Going Global On The Great Recession

I covered a bit of this in last night's week in review, but the World Bank's report that the world will experience negative economic growth in 2009 for the first time since WWII is very discouraging news. I don't know if I agree with the framing of this Washington Post story - this was as much a problem of sovereign wealth funds and international banks BUYING junk mortgage-backed securities as it was the lending frenzy in the US and the distribution of the mortgage-backed securities themselves - but the implications of this negative growth are severe.

The World Bank also cautioned that the cost of helping poorer nations in crisis would exceed the current financial resources of multilateral lenders. Such aid could prove critical to political stability as concerns mount over unrest in poorer nations, particularly in Eastern Europe, generated by their sharp reversal of fortunes as private investment evaporates and global trade collapses.

In its report, released ahead of a major summit of finance ministers in London this week, the World Bank called on developed nations struggling with their own economic routs to dedicate 0.7 percent of the money they spend on stimulus programs toward a new Vulnerability Fund to help developing countries.

The report predicted that the global economy will shrink this year for the first time since the 1940s, reducing earlier estimates that emerging markets would propel the world to positive growth even as the United States, Europe and Japan tanked. The dire prediction underscored what many are calling a mounting crisis within a crisis, as the downturn that started in the wealthy nations of the West washes over developing countries through a pullback in investment, trade and credit. Despite the United States' position as the epicenter of the crisis, investors are flocking to U.S. Treasury bills and the dollar, squeezing developing nations out of global credit markets.

Certainly the idea of a global stimulus is one that the US is pushing. There are very real, frightening national security implications to developing nations collapsing, and it's important to deal with that shortfall in demand instead of isolating regulatory reform (which is also needed) at the G20. Even while the US stimulus looks to be coming in low, it's relatively high compared to most other developing nations. The more that there is a unified global stimulus, the less leakage from one country to the next (which is the concern with the US, say, stimulating the Chinese economy through the consumer purchase of a lot of their goods) and the better for global trade, which has absolutely cratered. Larry Summers actually talked about this today in the Financial Times.

Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a co-ordinated effort to boost demand and lift the world out of recession.

In an interview with the Financial Times, Lawrence Summers said the urgent need for a short-term increase in spending by governments temporarily overrode the longer-term goal of tackling the global imbalances many economists believe caused the financial crisis.

The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said.

His comments, ahead of next month’s crunch G20 summit in London, make it clear that the US administration wants industrialised nations to share responsibility for engineering a global demand-led recovery and does not believe this burden should fall on China alone.

“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers.

“There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”

That's the only way out of this crisis, which is why Republican calls for a spending freeze are so absurd. Still, it's important to recognize that even a global demand surge up to the levels of the United States would probably not be sufficient to stem the tide of downturn. Paul Krugman notes today that policymakers are behind the curve:

To see how bad the numbers are, consider this: The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast [...]

So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.

But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.

O.K., that’s a warning, not a prediction. But economic policy is falling behind the curve, and there’s a real, growing danger that it will never catch up.

Cheery Monday news!

More Than Divestment

On the same day that John W. McCain gives a speech to the powerful pro-Israel lobby AIPAC, where he calls for a worldwide divestment effort to isolate Iran, it is revealed that such a divestment would significantly hurt the balance sheets of members of his own campaign:

In the summer of 2005, John McCain's chief strategist Charlie Black, working for his firm Black, Kelly, Scruggs & Healey, was paid $60,000 to lobby the U.S. government on behalf of the Chinese oil conglomerate CNOOC. At the time, CNOOC was mounting an aggressive bid to buy Unocal, a California-based oil giant, and Black was tasked with churning up congressional support. But the bid ultimately fell through, in part because of objections over the China oil industry's ties to Iran, a country in which it had already invested tens of millions of dollars.

"This transaction poses a clear threat to the energy and national security of the United States," wrote Rep. Joe Barton, a Texas Republican. "U.S. national energy security depends on sufficient energy supplies to support U.S. and global economic growth. But those supplies are threatened by China's aggressive tactics to lock up energy supplies around the world that are largely dedicated for their own use." [...]

as demonstrated by the CNOOC anecdote, if choking off Tehran's economic lifeblood is McCain's goal, he could have personally started down that road years ago -- with his own advisers.

