.: The Red Brick – Dubai College's Student Newspaper :.

Is the common view in the field of economics that ‘Free Trade’ is the best way forward for the world economy true? Yes. However we are living in a time whereby the field of economics is in despair and disillusion. No longer can we assume that all the theories put forward by economists in the past, and that have worked in the past, are the best options to take in this moment in time. What I am trying to say is that in this day and age there is certainly room for debate in the ‘Free Trade vs. Protectionism’ argument.

The economic case against protectionism is that it distorts incentives: each country produces goods in which it has a comparative disadvantage, and consumes too little of imported goods. And under normal conditions that’s the end of the story. But these are not normal conditions. We’re in the midst of a prolonged global slump, with governments everywhere having trouble coming up with an effective response. The crux of the problem facing us is that there are major policy externalities that are constantly arising. For example, if country X’s fiscal stimulus (measures taken by the government, normally involving increased public spending and lower taxation, aimed at giving a positive jolt to economic activity) helps country Y’s economy by increasing their exports, there is a problem since country Y will not experience X’s addition to government debt. Therefore the benefit that occurs as a result of fiscal stimulus for one country is less than it is for the world as a whole. Subsequently, this means if macroeconomic policy is not coordinated internationally- and it most certainly is not- there will tend to be too little fiscal stimulus, everywhere.

Now ask, how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then every government would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise. Yes, trade would be more distorted, which is a cost; but the distortion caused by a severely underemployed world economy would be reduced. You must understand that this is not a cry for protectionist policies at all times, rather it is a second-best argument; a way in which the world must adjust to the ever-changing economic climate it is currently experiencing.

Everything I’ve just said only applies when the world is stuck in a liquidity trap (money is not readily accessible), which is what is going on in the world today. But this shall not be the normal situation. If we do go all protectionist in the long term it will destroy all the advancements made in trade negotiations over the past century, and it would take a long time to put the pieces together again. Nonetheless, there is a short run case for protectionism which will only increase in force and plausibility if an effective economic recovery program is not found.

The human race is on the verge of complete and utter destruction. We are on the edge of a precipice and at the entrance to a black hole that we cannot escape from. If the euro collapses, it will lead to the collapse of the global financial system and the world economy as we know it. Money markets will dry up and there will be chaos as civil wars grip the nations of the world, which in turn might threaten the supply of oil, leading to rocketing oil prices. People might not afford to heat up their homes or fuel up their cars. There will be permanent blackouts in most parts of the world. Humans will lose their sense of morality as their basic survival instincts take over. As they scramble for food and other basic necessities, the world might plunge into WWIII…..

Indeed, the world stands at such a juncture. This period in history can be summed up by my favourite poem- ‘The Second Coming’ by Yeats:
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
(And it ends so beautifully ominous)
What rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

How can we pull ourselves back from the brink of apocalypse? By listening to me!

Aman’s Four Point Plan
1.) STIMULUS-The word is scorned upon by right-wing politicians and economists. With debt spirals plaguing most of Europe, ‘stimulus’ is a word that you simply do not utter. However, the Americans need another round of stimulus. The government needs to keep up spending in the short-term with an emphasis on infrastructure investment and extending the payroll tax cuts. As long as the Government lays out a medium to long-term plan to reduce the debt, stimulus in the short term will boost the economy and improve the stuttering expansion we are witnessing.
The American government cannot default and its debt, while expanding rapidly, is not an immediate cause for alarm (If you disagree with this view or do not understand why this is the case then you can e-mail me with you queries at amannavani1@hotmail.com). Thus, a well-designed stimulus is still a viable option.

2.) QE- Quantitative easing, which is essentially increasing the amount of money in circulation in the economy, has been meet with widespread criticism. It is certainly not a magical solution to all our problems but it will help to buy us some time and will go a long way in reducing the likelihood of another recession. The fact is QE increases investor confidence and causes an equity and stock market rally which in turn should increase consumer confidence. Quantitative easing is like alcohol; it will only provide a brief high but it is a high that is desperately needed to prevent complete disaster. The Federal Reserve needs to continue its QE programmes.

