While much of the media coverage around the G20 leaders summit has been about the failure of international diplomacy in Syria, the formal agenda was around one issue: growth. Growth through jobs, growth through transparency, and growth through effective regulation—these were the three themes the Russian government prioritized for this year’s summit.
One could perhaps argue that the obsession with growth is appropriate. The US economy—the source of the largest financial crisis since the Great Depression—is again growing, but when compared with previous economic recoveries the pace of growth has been extremely sluggish. Economists estimate that at current rates of growth and job creation, the US will not achieve anything close to full employment before 2022. Most G8 economies—especially in Europe—are in worse shape and even China and India are seeing growth expectations slow down.
But focusing on growth is a bit like treating strep throat with asprin. You may alleviate some of the symptoms, but you’re not treating the source of the problem.
Whatever cure the global economy needs must address the structural problems which have led to the current crisis. Diverse as they may be, those structural problems all have the same root—an economic system that prioritizes the interests of global capital over the needs and rights of ordinary people.
Despite the overemphasis on growth, G20 governments have considered reforms—such as ending “too big to fail,” substantial reform of the international monetary system, and cracking down on corporate tax dodgers—that could address the root causes of crisis. But to date, there has been little or no implementation of those reforms.
The Bubble Casino’s Latest Bust
In the absence of any change in the underlying structure, investors have been playing a game with free money, largely provide by governments engaged in monetary stimulus (Quantitative Easing or QE in the United States). Instead of passing on the gains from free money to consumers, investors have been looking for bets that will ensure both security (investors know that another crisis could be around the corner) and high returns. When they thought that commodity markets fit the bill in 2008-2010, the inflow of money caused havoc for consumers, especially poor consumers who found themselves paying more for food without any increase in wages. Bread riots not seen for a generation returned.
When that bubble deflated in 2010, money flowed out of commodities and towards the emerging markets of Brazil, South Africa, India, China, Indonesia, Turkey, and a few others. But now that QE is winding down, money has already started moving back to Northern markets where investments can again be profitable without the risks involved in developing countries.
We don’t yet know the full effect of this latest shift. Currency markets in South Africa, Brazil, India, Turkey and Indonesia seem to be stabilizing after losing as much as 25% of their value against the U.S. dollar over the past year. A replay of the 1997 Asian financial crisis is unlikely. Many countries are in a good situation because they have stockpiled foreign-currency reserves and taken out few foreign-currency-denominated loans. But in an integrated global market, falling currency values mean rising prices; in some countries, food, fuel and other essential items are already more expensive than they were a few weeks ago.
If the G20 really were a “board of directors” of the global economy, they would have left St. Petersburg with a solution to this latest crisis, if not the underlying trend. But the G20 isn’t that. It’s a forum for discussions, not a rapid-response mechanism (nor even, really, a slow response mechanism most of the time). Except in times of deep crisis, it requests studies, deliberates through its finance ministries, and sometimes reaches sufficient consensus to recommend policy changes or new processes to get agreement on policy changes. Instead of decisive change, the St. Petersburg communiqué refers to a perceived need to “carefully calibrate and clearly communicate” economic policy between countries. The outcome is particularly unsatisfactory given that the G20 has been obsessed with this issue—sometimes under the misleading label “currency wars”—since 2010.
And there are solutions on the table. From the UN Conference on Trade and Development (UNCTAD) proposal to peg exchange rates to inflation, to proposals related to use of a neutral currency, such as International Monetary Fund (IMF) Special Drawing Rights, there are a range of options which would address at least one aspect of this problem—namely, the global over-reliance on the U.S. dollar.
While these solutions would not stop the bubble casino from operating, they might at least slow it down a little.
Over the past few years, our economic system has punished the innocent and rewarded the guilty. But believe it or not, that’s not its most troubling feature.
Globally the richest 0.6% of the population controls a little less than 40% of global wealth, meaning that the Occupy Wall Street movement was being optimistic when they coined the slogan “We Are The 99%.”
Of the reforms on the table, there are a few that might actually work in terms of taking power away from the tiny elite who continue to profit from this unsustainable system. Many of these relate to taxation.
Taxation gets a bad name for obvious reasons, but at its core, it is one idea that might get us out of our global predicament. It goes after wealth—in a progressive system, the wealthy pay a greater share—and uses it to pay for “public goods” or things that everybody needs. Bridges, highways, airports, not to mention schools, hospitals, clean water—there’s no limit to what taxes can pay for. And politicians who don’t use taxpayer money to fund better infrastructure, social services, and jobs are likely to find themselves out of work after the next election cycle. A little bit in increased tax revenue can go a long way to addressing a lack of social services and an inability to implement a strong strategy for universal and good-quality employment..
But too many avoid paying taxes. Through a complex network of treaties, companies list income generated in one country as income generated in another, thereby allowing themselves to pay taxes (or not) in places that have little or no corporate taxation and where they don’t have to disclose financial information.
To its credit, this year’s G20 summit endorsed a plan drafted by the Organization for Economic Cooperation and Development (OECD) to address the issue of Base Erosion and Profit Shifting (BEPS). The summit communiqué includes strong language on the need to address the interests of developing countries in the next steps. But developing countries need to be at the table and it’s not clear whether or not they will be.
Potentially, BEPS is a once-in-a-lifetime opportunity. A single process could alter thousands of tax treaties, and political pressure to adhere to stronger regulations could become the norm. Together with new initiatives on “automatic exchange of tax information,” these measures could finally compel companies to pay what they owe in countries that they work in, and everyone could at last reap some benefit (not just the banksters).
But even these measures do not go far enough, considering the extremes of poverty and wealth that pervade the global economy. Another proposal that’s gotten a lot of attention over the past few years is the Robin Hood Tax. A re-branding of what was once called the Tobin Tax or the Financial Transactions Tax, the Robin Hood Tax would impose a small fee on the international transactions that make up the vast majority of commerce in today’s world. The money generated would be significant—hundreds of billions of dollars. Eleven European Union (EU) countries are considering going forward with such a tax, despite recent controversy regarding the legality of such a move. If those countries are bold, they will suggest a higher rate—at least the 0.5% that economist James Tobin originally suggested. At lower rates, the tax would still generate a lot of revenue, but it’s not clear that it would do anything to slow down the casino.