This is the second member of McCain's inner circle with lobbying ties to Iran that has been discovered in just the past few days - campaign manager Rick Davis was the first.

Matthew Yglesias notes that this is part of a larger problem with using divestment to deal with most states.

In a highly globalized economy, it's difficult to try to hermetically seal off Iran economically. You start divesting from firms that do business with Iran, but then you still have firms that do business with firms that do business with Iran. Divest all you like, but Iran still has oil that people want to buy, which gives Iranians money they want to use to buy things with. Which isn't to say that economic pressure is totally ineffective, but how effective it is has a lot to do with how wide the network of pressuring entities is. A really global sanctions and divestment campaign can deliver enormous blows, while unilateral measures are difficult to really enforce in a serious way.

Sudan, who has a far more limited economic picture relative to Iran, is easier to isolate, but in the final analysis, nothing beats good old-fashioned multilateral negotiation. We may never sever the economic ties that bind Iran to the globalized world, but we can gain diplomatic strength with a unified position and a broad set of actors willing to make the concessions necessary to reach agreement. If changing the behavior of Iran is the goal, only an international effort in all possible arenas, not just financial sanctions, will be successful. In fact, as Ilan Goldenberg notes, the last time Iran was faced with international consensus against its nuclear program, they actually ran to the bargaining table.

McCain argues that the Clinton Administration already tried engaging in 1998 and that the entreaties were rebuffed. He’s right. Supreme Leader Ali Khamenei vetoed any talks at that time. But McCain is selectively cherry picking history. The story of the last 15 years between Iran and the U.S. is one of missed opportunities on both sides. The best example is from 2003, where right after the start of the Iraq War senior officials in the Iranian Foreign Ministry sent the “Grand Bargain fax” to the Bush Administration outlining what a deal between the U.S. and Iran might look like. The Bush Administration decided not to respond because of its position of strength at the time and the belief that Iranian reformists couldn’t deliver on their promises. In the late 1980s and early 1990s Iran worked to have Hezbollah release all of the American hostages in Lebanon and in exchange expected greater engagement from the United States. But while the first Bush Administration had signaled that it would in fact engage after the 1992 U.S. Presidential elections, when they lost, the Clinton Administration decided instead opt for a dual containment policy. Elements in the Iranian government who had supported engagement with the U.S. ended up feeling spurned. The story is much more complicated than: “the U.S. has tried talking and Iran has refused.”

But that wouldn't look good on a bumper sticker. Certainly not as good as "Bomb bomb bomb Iran."

Starvation, Hunger, And The Downside of a Globalized World

Finally waking up to the global challenge we face with rising food and fuel prices and the imminent starvation of millions, the Washington Post is committing some responsible journalism, maybe a tad late, by running a series dedicated to the global food crisis. It's a complex issue with a variety of factors and countervailing forces, without an easy cause-effect scenario. So it's beneficial to stretch it out over several days and examine what we can do and how we can prevent future crises.

The first article looks at the statistical reality of food prices, which soared due to increased demand and hoarding, and aren't likely to fall back to 2006-era prices anytime soon. For a billion people living on next to nothing, the article says, "it is a matter of survival."

Interestingly for a consensus media establishment paper like the Post, they actually attribute the problem to market forces.

The root cause of price surges varies from crop to crop. But the crisis is being driven in part by an unprecedented linkage of the food chain.

A big reason for higher wheat prices, for instance, is the multiyear drought in Australia, something that scientists say may become persistent because of global warming. But wheat prices are also rising because U.S. farmers have been planting less of it, or moving wheat to less fertile ground. That is partly because they are planting more corn to capitalize on the biofuel frenzy.

This year, at least a fifth and perhaps a quarter of the U.S. corn crop will be fed to ethanol plants. As food and fuel fuse, it has presented a boon to American farmers after years of stable prices. But it has also helped spark the broader food-price shock.

