Of course, earlier crises may offer interesting analogies but the present circumstances are radically different to previous crisis situations. But conspicuous consumption and greed are not new. As such, they cannot explain the speed or the depth of the global crisis after What then are the deeper, more structural and systemic causes of the crisis? Why did academic economists fail to anticipate the coming crisis?
In retrospect, three factors can be identified that began to merge in the early years of the 21st century, and eventually created an unforeseen but lethal combination: In addition to these, a fourth contributing factor was the theoretical bias that developed in the academic profession towards the economics of market efficiency and human rationality. When the Fed realised that US aggregate demand was falling sharply and had the potential to throw the entire economy into a full-blown recession, it responded by radically lowering interest rates to one percent.
Initially, as the US housing sector remained stable, there were no signs of overheating. However, after another interest rate cut by the Fed, a housing bubble began to expand.
With lower interest rates, people could afford much larger home mortgages. This cheap money created a very competitive environment for financial institutions, which could only get high returns if they made ever-riskier investments. Global imbalances Macro imbalance in trade has accelerated dramatically over the past ten to fifteen years, partly as a result of loose US monetary policy.
Asian emerging economies and the oil-exporting countries accumulated large current account surpluses, and these were matched by large current account deficits in the US, as well as the UK, Ireland, and Spain. A key driver of these imbalances was the high savings rates in countries like China.
The run-up to the crisis should actually be traced back to the Asian financial market crash. Following this disaster, Asian governments and citizens felt increasingly insecure and ramped up their reserves — primarily in US dollars — in order to avoid becoming vulnerable to such a scenario in the future. This exacerbated the US debt burden, further perpetuating the trade imbalance.
Lax financial regulation Loose monetary policy and the international trade imbalance were compounded by a third factor: With the liberalisation of capital markets, finance became global, but regulation remained national. In addition, throughout the neo-liberal epoch, even domestic financial markets were systematically deregulated, allowing financial innovations to evolve unchecked. As the financial sector grew and became truly global, insufficient latitude was reserved for domestic government regulation and international supervision Financial sector deregulation allowed the macro-imbalances in savings rates to stimulate a massive wave of financial innovation, focused on the origination, packaging, trading and distribution of derivatives, credit default swaps, and other securitised credit instruments.
Since the mids there has been huge growth in the value of credit securities, an explosion in the complexity of the securities sold, and a related explosion of the volume of credit derivatives, enabling investors and traders to hedge underlying credit exposures. As securitisation grew in importance from the s on, this development was lauded as a means to reducing banking system risks and to cutting the total cost of credit intermediation.
The politics of international deregulation, together with computer-based finance mathematics, finally extricated the capacity to produce money by credit from public control — which to some extent at least had tied it to production and consumption. The financial industry thus acquired the capacity and the licence to make money out of money, generate claims to resources at a rate so rapid that the real economy cannot possibly follow. It could even be argued, that money ceased to a public institution directing economic activities into productive endeavours.
Instead, it was reduced to being a commercial commodity itself, decoupled from its previous function for the real economy, no longer bounded by any national base or interest or regulation, or by any other direct or indirect requirement to commit itself to any other productive function beyond itself Why were so many economists so blind?
To be sure, a small minority of eminent members of the economics profession, notably Robert Shiller, Raghuram Rajan and Nuriel Roubini37, did point to the great risks of an unchecked housing bubble. Dani Rodrik and Barry Eichengreen warned against the negative fallout potential of the global imbalances Yet the majority of mainstream economists failed to recognise what was going on. Intellectual inertia and mathematic sophistication has adversely affected both academia and economic institutions, as this led to significant blind spots for deeper structural economic problems in the run-up to the crisis.
If nothing else, economists will be going through a long period of sobering up. The theory of efficient markets operated by rational actors was the dominant intellectual economic paradigm from the early nineteen eighties onward. It led to a refinement of macro-economic models and gave economics the aura and authority of an exact science.
