Prince Charles, Prince of Wales talks to Christine Lagarde, Managing Director of the International Monetary fund, before the start of the Inclusive Capitalism Conference at the Mansion House on May 27, 2014 in London, United Kingdom.
Inclusive Capitalism Initiative, or a Trojan Horse to quell global revolt?
by Nafeez Ahmed / 28 May 2014
Yesterday’s Conference on Inclusive Capitalism co-hosted by the City of London Corporation and EL Rothschild investment firm, brought together the people who control a third of the world’s liquid assets – the most powerful financial and business elites – to discuss the need for a more socially responsible form of capitalism that benefits everyone, not just a wealthy minority. Leading financiers referred to statistics on rising global inequalities and the role of banks and corporations in marginalising the majority while accelerating systemic financial risk – vindicating the need for change. While the self-reflective recognition by global capitalism’s leaders that business-as-usual cannot continue is welcome, sadly the event represented less a meaningful shift of direction than a barely transparent effort to rehabilitate a parasitical economic system on the brink of facing a global uprising.
Central to the proceedings was an undercurrent of elite fear that the increasing disenfranchisement of the vast majority of the planetary population under decades of capitalist business-as-usual could well be its own undoing. The Conference on Inclusive Capitalism is the brainchild of the Henry Jackson Society (HJS), a little-known but influential British think tank with distinctly neoconservative and xenophobic leanings. In May 2012, HJS executive director Alan Mendoza explained the thinking behind the project:
“… we felt that such was public disgust with the system, there was a very real danger that politicians could seek to remedy the situation by legislating capitalism out of business.”
He claimed that HJS research showed that “the only real solutions that can be put forward to restore trust in the system, and which actually stand a chance of bringing economic prosperity, are being led by the private, rather than the public, sector.” The Initiative for Inclusive Capitalism’s recommendations for reform seem well-meaning at first glance, but in reality barely skim the surface of capitalism’s growing crisis tendencies: giant corporations should invest in more job training, should encourage positive relationships and partnerships with small- and medium-sized businesses, and – while not jettisoning quarterly turnovers – should also account for ways of sustaining long-term value for shareholders.
The impetus for this, however, lies in the growing recognition that if such reforms are not pursued, global capitalists will be overthrown by the very populations currently overwhelmingly marginalised by their self-serving activity. As co-chair of the HJS Inclusive Capitalism taskforce, McKinsey managing director Dominic Barton, explained from his meetings with over 400 business and government leaders worldwide that:
“… there is growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results.”
Among those “damaging results” – apart from the potential disruption to profits and the capitalist system itself – is the potential failure to capitalise on the finding by “corporate-finance experts” that “70 to 90 percent of a company’s value is related to cash flows expected three or more years out.” Indeed, as the New York Observer reported after the US launch of the Henry Jackson Initiative for Inclusive Capitalism, the rather thin proposals for reform “seemed less important than bringing business leaders together to address a more central concern: In an era of rising income inequality and grim economic outlook, people seemed to be losing confidence in capitalism altogether.”
Lady Lynn Forester de Rothschild, who co-hosted yesterday’s conference, told the NY Observer why she was concerned:
“I think that a lot of kids have neither money nor hope, and that’s really bad. Because then they’re going to get mad at America. What our hope for this initiative, is that through all the efforts of all of the decent CEOs, all the decent kids without a job feel optimistic.”
Yep. Feel optimistic. PR is the name of the game. “I believe that it is our duty to help make all people believe that the elevator is working for them… that whatever the station of your birth, you can get on that elevator to success,” de Rothschild told Chinese business leaders last year:
“At the moment, that faith and confidence is under siege in America… As business people, we have a pragmatic reason to get it right for everyone – so that the government does not intervene in unproductive ways with business… I think that it is imperative for us to restore faith in capitalism and in free markets.”
According to the very 2011 City of London Corporation report which recommended funding the HJS inclusive capitalism project, one of its core goals is undermining public support for “increased regulation” and “greater state” involvement in the economy, while simultaneously deterring calls to “punish those deemed responsible for having caused the crisis”:
“Following the financial crisis of 2008, the Western capitalist system has been perceived to be in crisis. Although the financial recovery is now underway in Europe and America, albeit unevenly and in some cases with the risk of further adjustments, the legacy of the sudden nature of the crash lives on.”
