Lant Pritchett on why we struggle to think in systems (and look for heroes and villains instead)

January 23, 2014

Is the British development bubble a good thing? Reflections after another session at DFID.

January 23, 2014

Why hasn’t the 2008-14 shock produced anything like the New Deal?

January 23, 2014
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Ricardo Fuentes gave a staff talk this week on his big new paper (with Nick Galasso) on the links between economic and political power. What struck me was a very serious ‘dog that didn’t bark’. The 1929 collapse and the Great Depression led to profound reform in the US, with the New Deal and a sharp reversal of rising inequality. A series of shocks prompted similar redistributive transformations in Europe (rise of fascism, World War Two) and East Asia (Chinese revolution, World War Two).

Fast forward to 2008-14. This time around, much more timid radical financial reforms have produced absolutely nothing in terms of cartoon_fdr_sweeping_changesredistribution – 95% of US economic growth since 2008 has ended up in the hands of the richest 1%. So why is this time so different, and what can be done about it?

In response, Ricardo highlighted a paradox. The very success of Ben Bernanke who, instead of tightening the tourniquet and triggering a massive depression, as in the 1930s, pumped money into the economy, avoided a global financial meltdown. But that in turn eased the pressure for reform. Sounds a bit Trotskyist (worse is better), but also sounds about right. Just as revolutions in Latin America needed both revolutionaries and a really inept dictator to triumph (Cuba/Batista, Nicaragua/Somoza), maybe New Deal style revolutions require a level of economic self harm that no longer exists. Tricky.

So assuming that killing all the economists is not a feasible policy option (sorry to disappoint you), what might be the political elements that enable us to scale the mountain that the financial elites have assembled to defend their privileges, and redirect economic activity towards a greater goal? What might be some countervailing trends?

Overall, this problem seems most acute in the financial centres, where the financial elites are now so deeply dug in, that, like particularly determined ticks, that they may be impossible to dislodge (in the UK Ha-Joon Chang thinks the Labour Party is still under the financiers’ spell).

Outside the US and UK, the balance of forces may be more promising: A surge in levels of democracy, and active citizenship in many countries, (combined with better economic management) underpins the main ray of light in reducing inequality – rapid progress in Latin America over the last 15 years. That message is spreading to other regions.

What about sources of hope nearer the heart of the financial-political complex? Some straws to clutch at:

  • Reshaping the elite’s understanding of its self interest. Once inequality starts to risk social breakdown, the logic of further concentration of wealth starts to unravel. A lot of serious, mainstream players get this, including the IMF and the WEF (currently running the Davos gabfest).
  • Maybe not enough time has elapsed yet – the New Deal only came four years after the Wall Street crash, and its more radical variant a couple of years after that. Could all the incremental progress since 2008 on transparency, tax dodging, financial transactions taxes, capping bonuses  etc reach some kind of tipping point that starts to have a serious impact on inequality?
  • Could climate change or other environmental risks supply the kind of existential threat previously provided by war and political upheaval ?
  • Some role for digital democracy and accountability (OK, maybe the straw clutchism is getting out of control here)
Where next - up or down?

Where next – up or down?

But I have to say, it feels like the political chips in the UK and US are just not as favourable this time around. Maybe pressure from outside will shift that, as part of the rise of the rest, but I wouldn’t bet on it. As for changing things from within, that probably means spending more time working with elite champions, rather than just pursuing ‘us and them’ narratives (however tempting). In the seminar, Alan Doran suggested two interesting avenues to explore:

–          Find champions among 3rd generation plutocrats (1st generation gets moderately rich, 2nd generation gets megarich, then their kids wonder what life’s all about)

–          The megarich can’t spend all their money on stuff, so the key is how they invest the rest – why not do the research for what constitutes a distributionally progressive/regressive investment portfolio and lobby them to change accordingly?

Sorry if this sounds too lily-livered and gradualist, but the comparison between 2008 and the 1930s suggests that, absent a war or other major shock, a new New Deal isn’t going to happen any time soon, at least not anywhere near the financial epicentres.