It yielded a spectacular series of Nobel Prize winners who performed pioneering work in the mathematization of economic behaviour. The crisis has disposed of this dogma. Human behaviour, informational inconsistencies, and irrationality must be reintroduced to economic. Shiller ; ; Rajan ; Roubini Rodrik ; Eichengreen It will have to become more modest too. But this is easier said than done — an entire generation has been brought up to believe in the concept of the efficient market. Institutions will continue to cling to this concept, and a paradigm shift will be more difficult than recent revelations would justify, especially since alternative constructs are not readily available.
Paul de Grauwe intimates that perhaps the root cause of this academic oversight was the error of modern mainstream economics in believing that the economy is simply the sum of microeconomic decisions of rational agents. The profession of economics was so caught up in this rational actor and market efficiency paradigm that it completely forgot some of the most elementary dynamics of economic crises: Fundamental to Keynesian economics is the idea that instead of rational actors, much economic activity is governed by animal spirits, best understood as waves of optimism and pessimism Left to their own devices, capitalist economies will experience manias, followed by panics.
It is the function of the modern state to sail into the wind of these excesses: In the evolution of the paradigm shift from Keynesianism to monetarism and rational expectation macroeconomics, the study of animal spirits has almost completely disappeared from mainstream macroeconomics, and the economics of finance. When expectations are assumed to be rational, intellectual models little room for waves of pessimism and optimism to exert an independent influence on economic activity.
As time went on, more and more professional economists were drawn onto the bandwagon of passive acceptance of the dominant intellectual paradigm. Most academic economists shied away from probing the underlying vulnerabilities of loose macroeconomics, financial deregulation, mortgage and pension markets, and distorted incentives and bonus schemes in the big financial institutions that exacerbated economic instabilities.
Moreover, the high level of sub-disciplinary specialisation in the field of economics made it difficult for any single academic to put together all the pieces. This intellectual inertia and sub-specialisation blinded academic economists to the underlying causes of the crisis. In this respect, the current crisis is a wakeup call, re-introducing the concepts of animal spirits, imperfect information, cognitive limitation, and heterogeneity in the use of information, back into macroeconomic and financial market modelling and analysis.
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The above three features of loose monetary policy, the savings and trade imbalance, and lax regulation ultimately exacerbated the pro-cyclical and self-reinforcing nature of the downturn. For the past two decades, increase in US debt came from the financial innovation, rather than the real economy. Once, a home owner took out a mortgage, and household debt increased. But since the late s, mortgages could be used to secure mortgagebacked securities, and those securities could in turn be used to secure a collateralised debt obligation. The end result was more borrowing, but no more real economy activity.
Moreover, when assets, driven by cheap money, came to be bought not because of the rate of return on investment but in anticipation that such assets and securities can be sold at a higher price, the stage was set for an asset bubble of overvalued stocks in relation to real economy fundamentals. The history of the current crisis is therefore perhaps less a tale of greed or improvident borrowing than it is a tale of profligate lending. Examining the supply of credit provides a far more telling analysis than looking at its demand by ordinary consumers.
Maier40 claims that while governments adopted the imperatives of balanced budgets, inflation targeting, deregulation, and privatisation thus constraining the money supply , the private financial sector was allowed to use financial innovation to create as much money as it saw fit. It was thus not greed, but rather the necessity and availability of credit that led to the overwhelming indebtedness of American citizens. In retrospect, it can be argued that the compression of incomes in the US throughout the neo-liberal period was compensated by a reduction in household savings and mounting private indebtedness, which allowed spending patterns to be kept virtually unchanged.
At the same time, limited social safety nets forced the government to pursue active macroeconomic policies to fight unemployment, which increased government indebtedness as well. Thus, growth was maintained at the price of increasing public and private indebtedness, adding to the already existing macro imbalance. Privatized money production on a hitherto unknown scale can be understood as a response to the general stagnation of growth and profitability after the s.
In the era of neo-liberalism, structural inequalities were allowed to persist and widen further, both within and between countries. In macroeconomic parlance, increased inequality implies weak domestic demand: In addition, global demand contracted even further in the wake of Asian financial crisis, when Asian emerging economies started to hoard reserves so as not to become dependent on IMF loans in hard economic times.
