It’s budget season, and — like Washington, D.C’s trademark cherry blossoms — a perennial myth about federal finances has re-emerged on Capitol Hill: That only taxpayers pay for the things the government buys. Asked on Morning Joe about cuts to everything from the Environmental Protection Agency to Meals on Wheels, White House budget director Mick Mulvaney went for the heartstrings: “One of the questions we asked was ‘Can we really continue to ask a coal miner in West Virginia or a single mom in Detroit to pay for these programs?’ And the answer was no.”
The truth is that the White House didn’t ask coal miners or single moms much of anything when it outlined $54 billion in additional spending for the Pentagon, which the budget’s drafters have argued will be pulled from non-defense discretionary spending. Political economist Ann Pettifor, director of the U.K.-based think tank Prime Economics, argues that government spending primarily reflects political priorities- — not how much tax revenue is in the bank: What services will the state provide, and which will it privatize? How many tax breaks will corporations be given in the name of job creation? As she and others have pointed out, questions of deficits and belt-tightening rarely arise when it comes to new fighter jets and bailouts for the financial sector.
In her latest book, The Production of Money: How To Break the Power of Bankers, Pettifor seeks to pull back the curtain on how money is created and used in the global economy. Doing so, she contends, may just hold the key to taking on some of the century’s most pressing crises. In These Times caught up with Pettifor to talk about money and markets, the Democratic Party, taming the financial sector and how a long-dead Hungarian economist can help us understand Trump’s rise.
I want to start off with an economist you reference a lot and who there seems to be kind of a revived interest in recently, Karl Polanyi. What does Polanyi argue, and how does he help us understand where we sit in 2017?
Polanyi wrote a now quite famous book, The Great Transformation, in 1945. It rose out of his experience of the rise of Hitler and the rise of nationalism and fascism in the 1920s and ‘30s. Really his argument is quite unique. It’s a political economy of the way in which markets are, in fact, socially embedded in society, and have always been since the beginning of time. We have always had markets, for almost as long as we can count. And yet those markets have always been embedded within social relations, i.e., subject to oversight and regulation by society. What began to happen in the 1920s was that the people who are involved in markets began to lobby for markets to become disengaged — disembedded — from society, detached and self-regulating and beyond the oversight of the regulatory bureaucracy. As such, financial markets began to operate in the stratosphere. As a result, society had no influence over them and no impact on them. Polanyi argued that the more that money, markets, trade and labor became detached from society, the more likely it was that society at some point was going to react. Because if society did not react, then people would suffer from this detachment.
He said that’s what had happened in the 1930s. As the globalization of the time — financial liberalization — took off, almost immediately society began to react. Society seeks protection from those markets, which it considers to be potentially extremely harmful, causing local jobs to disappear, money to become too expensive and trade to become very imbalanced.
People look to a strong man — and usually it’s a man — who promises to protect them from these forces. That is exactly what Donald Trump has done. He said he could protect American society from migration: Hence, the building of a wall. He thinks he can protect the American economy and American jobs from what he regards to be unfair trade. The popularity of Donald Trump is based on these promises that American society will be protected from unaccountable, detached and remote market forces that are beyond the control not just of regulators, but also of democratic governments.
Governments on both sides of the Atlantic have said that there’s nothing we can do: The market thinks this ought to be the value of the dollar; the market thinks this is where interest rates should be; the market thinks this is what the bond market should look like. By governments admitting that they have no power over these markets, or that they have ceded power to these markets, they themselves become impotent in the face of these international forces. Voters naturally can see that. We can all say that governments are all shrugging their shoulders and saying, “Nothing to do with me, guv.” And so people are saying let’s bypass government and go find ourselves a strong leader. It might be Le Pen in France or President Trump or President Duterte in the Philippines or President Modi in India, who will protect us and our nation.
This tendency toward protection that Polanyi talks about, though, doesn’t need to only fuel the Right. Do things like Occupy Wall Street, and the rise of politicians like Jeremy Corbyn and Bernie Sanders, hint at a progressive, left-leaning retaliation?
Yes. Again, in the 1930s societies chose to be defended but in different ways. We had the rise of Hitler and Mussolini and other fascists in Europe. But in the U.S. you had the rise of President Roosevelt, who promised to protect American jobs and who promised to put the bankers back in their place, and subordinate the finance sector to the interest of the economy as a whole. That was a progressive response. And I think today we have the attempts at a progressive response in some of these movements, but they haven’t made the same progress as the right-wing movements have.
Right now what is quite frightening is the degree of strength of the extreme Right, the center-Right and the far-Right, both in Europe and in the United States. While there are left-wing movements — and they include the Corbyn movement and the Occupy movement — these haven’t been able to break through to the wider popular imagination, and capture the imagination of people. We find, for example, that while Corbyn expounds great values, his popularity is quite low and is falling. And the Occupy movement is now scarcely visible, and was eclipsed by the Tea Party movement.
