Three progressive ideas for the recession

Oscar Landerretche

Outlined below are three policy instruments that will aid progressives in responding to challenges presented by the global economic crisis:

The World Finance Organisation Initiative
It has become increasingly clear that the structure of current multilateral financial institutions is inadequate. The global financial order is chaotic and inadequately regulated. Progressives now face an important – if difficult – challenge. We have to strike a new balance between global financial freedom and global economic responsibility. The coordination of financial regulatory standards has stopped being a purely intellectual endeavour, and become the order of the day.

Hence, the need to establish a World Financial Organisation (WFO). As we have learnt through our experiences with the World Trade Organisation (WTO), this new institution must be built slowly on the basis of regulatory checks and balances. A gentle, persuasive form of politics should be employed to build strong and long lasting international and intersectoral coalitions. There must be no institutional “overshooting” that risks simulating a “global state”. Rather, a system of rules for bilateral negotiations should be established over time to eventually become a comprehensive system. Countries should sign Financial Flow Agreements (FFAs) that match regulatory standards and share information. The existence of a WTO-like global discussion forum and clearing house would be important in order to regulate the flow of treaties across financial sectors and national boundaries. Furthermore, the new WFO should be charged with oversight of all new products that will inevitably appear on the market when rapid financial innovation returns in a couple of years.

The financial thrift tax relief initiative
It is always easy to have a scapegoat to blame for a crisis. When the post war Keynesian construct broke down in the seventies it was “bureaucrats”, now it is “bankers”. However, the fact remains that the banks were providing a service to individuals and firms. It is true that “bankers” were in a privileged position to control the boom in leverage and ensure stability. It is true that they did not do so. But it is also true that, ultimately, ordinary individuals and firms also failed to act responsibly. The reasons for this include “externality” and coordination failure. “Externality” implies that everybody acts more irresponsibly than they should because they do not assume the full responsibility and costs for their actions.

This poses difficult choices for regulators. On the one hand, if individual leveraging and debt have social costs, they should surely be taxed. On the other, there are strong economic reasons to avoid transaction taxes, especially on financial transactions, since they are the source of funding for new business ideas and innovation.

Hence, the Financial Thrift Tax Relief (FTTR) proposal. The idea is to generate a positive income or profit tax benefit for businesses and individuals who actively show that they are not excessively leveraged. To reduce the distortions of this tax initiative, it would have to be voluntary, so that businesses or individuals who believe that they have an interesting opportunity and decide to leverage anyway, can do so, only without the FTTR, thus being subject to the rest of the tax code.

One could argue that the FTTR is less than progressive, since debt helps provide important opportunities for low and medium income households to finance new business initiatives and other projects, especially in high-growth emerging economies. On the other hand, one cannot ignore the fact that access to cheap loans can make debt spiral out of control, as the current crisis has demonstrated. The answer to this critique is to ensure that the tax relief initiative is coupled with other important policy instruments, such as means tested subsidies and access to security funds, to help ensure that lower income households still have access to capital.

The “human wealth era” initiative
Emerging economies benefited during the “financial growth” era by creating attractive conditions for foreign investment, resulting in enormous investment flows that spurred local growth. However, this growth paradigm also rested on the assumption that labour in emerging economies would have the following desirable characteristics: cheap, flexible, repetitive and submissive. This strategy was therefore entirely at odds with the progressive labour policies that have been championed in the advanced economies, especially “High Productivity Workplace” (HPW) theory. The HPW strategy fosters better labour-management relations in order to encourage workers’ commitment, engagement, proactivity and productivity. It is also more consistent with the “knowledge economy” workplace.

An HPW initiative must now be established for emerging economies. My proposal is to call it the Human Wealth Era (HWE) initiative, indicating the start of a new progressive era where workers (skilled, engaged and organised) will also be the beneficiaries of capital. The HWE initiative should be similar to the “Washington Consensus” in its style. It should summarise a series of general policy recommendations that are applicable in different forms, thus allowing for the political and economic heterogeneity of different countries. It should include a guideline that involves pacts for development policies, labour policies and education policies (specifically worker training). The general principle would be that government subsidies, as well as labour rules, should be utilised to incentivise HPW style commitments from businesses i.e. business plans will be supported if they promise the wealth and wellbeing of workers. Policies would then become partnerships between the state, the workers and the firms.

Oscar Landerretche is assistant professor of economics at the University of Chile