"Market, Capital, State" is a big chunk to chew, so big that for a long time I could not utter even a few words on these topics. As a way to get started, I pick an issue of "The Economist" and comment on that.
The covers blares out: "Can she fix it?" The illustration makes sure we get the referents of the "she" and the "it": a car mechanic being presented with a huge motor, rusty and dripping black oil, in the shape of a map of the contiguous forty-eight states. The subtitle of the cover rounds out the complex of allusions by "Hilary Clinton and the American economy".
Here we go again. In the 1992 presidential campaign the de facto slogan of the victorious Democrats was "It's the economy, stupid." Both stupid and clever. Clever because of the wide-spread notion that presidents can fix economies. Stupid because the notion is a delusion. This is just what we would expect from a typical media outlet. It's worrying that The Economist seems to be prey to this delusion.
April 16 is indeed a Clinton issue. Apart from the cover there is a Leader and the Briefing on Clinton. The latter is entirely about campaign tactics, so has become irrelevant by the time you read this. The Leader touches on issues that are more worthy of attention.
The author of the Leader on Clinton is fortunately not the person responsible for the cover: in the Leader there is skepticism about the notion that presidents can fix economies.
A typical Clinton speech on the economy contains some reflections on the tornadoes of globalisation and automation that have torn up opportunities for less-skilled workers, then culminates in a proposal to introduce a minuscule, two-year tax credit for companies to encourage profit-sharing schemes. This risks repeating the worst parts of 1990s Clintonomics, which added a slew of micro-measures to America's over-complicated tax code.Hear, hear. In an ideal version of American society a president cannot do much to improve the economy (whatever "improvement" means—not just up the GDP, I hope). But the government can do a lot to damage the economy by pandering to popular misunderstandings: (1) adding to the complexity of tax code and (2) patching up big defects in legislation. (1) needs no elaboration: everyone who files an income tax return is confronted every year with frills added over the years by what some politician perceived as popular pressure. (2) is more worthy of attention. As for defects in legislation, let's have a look at what's wrong with the financial sector.
In most Western economies today, the assets and liabilities of banks exceed the assets alnd liabilities of the government and the aggregate annual income of everyone in the country. But these assets and liabilities are mainly obligations from and to other financial istitutions. Lending to firms and individuals engaged in the productions of goods and services—which most people would imagine was the principal business of a bank—amounts to less than ten percent of that total [John Kay: "Other People's Money", Public Affairs, New York, 2015, page 1.]This bare fact is a tip of a huge iceberg. The iceberg is the evolution of banking from 1929 to 2008. Soon after 1929 the financial sector collapsed, with disastrous effects for the economy. In response the Glass-Steagall Act of 1933 separated commercial from investment banking. The payments system, on which we all depend to buy food and perform other urgent transactions, falls under commercial banking. This is what the above-quoted Kay calls "The Utility". Initial public offerings, mergers and acquisitions are activities typical of investment banking. This what Kay call "The Casino". The abuses rectified by Glass-Steagall in 1933 included that deposits generated by the commercial banking arm were used to finance investment-banking activities. As a result failure in the latter brought down a part of the payments system. The Glass-Steagall act separated commercial banking from investment banking. This naturally irked certain powerful interests. Until around 1980 these remained impotent. In the political climate of Thatcher and Reagan it became politically feasible to dismantle Glass-Steagall bit by bit until by 1999 its last vestiges were demolished.
In the early 1930s payments-system failures occurred bit by bit over a period of a few years. The result was wide-spread severe poverty. In the 2008 the effect would have been total collapse (imagine what would happen if bank cards stopped working). As a result the payments system was rescued at huge cost to the tax payer, without anything being done about the cause.
So back to Clinton and the notion that governments can fix economies. On rare occasions they can. Glass-Steagall was such an occasion in 1933. Since the accession of Bill Clinton in 1992, presidents have been asleep at the wheel. This includes both of the Obama terms. Hilary Clinton in 2016 proposes to fix the economy by adding another curlicue to the tax code in the form of a minuscule two-year tax credit for companies to encourage profit-sharing schemes. Ms Clinton, stop addressing the wonks—it's time to think big. Make this the slogan of your campaign: "It's Glass-Steagall, stupid".
Subtitle: "Thrifty Germans and Dutch are furious at low interest rates, and the ECB"
Let's ignore the Dutch, as there are relatively few of them. Instead, address one of those furious Germans.
To: Werner Wutsparer
From: Alexander Bender-Cramer
Date: May 23, 2016
It has been brought to my attention that you are enraged at the ECB and that you blame it for the fact you only get a measly one percent per year on the balance of your savings account. It is time you get informed about some basics of economics and finance.
Your ignorance in this respect is understandable: you grew up in a situation where these basics were mercifully hidden behind illusions. You grew up in a society that experienced economic growth and was blessed with an financial sector that functioned reasonably well. Now growth has slowed. Governments have allowed the financial sector to make its duty to society secondary to the enrichment of its masters. These changes have been in the making for decades, but only manifested themselves in full force with the financial crisis of 2008.
In the benign conditions in which you grew up you entrusted your savings to an account with a bank and you got what you considered a decent interest. You chose to save rather than invest because you wanted to be assured of a steady, positive return.
Did you ever wonder where the money for those admittedly modest returns came from? Suppose the bank didn't do anything else with your savings than keep it ready for the day you would come to claim it for the down payment of your house. Then the bank would have to charge you for safekeeping of your money. How else could the bank pay for the handsome building with well-groomed ladies and gentlemen ready, or almost ready, to minister to your needs in matters financial?
No, you expect the money back at your convenience and get a decent interest in the meantime. Such magic is only possible if the bank to does not keep your money but gives it to a borrower who can be relied on to pay it back in time plus an interest high enough to pay your interest, after subtracting the cost of the building, the nice people who help you, and a bonus for the boss.
This whole business of finding suitable borrowers, that is, people who are short of money now, but have plenty later, is investing, something scary and risky, which is what you did not want to get into. You took your money to the bank to be saved and, guess what, this cheat turned around and invested it. In the benign decades of the second half of the 20th century this arrangement more or less worked (with some exceptions). As a result the illusion of saving with a significant positive return was upheld.
If it were just you, Werner, and not too many others among you countrymen, then the problem of low interest rates would not exist. But your country as a whole is saving on a massive scale. How massive? Here my sources differ. The Economist (April 30, 2016, page 47) writes "Germans put aside 17% of their disposable income". Elsevier (May 14, 2016, page 46) reports the ECB president as saying "Germany has already a savings surplus of 5% for almost ten years". Perhaps a percent "savings surplus" is something else than a percent of "disposable income".
Whichever way you look at it, the disparity is huge. On the scale of an economy, all saving has to be invested right away. German investors have not been able to find nearly enough suitable German borrowers for ten years now. Massive amounts of money needed to be lent to borrowers who were not German or not suitable, or even both un-German and unsuitable, the kind that say "Can't Pay, Won't Pay", as in the play by (the Italian) Dario Fo.