Tuesday, April 16, 2013

Instead of the state, globalisation has withered

Arguably the most pervasive economic phenomenon of our generation is globalisation, entailing the integration of people, capital, ideas and cultural norms across global economic space.

To a great extent this widespread order owes much to the economic stance of openness embraced, willingly or otherwise, by nation states, featuring the reduction of protectionist trade barriers, easing restrictions on capital flows across borders, and increasingly non-discriminatory immigration programs.

Although complete international economic, social and cultural integration is yet to be achieved, there is little doubt that, on balance, the globalising trend of recent decades has delivered substantial benefits.  Immigrants have secured economic and social gains from reduced entry barriers imposed on cross-border movements, with opportunities to live safer, happier lives in countries providing more abundant job opportunities.

Incumbent residents in countries welcoming mass migration also benefit, with a larger population supporting economic development and with new and interesting cultural precepts injecting more cosmopolitan outlooks into the population at large.

Reduced tariffs on merchandise and foreign investment has extended economic prosperity by growing profitable industries and expanding employment, and providing customers with a greater choice of often cheaper products.  Foreign investors and domestic taxpayers alike have benefited enormously from tax-rate reductions on income and capital enacted by governments in their efforts to attract skilled labour and specialised capital to their countries.

While the international transmission of policies lending support to economic deregulation can be credited for yielding these gains, there is always the attendant risk that some countries could act in unison and perversely restrict opportunities.

The most optimistic had hoped that post-1970s globalisation would wither away the state, but the 2008 global financial crisis ushered in a largely synchronised enlargement of government with a momentum rarely seen in the postwar period.  In other words, what we have experienced in recent years is effectively the globalisation of statism on policy steroids.

Demonstrating that Soviet socialism might be dead, but dormant Western Keynesian socialism only needed resuscitation, incumbent politicians of all parties embarked on an unprecedented ''fiscal stimulus'' spending spree sending previously sound budgets into a parlous state, and parlous budgets into an even more parlous condition.

The consequence of this overspending was a dramatic increase in public-sector indebtedness, with some estimates indicating that debt owed by the globe's taxpayers to each other, in the name of their governments, stands at more than $50 trillion.

The justly criticised incestuous relationships between governments and their bailed-out domestic financial sectors drew ever closer as politicians laid out stricter guarantees on capital reserves and obligations on private banks to buy more government securities.

But the global financial crisis policy surprises were not limited to dusting off Keynes' General Theory of Employment, Interest and Money or the retreat from financial liberalisation.  Conventional understandings of the arm's-length relationship between fiscal and monetary policies, and the appropriate degree of monetary policy activism, have also been shaken to their core.

Monetary policies were once again openly conducted for macro-economic stabilisation, such as enhancing economic and employment growth, as opposed to the prior consensus that central banks conduct monetary policies primarily with a view to controlling inflation.

A clear manifestation of changing central bankers' dispositions regarding monetary policy conduct was the substantial reduction in official interest rates to close to zero in many advanced economies, a policy supposed to fuel private investment but which has underhandedly reduced the returns to savings.

Interest rate reductions have been accompanied, mainly in the United States, Britain and eurozone countries, by successive rounds of ''quantitative easing'', effectively printing money so that central banks can buy government securities through secondary markets.

These procedures, however, may have paved the way for governments to borrow to fund their overspending.  As Adam Smith put it:  ''The honour of a state is surely very poorly provided for, when in order to cover the disgrace of real bankruptcy, it has recourse to a juggling trick of this kind.''

Some policymakers may perceive that the fiscal and monetary policy juggling trick, all geared for the grand political purpose of spending today and paying tomorrow, can continue with no end in sight.  But, eventually, even the policy jugglers must tire or lose concentration as more policy balls are thrust into the air all at once.

So long as governments are unprepared to countenance correcting their overspending habits, new and increasing taxes, even on the previously perceived untouchables of bank deposits, superannuation nest eggs or other savings, become the politician's friend to repay public debt.

It also seems the central banking jugglers hadn't quite thought through the long-term consequences of their activism, as any future interest rate increases could further stall growth and raise public-debt servicing costs.

Such measures, if applied widely and in synch, would certainly hamper the resilience of global markets, and the damage would be magnified if politicians return to protectionism, financial barriers and immigration lockdowns in response to domestic voter demands for security in a low-growth and still uncertain world.

If for nothing else, our tethered world of burgeoning deficits, astronomical debts and debased money serves as a stark reminder that reckless policies threaten globalisation's promises of prosperity and social cohesion for all.

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