An imperfect liberal democratic perspective

This article is a response to comments made to in regards to my previous OLO effort about whether Western nations can remain affluent and fair, especially one that portrayed me as just another leftist statist with little understanding of economic theory (notably the Austrian school).

First, I admit that I have little interest in theory. Rather, I am driven by issues, making my conclusions after evaluating a wide range of evidence collected from all sides of the debate. Grand theories that supposedly explain or advise us about what to do in such a complex world have never really impressed me.

Nevertheless, I have become aware of the Austrian school in the last couple of years due to its followers blaming governments for the global financial crisis (GFC) and attacking recent government stimulus. In general terms, the Austrian School argues that the expansion of the money supply promotes lower (short-term) interest rates either through an inflow of gold, printing of money, or financial innovations, which tend to stimulate borrowing from the banking system and create an unsustainable boom.

In response to the GFC, Peter Schiff called on the US to allow free markets to work by eliminating deficit spending, bailouts, stimulus packages, central bank control of interest rates, or mortgage safety. He also called for the reduction of corporate regulation to allow loss and failure, much lower federal income taxes to spur savings and real production, and a major reduction of borrowing from foreign countries.

While it is argued that the Austrian school provides an incomplete account of the business cycle by downplaying unemployment considerations, thus providing a “recipe for intellectual and policy disaster and theoretical stagnation”, I do accept the Austrian school concern at the extent of the recent stimulus response. My gut feeling is that shorter-term pain is preferable to longer term economic mediocrity that may result from Western governments going much further in debt.

But my perspective differs severely with the Austrian School in regards to its call for government to get out of the way. For instance, the Austrian School supporter Wolfgang Kasper argued at a recent New Zealand Business Roundtable that the German economic miracle “carried within itself the germs of its own destruction, because the free-market design was coupled with a commitment to political redistribution”, an aspect compounded by its mixed member proportional-style electoral system which fosters “political populism and opportunism”.

Kasper also refers to the prowess of the pragmatic East Asians who are “much less guilt-prone and futurophobic than the affluent Westerners or the adherents of conservative Islam”. In making his policy recommendations for New Zealand, he even refers to the modern example of China which has abandoned nineteenth-century Marxism in “favour of a widely shared Schumpeterian ‘can-do’ paradigm”.

For all of Kasper’s talk of enhancing any discussion of political economy by thinking more about “normative issues such as freedom versus security, efficiency versus justice, or growth versus the preservation of a liveable environment”, should we really be inspired by China’s can-do mentality?

Take some of the factors behind the ten employees of the Taiwanese-owned Foxconn (maker of iPhones and iPads for Apple and computers for Dell) who killed themselves in early 2010.

Foxconn, the world’s biggest electronics outsourcing manufacturer, which then operated 20 plants and employed more than 800,000 Chinese workers in China, paid their workers a basic monthly wage of 950 yuan ($US140), at least in Shenzhen in line with its official minimum wage, but employees need to work many hours of overtime each day to make the necessary 2,000 yuan needed to meet basic needs.

Foxconn recruits also undergo a course of “military training” to prepare them for the company’s industrial discipline, typical of export factories in China, while its workers live in dormitories with up to 10 people a room where one cannot cook, have visitors or sexual relations. Further, the dorms have no air conditioning, although air conditioning operates on the factory floor.

On production lines, there are restrictions on how often workers may go to the toilet, and extensive security surveillance which ensures that workers barely communicate with each other.

It is reported that an earlier suicide (July 2009) occurred after Foxconn’s security division searched a worker’s room and physically abused him after a fourth-generation iPhone prototype he was shipping went missing.

While Foxconn promised to hire psychologists to conduct check-ups on workers, and nets were hung around factory buildings to try to prevent further suicide jumps (how is that for innovation), its management also ordered all workers to sign letters saying that the company was not liable for suicide deaths. The company only backed down after further public anger before increasing the basic wage by 30 per cent rather than the previously announced 20 per cent.

Enough said about the can-do mentality of China.

The development of pluralist Western societies, made possible by the acceptance of certain ideas and various internal struggles, is hardly a backward development. Many democratic societies, aided by major centre-left and centre-right political parties, various interest groups and a free media, have evolved to adopt a reasonable balance between individual and collective impulses. They also provide examples of societies that reasonably balance national and international aspirations through greater support for freer trade after decades of blatant protectionism.  

This does not mean that Western societies can easily balance such considerations. While the US that has done most to support freer trade, including giving immense opportunities to East Asian societies to prosper, its own society has given less attention to it social welfare system when compared to other Western societies. It now faces enormous policy challenges as it deals with its large debt while trying to uphold its global leadership role.