Fitoussi42 argues that the crisis is rooted in the problem of reverse income distribution, both in the United States and Europe, fatally depressing global demand. Looking beyond the aftermath of the crisis, he proposes new indicators of social and economic progress and prosperity, considerably expanding the narrow focus on GDP as the foremost figure of economic vitality.
The Contours of Embedded Globalization The core lesson that has emerged from the crisis is that economic markets are not selfcreating, self-regulating, self-stabilising, and self-legitimising. While this important lesson is certainly not new, in the past decades of neo-liberalism policymakers do seem to have forgotten the fundamental truth that the benefits of global economic interdependence rely heavily on robust domestic and supranational, social and political institutions, reminiscent of the era of embedded liberalism.
Domestic and supranational institutions must be able to bind, bond, and bridge advanced polities, economies, and societies. Unfortunately, however, once the genie is out of the bottle, it is far more difficult to re-regulate an economy than to deregulate it. And as deregulation brought concentrated wealth to sectors that benefited from even further deregulation, accumulated wealth was efficiently translated into a strong financial lobby in London, New York, and Washington.
The financial sector effectively bought political power. Therefore, the failure of politics lies in part in its inability to resist being hijacked by financial interests. The excesses of deregulation have hit society hard. Public institutions and authorities matter, in fact, they have proven to be indispensable. This ideology elevated the free market to the status of an ultimate goal and an enlightened ideal, rather than one of many possible means by which society can increase its prosperity and well-being.
The crisis seems to have debunked this ideology: Re-establishing the rules of the game and the relationship between the market and the public authorities has. Even free market zealots have been forced to concede that if not government than at least governance has a role to play in the economy. The neo-liberal era may have come to an end, but whether the crisis indeed marks the ascendance of a new regime is an open question.
Some of the rules of economic regulation and policymaking will be rewritten. The economic crisis has brought the world to a new policy crossroads, but it also needs to be acknowledged that the room for manoeuvre and institutional innovation may be fairly restricted, not only because of the likelihood of low economic growth, but also because of domestic and international political constraints.
As a consequence, some policy recipes that were successful before including currency devaluations and trade protectionism are no longer available to national policymakers, in part due to European and WTO economic integration. In this respect, concerted coordinated action at the international level is essential to effectively governing the global economy. The question of institutional choice and regime change, for present purposes, encompasses two key dimensions.
Internationally, the task will be to devise a stable and sustainable system for international cooperation and regulation, which addresses the diverse needs of advanced, developing, and the least-developed economies. At the domestic level, institutional change requires recalibrating the role of the state in shaping a stable economy by combining economic dynamism with a more equitable distribution of life chances. Walking the fine line between protectionism and protecting domestic policy space will be difficult under the likelihood of low growth.
Discussion is ongoing when and how to withdraw anti-recession spending programs that are expected to increase the EU public debt by 20 percentage points in the three years from and But the biggest problem consists of rising long-term pension costs and other age-related expenditure. Though the debt and deficit increases are by themselves quite impressive, the projected impact on public finances of ageing populations is anticipated to dwarf the effect of the crisis many times over. The fiscal cost of the crisis and of projected demographic development compound each other and make fiscal sustainability an acute challenge.
In principle, this adjustment could take place via both an increase in revenues and cuts in expenditures. Effective solutions to the current global crisis require international cooperation, but no government is able to go ahead with an internationally coordinated plan without taking into account issues of domestic legitimacy. Any solution to the crisis has to be both effective and legitimate at level of supranational economic institutions as well as at the level of the nation-state.
Most markets must remain primarily embedded at the level of the nation-state, as long as democratic governance and political identities remain nationally embedded. Economic relations between states should be structured with the aim of opening up trade and investment flows subject to the proviso of maintaining heterogeneous national arrangements. Meanwhile, poor nations should be enabled to position themselves to benefit from globalisation through economic restructuring.
All nations must be given the space to create financial systems and regulatory structures attuned to their own conditions and needs. To this effect, substantive policy concerns would be brought to the table of international economic negotiations. The global crisis has laid bare important changes in the global distribution of wealth and power. The power of the US is on the wane, and emerging economies such as India and China have meanwhile become key global economic players.