The report, written by the City of London’s director of public relations, continues to note that “the fabric of the capitalist system has come in for protracted scrutiny,” causing governments to “confuse the need for reasoned and rational change” with “the desire to punish those deemed responsible for having caused the crisis.” But this would mean that “the capitalist model is liable to have the freedoms and ideology essential to its success corroded.” Far from acknowledging the predatory and unequalising impact of neoliberal capitalism, the document shows that the inclusive capitalism project is concerned with PR to promote “a more nuanced view of society,” without which “there is a risk that… we will be led down a policy path of increased regulation and greater state control of institutions, businesses and the people at the heart of them, which will fatally cripple the very system that has been responsible for economic prosperity.” The project is thus designed “to influence political and business opinion” and to target public opinion through a “media campaign that seeks to engage major outlets.” The Henry Jackson Initiative for Inclusive Capitalism is therefore an elite response to the recognition that capitalism in its current form is unsustainable, likely to hit another crisis, and already generating massive popular resistance.
Its proposed reforms therefore amount to token PR moves to appease the disenfranchised masses. Consequently, they fail to address the very same accelerating profit-oriented systemic risks that will lead to another financial crash before decade’s end. Their focus, in de Rothschild’s words in the Wall Street Journal, is cosmetic: repairing “capitalism’s bruised image” in order to protect the “common long-term interests of investors and of the capitalist system.” That is why the Inclusive Capitalism Initiative has nothing to say about reversing the neoliberal pseudo-development policies which, during capitalism’s so-called ‘Golden Age’, widened inequality and retarded growth for “the vast majority of low income and middle-income countries” according to a UN report – including “reduced progress for almost all the social indicators that are available to measure health and educational outcomes” from 1980 to 2005. Instead, proposed ‘reforms’ offer ways to rehabilitate perceptions of powerful businesses and corporations, in order to head-off rising worker discontent and thus keep the system going, while continuing to maximise profits for the few at the expense of the planet.
This is not a surprise considering the parochial financial and political interests the Henry Jackson Society appears to represent: the very same neoconservative elites that lobbied for the Iraq War and endorse mass NSA surveillance of western and non-western citizens alike. Indeed, there is little “inclusive” about the capitalism that HJS’ risk consultancy project, Strategic Analysis, seeks to protect, when it advertises its quarterly research reports on “the oil and gas sector in all twenty” countries in the Middle East and North Africa (MENA). Those reports aim to highlight “the opportunities for investors” as well as “risks to their business.” Just last month, HJS organised a conference on mitigating risks in the Arab world to discuss “methods for protecting your business interests, assets and people,” including “how to plan against and mitigate losses… caused by business interruption.” The focus of the conference was protecting the invariably fossil fueled interests of British and American investors and corporates in MENA – the interests and wishes of local populations was not a relevant ‘security’ concern.
The conference’s several corporate sponsors included the Control Risks Group, a British private defence contractor that has serviced Halliburton and the UK Foreign Office in postwar Iraq, and is a member of the Energy Industry Council – the largest trade association for British companies servicing the world’s energy industries. The “inclusivity” of this new brand of capitalism is also apparent in HJS’ longtime employment of climate denier Raheem Kassam, who now runs the UK branch of the American Breitbart news network, one of whose contributors called for Americans “to start slaughtering Muslims in the street, all of them.” Perhaps the final nail in the coffin of HJS’ vision of capitalist “inclusivity” is associate director Douglas Murray’s views about Europe’s alleged Muslim problem, of which he said in Dutch Parliament: “Conditions for Muslims in Europe must be made harder across the board.”
Earlier this year, Murray’s fear-mongering targeted the supposed “startling rise in Muslim infants” in Britain, a problem that explains why “white British people” are “losing their country.” London, Murray wrote, “has become a foreign country” in which “‘white Britons’ are now in a minority,” and “there aren’t enough white people around” to make its boroughs “diverse.” So abhorrent did the Conservative front-bench find Murray’s innumerable xenophobic remarks about European Muslims, reported Paul Goodman, the Tory Party broke off relations with his Center for Social Cohesion before he revitalised himself by joining forces with HJS.