So yes it’s quite possible for there to be a progressive reaction to these detached market forces. But what is most striking about Europe is the extent to which social democratic parties have lost the plot. We’ve seen in Holland that the Labor Party has been almost decimated in recent elections. This has been the case across Europe. In France, the social democratic party is in decline. In Greece, the social-democratic PASOK was wiped out by the financial crisis there, because it was unwilling (or unable) to actually protect people from these forces. There are some signs in Germany that the social democrats there are regaining popularity, and they’re doing so on the grounds of reversing some of the reforms that had hurt labor in the past. But it’s not at all clear that social democratic candidate Martin Schultz will win. Outside of Germany, the trend is toward the Right and the far Right. And that is very worrying.
In the United States we’re at a different starting point, in that the Democratic Party has not been a functionally social democratic party for some time—if it ever was. What might a corrective on that look like? How can progressives talk about the economy in a way that responds to this moment?
The problem with much of the left and progressive movements is that they’ve had a complete blind spot for one of the most important sectors of the economy, which is the intangible, invisible finance sector, which built up more than 200 percent of GDP in debt and has trillions and trillions of dollars in assets and that is engaged in speculation across a whole range of asset classes. The Left on the whole has just not dealt with that. The preoccupation has been with the tangible stuff: trade, labor rights and immigration.
What should happen to subordinate the interests of the global finance sector to the interest of the people and democracies? The Left doesn’t have an answer on that. Much of the Left — and I include the British social democrats and the Labour Party under Tony Blair — are completely wedded to the idea of globalization and the idea that the marketization of public assets is a good thing. They’re completely wedded to the idea that it’s vital for finance capital to be able to be mobile across the globe, because it increases levels of investment in places where investment has been low.
That’s the story that’s been told. In reality, what mobile global capital has done is to massively enrich the 1% and to massively increase inequality while at the same time rendering the lives of millions of people incredible insecure, not only in terms of public services, but also in terms of employment and rights. Globalization doesn’t just mean the internet and new technology and foreign travel, which is the way the Right would like to think about globalization. To my mind, globalization is first and foremost the detachment of markets and capital and money from the oversight of regulatory democracy. That way financial markets can avoid regulations and any of the friction involved in, for example, paying taxes where they make profits.
We have a problem here in Britain with Starbucks and Amazon and other big companies, who are willing to do business and make profits here but unwilling to pay taxes here. People quickly pick up on the fact that they pay taxes and these huge firms don’t, and yet do very well. And then you have Silicon Valley and companies like Uber, which extract rent, if you like, from British people using the Uber app, while at the same time undermining the transport sector here in Britain. We have all of this going on and very little is said about it by the Left.
You argue that it’s possible to tame finance, and bring the production of money back under public control, giving democracies a bigger say over how the economy operates. In the U.S., we have a cabinet now that’s stock full of Goldman Sachs executives. How does that complicate the project of reclaiming money production and the economy?
It massively complicates the issue. And it means that for some time there will be absolutely no chance of that happening, because Wall Street has captured the political system and is manipulating it in its own interests. They’re doing that at the invitation of the president and his staff. And the problem is that I don’t think the American people really understand that. Take the example that Wall Street has done very well since the crisis, even though they were responsible for it. On the whole, what people care about is healthcare and the services they get from their local states. These are the things that are going to matter in the near-term and that a lot of liberals will focus on, mainly because there’s a poor understanding of money.
We tend to think of money as a commodity, like gold, that is scarce. And so because we have this flawed understanding of money, one that is very widespread — including by people like Paul Krugman in the New York Times—it’s hard to understand how effortlessly banks create additional finance and enrich themselves at our expense, without adequate oversight. What I fear is that this will go on for a while, and people will come to understand what is going on and the reaction will be even uglier. But if we look across the world, like in China for example, they are making strenuous efforts to manage their financial system, certainly the global part of their financial system. They’ve introduced what is known as capital control, to limit the flow of capital out of China and into China — mainly out of China. They’re doing to keep the economy in China stable. China and the Chinese Communist Party cannot afford to have another insurgency. They cannot afford to allow the finance sector to destabilize the whole economy.
Even in this modern age of new technology, it’s possible for governments to act. There has to be the will to do so. There’s no will in the United States, but we know that it can be done because it was done post-war: After the catastrophic failure of the financial system in the 1920s and 30s, economies came together with governments — led by President Roosevelt — and came up with a new financial architecture, which subordinated the global capital markets to the interests of the domestic economy. And we had thirty years that is known in economics textbooks as the golden age of economics. There was stability and virtually full employment and very few financial crises. We know it can be done.
They had to create this financial architecture after a catastrophic World War. With the world in shreds they rebuilt. If they were able to make those changes, we know it’s possible for us to make those changes. There has to be the political will, and for there to be the political will there has to be understanding and debate and discussion publicly about the role of the finance sector in creating instability, volatility and in job losses — all of the things that make American people insecure.
What’s the story to be told about a new economics, that carries the same sort of rhetorical power that market fundamentalism has managed to in the last several decades?
The narrative is that the responsibility of a democratic government is to address and meet the interest of the domestic economy — of people living within the boundaries of the nation. I think a really important point to discuss is this: That for a government to make policy — on pension, on healthcare or taxation — requires boundaries. The American government cannot make policy for the British people when it comes to taxation. American tax policy is bound by American boundaries. Money and finance abhor boundaries and want to exceed them. We have to tame capital and finance and insist that they too are subject to the boundaries of policymaking. Subordinating the finance sector to the interest of the real economy must be the slogan of movements in the future.