Cutting the financial sector down to size

That’s the provisional title I used for my latest piece in Inside Story. Peter Browne, the editor, gave it the longer and clearer title “Want to reduce the power of the finance sector? Start by looking at climate change”.

The central idea is a comparison between the process of decarbonizing the world economy and that of definancialising it, by reducing the power and influence of the financial sector. Both seemed almomst impossible only a decade ago, but the first is now well under way.

There’s also an analogy between the favored economists’ approach in both cases: reliance on price based measures such as carbon taxes and Tobin taxes. Despite the theoretical appeal of such measures, it looks as if regulation will end up doing much of the heavy work.

Cheap at twice the price

One of the vanished joys of academic life is the experience, after publishing an article, of getting a bundle of 25 or 50 reprints in the mail, to be distributed to friends and colleagues, or mailed out in response to requests from faraway places (if you live in Australia, everywhere is faraway), often coming on little postcards. Everything is much more efficient nowadays, and I just finished throwing away my remaining collection of reprints. But now, an electronic ghost of the reprint has come to visit.

Earlier this year, I contributed an article to a special issue of Globalizations on “The diffusion of public private partnerships: a world systems analysis”. This is a fair way outside my usual academic area of expertise, a fact which may be apparent to readers who know more about the topic than me, but I wanted to say something about Australia and New Zealand. I just got an email from the publisher offering 50 free e-prints . I don’t think my fellow economists will be much interested, and most would have library subscriptions anyway. So, I’m opening it up to my readers. As I understand it, the first 50 to download it get it for free. After that, anyone really interested can email me for a copy.

Update If you want a copy just click on the link

Adani’s silent partners

A month after Adani got the final approvals for its Carmichael mine, it’s still hard to work out what’s going on with Adani and the Galilee Basin in general. Adani has been making a fair bit of noise, but the project still seems to consist of tree clearing and road building.

To get past this stage, and without significant in-house experience of major projects, Adani needs partners: engineering design firms, construction contractors, and so on. And even if no external funding is needed, the project still needs insurance, which is getting harder to come by.

Adani claims it has insurance lined up, but declines to say which firm is providing it. Assuming the claim is true, the obvious explanation is that the insurer is worried about reputational damage from being associated with such a toxic project. Presumably, that concern will be reflected in higher premiums.

The same is true as regards engineering. It’s widely rumored that global firm Gutteridge, Haskins and Davey will get the job, but so far GHD has refused to comment. As well as reputational damage, GHD needs to consider the fact that Adani has burned a string of previous contractors. They are still fighting their last partner, AECOM over a payment of $12 million. AECOM must surely be regretting ever getting into bed with Adani, ending up losing their money as well as their reputation.

Any firm looking at this history, and tendering to Adani, would want a high price and money up front for its services, as well as trying to keep its involvement as quiet as possible. That in turn raises the question of how a project that was marginal to begin with can manage to pay over the odds for everything it needs. This at a time when a company like Whitehaven is relying for its continued profitability on the assumption that existing producers will leave the market.

On the jobs front, Adani has been advertising positions in its Townsville office (about 60, as of today). But that’s barely enough to replace the cuts made last year. There’s no sign of the promised thousands of jobs so far.

A message from the recent past

That’s the headline from my latest piece in Inside Story, in Libra, Facebook’s newly announced cryptocurrency. Opening and closing paras below

Facebook’s announcement that it is launching a #cryptocurrency called Libra raises two questions. Will Libra compete with the most famous cryptocurrency, #Bitcoin ? And what is a cryptocurrency anyway?

Ultimately, the crucial part of the name is “crypto.” What Bitcoin and Libra have in common is a desire to avoid the constraints of government regulation of financial markets by burying their operations in layers of technological mystery. These aspirations, brought together in the term “fintech,” reflect the market libertarianism that dominated both the technology and finance worlds in the heady days of the 1990s, and persisted even after the global financial crisis of 2008. It remains to be seen whether such aspirations will flourish in the current, much less favourable environment

Can globalization be reversed (wonkish)

The term “globalization” came into widespread use in the 1990s, about the same time as Fukuyama’s End of History. As that timing suggests, globalization was presented as an unstoppable force, which would break down borders of all kinds allowing goods, ideas, people and especially capital to move freely around the world. The main focus was on financial markets, and the assumption was that only market liberal institutions would survive.