Can Capitalists Save Capitalism?
by Thomas B. Edsall / Jan 20, 2015
Key Democrats have reached agreement on a set of policies known as “inclusive capitalism”: a forceful market-oriented economic agenda intended to counter inequality, restrain the accrual of vast wealth at the top and provide the working and middle classes with improved economic opportunities. From the White House to Congress to liberal think tanks, recent Democratic proposals would substantially alter the rules of the marketplace. These include major revisions of the tax code, legislation to pressure corporations to increase pay to match productivity growth and an expansion of refundable tax credits to include low-income workers as well as households making as much as $80,000 a year. According to a report by the former Treasury secretary Lawrence Summers and Ed Balls, a top British Labor Party politician, unless there is serious government intervention, inequality and a lack of financial resources among those in the bottom half of the income distribution will result in “insufficient aggregate demand – too little spending by consumers and businesses to keep gross domestic product at its capacity.” Developed nations “need new social and political institutions to make 21st century capitalism work for the many and not the few,” Summers and Balls wrote. “Inclusive capitalism,” according to its advocates, seeks “to make our economic system more equitable, more sustainable and more inclusive.” It is an international movement that has now made its way into Democratic Party circles.
Mark Carney, the Canadian governor of the Bank of England, articulated a fundamental premise of inclusive capitalism in a speech delivered in Britain last May: “Just as any revolution eats its children,” Carney said, “unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.” Among the attendees at the conference in London in May were such Democratic and liberal luminaries as Bill Clinton; Eric Schmidt, executive chairman of Google; and Summers, who served President Obama as a top economic adviser. Two of the earliest advocates of inclusive capitalism were the late C.K. Prahalad, professor of business at the University of Michigan, and Stuart L. Hart, professor emeritus of strategic management at Cornell. In a widely cited 2002 article, “The Fortune at the Bottom of the Pyramid,” Prahalad and Hart argued that powerful corporations could — must — improve the conditions of the world’s poor by promoting commercial activity, employment opportunities, access to credit, and wealth creation among those at the bottom of income distribution – a group they refer to as the fourth tier, the world’s poorest four billion people.
Prahalad’s core thesis was that the poor could be the
engine of the next round of global trade and prosperity. If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up.
The concept of inclusive capitalism has expanded over the past 13 years to apply to those at the bottom and middle of the ladder in developed nations, including the United States. The fundamental “inclusive capitalism” argument is that business enterprises lose profit-making opportunities when consumers have little money to spend. Inadequate purchasing power among the many threatens corporations and poses a direct danger to the top 1 percent, and, indeed, to capitalism itself.
As testimony to the power of the concept of “inclusive capitalism,” President Obama in his State of the Union address called for the enactment of tax policies designed to provide a larger share of market-driven economic growth to the working and middle classes. In a May 7, 2014, speech in Dublin, “Global Lessons for Inclusive Growth,” Jason Furman, chairman of the Council of Economic Advisers, outlined central elements of the White House agenda. Administration policies, Furman argued, would result in “higher median incomes, lower poverty rates, and broader, more inclusive growth.” Representative Chris Van Hollen, ranking Democrat on the House Budget Committee, outlined additional inclusive capitalism policies in “An Action Plan to Grow the Paychecks of All, Not Just the Wealth of a Few.” The Summers-Balls report – “The Report of the Commission on Inclusive Prosperity” – is the most comprehensive summary. This report, which uses the phrase “inclusive capitalism” more than a dozen times, was published by the Center for American Progress, a Democratic think tank founded by John Podesta – Bill Clinton’s former chief of staff who in February will join Hillary Clinton’s exploratory presidential campaign.
