A New Bretton Woods?

Thanks to government policies we’re unlikely to have bread lines and unemployment reaching over 30%, the current “recession” is looking more and more like the kind of economic event that heralds the end of a particular economic era.  We will get through it and a new era will begin, but things will have to get a lot worse before they get better.   The reason is politics:  people interpret the world through their political lenses and so far have not yet been convinced that real change is needed.

The boom of 1948 to 2008, sixty years of prosperity and growth, can be divided into two parts.  The recession of 1979-83 marks the break between the two.   In the first part the industrialized West produced as much if not more than it consumed, budgets were for the most part in balance, debt accrued in the war was being paid down, and income disparities were narrowing.   The standard of living went up, political stability grew.   However, since the great recession ending in 1983 the industrialized West has gone further into debt than had ever been imaginable, production has shifted to the third world and a series of bubble economies have created the illusion of sustainable prosperity.  In those three decades imbalances were being built that would ultimately ignite a global economic crisis.   It’s far worse than 1980 because debt is massively higher, infrastructure much more out of date, and globalization has altered the nature of the global economy.

Globalization is a mix of the internationalization of global capital and the growth of information technology.   Before 1980 it was difficult to merge companies across borders, invest in foreign markets, and go anywhere on the planet to find the best return on investment.    Now capital has been unleashed from its national borders meaning that business and capital no longer had national loyalties.   Whether this is good or bad is hotly debated.   What is clear is that the global institutional structure that worked so well up through the 80s is no longer adequate.  It was a state-centric approach now serving a world where state sovereignty is weakening.   Current institutions were created when the dominant economies were in the West, closely linked, and relied on the US as the global hegemon to assure defense, provide the global reserve currency (the dollar) and promote free trade.

That old order began with a meeting of economists at the New Hampshire resort of Bretton Woods in July 1944.  They were determined to completely reorganize the entire global economic system.   Their goal was simple: save capitalism.   Capitalism had been thought to have led to the great depression, fascism and systemic collapse.   They believed that with US leadership and the proper institutional infrastructure capitalism could lead to true prosperity.   The resulting “Bretton Woods system,” including fixed exchange rates (through 1971), the General Agreement on Tariffs and Trade (GATT – now the World Trade Organization), the International Monetary Fund (IMF) and the World Bank.   Together these institutions formed the foundation of this new system.   Free trade was the lynchpin and the key to igniting the most impressive economic expansion in world history.

Those institutions are no longer adequate.   The gold standard and the fixed exchange rates were jettisoned when they’d served their purpose in the early seventies.   Once trust in currencies was strong enough so the market could handle currency valuation, there was no need for the gold standard.   The rest of the institutions were built on two principles: a)  state sovereignty; and b) American hegemony.

Hegemony is long gone.   The dominant role of the US had faded by the late 60s, and since then the rise of the EU, Japan, China and others has created a real counter balance to US economic strength.    With $14 trillion of foreign debt and a large current account deficit, the US no longer can snap it’s fingers and expect the world to comply with its wishes.   Sovereignty is vastly overstated.   True sovereignty never really took in much of the third world, while even the develop countries find that globalization vastly limits their capacity to develop national responses to problems.   If the problems are global, a national response is inadequate.   The US used to think that our size made us immune to this; the current crisis shows that is not the case.

The world needs a recasting of global economic institutions designed to function in a world of complex interdependence, powerful non-state actors, and the need for coordinated policy.

If we learned anything from the Great Depression, it’s that markets alone don’t magically fix a broken economy.   To address the current imbalances, there needs to be a global effort to stimulate the economy and adjust the structural imbalances.   This might include a new global reserve currency, acceptance of a weaker dollar, and a massive well orchestrated global intervention in the economy designed to stimulate growth and regenerate markets.   That won’t happen until the situation gets much worse than it currently is.

In the US a huge chunk of the political discourse is run by people who equate any kind of government activism with “socialism,” an absurd charge but one which so tinges the political atmosphere that President Obama can’t even propose higher taxes on the wealthiest without being charged with class warfare.     Right now the Republicans are waging class warfare on the poor, telling them to suffer unemployment and want while protecting the elite who are doing very well.   The Democrats have to make that case boldly, with no apologies.   They have to note that cutting spending stifles economic growth far more than tax increases on those wealthy who now pay historically low rates.