But only the naive would suggest that government does not have an important role to play, notwithstanding the reality that many Western nations will have to reduce debt levels.

Take the extent of suffering in Britain during the 19th century, despite that industrial power upholding a greater commitment to freer trade. Even with progressive regulations and new technology in the late 19th century that improved building quality and delivered cheaper quality food, over 25 per cent of its population by 1900 was living at or below subsistence level. Surveys indicated that around 10 per cent could not afford even basic necessities such as enough nourishing food, and 15-20 per cent had just enough money to live on (provided they did not lose their job or have to take time off work through illness).

Such evidence indicates why the role of government does matter in terms of the balance between economic and social considerations.

It may also explain why the former prime minister John Howard celebrated ABS data which showed that low and middle-income households had seen their real disposable incomes grow by more than 23 per cent between 1995-96 and 2003-04, a greater increase than for high-income households. Howard also noted OECD research which confirmed that Australia has one of the most progressive tax-transfer systems in the developed world, with a higher share of benefits going to the poorest 20 per cent of households than any other developed country.

And with Kasper suggesting greater influence by the Austrian School on Western societies since the stagflation (double-digit inflation and unemployment) of the 1970s, the US provides a recent example of what can happen when government does get more out of the way. Between 1980 and 2008, the share of income earned by the bottom 90 per cent of Americans reduced from 65.37 to 51.77 per cent (64.44 per cent in 1950), with the top one per cent getting 11 of the extra 13.59 percentage points going to the top 10 per cent.

Kasper argues that, “in these times of global mobility, international competition and prevailing value relativism”, only universal institutions should prevail in order not to limit wealth creation and innovation. Kasper refers to individual property rights that “should not be restricted as long as this causes no harm to others”. He also criticises anyone that advocates ‘optimum tariffs’ (a limitation on the freedom to trade one’s property rights); foreign investment controls (violation of the freedom to use one’s capital wherever one sees fit); licensing and industry policies; the control of labour markets (abridging one’s right to use one’s own labour as one sees fit); and zoning regulations (which often violate individual rights to develop what is theirs without evidence of harm being done to others).

Again, unless supporters of the Austrian School can demonstrate why we have little to fear from such policies being implemented in their purest form, all we have is our ongoing struggle to find the most appropriate balance between markets forces and government intervention. In the real world, people and nations have real concerns from their economic interaction which have to be addressed, just as they always have and always will.

Kasper’s views are often completely out of touch with reality. While Kasper advised one Australian parliamentarian to “rely on common sense and opt for free trade” when considering two models advocating car tariffs or abolishing them, a recent CNN money article highlighted concern from Western automobile company executives about China’s potential for overcapacity which may force them to export Chinese-made vehicles to other markets.

While many of Australia’s journalists also appear happy with free trade, probably on the basis that Australia may long benefit from a rising China, other nations express greater sentiment about the need to alter one’s industry approach. Just a week ago, one  Washington Post journalist argued just how incompatible China was with free trade ideals. With Evergreen Solar closing its solar panel factory in Devens, Massachusetts, after opening just three years ago with at least $US43 million in state subsidies, the US learned that Evergreen is shifting its production to China because of lower costs and considerable government subsidies offered by the government there.

Further, while the US company Manitowoc Co had been exporting giant cranes to China for years for use in giant construction projects, Chinese firms – now ready to enter the market – were to be assisted by Beijing slapping a 30 per cent tariff on Manitowoc’s exports under global trade rules that allow “developing” countries to protect “emerging” industries. Manitowoc now has entered a joint venture with one of its Chinese competitors, which means much of the work will be done there.

As David Cay Johnston argues, a 2001 Pulitzer Prize winner for exposing tax loopholes and inequities, today’s ‘free trade’ is representative of “tax-subsidized mechanisms that encourage American manufacturers to close their domestic factories, fire workers, and then use cheap labor in China for products they send right back to the United States”. He points out that this has not only created enormous downward pressure on wages, not just for factory workers, which means “less money earned from labor translates into less money to finance the United States of America”.

To conclude, Western societies will indeed need further policy reform in the future as our reliance upon debt (public and/or private) cannot go on forever at such high levels. But while centre-right think tanks will play a role through policy ideas that hep a society encourage efficiency in regard to the public purse, reform is unlikely to occur in the dramatic way advocated by followers of the Austrian school, especially if communist China is cited as an example of Schumpeter’s can-do approach.