blame the other. Bread and Circuses were not invented without reason. Can’t wait for the Superbowl!

      Coming to terms with human violence is the larger picture. Is human civilization possible without constant warfare and aggression? We haven’t cracked that nut as the saying goes and all the talk of American Exceptionalism does not obscure the fascist nature of our evolving culture.

      Can those dedicated to peace survive alongside violent neighbors?. How do you implement a strong defense without corrupting a peaceful intent?

    2. aka

      “Our power structure likes inequality and domination.” washunate

      Obviously some should have more power than others based on their worthiness; we shouldn’t want fools or the wicked to have much power and a just economic system would tend to limit the power of both.

      But our economic system is not just since government subsidizes the wealthy, whatever their worthiness (though with limited success in the case of fools, I imagine) and wealth equals power.

  8. Minnie Mouse

    The global system just needs far less tight coupling and far more independent redundancy between nation states. That would mitigate the risk of global systemic collapse.

  9. Y Chang

    There seems to be a tendency to label people with power and/or money as “stupid”.

    I have yet to identify a stupid person with considerable wealth or power, except those who inherited it.

    All politicians and their puppet masters are smart people who exactly know what they are doing. Please don’t call them stupid. That includes both Bush and Obama.

    1. greg

      Yes. They are smart people, who know exactly what they are doing, within their bubble.

      Factors beyond their bubble are totally beyond their understanding, and they are incapable, except perhaps in some general (or for a few some personal) way, of preparing for the eventual effects of these factors on their world.

      Look at economists: They are smart people, who know all about economics, within their bubble.

      The aristocracies of France and Russia were smart people, who knew exactly what they were doing. Within their bubbles.

  10. Fiver

    I had to cancel my subscription to the idea of a ‘bungling’ but otherwise responsible policy-making elite in the US long ago. It should be noted the US was instrumental in effecting the entire European Union project. The financial Achilles Heel, the absence of a unified, central financial backstop, was deliberately built into the Euro by its ‘founding’ economist to constrain nations’ abilities to run up debt.

    But derivatives and neoliberal financial deregulation allowed private banking and some governments to run absolutely amok. The first big crack was the Asian Financial Crisis (yes, the Mexican peso and LTCM also important). Who was the American point man on the mission to put out the fire? Tim Geithner. What does he foist on all the Asian Tigers? Well:

    One important reason they were able to implement unorthodox economic policies was the relative decline in the power of the International Monetary Fund (IMF) in this period. Weisbrot argues that the IMF began to lose influence in the wake of the Asian crisis of 1998, when it so clearly got both its assessment of the problem and its proposed solutions completely wrong. The geopolitical and economic changes that this loss of IMF influence enabled were hugely beneficial for the citizenry in these countries – and point to the huge costs still being paid by those forced to live under neoliberal economic orthodoxy.

    Geithner at the NY Fed. Geithner at AIG – dead centre. Geithner is the second-most valuable player on Team Trillions For Banksters (Bernanke in a class by himself). Geithner also as Treasury Sec was responsible for the IMF position on Greece, which was to support austerity for years. I rather expect this was to protect big US banks. He oversaw, along with Bernanke, the greatest theft of wealth the world had ever seen.

    When the consequences of policy ‘error’ start landing in real terms on those who advocated, lobbied, pursued, fought for and implemented whatever ‘error’ in question, I’ll start believing again in an elite that is merely foolish not criminal.

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