November 19, 2010
Korean-born economist Ha-Joon Chang teaches economics at the University of Cambridge and is the author of the forthcoming book, 23 Things They Don’t Tell You About Capitalism. "Obama] has to buy time to restructure the economy without creating a recession by sustaining this deficit spending, because otherwise our other option is going back to the 1930s," Chang says. "Don’t forget that in the 1930s a lot of countries started cutting this deficit as soon as things looked slightly better, and many of them went back into recession."
Ha-Joon Chang, teaches economics at the University of Cambridge. He is the author of the forthcoming book, 23 Things They Don’t Tell You About Capitalism. His previous book was titled, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.
AMY GOODMAN: President Obama has just left again for Portugal. He just came back from his 10-day Asian trip where he emerged from the G-20 summit in Seoul, South Korea saying the countries at the summit had agreed to "Get the global economy back on the path of recovery."
But critics have pointed to Obama’s failure to secure a free trade agreement with South Korea and the lack of progress between the United States and China on currency issues. Before leaving Seoul, Obama defended the $600 billion move by the Federal Reserve to buy up government bonds and rejected claims that the U.S. is waging a currency war by devaluing the dollar. Meanwhile, although the U.S. has accused China of artificially manipulating the price of the yuan for economic gain, Obama failed to win international backing for his effort to pressure China to raise its currency value.
JUAN GONZALEZ: For more on the currency wars, capitalism, and the free market, I spoke to the Korean-born economist Ha-Joon Chang last week. He teaches economics at the University of Cambridge. He’s the author of the forthcoming book, 23 Things They Don’t Tell You About Capitalism. His previous book was titled, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. I began by asking him for his assessment of President Obama’s visit to Seoul.
HA-JOON CHANG: Currency, I think was unrealistic to expect any concrete agreement there. Both countries have such different views about what is the right way forward; they have all very different interests. So I think it was quite unrealistic to expect anything on that account.
But I think that there was probably a more realistic expectation of the Korea-U.S.A. free trade agreement. But once again, the problem is that the deal was already agreed and then the Americans are asking for more. The South Korean government is actually quite keen to sign this agreement, although I personally oppose it. But even they couldn’t quite stomach it because they had made all the concessions – well they thought they had – and then now the U.S. is coming back, “We want more.”
JUAN GONZALEZ: What were some of those concessions? Because the president portrayed it as an attempt to get more protections for American workers in a renegotiated part of the deal.
HA-JOON CHANG: Yes, that is the fundamental problem with bilateral free trade agreements because when you open up trade in this kind of way, a lot of people on both sides are going to get hurt and none of the countries have come up with an adequate compensation mechanism. It’s understandable that the Korean farmers or U.S. auto workers – people who are going to get hurt – want to protect themselves and oppose these agreements.
JUAN GONZALEZ: In terms of the currency debate, clearly, the United States now and other countries in the world for more than several years have been claiming that China is refusing to peg its currency at what it’s really worth now on the international scene.
And now suddenly though the tide – especially after the Federal Reserve action in the past week, to begin to buy up more bonds and in effect drive the currency value of the U.S. dollar down – now the charges are being leveled against the United States. Who is right here? And what is the role not only of the emerging Third World countries, but also of the European Union in this debate?
HA-JOON CHANG: Well, you know, it is quite understandable why Americans are frustrated by the slowness in the adjustment of the Chinese currency. Let’s get the facts right. It has been adjusted, only very, very slowly. So it is not like China is absolutely refusing to move, but yes, given the imbalances that the U.S. is facing, it looks painfully slow.
But on the Chinese side, you have to understand. First of all, they don’t want the kind of abrupt adjustment that Japan had to make to its own currency in the 1980s in the so-called Plaza Accord, which then created this huge financial bubble and destroyed the Japanese economy. So the Chinese want to do it slowly. Secondly, it’s not just China who manipulates currency value. As you just said, the Fed flooding America with this money is also currency manipulation, so the Chinese are rightly upset.
But on the other hand, yes, the problem is that since the 1970s, we have lived under the notion that only the deficit countries have to make adjustments. Surplus countries have to make adjustments, too. But in the last 30 years, the reigning orthodoxy has been that anyone who is spending beyond his means has to be punished. This is exactly the logic behind the punishment of Third World countries in the debt crisis and later, the Asian economies and Argentine economy.
So in that sense, actually, the very thing the U.S. has tried to impose on the world is coming to haunt itself. If the U.S. has been on the forefront of this logic that it’s only the deficit countries that have to make adjustments, and now other countries are logically saying, “Well, why don’t you then, do the same?”
JUAN GONZALEZ: But in terms of the currency, in terms of this flood now of American capital that is heading overseas now because the government has driven interest rates down here so drastically, several of the emerging economies – certainly Brazil, India, and others – are increasingly looking at how to prevent this entrance into their economies of basically, speculative capital.