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However, their economic prowess is not yet reflected by their share in international bodies. At the same time, the EU is faced with a plethora of internal problems in the wake of Eastern enlargement. Quite surprisingly, the international community is already adjusting to this new multilateral reality. Whereas existing institutions usually continue to reflect the international distribution of power of the status quo ex ante, the IMF and the World Bank have recently allowed for far more domestic heterodoxy than ever before. The crisis has changed these institutions practically overnight. In terms of substance, the Washington Consensus rules no longer govern, and Dominique Strauss-Kahn, director of the IMF, realised that without change, China and other emerging economies would not stay engaged and therefore demonstrated flexibility in reform.
In order for these global organisations to recover, they must reform by, firstly, fully integrating the emerging countries, and secondly, promoting equitable and sustainable models of globalisation.
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By , in institutional terms, the elite club of rich industrial nations, known as the G7 — Britain, Canada, France, Germany, Italy, Japan and the United States, has been permanently, replaced by the group of 20, including China, Brazil, India and other fast growing developing countries, as a global forum for economic policy.
The rise of the G20 marks an instance of profound institutional change. It is not clear why these 20 specific countries were appointed to represent the world. From a social justice perspective as well, G20 insufficiently represents the poorest countries. One way of rationalising these arrangements would be by moving to a Group of 24, based on representation in the International Monetary and Financial Committee of the IMF.
Of the twenty-four representatives in this committee, five represent individual countries, whereas the others represent groups of countries. All this makes it a far more effective structure to supersede the G The EU should come to recognise that two seats — one for the euro area and one for the rest of the EU — is sufficient. This would streamline decision-making, both within the G20 and the IMF, while freeing up seats at the table for currently underrepresented developing economies and regions.
A final geopolitical international challenge is that this economic crisis coincides with a major environmental crisis, whose solution requires a complete transformation of our modes of production and ways of living. Regardless of the institutional changes following the crisis, the imperative to act on issues such as climate change, energy insecurity, and water scarcity will remain paramount Climate change policies can play an important role in revitalising economic growth.
Averting climate change should be an important policy goal when prioritising stimulus spending. Investments should go towards clean energy and the adaptation of green technologies should be given prominence. Thanks to the crisis, substantive global issues, such as climate control, water management, renewable energy, and other long-term concerns of sustainable development are now high on the world political agenda. This is a welcome correction.
The crisis has affected different economies differently, as a result of their relative vulnerability to endogenous and external economic shocks and also because of the differing institutional capacities they were able to mobilise to address the economic duress. The smaller economies of Western Europe, which have been unable or unwilling to muster fiscal stimulus packages on par with those of Germany and France — for example Belgium, the Netherlands, and Sweden — are behind the curve of recovery. Ballooning budget deficits in Ireland, Greece, and Spain raise severe doubts about recovery.
In August , the Bank of England surprised everybody with another round of quantitative easing of 50 billion British pounds, admitting that the recession appears to have been deeper than previously thought. Many of the new member states of Eastern and Central Europe have been disproportionately damaged by the crisis.
Wade Jacoby44 argued that former communist countries made the transition to the market economy at the height of the neo-liberal era,. Now they are suffering more than other countries, as a result of this irrational exuberance. The Baltic states, which predicted GDP declines between 13 and 17 per cent in , have already been forced to introduce tough retrenchment programs in public finances. Emerging economies, specifically Brazil and India, are expected to do much better in the post-crisis period. According to Nancy Birdsall45, this is partly due to the extent to which they were able to decouple themselves from financial globalisation.
By contrast, lower-income developing countries, which traditionally have relied heavily on trade, will suffer severely from the crisis. Sub-Saharan countries surely and sorely lack the economic resources and institutional capacities to implement counter-cyclical fiscal policies. The temptation to focus on the incipient recovery of the more advanced OECD countries, as well as on the so-called emerging BRIC — Brazil, Russia, India, China — runs the risk of glossing over the far more devastating effects the crisis has had on developing countries, which cannot muster the resources for a counter-cyclical fiscal stimulus.