Those pressing the Democratic Party to take more populist stands contend that the lack of a persuasive Democratic economic program contributed to, or drove, devastating losses in the 2014 elections in states as diverse as North Carolina, Maryland, Iowa and Colorado. According to an Oct. 13, 2014, Gallup pre-election survey, voters believed Republicans were better equipped to handle the economy than Democrats by 50 percent to 39 percent. If policies grounded in “inclusive capitalism” become central to the party platform, it will mark the party’s strongest commitment to the economic interests of working- and middle-class Americans since Franklin Roosevelt’s New Deal. The new agenda stands apart from Lyndon Johnson’s War on Poverty, which was focused primarily on the “Other America” of the very poor. The most damaging contemporary American trend that the proposals seek to counter is the sharply declining share of national income flowing to labor, and the parallel increase in the share flowing to owners of capital. This trend, which accelerated sharply in 2000, is shown in Figure 1, a graphic produced by the White House.
“We need to share the wealth,” said Senator Charles E. Schumer, chairman of the Senate Democratic Policy and Communications Committee and a leading proponent of the party’s focus on economics. Schumer, in an interview, voiced strong enthusiasm for the Summers report. “It could bring together the left and center and even parts of the right,” Schumer suggested. In his State of the Union address, Obama put it this way: “Let’s close loopholes so we stop rewarding companies that keep profits abroad, and reward those that invest in America.” His plan calls for the imposition of new taxes on the wealthy and on major financial institutions, totaling $320 billion over 10 years. The money would be used to finance tax cuts and credits for low-to-moderate-income men and women, and to make attendance at community colleges tuition-free. Not only would Obama raise capital gains tax rates from 23.8 to 28 percent for couples making more than $500,000 in taxable income, but he would eliminate a provision in tax law that allows the very rich to avoid taxation on much of the wealth passed on to their children and he would end a current exemption from taxation on the increase in the value of stocks, bonds and other assets when passed on through inheritance.
This exemption, technically called the “stepped up basis,” is crucial to the unrestricted intergenerational transfer of wealth, a practice that many liberals, and even some conservatives, contend conflicts with equality of opportunity. The Obama plan additionally calls for a .07 percent fee on financial institutions with more than $50 billion in assets that would produce $110 billion in revenue over 10 years. Van Hollen, in turn, would raise revenues by imposing a transaction tax on stock trades. He would use the money to finance a $1,000 tax credit for workers making less than $100,000 annually, a $20,000 deduction for two-earner families, an annual $250 payment to those who put at least $500 into an approved retirement pension plan, and to substantially increase child care tax credits. Van Hollen would also bar large corporations from deducting C.E.O. and other corporate compensation over $1 million unless employees got pay raises reflecting increases in worker productivity and the cost of living. The Summers-Balls report includes many of the proposals outlined by Obama and Van Hollen. Balls warned on his blog that “unfettered markets and trickle-down economics are leading to increasing levels of inequality, stagnating wages and a hollowing out of decent, middle income jobs.”
Their report addresses four major economic developments broadly undermining wages and working conditions:
-First, that “increasing global economic integration has also meant increased competition for many workers who produce tradable goods and services.”
-Second, that “advances in robotics and artificial intelligence have put intermediate-skill jobs at risk in what economists call a hollowing out of the labor market.”
-Third, that “Major corporations have opted to use subcontracting to perform basic functions, and many workers are now classified as independent contractors, eroding basic labor law protections.”
-And fourth, “corporations have come to function much less effectively as providers of large-scale opportunity. Increasingly, their dominant focus has been on maximization of share prices and the compensation of their top employees.”
In addition, Summers and Balls argue that competition in the banking sector has broken down and “will need interventions to support the reasonable functioning of the free market.” What do these points actually signify in practice? In a section titled “U.S. Policy Response,” Summers and Balls call for making parent companies responsible for the working conditions of employees of subcontractors; adopting government policies favoring employee stock ownership so that workers benefit from the growing share of national income flowing to capital as opposed to wages; and imposing tough and costly sanctions on employers who use illegal tactics to fight unionization. Not stopping there, Summers and Balls call for a substantial boost in the $24,000 pay ceiling under which employees must get time and a half for overtime work beyond 40 hours a week; increased infrastructure spending of $100 billion a year, or $1 trillion over 10 years; and strengthened provisions in trade agreements guaranteeing collective bargaining rights and basic environmental protections to reduce the movement of American companies to countries with the lowest labor standards.