Despite the sloganeering, the goal is not to build socialism, but to correct imbalances that now prevent markets from functioning adequately.   Markets have always needed a regulatory structure of some sort to work — even Adam Smith realized that.   That structure could be a set of local customs and norms in a small setting, state laws and regulations in the post-war setting, and now transnational agreements and policy action.

At some point it will happen.   If President Obama were to lead a call to bring top world economists back to Bretton Woods to plan a new global order, and states had the will to make it happen, it might quickly be as successful as the original Bretton Woods system.   More successful, even, as now third world states would be part of the solution to global problems.   But it’s not going to happen any time soon, thanks to a political mindset that still thinks primarily in terms of independent states rather than an interdependent global system.   That mindset may be strongest in the US, but it exists across the planet — old ways of thinking resist change, even if the world is clearly in transition.

Last time it took a 10 year depression followed by a bloody six year war before the world embraced a new order.    The success of the original Bretton Woods system is clear — never before has so much wealth been created so quickly.   There is no reason to think this can’t be done again, this time involving the resources and dynamism of the entire international community, not just the West.    First there has to be the political will to make it happen.   Things will have to get a lot worse before that political will is evident.   How much worse?    Ten years of depression and six years of war like last time?  I hope not.

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  1. #1 by Alan Scott on September 21, 2011 - 01:16

    Scott,

    ” If President Obama were to lead a call to bring top world economists back to Bretton Woods to plan a new global order, and states had the will to make it happen, it might quickly be as successful as the original Bretton Woods system. ”

    Why should the world agree to that? Why should China or the middle east oil powers agree to it ? Why would they listen to Obama ? He has fallen in stature all over the World, not just here . He is a minor politician who got himself elected President. Now even those who fawned all over him, his first year, do not care what he says .

  2. #2 by Scott Erb on September 21, 2011 - 01:22

    Actually Obama is still one of the most popular US leaders across the world in recent history. You’re again engaged in wishful thinking.

    But the point is that in a global economy it’s in the world’s interest to cooperate, and if the US led such an effort regardless of who is President many countries would embrace it. I think to really happen though, things will probably have to get much worse before states see no other choice.

    Oh, Obama’s ratings are above what Reagan’s were in 1983 before his economy improved, Obama’s personal ratings are still high, and he’s probably going to be re-elected and perhaps end up as one of the greats. You’re believing the hype from the partisan media and talk radio — they’re not serious.

  3. #3 by modestypress on September 21, 2011 - 03:25

    A wild card, still in its earliest days, is the replacement of human labor by automation. Right now, perhaps 1-5 % of work formerly done by humans is done by robots (e.g., replacing humans on assembly lines) and by artificial intelligence programs (e.g., answering telephones at call centers). By the end of the decade, about 25% of human labor will no longer be necessary for the functioning of an economy. In theory many or most of us could be “ethical slave owners”, with robots, androids, and AI programs supporting us.

    We are totally unprepared for this changeover, which will overtake us much faster than most imagine. Two of the biggest problems are:

    1)How to divy up the “earnings” of the robots to the benefit of the populace as a whole. Right now, the factory owners and the top of the technogeek pyramid will consider the earnings as all theirs, with bupkis for the rest of us (yiddish for “nothing”).

    2) How to crate meaning and purpose, which most of us find through our employment. Right now most of society is not prepared (even if the economic rearrangement were solved in some way) to satisfy ourselves as artists, gardeners, and athletes.

  4. #4 by Alan Scott on September 21, 2011 - 16:42

    Scott,

    ” You’re again engaged in wishful thinking. ”

    🙂 That is what I would say to you . One of us is wrong . Funny you brought up Reagan. At this point in 1983 I believe unemployment was in deed worse, but there was a sense of recovery. Economic growth was good . Right now under Obama there is a sense of drift, very Jimmy Carter like .

    ” Obama’s personal ratings are still high, and he’s probably going to be re-elected and perhaps end up as one of the greats. ”

    He is only popular with you guys. We never believed the hype and now even the independents are done with him. He is tacking far left to get you guys back in line. His jobs proposals are all red meat to you, but they will do nothing to ease the Business community’s fears, which is the problem .

    ” You’re believing the hype from the partisan media and talk radio — they’re not serious. ”

    Don’t look in the mirror .That again is just what I’d say to you .

    • #5 by Scott Erb on September 21, 2011 - 18:06

      Reagan used a massive increase in deficit spending to help bolster the economy. Republicans then supported increased debt — and it stimulated the economy. This crisis, which began before Obama became President, is much worse than the one Reagan inherited. It’s not the fault of Obama or Bush, but 30 years of growing economic imbalances.