Even gas- and resource-rich Russia is likely to suffer a steep fall in GDP. Compared to the US, European countries were slow in recognising the severity of the crisis. As a consequence, monetary easing and fiscal stimulus measures were implemented less aggressively than in the US. One reason why fiscal stimulus programs were less expansive in Europe is due to the fact that the EU is made up of many small open economies. This creates free-rider problems, with the benefits of fiscal stimulus spilling over into neighbouring economies. While the US is more indebted, it has the advantage of being an immigrant economy with flexible labour markets, which will make it relatively easier to mobilise labour and other resources than in the ageing European and Japanese economies.
Under conditions of low growth, China as well as European export-oriented economies will no longer be able to rely primarily on industrial exports to drive their economies. As much as we can anticipate the policy debate about competing models to reach new levels of intensity in the near future, it is our contention that it is useless to couch policy responses to the current crisis in terms of a battle between warring alternatives.
Moreover, models come and go. Europe at a Crossroads Political factors play a key independent role in the selection of policy responses and domestic institutional adjustments. Previous crisis episodes have revealed how hard times exacerbate existing tensions, invariably decreasing satisfaction with existing governments. If the crisis results in an extended period of high unemployment, the voting public may grow disenchanted with the prevailing policy regime, which they identify with economic liberalisation.
Facing the likelihood of relatively low growth, the key challenge that political leaders will face is therefore not so much how to manage growth, but how to manage expectations. Even before the economic crisis there was no evidence that citizens were shifting allegiances away from the nation-state. In Europe, the referenda on ratification of the European constitution demonstrated the strength of nationalism. Various public opinion polls overwhelmingly reaffirmed that citizens held their national governments accountable for their security and wellbeing, and felt betrayed by the globalising ambitions of the EU.
The economic crisis intensified these sentiments, thus bringing the centrality of the role of the nation-state back into the limelight. The European welfare state, following this line of reasoning, was introduced as a way of re-establishing this legitimacy and rebuilding the capacities of the state. Whereas in good times the hand of the state may have been hidden, in hard times it re-emerged visibly and powerfully. A new welfare edifice custom-tailored to the realities of economic internationalization, post-industrial social change, post-crisis austerity, and intensified European integration is needed.
Is the new social policy agenda — the social investment paradigm — the best safeguard for social progress, delivering on the promise of equality of opportunity, in combination with a strong commitment to basic social citizenship? Will the strong emphasis on social promotion in the recent literature produce a satisfactory response to the current global economic downturn? Or, should traditional social protection come back into the equation? The need for resilient employment and social policy is greater than ever today. Now is the time to modernize social services, safeguard pensions, and narrow the gap between rich and poor, while simultaneously consolidating state revenue.
This precarious juncture, as we teeter on the verge of recession, creates a number of policy temptations. There is the obvious temptation of completely abandoning fiscal discipline to save jobs and maintain, as much as possible, the welfare status quo. Strengthening the social dimension of domestic Then there is the short-sighted seduction of retrenching current welfare commitments to foster financial and budgetary stability. Equally ineffective is the alluring strategy to fight unemployment by reducing labour supply through early retirement schemes, which many European governments fell for in the s and s.
Worse still is the nationalist and protectionist temptation that proved so disastrous in the s, which could be revived today if governments pay direct subsidies to failing domestic industries. There is a real danger of adopting incoherent policy combinations that may actually deepen the economic downturn, worsening job losses, reducing state revenue, eroding pensions, and widening the gap between rich and poor.
Historical mistakes, like deflationary contraction in the s, and labour supply reduction in the s and s, should not be repeated. In these uncertain times, we must not lose sight of the overall aim of creating employment-friendly, fair and efficient, welfare systems. Short- to medium-term macroeconomic measures are necessary to respond to immediate needs, but such measures should be consistent with the ongoing recalibration efforts to prepare domestic welfare states and EU social policy for the 21st century challenges that lie ahead.
Here are our prescriptions for the major policy priorities at stake: Let automatic stabilizers work To prevent a global economic abyss, it is necessary to let automatic stabilizers work, to protect citizens from the harshest effects of rising unemployment, while at the same time serving to safeguard economic demand. In the longer run, confidence in the economy relies on sound public finances. Today we can observe, in sharp contrast to the Great Depression, how a fierce anti-deflationary macroeconomic policy response has rapidly come to fruition in the OECD area.