3.) BAILOUT- Across the Atlantic, the ECB needs to step in without further delay. They must abandon their thoughts of keeping inflation in check. Europe is not going to be transformed into Germany in the 1920’s anytime soon. Instead, the ECB must convince investors that they will provide support on the scale needed to keep Italy afloat. They must continue to buy Spanish and Italian bonds and do more to help banks obtain long term financing. An ECB bailout does raise the issue of moral hazard, however, the euro must not be allowed to collapse under any circumstance.

4.) STRUCTURAL REFORM-The underlying fundamental lacuna in the financial system of the USA, which led to the deepest recession since 1929, remains largely unaddressed. For large investment banks, it is business as usual as they remain free of government oversight. There needs to be greater regulation.

European governments must reduce welfare provisions and the power of the trade unions. Unemployment benefits and pensions must decrease while trade unions cannot be able to negotiate higher wages without matched increases in productivity. These measures should be complemented by long-term supply side reform aimed at increasing innovation and efficiency as well as promoting a greater entrepreneurial spirit.
It remains to be seen if politicians around the world can finally muster up the will to do what is right. The window for manoeuvere, however, is swiftly closing. We seem to be at the behest of a mysterious force that is currently pulling us towards a second Depression.

The G-20 is the premier forum for discussing, planning and monitoring international economic cooperation. This week’s G-20 Summit in Cannes will be the sixth meeting of the G-20 heads of government in a series of on-going discussions about financial markets and the world economy.

This year’s summit, despite the fact it is supposed to address issues in the world economy, is more than likely to turn into another eurozone crisis meeting amid desperate attempts to avoid a disorderly Greek default (something I alluded to in last month’s article).

EU officials are desperately seeking to avert a slide into default. This would, in turn, according to one economist, “lead to the complete collapse of the Greek banking system, a capital flight out of the country, a huge panic in the markets, the triggering of credit default swap pay-outs, unbearable pressure on German, French and other banks, and, not least, contagion oozing out from Italy.”

However the desire to keep Greece in the Euro may have weakened during the past week as a consequence of the referendum Greek Prime Minister Papandreou called in regard to the new austerity measures that were set to be put in place. Basically, he asked the people country to vote on whether they want their taxes to be raised, their pensions to be cut, their benefits to be lowered and their retirement age to be increased. What do you think the result will be?

This referendum has meant that for French President Sarkozy and German Chancellor Merkel, keeping Greece in the Euro is no longer their number one priority. The leaders made no effort to hide their frustration that the Prime Minister had taken this step, “unilaterally”, “without consultation”, and only days after a European summit that was supposed to have put the eurozone on a better path. Just a few months ago, when Greece came under pressure, these two leaders were making joint statements saying “the future of Greece is in the euro.” Not now. In stark contrast, today they consider a eurozone without Greece as not necessarily the worst outcome. What a difference a month makes.

Now let’s come back to Cannes. Sarkozy has stated that Greece could indeed stay in the Euro- but it has to want it. If the Greeks are going to get a referendum – President Sarkozy said – that is the question they ought to be asked. France and the rest of the eurozone have done everything they can to help Greece, but “there are rules” to this common European currency. Greece has to decide whether it wants to follow them. Even though this statement does sound feasible, where was this mentality in 1999 when Greece was allowed into the Euro despite breaking almost all the “rules”?

In light of these developments the nature of the G20 summit has changed completely. This time last week I would have written an article on how European leaders would have striven to do all they could in the south of France in order to keep Greece in the Euro. However, amid all of the turmoil coming out from Greece it is clear that major European economies (namely France and Germany) are no longer willing to save Greece at any price. They are unwilling to let the Greeks remain in the common currency if their and membership will continually lead to drama and trouble. And they do not want the Greeks thinking they can let this situation happen again and that they can be bailed out every time it does, this is known as moral hazard.