      I don’t buy your use of “you guys” and “we.” You are one person, as am I. His personal and likability ratings are still higher than job approval. Most Americans are not partisan and remain open minded to both parties. I also think the fears of the business community are based on real economic conditions, not on politics. You still view the world through a partisan lens, and partisan lenses distort, whether on the right or left.

  5. #6 by Alan Scott on September 21, 2011 - 22:52

    Scott ,

    ” You still view the world through a partisan lens, and partisan lenses distort, whether on the right or left. ”

    So do you . I am simply very open about it . I go to great pains not to lie to myself and when I am guilty of it, I admit it. You go to great pains to pretend you are not partisan .

    ” Reagan used a massive increase in deficit spending to help bolster the economy. ”

    Partially true. Your Democrats controlled the House, do not forget during Reagan’s entire Presidency and you know your guys were never known for any restraint in spending other people’s money. Reagan pushed tax cuts and deregulation to turn around the economy. With rebuilding the military and Tip O’Neill as Speaker of the House , deficits happened. What Ronald Reagan did not do was use domestic deficit spending as stimulus.

    Your guy Obama specifically ran up the deficit with Cronyism spending . Much of Obama’s Stimulus went to politically connected groups and not to real economic stimulus. This cronyism recycled taxpayer dollars back as Democratic Party donations. Solyndra, teachers unions, etc.

    ” This crisis, which began before Obama became President, is much worse than the one Reagan inherited ”

    I totally dispute that .But it depends really on how you wish to measure misery . Reagan dealt with rampant inflation. I was there, I well remember it . You guys always forget inflation, always when you misremember that time period.

    Again, Reagan’s policies worked . In 1983 Real economic growth rates were Q1=1.5%, Q2=3.2%, Q3=5.6%, Q4= 7.7%. I could have used the nominal figures which were much higher .

    http://www.data360.org/dsg.aspx?Data_Set_Group_Id=274&page=2&count=100

    Obama’s economic growth figures are much worse. Obama has done the exact opposite of Reagan and gotten the exact opposite result .

    • #7 by Scott Erb on September 21, 2011 - 23:30

      I view the world a particular way, but it’s not hyperpartisan. I don’t blame one side for problems, and I think both sides get some things right. I also refuse to personalize it, I tried to always speak respectfully of President Bush even when criticizing his policies.

      I was working for a Republican Senator in the early/mid 80s and Reagan actually had a GOP Senate and a working majority in the House thanks to southern Democrats. The Republicans did call deficit spending a stimulus — that was their argument for why deficits were not a problem! But I do blame both parties — and have consistently in this blog (I call it the great Democratic and Republican compromise for less taxes and more spending). You asked why Reagan was getting out of it by late 1983 and able to regain popularity. The economy turned around because of two factors: deficit spending and the dramatic fall of oil prices. I do think marginal tax rates were too high as well, so many of Reagan’s tax reforms helped too.

      Note as well that both of these recession were/are global events. The industrialized West recovered together as oil prices dropped in 1982-83. This included heavily regulated European states with high taxes. Now the whole world is suffering a more severe crisis. It’s short sighted to blame (or credit) one President with these global economic trends. I see this crisis as as bad if not worse than the Great Depression, and suspect (as this post argues) that only a complete sea change in how the economic system is structured globally will solve this. I guarantee you that if McCain had been elected we’d probably see a similar situation as now. If the stimulus had not been passed we might be seeing unemployment nearing 15%.

  6. #8 by Alan Scott on September 21, 2011 - 23:52

    Scott,

    Voodoo economics actually worked. While you worked in the public sector, I worked in a smoke stack industry. I was unemployed for a short time and the rest of the time I was scared to death of being permanently out of work . The early eighties in a lot of ways were worse than now. That was what it took to ring inflation out. You are right about oil. But there you get into supply and demand. Demand was going down as supply finally went up. The late 70s, early 80s were boom times in the oil fields. Reagan did not discourage increasing supply, as Carter and Obama did . If Obama would get off of his green kick and just stop threatening coal, oil and natural gas companies with these stupid carbon taxes and all the other BS, energy would get cheaper and the economy would improve.

    I just realized that you are one of the first Liberals in the history of the universe to admit that lower oil prices spur economic growth. Maybe you could let President Obama in on the secret. I know, I know he released oil from the reserve to lower prices, but he does not get that increased production, like if he stopped sitting on offshore oil leases, would increase GDP and his chances for four more years . He could actually be the next Reagan.