There is a clear policy consensus that a Keynesian crisis should be met by an expansionary policy of anti-cyclical macroeconomic management across Europe. This kind of European policy coherence was surely lacking in the s and 80s era of stagflation. The global nature of the crisis triggered a co-operative, albeit timid, response from the 15 countries of the eurozone plus the UK, in the fall of Subsequently, 27 EU leaders agreed on an economic stimulus package of about billion euros, or 1.
The ECB is cutting interest rates. And the stability of the euro should not be underestimated, in that a common currency forestalls any policy of competitive devaluation. The internal market, enhanced in scope and strength by the addition to the EU of ten new member states from Central and. Eastern Europe, surely puts a break on competitive protectionism. The switch to public spending in order to re-inflate the economy is likely to generate additional fiscal pressures in the foreseeable future, which should not be forgotten.
We have to find a way to prioritize social investments without undermining the principles of sound public financing. Taking social investments out of SGP rules could be a step in the right direction. Strengthen long-term attachment to the labour market The overriding policy lesson in our advanced economies is that in the face of demographic aging and a declining work force, nobody can be left inactive for long.
The present economic crisis is likely to incur new forms of labour market segmentation to the detriment of more vulnerable workers, such temporary agency workers, fixed term employees and the unemployed, while labour market insiders have less to fear. Hence, risks and capabilities to adapt are distributed unequally across the work force. Impending layoffs should be mitigated by temporary and short-term unemployment benefits, combined with additional training measures.
Any kind of job, be it short term, part-time or subsidized, is better than no job at all at forestalling unemployment hysteresis and deskilling. With demographic aging, labour markets will be tight in the long run. Relaxed hiring and firing legislation is best combined with generous social protection, active training and labour market policies to maximize employment. The ability to balance careers and family-life is also crucial for removing gender biases in the labour market.
Constricted female labour market participation widens the gender gap, hampers economic growth, and reduces fertility. Policy makers tasked with writing a new gender contract should look to generous parental leave, employment security, and above all else, high quality childcare. These provisions can positively affect long term productivity by boosting female earnings,. Since life chances are so strongly determined by what happens in childhood, a comprehensive child investment strategy is imperative.
Inaccessible childcare provokes low fertility, while low quality care is harmful to children, and low female employment raises child poverty. Increasing opportunities for women to be gainfully employed is a key step. But the concept of early childhood development needs to go beyond the idea that childcare simply allows parents to reconcile work and family life. Rather, we must adopt the position that early childhood development is the best way to ensure that children will be lifelong learners and meaningful contributors to their societies.
Invest in human capital In the new, knowledge-based economies, there is an urgent need to invest in human capital throughout the life of the individual. Considering the looming demographic imbalances in Europe, we cannot afford large skill deficits and elevated school dropout rates. Education systems design makes a difference. Inequality and extreme educational differentiation reinforce cognitive poverty, early stratification, and social segregation. Delay retirement and increase its flexibility As life expectancy increases and health indices improve, it will be necessary to keep older workers in the labour market for longer.
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Sustainable pensions will be difficult to achieve unless we increase employment rates of older workers and raise the retirement age to at least 67 years. Delaying retirement is both efficient and equitable. It is efficient because it implies more revenue intake and less spending at the same time.
It is also intergenerationally fair because retirees and workers both sacrifice in equal proportions. In the future, older workers will be much better positioned to adapt to new labour market conditions, with the aid of retraining, lifelong learning, quality jobs, and flexible retirement. Integrate migrants through participation Priority should be given to problems of participation and integration of migrant groups, whose rates of unemployment in the EU are, on average, twice that of nationals.
Economic exclusion and physical concentration ghettoization reinforce educational underperformance, excessive segregation and self-destructive spirals of marginalization. Maintain minimum income support We cannot assume that the measures described above will remedy current and future welfare deficiencies.
Hence, it is impossible to avoid some form of passive minimum income support. It is, therefore, necessary to have an even more tightly woven net below the welfare net for the truly needy to meet minimum standards of self-reliance. The key lesson of the Great Depression of the s eventually ushered in Keynesian demand-side policies and, after a devastating World War, firmly established the need for some sort of safety net in every major industrial democracy.