Among their other proposed policy initiatives are creation of an income tax credit for those with moderate pay levels. It would start at $23,260 for joint filers with children, just where the current earned-income tax credit phases out. At $85,000, the credit would diminish, reaching zero at $95,000. They would also change the mortgage interest and property tax deductions into tax credits. Deductions inherently provide larger benefits to those in higher tax brackets. Credits provide equal benefits to all who qualify. Republican leaders in Congress have already stiff-armed these proposals. In response to Obama’s plan to tax the wealthy to boost breaks for the working class, Michael Steed, spokesman for the speaker of the House, John A. Boehner, said in a statement, “More Washington tax hikes and spending is the same old top-down approach we’ve come to expect from President Obama that hasn’t worked.”
“The president needs to stop listening to his liberal allies who want to raise taxes at all costs and start working with Congress to fix our broken tax code,” Senator Orrin Hatch, chairman of the Senate Finance Committee, said in a statement, Taken together, the Obama, Van Hollen, and Summers interpretations of “inclusive capitalism” are a victory for the left of the Democratic Party. This is especially the case for the Economic Policy Institute, which has been conducting a lonely fight for stronger legislative and regulatory initiatives to counter stagnating wages. Josh Bivens, the research director at E.P.I., said in an email that the proposals did indeed “look like a shift in the Democratic Party on economic policy.” He said his hope was that “the next two years becomes a competition about who is willing to be the most aggressive in trying to boost low/middle-class incomes.”
Dean Baker, co-director of the Center for Economic and Policy Research, called the Obama plan “a pretty big deal. Raising the capital gains tax rate and ending the stepped-up basis at death are changes that almost exclusively hit the wealthy, and they amount to a fair bit of money.” While none of the proposals, or their advocates, acknowledge this explicitly, one of the objectives of the evolving Democratic economic agenda is to get back support among whites without college degrees – the polling shorthand version of what is sometimes still called the white working class. In 2014, these voters, who made up 36 percent of the electorate, cast their ballots for Republican House candidates by a 30-point margin (64-34 percent). This was nearly double the 16-point Republican margin among white college graduates, 57-41.
Inclusive capitalism has its critics on the left, nicely summed up by the Guardian columnist Nafeez Ahmed. He argued last May that the inclusive capitalism movement represented “less a meaningful shift of direction than a barely transparent effort to rehabilitate a parasitical economic system on the brink of facing a global uprising.” Andrew Grove, founder of Intel, put the push toward “inclusive capitalism” in a more positive light. “Our generation has seen the decisive victory of free-market principles over planned economies,” he told the Economist in 2012. “So we stick with this belief largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.” While the new agenda has no chance of passage in the Republican-controlled Congress, Democrats plan to use the tenets of inclusive capitalism in the 2016 elections. One Democratic goal in putting specific policies forward is to use them as wedge issues to force Republicans to choose between their affluent backers and their supporters in the white working class. This will be no easy task because a decisive majority of whites without college degrees has been voting against Democratic candidates for two decades, making it very difficult for the party to break what has been a Republican hammerlock since 1994.
The Capitalist Threat of Capitalism
by Paul Polman & Lynn Forester de Rothschild / May 23, 2014
Winston Churchill famously observed that democracy is the worst form of government – apart from all the others that have been tried. Were he alive today, he might think the same of capitalism as a vehicle for economic and social progress. Capitalism has guided the world economy to unprecedented prosperity. Yet it has also proved dysfunctional in important ways. It often encourages shortsightedness, contributes to wide disparities between the rich and the poor, and tolerates the reckless treatment of environmental capital. If these costs cannot be controlled, support for capitalism may disappear – and with it, humanity’s best hope for economic growth and prosperity. It is therefore time to consider new models for capitalism that are emerging around the world – specifically, conscious capitalism, moral capitalism, and inclusive capitalism.