    • #9 by Scott Erb on September 22, 2011 - 00:52

      When oil prices drop dramatically and you stimulate the economy with a massive increase in debt, it will aways work! What’s voodoo about it is that you end up paying the prices down the line…like where we’re at now.

      Nothing Obama is doing is hindering energy production any more than in the past, and none of that could bring short term gains to the economy. It’s solutions on the cheap — painless things like ‘if regulations were dropped then everything would blossom.’ So easy to trumpet because it sounds easy and painless, and everyone likes to think such an answer exists. If that would work, Obama would do it in an instant. But it’s not a solution — and the consequences of rapid deregulation could be worse than the meager benefits it would bring.

  7. #10 by Alan Scott on September 22, 2011 - 02:53

    Scott,

    You are making excuses for Obama and blaming everything that went wrong on his predecessors. You know what, it is George Washington’s fault. We are paying the price of the unpaid debt from the Revolution . Voodoo economics was how George H.W. Bush described Reagan’s economic outlook when he ran against him in the primaries . He had to walk that back when they became running mates . Your Democrats seized on it.

    As always , Voodoo economics worked . If you wish to complain about the deficits of Reagan, fine. The economy was good. What have we gotten for Obama’s deficits ? Nothing .

    And if you wish to point out things in the past that haunt us and will haunt us forever, paying the price, you might want to remember SS and Medicare.

    ” Nothing Obama is doing is hindering energy production any more than in the past, and none of that could bring short term gains to the economy. ”

    He is holding up huge parcels of land for offshore leases . He is threatening new fees and taxes on energy companies. In the private sector these matter.

    ” It’s solutions on the cheap — painless things like ‘if regulations were dropped then everything would blossom.’ ”

    Just drop the BS regulations . Not the necessary ones . Obama has put in charge of the ruling agencies, fellow green marxists who hate the businesses they regulate .

    ” If that would work, Obama would do it in an instant. ”

    That is not true. President Obama has consistently shown that ideology and politics trump common sense. The guy can’t help being what he is, a big government socialist.

    • #11 by Scott Erb on September 22, 2011 - 14:40

      I’ve explained to you why this crisis will last longer, it has nothing to do with Obama. That’s not something a President can control. Giving leases wouldn’t affect the economy for years, maybe longer. President Obama has been harshly criticized by left for being too willing to work with Republicans. As it becomes clear the GOP has no desire to cooperate, he’ll become more partisan. Right now the polls are close by in Obama’s favor — Obama leads Romney, for instance, by only 3 points. Obama leads Perry by 8 and Bachmann by 14, Palin by 11, Paul by 3, Gingrich by 15, Cain by 10 — and this is probably the least popular Obama will be, once his campaign machine gets moving and if there is any bump in the economy his numbers will improve.

      In generic Obama vs. an unnamed Republican the polls are split, some show Obama leading, others a slight lead for the generic Republican. But the Democrats were trouncing Bush in those polls back in 2004. So I think Americans understand that this is a true economic crisis with no easy answer, and that both parties are responsible. In the campaign the two sides can make their argument. But given the weakness of the economy Obama remains surprisingly popular.

  8. #12 by Alan Scott on September 23, 2011 - 00:01

    Scott,

    I realize I am being a real pain in the A$$, but I believe you are letting what you want to happen cloud your vision . Those polls you cite are not good for the President , this far out. Again his proposals are political maneuvers, not serious ideas.

    ” I’ve explained to you why this crisis will last longer, it has nothing to do with Obama. ”

    If a Republican was in power and made an argument like that after 3 years, you would laugh. It’s not as if we had been up and we are now going into a downturn. Things at the local level in some parts of the country are actually good. We have a crisis of confidence because of Obama. He spent $ 750 Billion in stimulus, and got almost no return on our money. How can you waste that kind of money and believe it has no effect on the long term economy ? That money is gone. That missing value will have to be made up eventually by the private economy .

    Private money should by now, be going into the economy and the President keeps scaring it away. Look at where it keeps going. Into US Treasuries and into gold and oil. That is all fear based. Yes we attract all of this international money despite losing our AAA rating. But we are also sucking up the world’s risk capital to finance our loose spending. Risk capital is being used unproductively. That is making it harder for Europe to bail out it’s wayward members . Which delays the world recovery .