What is your sense of how this will develop? And again, how Europe, which is this other huge power force in the world economic scene, how Europe will react to the debate between the emerging countries and the United States over currency controls?
HA-JOON CHANG: Well, first of all, let’s put this into perspective. The reason why the Fed has to engage in this massive quantitative easing is because of the inability of the American political system to agree on continued deficit spending. So although the brunt of adjustment is put on monetary policy, this is at the root of the problem. In a way, monetary easing wouldn’t be as big if the American political scene is such that it can continue the stimulus package. But it is not going to happen.
So we’re stuck with the situation now. Given the low interest rate and a huge amount of liquidity released into the system, a lot of money is flowing into the so-called emerging economies – that is, middle-level developing countries – and they are really desperate. I mean, some of these countries have seen huge appreciation of their currency values which is making their export difficult.
Now, most of them are beginning to put capital controls in place. This is quite amazing because until recently, it was a mortal sin. Now, in certain countries, even the IMF is saying, maybe you should put capital controls in so that the speculative capital wouldn’t destabilize your economy.
JUAN GONZALEZ: By capital controls, you mean what, precisely? The taxing of investments, of financial investments that are coming in from abroad? Restrictions on their leaving?
HA-JOON CHANG: Yes, well, there are a range of measures. The most kind of draconian measures will be that you have to get government approval when you are bringing money, you have to get approval when you are bringing it out. That is still where a lot of countries are putting, for example, deposit requirements. When you’re bringing money in, you deposit, say, the equivalent of 30% to 50% of the money, which you will get back when and if you leave after, say, a year or two, but if you leave earlier, then you lose the money. So this is to –
JUAN GONZALEZ: To curb speculation.
HA-JOON CHANG: Exactly, yes. Some other countries have studied taxing capital gains from this speculative flows. So a range of measures are being used, but the direction is clear: these speculative inflows cannot be managed through market mechanisms.
Just put it into perspective, even the biggest stock markets in the developing countries are less than 1% or 2% of the U.S. stock market. So a tiny drop flowing out of the U.S. is a flood for these economies so that they need these kind of protective mechanisms.
JUAN GONZALEZ: Ever since the financial collapse a couple of years ago, first, all the governments tried to engage in some sort of stimulus of their economies, but now the clear debate is over is the way forward to reduce deficits and to impose austerity on government spending? Or is it to continue to stimulate economies and promote economic growth? Obviously, you fall clearly on one side or another – could you explain why?
HA-JOON CHANG: Yes. Look, one thing that has to be made clear at the very beginning is that the main reason for these large deficits is not excessive government spending, but falling tax revenue through the collapse in private sector demand. So if we are in a full implement situation, cutting government spending might create room for the private sector to come and create jobs and so on.
But the very reason why we have this deficit is the private sector is not investing, and cutting deficits is not going to make them invest because the root cause of their unwillingness to invest is the problems with their balance sheets. This cut is not going to solve the problem.
But more importantly, in the short run, that is viewed that it is the best if you cut the deficit as much and as quickly as possible. There’s no economic logic. The British government, you know, says to cut the deficit down to basically zero in four years’ time. But four years makes sense in calendar terms, but in economic terms, it doesn’t make any sense.
If you want to cut this deficit, you have to cut to the state of the economy. So maybe in some cases, you can cut it in two years, maybe in some cases it will have to be 12. Unfortunately a lot of deficit hawks have a hidden agenda. They basically want to rollback the welfare state and they’re using it as an excuse to do it.
JUAN GONZALEZ: As Naomi Klein says, “Disaster capitalism is the opportunity to implement policies that you have always wanted to do.”
HA-JOON CHANG: Exactly and then the kind of political sleight of hand they have deployed is quite remarkable. All this crises that have basically been generated by the bankers and other financiers, I mean, these people are still paying themselves billions of bonuses while the poorest people are asked to make the adjustment. I mean, this is outrageous.
JUAN GONZALEZ: Now you are seeing one country after another – Greece, France, England with its austerity measures – and now, of course, the United States, the Debt Commission recommending potentially huge cuts in Social Security and Medicare here in the United States. How do you see President Obama’s policies so far in terms of the way he’s handling this crisis, since he got into office?
HA-JOON CHANG: Well, luckily the U.S. still hasn’t yet given into the deficit hawks, but with the Republican victory in the midterm elections and the Debt Commission, it’s coming. But he has to resist it. He has to, if possible, buy time to restructure the economy, without creating a recession, by sustaining this deficit spending.
Otherwise, the other option is going back to the 1930s. Don’t forget that in the 1930s, a lot of countries started cutting the deficit as soon as things looked slightly better and many of them went back into recession. It is already happening in Ireland. They started cutting the deficit, now they are in bigger trouble.
AMY GOODMAN: Korean-born economist Ha-Joon Chang speaking to Juan Gonzalez. He teaches economics at the University of Cambridge in Britain; the author of the forthcoming book, 23 Things They Don’t Tell You About Capitalism; his previous book, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.
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