(since Lynn brought it up)
Such efforts at redefining capitalism recognize that business must look beyond profit and loss to maintain public support for a market economy. All of them share the assumption that companies must be mindful of their role in society and work to ensure that the benefits of growth are broadly shared and do not impose unacceptable environmental and social costs. As it stands, despite recent emerging-market growth, the world economy is a place of staggering extremes. The 1.2 billion poorest people on the planet account for just 1% of global consumption, while the billion richest are responsible for 72%. According to a recent study, the 85 richest people in the world have accumulated the same wealth as the bottom 3.5 billion. One in eight people go to bed hungry every night, while 1.4 billion adults are overweight. Any system that generates such excesses and excludes so many faces a risk of public rejection. Troublingly, capitalism’s negative side effects are intensifying while confidence in public institutions has fallen to an historic low. According to the latest Edelman Trust Barometer, less than half of the global population trusts government. Business fares better but not much. Scandals – from conspiracies to fix key financial rates to the discovery of horsemeat in the food supply – undermine people’s faith in business as an agent of the greater good.
Disillusioned with both state and market, people increasingly ask whether capitalism, as we practice it, is worth the costs. We see this in movements such as Earth Day and Occupy Wall Street. In many parts of the world – from the Arab Spring countries to Brazil, Turkey, Venezuela, and Ukraine, frustrated publics are taking to the streets. Addressing the failures of modern capitalism will require strong leadership and extensive cooperation between businesses, governments, and NGOs. To begin creating a path forward, we are convening key global leaders in London on May 27 for a conference on inclusive capitalism. Top executives from institutions representing more than $30 trillion in investable assets – one-third of the world’s total – will be in attendance. Their aim will be to establish tangible steps that firms can take to begin changing the way business is done – and rebuilding public confidence in capitalism.
Such an effort can bear fruit, as Unilever’s own actions demonstrate. Since abandoning guidance and quarterly profit reporting, the company has worked hard to prioritize long-term thinking. It has adopted plans to boost the company’s growth while reducing its environmental footprint and increasing its positive societal impact. Many of its brands now have social missions – for example, Dove products are marketed with an accompanying women’s self-esteem campaign, and Lifebuoy soap targets communicable diseases through its global hand-washing programs. Not surprisingly perhaps, these are among the company’s fastest-growing brands. Yet there is a limit to what any one company can achieve. Transformational change will come only from businesses and others acting together. Again, we are hopeful, because momentum is building. Coalitions are being formed to tackle issues ranging from illegal deforestation to food security. Bodies like the World Business Council for Sustainable Development and the global Consumer Goods Forum are uniting key industry players and putting pressure on governments to join forces in the search for sustainable capitalism.
As the cost of inaction rises, governments and businesses must continue to respond. None of us can thrive in a world where one billion people go to bed hungry each night and 2.3 billion lack access to basic sanitation. Nor can business thrive where public optimism about the future and trust in institutions are at historic lows. We have a long way to go, but we believe the necessary transformation is beginning. A growing body of evidence suggests that new business models can deliver responsible growth. The Conference on Inclusive Capitalism represents another step forward. Though our work has only just started, we are convinced that within a generation we can redefine capitalism and build a sustainable and equitable global economy. We have no time to lose. As Mahatma Gandhi once put it: “The future depends on what you do today.”
“Our world economic system can’t take it anymore,” says the Bishop of Rome in an interview with La Vanguardia. “I’m no illumined one. I didn’t bring any personal projects under my arm. We are throwing away an entire generation to maintain a system that isn’t good,”
FLIPPING the TABLES
Pope Francis Warns Global Economy Is Near Collapse
by Alexander C. Kaufman / 06/13/2014
The global economic system is near collapse, according to Pope Francis. An economy built on money-worship and war and scarred by yawning inequality and youth unemployment cannot survive, the 77-year-old Roman Catholic leader suggested in a newly published interview. “We are excluding an entire generation to sustain a system that is not good,” he told La Vanguardia’s Vatican reporter, Henrique Cymerman. (Read an English translation here.) “Our global economic system can’t take any more.”
The pontiff said he was especially concerned about youth unemployment, which hit 13.1 percent last year, according to a report by the International Labor Organization. “The rate of unemployment is very worrisome to me, which in some countries is over 50 percent,” he said. “Someone told me that 75 million young Europeans under 25 years of age are unemployed. That is an atrocity.” That 75 million is actually the total for the whole world, according to the ILO, but that is still too much youth unemployment.