The first explicit reaction against globalization to gain popular attention in the developed world[1] was the Battle of Seattle in 1999, but the process, and the neoliberal ideology on which it rested, didn’t face any serious challenge until the Global Financial Crisis of 2008. The Crisis destroyed Neoliberalism as a political project with positive appeal, but its institutions have remained in place through inertia.

Now, however, globalization is finally facing serious threats, most immediately from the nationalist[1] right, seeking to restrict movement of people and goods across national borders. There hasn’t yet been any serious challenge to financial globalization, but faith in the wisdom and beneficence of financial markets has disappeared.

An obvious question here is: can globalization be reversed? My short answer is: within current political limits globalization can be reversed least partially in the case of trade, but can only be slowed in the case of movements of people. I’m still thinking about financial flows.

Starting with trade, the reaction to Trump’s various trade wars has shown that the 21st century system of world trade based on complex supply chains involving many different countries is quite fragile. An across-the-board tariff rate of 10 per cent, the level that prevailed in 1960, would render supply chains with multiple border crossings uneconomic. The more likely pattern, again as illustrated by Trump, would involve a lot of unpredictable variation.

If Trump’s tariffs are maintained, and met with retaliation, the obvious response will be to return to the simplified supply chains of the 20th century. Manufactured goods would be produced in a single jurisdiction (maybe using imported raw materials, which are rarely subject to tariffs) either for domestic consumption or for export as finished products.

Moderate tariffs won’t, however, be enough to produce substantial import replacement of the kind needed to make (for example) American manufacturing great again. The force of comparative advantage is too strong for that. A return to something like Smoot-Hawley tariff scales (up to 60 per cent) would be needed. This seems to be outside the limits of what could happen political, given the increase in consumer prices that would result. However, any judgement about political limits has to be taken with a grain of salt these days.

What should we think about the costs and benefits of such a transition? Breaking down complex supply chains involves some obvious losses in efficiency. It’s hard to estimate how large they are on a continuing basis, but there would certainly be some big economic losses in the transition.

The current system enables US companies to hire subcontractors with exploitative labor practices, they can, as Naomi Klein pointed out in No Logo, be put under pressure to fix things. If most production was undertaken by firms in poor countries, there would be less of an opportunity for such pressure.

Complex supply chains also facilitate tax evasion through transfer pricing. However, this problem is due at least as much to the operations of the financial system as to the organization of physical production.

A lot depends on the specifics of tariff structures. Trump’s moves so far have been largely random, and the responses have been targeted at causing political pain for Trump rather than as part of a coherent strategy. In these circumstances, the reversal of globalization in trade is likely to cause more harm than good.

fn1. Nationalism in this context means something like “dominant identity nationalism” where dominant identity is a placeholder for those considered to be “real” members of the nation concerned,for example, white Christians in the US case. I plan to write more on this, but may not get around to it for a while.

fn1. A commenter at Crooked Timber points out that the Zapatista rebellion in Mexico (1994) was prompted by the signing of NAFTA

Keynes and Versailles, 100 years on

The 100th anniversary of the Treaty of Versailles is coming back. I have a piece in The National Interest which ran under the headline (selected by the subeditor, as is usual), America Needs to Reexamine Its Wartime Relationships. Keynes first came to public attention with his critique of the Versailles Settlement, The Economic Consequences of the Peace, whith foreshadowed, in important respects, The General Theory of Employment, Interest and Money.

I argue that the rise, fall and rise again of the standing of Keynesian macroeconomics runs in parallel with views on the justifiability of the terms imposed at Versailles and more generally of the use of war as a policy instrument.

Explaining Adani: why would a billionaire persist with a mine that will probably lose money?

That’s the title of my latest piece in The Conversation, republished on the ABC website. Possible answers

So what could be going on? Perhaps Gautam Adani is willing to lose a large share of his wealth simply to show he can’t be pushed around. Alternatively, as on numerous previous occasions, his promises of an imminent start to work may prove to be baseless.
The third, and most worrying, possibility is that the political pressure to deliver the promised Adani jobs will lead to a large infusion of public money, all of which will be lost.
The $900 million Adani sought from the Northern Australia Infrastructure Facility in 2017 would be enough to keep the project going for a couple of years, without the need for Mr Adani to risk his own money. It now appears that a similar sum might be sought from the Export Finance and Insurance Corporation.