One final thought, connecting with previous posts on complexity and ‘how to campaign when we don’t have the solution’, I think what Ricardo and Nick so brilliantly (85 individuals owning the same as the poorest half of the world’s population – 3.5 billion, is a classic killer fact), is actually the best strategy. It’s what Matt Andrews recommends as the right role for outsiders – focus on identifying and amplifying the problem, because the solutions are likely to be complicated, context specific, and discovered through trial and error by those involved, not lifted wholesale from the recommendations shopping lists of thinktanks and NGOs.

Any thoughts?

6 comments

  1. I propose, whilst weaving your straws, some of which might contribute to change, wait for the next financial shock. It is true that a radical loosening of monetary policy rode out the last wave but at the cost of displacement – the public assumption of debt (that, deficit reduction aside, most of which will prove unredeemable)- and adding to the sheer volume of money. The next shock (or one after) will overwhelm the system (that is inherently unstable – too much money chasing too little opportunity in a finite world) and we will have to adopt radical solutions. Radical debt forgiveness, exchange controls, negative interest etc. It will be horribly messy but that is a result of missing our opportunity this time round.

  2. You’ve hit on something there, Duncan. In the US, European and Asian examples from history, inequality was seen as dangerous, a threat to elites and wider stability. By and large, it isn’t seen that way now. But surely it should be. What did the new President of the Central African Republic, Catherine Samba-Panza, say on Tuesday? That “when one section of the population see that it doesn’t have the same opportunity to access economic resources as others, that creates frustration, identify introversion and an explosion.” And what turned the Syria that nobody called ‘fragile’ into what we see now? Well surely a mixture of very many combustible factors, but one of which was probably the rising inequality between different areas. In short, inequality is dangerous as well as morally contemptible – as Frances Stewart’s research in other regions showed a few years ago. Remembering that is surely part of the answer to reshaping the global elite’s understanding of self-interest….

  3. Hi Duncan (long time!) – thought-provoking blog. Reflecting on it, I think that in many cases we do know at least part of the solution, but the problem is that it doesn’t appear achievable: the power dynamics just look impossible! In these cases what may ultimately be required is action to change social norms from the grassroots up – movement building I suppose – to create the conditions where political elites have the manoeuvrability and space to act. But this is inherently unattractive in an NGO culture often focused on relatively short-term victories. Amplifying the problem -as you say above – is definitely part of movement-building, but so is amplifying hope: highlighting what’s working elsewhere and how those involved came up with the idea, to inspire other innovators to come up with their own initiatives.
    Thanks for the spur to reflection!

  4. “Ha-Joon Chang thinks” Britiain is under the financiers’ spell? He’s right, of course, but better to say “pretty much everyone knows.”
    I would go further: the spell is a curse. To be precise, a “Finance Curse,” whose symptoms and causes overlap heavily with the better-known “Resource Curse” that afflicts mineral-rich countries. Read about the Finance Curse here.
    http://www.taxjustice.net/topics/finance-sector/finance-curse/

  5. It seems like the biggest problem isn’t convincing elites in any particular country to adopt policies that favor radical redistribution (not to diminish those challenges, of course) but how to counter the flight of capital from those countries which do adopt redistributive policies to those which do not. The incentives for defection (the ‘Depardieu defection’?) rise proportionately to the amount of total potential capital flight: the more states that agree to radically redistributive policies, the greater the potential gains for any individual defector. Even when Nicholas’ day of reckoning comes, this defection problem remains. The growing wealth of ’emerging markets’ may even make the problem worse, creating more legitimate destinations for large-scale movements of capital who become potential defectors. Can the defection problem be overcome by a global network of citizens demanding reform? Do we need some kind of mechanism for the global governance of capital? Are there alternatives to those two? I would say that there’s an important role there for Oxfam and other international NGOs as being able to advocate in many countries simultaneously. If only to prevent a Russian remake of ‘Le dernier metro’.

  6. The biggest issue I have with this debate in general is the loose use of the word “inequality” – you’re never going to have coherent responses to incoherent concepts and whilst I wouldn’t expect the word to be abused in this blog it there are too many people out there trying to influence the debate using very different definitions of the word and with very different agendas.

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