Austerity Is Mostly Stupid… Mostly.
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But there is some logic to it, especially in places like Britain. The fundamental problem is de-industrialization. You can print as much money as you want, sure, but if almost everything you need is made or grown or dug somewhere else well, you have a problem. The US avoids this thru having dollar hegemony, for now, but the UK doesn’t have that and the Euro ain’t what it used to be either. The solution is simple in concept: you need to re-industrialize with than printed money.
(This is a theme and topic we’ve covered before, but forgive me running thru it again from another angle.)
Industrializing or reindustrializing is hard, especially with open markets. You need very careful use of tariffs and subsidies, and you need to cut deals with the current hegemonic industrial power: aka. China. You need real industrial policy, in other words. And neoliberalism doesn’t believe in that.
Instead neoliberalism believes in this weird idea that markets are self-correcting and that whatever markets do is right. Nor does it believe in increasing wages for domestic demand, because it came to power during the oil shocks/stagflation period.
Raising wages and thus general domestic demand when you don’t produce enough domestically means money flooding out of the country. This isn’t necessarily bad. A lower pound or Euro is an export subsidy and helps reindustrialize, but it’s still a hard sell and it has to managed.
You can’t let the trade and balance of payments deficit grow too large. And you have to manage domestic demand: pushing people to buy what is produced locally and making imports for consumer goods expenisve, while funneling import buys towards capital equipment.
This playbook has been run many times. Japan, South Korea, Taiwan, the US in the 19th century, China most recently. We know how to do it. But it does require discipline and an ideological change from neoliberalism, plus a willingness to cooperate with the main industrial power
It’s damn near impossible to industrialize or re-industrialize without aid from the current industrial hegemon. That means getting into a trade war with China is counter-productive. You need to import capital goods from them, and sell them what you produce at competitive prices.
Japan and the USA had Britain. Japan (2nd time), South Korea, China and Taiwan had the United States. You need the markets, knowledge and capital goods.
This mean, in effect, that you need to cut a deal with the current industrial power. They don’t precisely have to be good deals (China offered to make American rich people richer), but the deal has to be something they want.
For US/China one obvious deal is to let them get goods like EVs into the US without tariffs if they build branch plants and help create a supply network in the US. Another obvious deal is to stop supporting Taiwan so much & another is to let them have the South China sea. The EU and Britain can make the same deals.
If the last two bother you, well, look at it this way: they’re going to get Taiwan and the South China Sea anyway, you’re just making it easier for them. You’re giving up things you’re going to have to give up anyway.
This requires a psychological change among Western elites. They need to be willing to admit that they are no longer the top dogs, at least economically and that they can no longer just impose the terms they want.
The longer you leave cutting deals with China to help you reindustrialize, the worse deals you’re going to get. Leave it too long, and reindustrialization may be essentially impossible.
Of course there’s much more to it than this. A complete rejiggering of internal markets is necessary. You have to gut finance and put it at the service of industry. Private equity has to be destroyed wholesale. People can only get rich by exporting or making goods for the domestic market which replace imported goods. Anyone doing significant import of anything but capital machinery (with an eye to building your own) can only be allowed to survive, not prosper.
Generally speaking, to use econo-speak, incentives have to be aligned for re-industrialization, and dis-aligned for anything predatory. Betraying elites must be crushed.
There is no solution to declining standards of living in the Anglosphere and the EU without re-industrialization (maybe Canada and Australia could find another way.) You’ve got to either produce what you need, or produce what others want to buy from you. It’s that simple.
Oakchair
they’re going to get Taiwan and the South China Sea anyway, you’re just making it easier for them. You’re giving up things you’re going to have to give up anyway.
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Another way to look at it is you’re giving up things you don’t actually have in order to improve your economy. What Europe/UK would be giving up is interfering in the affairs of countries on the other side of the world.
Though the ruling class views ruling the world and interfering in everyone’s affairs as more important than prosperity for all the stupid lazy welfare moochers in their own country.
Good thing the masses can foam with rage about immigration, proper pro-noun use, and Putin or else they’d have time to do something about the ruling class stamping boots on their faces –forever.
Duncan Kinder
You need to be productive
Industrialization is one way to become so, but not necessarily the only way.
Right now we are going through a massive revolution in the biological sciences with potentially dramatic implications in many ways. Could we grow houses? That’s not as far fetched as it sounds.
China does appear to have won the current round and Paraguay for all I know may win the next. But the next round it is and what we should focus on.
Purple Library Guy
Canada (and probably Australia, although I know less about Australia) is a bit of an outlier. It has such a small population compared to the amount of resources, that it has traditionally managed to maintain a first-world standard of living largely by exporting the resources. But there are a lot of caveats there. One is, Canada still did BETTER when it had more industry in the mix; Canada did have some decent industry circa the 70s and it has quite a bit less now and this had done us harm in a number of ways. So even for Canada an industrial policy would still be GOOD, just not as ESSENTIAL as for many places.