Pope Francis denounced the influence of war and the military on the global economy in particular: “We discard a whole generation to maintain an economic system that no longer endures, a system that to survive has to make war, as the big empires have always done,” he said. “But since we cannot wage the Third World War, we make regional wars,” he added. “And what does that mean? That we make and sell arms.”
“And with that the balance sheets of the idolatrous economies — the big world economies that sacrifice man at the feet of the idol of money — are obviously cleaned up.” Pope Francis is gaining a reputation for pointed comments on the global economy. In April, amid feverish media coverage of French economist Thomas Piketty’s bombshell book on income inequality, he made clear his stance on the widening wealth gap with a tweet saying: “Inequality is the root of social evil.”
‘NEAR MONEY’, ‘NEAR NEAR MONEY’
Even the Council on Foreign Relations Is Saying It: Time to Rain Money on Main Street
by Ellen Brown / September 02, 2014
“You can always count on Americans to do the right thing, after they’ve tried everything else.” —Winston Churchill
When an article appears in Foreign Affairs, the mouthpiece of the policy-setting Council on Foreign Relations, recommending that the Federal Reserve do a money drop directly on the 99%, you know the central bank must be down to its last bullet. The September/October issue of Foreign Affairs features an article by Mark Blyth and Eric Lonergan titled “Print Less But Transfer More: Why Central Banks Should Give Money Directly To The People.”
It’s the sort of thing normally heard only from money reformers and Social Credit enthusiasts far from the mainstream. What’s going on? The Fed, it seems, has finally run out of other ammo. It has to taper its quantitative easing program, which is eating up the Treasuries and mortgage-backed securities needed as collateral for the repo market that is the engine of the bankers’ shell game. The Fed’s Zero Interest Rate Policy (ZIRP) has also done serious collateral damage. The banks that get the money just put it in interest-bearing Federal Reserve accounts or buy foreign debt or speculate with it; and the profits go back to the 1%, who park it offshore to avoid taxes. Worse, any increase in the money supply from increased borrowing increases the overall debt burden and compounding finance costs, which are already a major constraint on economic growth. Meanwhile, the economy continues to teeter on the edge of deflation.
The Fed needs to pump up the money supply and stimulate demand in some other way. All else having failed, it is reduced to trying what money reformers have been advocating for decades — get money into the pockets of the people who actually spend it on goods and services. Blyth and Lonergan write:
[L]ow inflation . . . occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. . . . At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation. Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality. [Emphasis added.]
A money drop directly on consumers is not a new idea for the Fed. Ben Bernanke recommended it in his notorious 2002 helicopter speech to the Japanese who were caught in a similar deflation trap. But the Japanese ignored the advice. According to Blyth and Lonergan:
Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices. . . . The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter. Japan never tried using them, however, and the country’s economy has never fully recovered. Between 1993 and 2003, Japan’s annual growth rates averaged less than one percent.
Today most of the global economy is drowning in debt, and central banks have played all their other cards.
Blyth and Lonergan write:
It’s well past time, then, for U.S. policymakers — as well as their counterparts in other developed countries — to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.
The main reason governments have not tried this approach, say the authors, is the widespread belief that it will trigger hyperinflation. But will it? In a Forbes article titled “Money Growth Does Not Cause Inflation!”, John Harvey argues that the rule as taught in economics class is based on some invalid assumptions. The formula is: MV = Py
When the velocity of money (V) and the quantity of goods sold (y) are constant, adding money (M) must drive up prices (P). But, says Harvey, V and y are not constant. The more money people have to spend (M), the more money that will change hands (V), and the more goods and services that will get sold (y). Only when V and y reach their limits – only when demand is saturated and productivity is at full capacity – will consumer prices be driven up. And they are nowhere near their limits yet. The US output gap – the difference between actual output (y) and potential output – is currently estimated at about $1 trillion annually. That means the money supply could be increased by at least $1 trillion without driving up prices. As for V, the relevant figure for the lower 80% (the target population of Blyth and Lonergan) is the velocity of M1 –– coins, dollar bills, and checkbook money. Fully 76% of Americans now live paycheck to paycheck. When they get money, they spend it.
