Mark Blyth: A Brief History of How We Got Here and Why (includes the upside of Climate Catastrophe)

My notes:


Brexit makes no sense, pounds are a hedge between the dollar and euro, had the best deal ever.

David Cameron lost the referendum trying to improve on the best deal ever.

Greens are now the biggest party in Germany (left populist)

Computer Analogy:

Capitalist economic systems are like computers - same components arranged slightly differently.

50% of German companies don't list on their capital markets (retained earnings)

Americans have a huge, flexible labor market

Economic systems are like the operating systems of computers. You can't transpose American libertarian systems onto the Swedes, for example.

Three systems:

1870 - WWI The Gold standard:

Problem solved: Capital mobility without inflation. Argentina used the new steamship mobility to market their Pampas beef.

Potential problem of inflation solved. Open capital current accounts. Adjustments make wages (and prices) inflate and deflate.

Government is a minimalist night watchment to minimalize violence.

Heterogenous National Economies - globalization 1.0 - a profit-led growth model.

What crashed it? Answer: deflation, endemic to gold standard economies. This squeezes wage earners, prices, companies do less investment.

Wages are the main channel of adjustment (squeezing labor).

Gold hoarding shrinks global money supply (e.g. France), increasing the problem.

War incompatible with 'sound financie' and openness

Postwar hyperinflation...decimates

Did inflation bring Hitler to power? Not true. It's off by about 12 years.

II - Bretton Woods 1945-1980 

Policy target: full employment

Problems solved: employment (lesson of the great depression)

Restoring the world economy with U.S. dollars.

Open current accounts (for trade), but closed capital accounts. No currency trade, no big capital markets (perceived as a problem since the Great Depression).

Government is a quasi-cooperative welfare state. Incentives for (re-)investment in domestic enterprise, productivity. This only works in a closed economy.

Homogenous economies - everyone made cars, etc. Restricted finance to move manufacturing overseas.

COLA contracts, corporatism, wage-led growth.

High taxes & transfers
Construction of local economy cartels.

No one knows who runs the central bank (McChesney Martin)

What crashed II? Answer: Inflation.

When productivity can't keep pace with wage demands, this leads to negative returns on investment. So if inflation is persistent, it destroys the real return on capital. Capital hoards its cash...unemployment rises (= stagflation)

1945-80 was great for labor, a disaster for capital. Strikes are effective. Workers got "too empowered"

Capital revolted....privatize, integrate, dismantling labor, resetting the economy. Capital is free for the first time in 60 years. Wall street became very profitable, and (the flipside) everyone can get credit.

Bank's "assets" are really others' liabilities. The incentive for finance is to run down capital reserves, increasing leverage and returns, making fragility endemic.

Debts on top of debts (all "assets") leads to Ponzi finance. Houses became financial assets rather than dwellings. So Iceland had 10 x GDP in bank "assets"... Ditto for Germans, where one bank had 60 times GDP.

The fix?...No reset...a bailout. Public finance covers up the problem.

Lack of wage growth, private sector debt, means underlying issues lead to continuation of high debt.

Something is deeply wrong (bitcoin, immigration protests are symptoms).

Volatility constraint (the bailout) leads to an angry politics. Inflation hasn't significantly increased (~2%) but the stuff that people have to buy is much more expensive (40%). The technocrats can't understand why the population isn't happy.

Hourly compensation stagnates while productivity increases. Labor's share of the economy peaks in 1973, declining fairly steadily since.

95% of Americans works for wages, but the vast majority of the productivity improvement real income went to the top 1%. The bottom quintile has actually lost wages since... Benefits have been massively asymmetric, going mostly to the top, finance...(remember...their "assets" are the rest of the population's debt).

$17 trillion in Central Bank interventions save the Global Financial System...with no inflation as traditionally measured...even though healthcare, education, etc. is increasingly expensive.

Once labor loses all leverage, wages decline, private debt increases, and the government bails out finance.

...Old rules don't apply

Labor can't push up wages, even at full employment

Jobs can be moved abroad or automated

Unions are absent or powerless to command greater share of output

Immigrant labor gets politicized.

For Capital: Profit margins are super thin in most sectors (except digital monopolists) so employers hate to pay more.

Ruthless deflation in both labor and product markets leads employers to embrace volume!

The incentive is to do anything but push up prices

Product markets have seen ruthless deflation for 25 years.

Shareholder Value ideology also lowers investment (and boosts short-termism!).

Neoliberalism kills wage growth (ending labor cartels)

...It also kills product profitability, producing price deflation and monopoly profits (ending production cartels)

In the political "market," political cartels are guarding a 30-year-old system, without addressing underlying problems.

Politics is not just in trouble, it's inevitably totally revised...In europe and the U.S.


III - Neoliberalism Globalization 1980 - 2008

Policy target: price stability (controlling inflation and restoring the value of Capital).