This lesson to match social promotion with social protection continues to stand tall. Reach a globalization compromise We should take an activist approach to social policy beyond the borders of the member states of the European Union, not just for the coordination of a timely global fiscal stimulus and an agreement on financial markets regulation, but also to establish some minimum levels of protection without protectionism for vulnerable citizens everywhere. In the interests of fairness and political sustainability, we need a new sort of embedded globalization compromise at the supranational level, something analogous to the embedded liberalism compromise of the post-war era, with the EU acting as a unified player.
The new embedded globalization compromise should not only account for issues of fair trade, work and welfare, but also include substantive agreements on sustainable development, climate change, energy, food and biodiversity. Regime Change without the Punctuated Pendulum Swing People make history by constructing and transforming institutions that both constrain and constitute their social action. New institutions are hardly ever designed from a tabula rasa. Just as institutions shape the conduct of human actions, human conduct, in turn, reshapes institutions.
Crisis management today may be critically informed by previous crisis experiences. Just as neo-liberalism did not lead to a return to the roaring Twenties of unfettered capitalism, the current crisis is equally unlikely to bring about a restoration of the post-war regime of the embedded liberalism of national political economies.
Just as the current crisis is unlikely to trigger a swift pendulum swing of institutional design, it should be noted that neo-liberalism also did not attain institutional hegemony overnight. While the elections of Margaret Thatcher and Ronald Reagan may retrospectively have marked the beginning of the neo-liberal era, it was only with the fall of the Berlin Wall that this doctrine achieved global influence.
The neo-liberal rise to dominance was largely evolutionary; it emerged gradually through a series of institutional transformations and policy changes over a long period of time. In contrast to the traditional belief that institutional changes are always marked by rapid changes at critical junctures, it can be expected that future institutional shifts are likely to follow the logic of incremental transformative change through institutional evolution.
By comparison, the rise of embedded liberalism indeed represented a far more punctuated process of institution building. With this in mind, it is interesting to speculate about how the observed policy changes in the wake of the crisis will contribute to such a scenario of gradual institutional evolution. Specifically, five key policy changes warrant such an examination: The crisis has pushed central banks into a broad range of new interventions, aimed at safeguarding financial stability.
One intellectual lesson that has emerged from this crisis is that economists have to redefine what global and domestic financial macroeconomic stability means. Macroeconomic and financial stability is a much wider concept than price stability, and sometimes the two even conflict. Stephen Roach47 advocates a new mandate for the Federal Reserve; it should lean against the winds of financial excess and asset bubbles. Similarly, Willem Buiter, Paul De Grauwe, and Barry Eichengreen48 all argue that the ECB will in the near future be required to perform a variety of new functions, including undertaking liquidity and credit enhancing measures, becoming a lender of last resort, and.
However, in order to achieve financial stability, the ECB must be allowed to deploy new instruments, such as counter-cyclical adjustment of capital ratios for banks and minimum reserve requirements, which should be used to limit excessive credit creation by banks. However, if the ECB is to play a significant financial stability role, it cannot retain the degree of operational independence it was granted in the Treaty over monetary policy in the pursuit of price stability.
Changing this will be difficult, because the ECB is based on the European Treaty, which is extraordinarily tough to amend all twenty-seven member countries must agree to any changes. As the crisis lengthens and deepens, the absence of close cooperation between the European fiscal authorities on the one hand, and the ECB bankers on the other, will make both groups progressively less effective. The ultimate litmus test of effective macroeconomic regime change lies in the establishment of a new systemic risk regulator.
Banking should be subject to a capital regime entailing more and higher capital requirements, more capital against trading book risk-taking, and a counter-cyclical framework with capital buffers built up in periods of strong economic growth that would be available in downturns.
Ultimately, Europe must establish a powerful EU-level authority to which national supervisors report and whose instructions they carry out, in a manner analogous to the relations between the ECB and national euro area central banks Nonetheless, at the Pittsburgh summit of the G20 on September 25, some agreement was reached on timetable for regulatory reform, serving to reign in executive compensation, to raise capital requirements and leverage ratios for financial institutions, and to reduce the imbalances between consuming countries like the US and export-dependent China, Germany and Japan.