They don’t trade in the forms of investment called “near money” and “near, near money” that make up the bulk of M2 and M3. The velocity of M1 in 2012 was 7 (down from a high of 10 in 2007). That means M1 changed hands seven times during 2012 – from housewife to grocer to farmer, etc. Since each recipient owes taxes on this money, increasing GDP by one dollar increases the tax base by seven dollars. Total tax revenue as a percentage of GDP in 2012 was 24.3%. Extrapolating from those figures, one dollar spent seven times over on goods and services could increase tax revenue to the government by 7 x 24.3% = $1.7. The government could actually get more back in taxes than it paid out!
Even with some leakage in those figures, the entire dividend paid out by the Fed might be taxed back to the government, so that the money supply would not increase at all. Assume a $1 trillion dividend issued in the form of debit cards that could be used only for goods and services. A back-of-the-envelope estimate is that if $1 trillion were shared by all US adults making under $35,000 annually, they could each get about $600 per month. If the total dividend were $2 trillion, they could get $1,200 per month. And in either case it could, at least in theory, all come back in taxes to the government without any net increase in the money supply. There are also other ways to get money back into the Treasury so that there is no net increase in the money supply. They include closing tax loopholes, taxing the $21 trillion or more hidden in offshore tax havens, raising tax rates on the rich to levels like those seen in the boom years after World War II, and setting up a system of public banks that would return the interest on loans to the government.
If bank credit were made a public utility, nearly $1 trillion could be returned annually to the Treasury just in bank profits and savings on interest on the federal debt. Interest collected by U.S. banks in 2011 was $507 billion (down from $725 billion in 2007), and total interest paid on the federal debt was $454 billion. Thus there are many ways to return the money issued in a national dividend to the government. The same money could be spent and collected back year after year, without creating price inflation or hyperinflating the money supply. Why not just stimulate employment through the congressional funding of infrastructure projects, as politicians usually advocate? Blyth and Lonergan write:
The problem with these proposals is that infrastructure spending takes too long to revive an ailing economy. . . . Governments should . . . continue to invest in infrastructure and research, but when facing insufficient demand, they should tackle the spending problem quickly and directly.
Still, getting money into the pockets of the people sounds more like fiscal policy (the business of Congress) than monetary policy (the business of the Fed). But monetary policy means managing the money supply, and that is the point of a dividend. The antidote to deflation – a shrinking supply of money – is to add more. The Fed tried adding money to bank balance sheets through its quantitative easing program, but the result was simply to drive up the profits of the 1%. The alternative that hasn’t yet been tried is to bypass the profit-siphoning 1% and get the money directly to the consumers who create consumer demand.
There is another reason for handing the job to the Fed. Congress has been eviscerated by a political system that keeps legislators in open battle, deadlocked in inaction. The Fed, however, is “independent.” At least, it is independent of government. It marches to the drum of Wall Street, but it does not need to ask permission from voters or legislators before it acts. It is basically a dictatorship. The Fed did not ask permission before it advanced $85 billion to buy an 80% equity stake in an insurance company (AIG), or issued over $24 trillion in very-low-interest credit to bail out the banks, or issued trillions of dollars in those glorified “open market operations” called quantitative easing.
As noted in an opinion piece in the Atlantic titled “How Dare the Fed Buy AIG”:
It’s probable that they don’t actually have the legal right to do anything like this. Their authority is this: who’s going to stop them? No one wants to take on responsibility for this mess themselves.
There is a third reason for handing the job to the Fed. It is actually in the interest of the banks – the Fed’s real constituency – to issue a national dividend to the laboring masses. Interest and fees cannot be squeezed from people who are bankrupt. Creditor and debtor are in a symbiotic relationship. Like parasites and cancers, compound interest grows exponentially, doubling and doubling again until the host is consumed; and we are now at the end stage of that cycle. To keep the host alive, the creditors must restock their food source. Dropping money on Main Street is thus not only the Fed’s last bullet but is a critical play for keeping the game going.