Another is, there can be wild variations in how well a country does out of exporting a given amount of a given resource. If you do it smart, owning the resource, maybe having a publicly owned corporation to exploit it, or at least having strong royalties, in the case of a more decentralized good having some kind of marketing board to represent your producers, and trying to do at least some processing to add value before you send it away, you’re going to make stacks more money than if you let foreign companies exploit the resource, pay diddly in royalties and send the profits abroad.
On oil, a classic example is the finances of Norway vs. the finances of Alberta. Norway does it smart, Alberta does it stupid. Norway has a stupidly massive sovereign wealth fund and money to spend on lots of great stuff for their citizens, Alberta is in hock and their education and health care are dying. Another example is Canadian wheat farmers with the wheat board vs. Canadian wheat farmers after Harper killed the wheat board. Canada has been consistently moving in the neoliberal direction of exploiting resources the stupid way that sends all the money somewhere else, and it is hurting us.
Carborundum
I don’t understand how austerity fits in here. Is there some linkage flowing out of this (which seems a bit mangled)?
“The solution is simple in concept: you need to re-industrialize with than printed money.”
Ian Welsh
For a nation which produces most of what it needs, printing money (with proper controls) leads to increased domestic demand.
When too much of what you consume comes from outside, it leads to demand for foreign goods which causes various problems. You see that in developing nations all the time: they can’t just print money without horrific consequences.
Back in the 70s the British actually had to ask the IMF for help. This isn’t theoretical.
Nonetheless, since the UK still has the pound, and still provides some services the rest of the world needs, there is some room for printing. What it’s been used for, mostly, is to prop up the rich and the financial sector. There’s some logic to that, since the finance sector is most of what they have left, but doing so has made it impossible the re-industrialize. Financialized profits, especially with massive central bank and government subsidies, make other forms of enteprise uncompetitive unless they asset strip. Water utilities, NHS privatization and trains are good examples.
Giving the money to the rich and finance also has the advantage that it doesn’t turn into general demand. This is at the heart of much of what legitimate logic exists for the economic/central bank policies run since 79.
I suppose I should write a proper article on it. I have hit it in the past, but that was many years ago.
GlassHammer
Just two things:
1.) Some industries already left China or are mostly transferred to other nations. So for some industries you would need to work with Thailand or Singapore if direct coordination was possible. But… these countries (and China) work within a trading block (ASEAN) so direct coordination might not be an option.
2.) Austerity measures, will in a roundabout way, transfer your unemployment problems to other trading partners so you might expect some tariffs to come your way if you implement them.
Carborundum
I follow the linkage between monetary policy and balance of trade, but I’m afraid I still don’t understand the connection with austerity. As I understand the term, it’s about curtailing public sector spending. If it’s there by implication, I’m afraid it’s gone way over my head.
Ian Welsh
Public sector spending doesn’t cause only domestic demand. Take a look at the various austerity measures, like cutbacks on child support or energy subsidies for seniors. That money goes into circulation, which is true of most public sector spending, even things like infrastructure. If the country doesn’t produce what is bought by government or those it subsidizes, then it will still cause balance of payment issues.
Countries like South Korea, when industrializing, are very strict about buying from foreign markets. The best book to read on this is probably “Bad Samaritans”, the South Korean example is particularly illuminating.
You need /something/ to sell to foreign markets. What Britain has is primarily financial services, which is one reason the “City” is off limits. Britain doesn’t produce enough food. North Sea oil is a depreciating asset, and they have very little industry left.
So if you’re going to print/increase spending, you’ll increase demand and much of that demand will go into imports. If you want to industrialize/re-industrialize you need to target the spending and make other arrangements so that demand increase demand for domestic goods, and ensure that much of it goes into whatever industry you’re trying to build/re-build and you want to work on industry where there’s foreign demand, as well.
It’s clear I need to write a proper article about it, I assumed this stuff was obvious, and that’s on me, I spent too much of my life thinking about this stuff: what’s obvious to me isn’t to most others.
A lot of these issues apply to Canada, by the way. We had a nice little system set up until it got wrecked, from Mulroney on, but especially by the last Conservative government.
And, in both Britain and here (and the US) as I’ve noted many times, the cost structure is too high. It’s a trap, the stuff that needs to be done is massively politically unviable. (For example, you’ve got to crash housing and rent.)
Ian Welsh
OK, article in the hopper, it’ll go live tomorrow after 10 am Eastern.
Jan Wiklund
Ian: “When too much of what you consume comes from outside, it leads to demand for foreign goods which causes various problems. You see that in developing nations all the time: they can’t just print money without horrific consequences. ”
It seems to depend on other tools in your box, though. South Korea had a horrendous inflation when it industrialized, but it nevertheless used the money it printed to start up new industries, som in the long run it didn’t matter. Latin America didn’t invest that much, it used the money to let its privileged class buy imported luxuries. Which brought it down on their knees during the Volcker crisis.
Economy is not about money, it is about production capacity. If you increase that, the money is just small change.