So now it is clear that one clear message has been established in the run up to the G20 summit that gets under way this Thursday; is it conceivable that Greece could leave the euro? Yes they Cannes.

Occupy Wall Street

‘We are the 99%!’ have been the words of choice by the ‘Occupy’ protesters since the protests first began on the 17th of September on Wall Street. This protest has since spread to over 70 major cities and 600 communities in the USA itself, with another 900 cities taking part worldwide. That is a LOT of people. So just what exactly are all these people protesting about?

The ‘Occupy’ protests are primarily directed against economic inequality, corporate greed, corruption and influence over government, particularly from the financial services sector. Their catchphrase, ‘We are the 99%’, is a reference to the difference in wealth between the top 1% and the remaining citizens of the USA. It seems that these ‘99%’ do have a point, as shown by the two graphs, the top 1%’s income has been rising exponentially, especially when compared to the other two groups, which have stayed pretty much the same for the past 30 years or so.

Inequality rising!

Check out the highest points, just before the two major financial crises of the last century, spot a trend..

However, what further infuriates the protesters is the fact that after the recession of 2008, a large part of the financial sector was bailed out by the government and the big shot CEO’s of these companies kept getting their fat pay checks and big bonuses, when the money should have gone into the restructuring of the economy to prepare itself for the imminent recession. These huge financial powerhouses were bailed out by the government because of the corporate concentration in the American political system which lead to the firms having huge influences on most government decisions and policies.

But why did it take 3 years after the implosion of Lehmann Brothers, which kicked off the financial crisis, for people to start protesting? After the election of President Obama, there was a feeling among the young that he would pass laws to regulate the banking system and take these ‘financial fraudsters’ and bring them to justice. However, as time passed the would-be protestors started to lose faith in Obama, and realised that his election wouldn’t lead to such a change, due to a number of reasons, reasons over which he has no power.

As always, there is also a different side to which the protesters are paying no attention. In 2008, after a downturn in the stock market, which primarily affected the top 1%’s jobs, bonuses etc, taxable income fell by $18 billion dollars. This shows just how big the dependency on the top 1% is, because they end up providing the unemployment benefits that so much of that 99% benefit from, considering that only 53% of Americans pay federal income tax.

Wall Street has not taken lightly to these allegations and protests, retorting that these complaining middle-income Americans will be the ones that will get hurt if they get their wishes. If the financial sector were to lose their jobs, they would probably be over-qualified for the vast majority of jobs in the market; hence they would easily be able to take these middle income Americans’ jobs which would be going against the ethos of the protests, because all it would do is increase income inequality even further.

So what is going to happen about these protests? I don’t think these protests will amount to any real change in the economy or the way its run. Even if the protests do continue to gain momentum as they have in the past few weeks, the financial sector has too much power in Washington to allow for a meaningful bill to be passed or even put up for suggestion. The truth of the matter is that the financial services sector has become too powerfully integrated into the workings of the economy for it to be taken apart easily or without any large collateral damage. What people should have been doing was protesting years ago when the markets were on the rise and this income gap was as imminent as ever. Oh, but why would they be protesting about the people who were helping them make several times their annual pay check in the matter of days via the stock market..