Moreover, the G20 came together on new IMF voting rules with more power and authority of the developing economies. In many advanced economies, welfare policies are being re-assessed and re-calibrated. In Europe, the crisis has been, in many ways, a stress test for the welfare state. Although the crisis may put a strain on many redistributive institutions, this can also have positive consequences, as Tony Atkinson50 acknowledges. For one, social policy has resurfaced at the centre of the political debate.
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The crisis has reminded many Europeans of the importance of social programs to support the unemployed, the disabled, and the others most negatively affected by the crisis. In this respect, the economic crisis may reinforce, rather than undermine, the legitimacy of the welfare state. In China, the government has recently realised that internal consumption could be a new driver of growth, but they have yet to. In the US, on the other hand, the social debate since the onset of the crisis has focused almost exclusively on healthcare reform.
There are significant political hurdles to achieving such reform, as the bitter and even violent debates on the issue in the US demonstrate. Future productivity growth is likely to come from sources like green energy and low carbon path investments. Going beyond welfare state recalibration and sustainable development as separate phenomena, Jacques Delors, Tony Atkinson, and Jean-Paul Fitoussi52 underscore the need for different set of indicators of social and economic progress exceeding the traditional measure of GDP growth.
In fact, the crisis is partially the result of the exclusive focus on economic growth. The formulation of a new portfolio of social and economic indicators including, for example, various dimensions of adult numeracy and literacy, access to public services, poverty, and environmental health and climate control is especially politically opportune in the face of a period of lethargic and drawn-out recovery.
To address this issue, in early , Nicolas Sarkozy put together a committee of leading economists, chaired by Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi, to rethink GDP as an indicator of economic performance and to consider alternative indicators of social progress. In other words, the Commission renders more prominence to the distribution of income, consumption and wealth, in correspondence with sustainability indicators Delors ; Atkinson et al.
Delors ; Fitoussi ; Atkinson et al. Periods of unsettled beliefs can thus inspire new politics. This we have learnt from the experience of the Great Depression in the s, as well as the crisis of stagflation in the s and s. After two decades of neo-liberalism, a critical re-imagining of economy and society, including the role of public authority and political sovereignty, is underway. Even in the realm of international coordination, any sustainable solution to the global crisis continues to rely heavily on domestic legitimacy.
Nowhere is this political challenge more apparent than in Europe. Princeton University Press, Princeton. Adapting post-war social policies to new social risks. The EU and Social Inclusion. Oxford University Press, Oxford. Is Social Europe Fit for Globalisation? A study of the social impact of globalisation in the European Union. National Diversity and Global Capitalism. European Economic Review, Vol. Would you like to shrink the welfare state? A survey of European citizens. As of , poverty in Germany is at its highest since German reunification in During the postwar period, a number of researchers found that despite years of rising affluence many West Germans continued to live in poverty.
In , a study by the SPES estimated that between 1 and 1. As the opening sentence of the report put it,. A study carried out by the EC Poverty Programme derived a figure for of 6. Poor people in Germany are less likely to be healthy than well-off people. This correlates with statistics about the life style of this group that indicate higher prevalence to smoking cigarettes, being overweight, and exercising less. Consequently, they run a higher risk of experiencing lung cancer, hypertension, heart attacks, diabetes, and a number of other illnesses. Poor couples are more likely to argue, while being less supportive for each other and their children.
Poor children face limited educational opportunities. They are more likely to be raised by a teenage-parent. They are more likely to have multiple young siblings, are more likely to be raised in crime-ridden neighbourhoods and more likely to live in substandard apartments which are often overcrowded. Read e-book online Social Measurement through Social Surveys: How do educational social scientists and survey execs use social dimension strategies?
How are those strategies utilized to precise strategies in empirical learn? This e-book is a crucial source for college students, educational researchers, delivering an summary of either new and practiced tools of social dimension for quantitative survey study. Self and Other in Textbooks and Curricula.