Syriza’s finance minister has a big idea – but will Germany accept it?
|
Version 0 of 1. Since Syriza’s victory in the Greek elections on Sunday, it is the new Essex-educated finance minister Yanis Varoufakis who has been grabbing most of the headlines. Much of his appeal lies in his iconoclasm: in his 1998 book Foundations of Economics, a kind of bible for the growing alternative economics movement, he cites the British Keynesian Joan Robinson: “The purpose of studying economics is to learn how not to be deceived by economists.” But what can we expect from this reluctant economist and reluctant politician intellectually? Announcing his decision to run for a parliamentary seat on Syriza’s ticket on his personal blog, Varoufakis stressed that he never wanted to run for office, preferring to channel his policy ideas across the political spectrum. But he grew tired of seeing his policies ignored. Above all he wants to draw attention to an idea that was first conceived by one of his major intellectual influences: John Maynard Keynes. It’s an idea that even ardent Keynsians often neglect; an idea that Keynes dramatically announced to a group of sceptical listeners at the 1944 Bretton Woods conference; an idea that runs diametrically counter to the current policies of Germany’s government. That idea is a global surplus recycling mechanism. In his recent book The Global Minotaur, Varoufakis claims that the notion of a surplus recycling mechanism is simple in theory and revolutionary in its implications. It was first devised by Keynes while working as an unpaid policy adviser to the British Treasury during the early 1940s. The proposal was an outgrowth of Keynes’s frustration with the limits of the gold standard during the 1920s. At that time there was an outflow of gold from Britain to the US to pay for Britain’s trade deficit. Logically the inflow of gold should have expanded the money supply in the US, increasing the competitiveness of UK exports. But the US adopted policies to offset inflationary pressures. As the economist Marie Christine Duggan has suggested, the harsh lesson for Keynes was that the gold standard was ineffective at forcing creditor nations to increase domestic prices or reinvest their surpluses. Creditor nations were free to hoard as they liked, placing the burden of action on debtor nations who had very little choice but to act in ways that tended to depress their domestic economies. Keynes’s proposal for curbing the problem was to create global rules that would place equal pressure on both creditor and debtor nations to adjust their respective trade imbalances, helping to ease the burden shouldered by debtor nations. He suggested that any nation that failed to ensure its trade surplus did not exceed a particular percentage of its trade volume would be charged interest, compelling its currency to appreciate. These interest payments would help to finance the second arm of Keynes’s proposal: the creation of an International Clearing Union. The ICU would act as a sort of automatic “global surplus recycling mechanism,” to use Varoufakis’s term. As Varoufakis has emphasised, individual nations do this internally. They disperse their own wealth, either through direct transfers (paying unemployment benefits in Glasgow or Idaho through taxes raised in London or New York), or through direct investment – purposefully building more factories and infrastructure in depressed regions. Keynes believed we needed something like this on a global scale. In recent years, the idea has received more and more support: economists such as Paul Davidson and Joseph Stiglitz are supporters. But surplus nations are rarely enthusiastic about the idea. Even though the proposal serves their own interests over the long term (by systematically investing surpluses in depreciated areas, they’re helping to ensure markets for their own exports), few are willing to sacrifice short-term economic supremacy for long-term sustainability. When Keynes first introduced his proposal, the US delegation at Bretton Woods showed little interest in a plan that would restrict their ability to run whatever surpluses they want. After intense negotiations, Bretton Woods delegates reached an agreement that largely reflected the interests of the US contingent, led by Harry Dexter White. The most significant difference between White’s plan and Keynes’s is that White did not have any forced penalty mechanisms in place to charge interest whenever nations exceed surplus limits. At the time, Geoffrey Crowther – then the editor of the Economist – cautioned that “Lord Keynes was right … the world will bitterly regret the fact that his arguments were rejected.” Years later it may be time to resurrect a once lost idea. But perhaps too short memories in surplus nations may be the obstacle. Heiner Flassbeck, a professor of economics at Hamburg University, is one of the few German economists to highlight this point. Flassbeck points out that: “We’re asking debtor countries to repay their debt, but at the same time we are preventing them from doing it […] In Germany, unfortunately, the historical lessons are not even discussed. Nobody knows what happened, really, to Germany, what happened to the Germany reparations payments, that they were cancelled.” It’s good that Varoufakis now has a platform to remind them. |