There seems to be no end in sight to our economic woes. We do not seem to be in control of events, instead events seem to be controlling us. At times like these, it becomes imperative to delve into the past to search for answers and we have found some: those ‘evil’ Wall Street bankers have been criticised relentlessly, governments have been blamed for not watching over financial markets and the ‘New Classical’ economists have been slammed for championing the cause of unbridled free market capitalism as well as failing to predict the dire economic climate we find ourselves in today. However, I think we need to look even deeper and question the very purpose of economic activity.
Economic activity has the ability to transform societies for the better. It can lift people out of poverty. Capitalism, in my opinion, is a necessary step to move from deprivation to prosperity. However, its usefulness is outlived beyond a certain point, after which the costs of the wealth-producing treadmill are too high. Increasing wealth beyond this point does not improve people’s happiness and the dream of bliss attached to the accumulation of riches remains a delusion.
Unfortunately, many of the advanced economies in the West passed this point around two decades ago. Societies in developing economies are rapidly approaching this point as they strive to attain double digit growth. The twin ideals of capitalism and globalisation that have been so dominant for the past two decades have destroyed communities wrecked the environment, undermined democracy and created greater income inequality. They have led to a money-obsessed society; one where people have lost their sense of morality as well as the values that define their culture and heritage. The human race has been sucked into the process of cultural homogenisation and moral degeneration-a process that we have to reverse to ensure that we live more fulfilling and prosperous lives in the future.

The University of Chicago is an intellectual Mecca.Its faculty has won more Nobel Prizes than any other university on the planet. They have revolutionized the economics profession.In the 1970’s, when the world was gripped by stagflation, economists started to blame the government for having too much interference in the economy.Keynesian was out of fashion by the turn of the next decade. Led by Milton Friedman (a product of the University of Chicago), a new school of thought emerged: the New Classical school. It was pioneered by the Chicago boys. They believed that markets will always be efficient and self-correcting since consumers will have perfect information and therefore make rational decisions. It was an approach that had strong policy prescriptions-a minimal role for government. All the government had to do was make sure inflation was kept low and stable and make sure businesses were not choked by high takes. The University of Chicago backed up this efficient market hypothesis with complex stastical and mathematical models to prove that the free market was the best route towards prosperity. Economics had suddenly become more quantitative like physics and maths, an exact science rather than history or philosophy.

The ‘New Classical’ or ‘Chicago School of thought’ was music to the ears of right-wing conservative politicians like Ronald Reagan and Margaret Thatcher who simultaneously came to prominence across both sides of the Atlantic in the 1980’s.Reagen aggressively cut taxes on wealthy business owners and deregulated major sectors of the economy. What resulted was an extended stock market boom in the early 1980’s.For the rich, the Reagan years signified seemingly unrivalled prosperity. Around the same time, Margaret Thatcher, also known as the ‘Iron Lady’, was ruthless in smashing trade unions and strikesas she saw them as being highly disruptive towards business activity. Moreover, she embarked on a privatisation drive, throwing government-run industries into the choppy waters of competition. The term ‘Thatcherism’ was coined for the reduction of state economic involvement and unleashing the ‘powers of free enterprise.’

Then in 1990, the Berlin Wall fell and the Soviet Union disappeared.These tumultuous events symbolised to many the victory of democracy and unbridled capitalism. It prompted Harvard historian Francis Fukuyama to announce the ‘end of history’. He proclaimed that Western liberal democracy along with free market capitalism was the only way forward for the world. There was no alternative. Communism and socialism appeared to be nonsense. The belief in the free market was stronger than ever and the ‘New Classical’ school or the ‘Chicago School,’ as it is often referred to since some of its highest priests taught at the University of Chicago, became standard macroeconomic theory.

If we travel in time to September 2008, the world was a vastly different place from two decades ago. It was in freefall.Financial markets were in meltdown. Banks lent too much, consumers were riddled with high debt and the bursting of the housing market bubblewas the trigger that left the world reeling. A question begs to be asked: was the crisis due to a fundamental intellectual failure of the Econ profession? The free market was certainly not efficient and self-correcting. Deregulation of the financial and banking sector throughout the 1980’s and 90’s has had disastrous consequences. Banks have lent recklessly and the financial sector has been marred with insider tradingand various credit card schemesto extract as much from the hapless consumer. Westill have not recovered from the Great Recession of 2008.Maybe academic economists, most of whom have lent towards the New Classical school over the past two decades, need to have a re-think of what they have preached for so long.As Paul Krugman famously wrote, ‘the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men.’

AmanNavani