Solution embraced: Global integration, open financial markets

Governance: globalist (e.g. WTO, EU), welfare state residualist. Elected governments struggle to remain relevant

Globalization of heterogenous economies
Open Financial Markets
Flexible labor markets
Low taxes and lower transfers
Profit-led growth models
End of local economy protections and cartels.
Privatization
Everyone knows who runs the central bank (Greenspan)

....
What happens next?

Growth becomes critically dependent on returns to finance.

Finance is constrained by structurally low rates

Debt reduction is constrained by low inflation, but debts can be rolled over

Sustained wage growth fails to materialize

Ever higher levels of inequality, and sharper urban / rural divides appear.

Take home: The "bailed" regime becomes politically unsustainable - Center parties fail - Neo-Nationalism becomes structural.

Populism is a feature, not a bug.

Debts are too high, wages too low to pay off debt, inflation is too low to eat debt.

Left response: blame capital / globalization.

Right response: blame immigrants / globalization.

***How did we get here & why?***

Growth models specialize: Germans: export, French: stimulate consumption, etc.

Each has a problem to solve but doing so creates weaknesses that are exposed in moments of crisis (WWI, 1970s inflation, 2000s financial crisis)

We move from regimes with deflationary biases (benefit capital and creditors) to inflationary regimes (benefit workers and debtors) and back again...

We are currently in an interregnum between the two types. (i.e. current deflation, favoring creditors is due to become inflation, favoring debtors)

The Game Changer: ***Climate change*** 

Is going back to national inflationary policy bad for climate adaptation?

Can Green New Deal projects happen fast enough to defuse popular protest? Probably not.

Nevertheless, the political right project must fail. The alternative is death. (A little Marxist in this "historical inevitability" pronouncement...but then he also confesses George Soros is paying him to opine about this...)

Hopeful signs: In 2016, China installed more solar in one year than the U.S. has...ever.

So China continues
The U.S. flips to the left
Europe has already headed left (the Greens are growing!)

...together, that's 80% of consumption.

This bypasses Global governance, which encourages free rides.

He admires Chinese policy making (but not everything). For example: China decentralizes its decisions...command-and-control dictating local governments follow the successes produced after an initial period of experimentation.

About Climate adaptation - markets can't internalize their externalities (sorry, CCL, this means you. In effect, he pooh-pooh's carbon taxes here.)

Markets will be much more national, much more government-led.

***********

Questions:

We're just becoming aware of what 8.3 billion pounds of plastic look like.

BRICS was based on a commodity export fantasy... Bad to be a commodity producer, unless you make a commodity called "U.S. dollars" (a fact that allows the U.S. to behave badly).

Party systems have collapsed, but we don't have to imitate China...

More about the splits in UK parties (Boris is UK Trump). French party failures are anticipated. China opened their capital markets and $1 trillion left the country, saying their economic elite would rather live in Vancouver than anywhere in China. Political economy is incredibly fragile.

More volatile politics will reflect the circumstances.

As for the wealthy, money is not an exit strategy. He doesn't really believe hard core denial is more than 15% of the population. A critical event--e.g.  Miami loses drinking water--and perhaps oil companies coming out in a multi-billion-dollar settlement for climate change, which will happen, just like big tobacco--we'll get action.

Even if you don't believe it, all the incentives point all one way.

There's no inflation constraint on the global hegemon creating enough currency to address the problems.

MMT (Modern Money Theory) has a problem with imports. The inflation constraint prevents it, in the UK. The U.S. has no such constraint.

The political right has more capability to run an MMT-type intervention. The left talks about it, but the right just does it.

China does MMT behind capital controls, and the U.S. does too, but could do a lot more.

U.S. universities will fire people for saying controversial things.

The U.S. is not a democracy, it's a plutocracy. But even the plutocrats can't even afford to tell themselves too many lies because they'll lose money. That's why Wall St. Journal is notoriously accurate.

China has no rule of law, courts, etc. It takes centuries to create that (in China, in Eastern Europe). Latvia has enterprises that are just giant tax dodges for the Swedes to launder money. Capitalist can trust they'll get their money, redeeming investments, when courts are at least marginally honest. That limits their ability to destroy government.

Climate change is the "deus ex machina"...the exogenous force that will make the change necessary.

Zero carbon by 2050 is impossible. ... but technological progress and the trends in politics are hopeful. It's far less ideological than it seems.

The EU calls the Green New Deal what we already have on the books. The "left" isn't that radical.

Chinese exports have peaked in 2008, as a percentage of GDP...it can't help but import dollars. It's using those dollars to build belt-and-road so they're not at the mercy of Trump (because their accumulated wealth is in dollars).

India may use their carbon dependence to extort concessions from the rest of the world.

Global solutions may not exist...e.g. the refugee crisis in Europe. Local solutions applied there.