    You said you worked for a Republican Senator and now you teach at a college? What is your private sector economic experience ? I’ve always worked in the private economy. I have been through a few booms and busts. I have been a Stock Mutual Fund investor since the mid 1970s. You may or may not have more formal financial education than me, but your answers make you sound unworldly to me .

    We are all shaped politically by our jobs. People who have spent most of their working lives in Government or academia are overwhelmingly liberal. I was liberal myself until the post watergate era. In 1975 I was suddenly making more money than I could have ever dreamed of . A few years later if I had not been a saver and investor I would have been broke. Those experiences have made me extremely hostile to any liberal ideology. Also having seen wind and solar, boom and bust in the 1970s, well you know my opinion .

    Thanks for letting me vent . I believe I represent some of the thinking of a large part of the neo tea party crowd .

    • #13 by Scott Erb on September 23, 2011 - 00:59

      You’re no more a pain than I am! As long as we don’t take it personally, it’s fun. I have always argued that the President gets too much blame or credit for the economy. You will not see me blaming President Bush for this either. Economists disagree, I’m sure, but I’ve read a number of reports that without the stimulus we’d be in much worse shape. Alternative realities are purely speculative, of course. The stimulus also saved many state budgets.

      I’ve been working in academia since I was 26 starting grad school. Otherwise, I started working at age 16, first at a pizza place, then as a busboy at a steak house, then night supervisor at a pizza place (which did entail keeping costs down, doing the books, and I was the training supervisor and did scheduling — and always kept my labor below the goal). I worked a few years at a law firm (long though to decide being a lawyer would be boring), lived a year in Bologna, Italy (Johns Hopkins School of Advanced International Studies Bologna Center) worked a summer on an assembly line (wonderful 7:00 AM to 3:00 PM hours – kitchen cabinet making) before finishing at the Washington center of Johns Hopkins SAIS and getting the job with the Senator.

      I hated DC and politics — too many power games, too shallow. I was Republican, but the really disagreed with Reagan’s fiscal lack of discipline. After accompanying the Senator on a trip to Greece and Turkey (meeting some really fascinating important people — and I swear I saw Nastasia Kinski at the pool at the Instanbul Hilton!), I quit – shocking the people around me. I moved back to the Midwest, got a job managing a Rocky Rococo’s pizza in Minnesota as my MA in International Studies didn’t exactly open doors in the middle of the country. I liked that better than working in DC. I then decided I wanted a job where I could travel a lot to Europe, I always was involved in teaching, and so I went for my Ph.D. I chose to focus on teaching and not so much research, and teaching at a rural New England public university is about as far from the ivory towers as one can get.

      My goal in these debates is not ideology, but realism. What are the facts? And in my experience the facts never completely fit any left or right ideological stereotype. I admire my Republican Senator, Olympia Snowe. Republican conservatives think she’s too liberal, but she’s certainly to the right of most Democrats I know. I think the key in our system is for both parties to understand each other, come up with pragmatic compromises to deal with problems. Too much political rhetoric works against that, it goes for the gut not the head. I teach in a way that tries not to take partisan stands, show understanding of how different ideologies perceive issues, and to get students to think for themselves (my most recent post about Petrarch and Augustine is an example, but that’s outside Poli-Sci).

      I try as hard as I can never to ridicule belittle or demonize those who think different from me. From tea party conservatives to neo-Marxists, I’ve found that almost always there are many intelligent, honest people who simply see the world differently. If we talk with each other we can learn from each other. If we just take sides and argue it may be fun — like sports fans arguing for their team — but I think it’s not what our country needs now.

  9. #14 by Alan Scott on September 25, 2011 - 00:43

    Scott,

    I look forward to the coming battles . I believe it is not going to be nice because someone is going to lose badly . I am extremely partisan and love to pick a fight with the biggest guy on the other side of the street . For some reason I believe I will convert him, but it never happens .

    Again, thanks for tolerating me.

    • #15 by Scott Erb on September 25, 2011 - 01:20

      In politics the pendulum swings and today’s winners are tomorrow’s losers. In political arguments the reason people tend not to be converted is because reality is so complex and we all interpret it through our perspective that it’s always possible to find a way to get evidence that can be interpreted to fit one’s existing beliefs. Give the same evidence on the health care system in the US to a liberal and a conservative, assume each is just as honest and intelligent as the other, and they’ll still come up with different solutions because they’ll interpret the evidence through their perspective.

      Yet I like such arguments because I try to understand how other intelligent people look at things, and then rethink my own perspective. You probably won’t convert me, but I tend to learn something from the people I interact with.

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