"If you didn't have ethanol, you would not have the prices we have today," said Bruce Babcock, a professor of economics and the director of the Center for Agricultural and Rural Development at Iowa State University. "It doesn't mean it's the sole driver. Prices would be higher than we saw earlier in this decade because world grain supplies are tighter now than earlier in the decade. But we've introduced a new demand into the market."

They shrink back into blaming protectionist markets for the problem, but I think the paper stepped over a kernel of truth. It's not just about biofuels - it's been known for a while that they could contribute to starving the poor - it's about market forces driving types of farm production, subsidies making it more profitable, not to mention political forces (Iowa being the first primary state certainly drives the corn ethanol boom domestically). And this is a symbol for how markets work with respect to producing and distributing resources around the planet. Devilstower at Kos wrote the finest post on this topic I've ever seen, and I wish I could excerpt it all but I'll just give you a piece and urge you to follow the link and read it yourself:

Whether it's a bridge in Minnesota or body armor in Iraq, we live in a world constructed by low bid. That's not just true for items built by government contract. For decades, business has focused on efficiency, on the elimination of all redundancy, on "right sizing," on "just in time" on "zero inventory." One of the economic indicators we've been trained to look for each month is the measure of labor productivity, the amount of output achieved for each man-hour of input. In the United States, productivity has soared over the last decade, as automation, outsourcing, and just-in-time have worked together to make US workers much much more productive.

Want to know why corporations are able to sit on huge sums of money, but the average worker's pay hasn't increased? It's because they can get by with fewer of us and still get what they need. Not more than they need, of course. Just enough. Corporations have been proudly "cutting the fat." Flexibility and robustness are not the goals for a corporate society that rarely glances beyond the end of the current quarter.

The trouble is, fat does something other than cause unsightly bulges in your favorite outfit. Fat is storage. If bears were to "cut the fat" before heading into hibernation, they'd be really thin -- as in skeletons -- come spring.

We've promoted this vision of business that's right on the edge, pushing supply out right to the margin, getting everything done expending the precise resources needed, and with respect to this food crisis, a market that works that way is left unprepared. We've globalized and interlocked and paralleled these production and distribution systems so earnestly, that when some farmers decide to switch to growing biofuels instead of food, or when some Chinese and Indian people decide to eat a bit more meat than grain in their diet, or when a few monsoons and hurricanes wipe out some crops, there's no excess supply to which to revert.

The crisis is not necessarily borne out of production, but economics, and in particular the current form of capitalism. The second part of the Washington Post series focuses on the real-world cost of this perversion of production and distribution as it relates to the poor in Mauritania. The problem is this easy reliance on a globalized market that will unquestionably produce whatever bounty is needed. That dismisses human greed. And it has led us down this path.

Senator Dodd: Cut off Chinese imports until they stop poisoning us

This is the greatest blow to the neoliberal consensus I have seen in a long time. And it's a courageous call to action from Senator Dodd.

This is an issue of safety. Parents should be confident that the toys and food that they give their children have been inspected and are safe. That's why I am calling on the President to use his authority to immediately suspend all imports of toys and food from China. It's not enough to simply talk about working for fair trade agreements. We need leadership that will act to enforce fair trade. We have the legal right and power under the WTO to keep products out of our country that threaten the health and safety of our families, and I'm going to do all I can to ensure we do so.

Only in our similarly poisoned political culture would this be seen as controversial. The Chinese have been operating for years with virtually nonexistent labor standards, allowing them to overpower our manufacturing base by producing goods at rock-bottom prices. They have not created a flat world, but one completely tilted in their favor, which uses what amounts to slaves to give us complacent Americans 99 cent packs of tube socks. Predictably, this inattention to any kind of human rights or quality control has led to poisoned food, poisoned toys, foodstuffs made out of cardboard, toothpaste with antifreeze, and probably a hundred other various depredations we just haven't heard about yet. In this situation, the only sensible thing to do is to not allow such items into American homes until we can get a handle on how wide and deep it actually goes. Senator Dodd's call is Common Sense 101.

But, as HTML Mencken notes, this will be met with howls of "protectionism!" and "you want to kill our economy!" And those howls will be coming from a particular source:

The problem here is the 21st Century version of The Jungle, with the Chinese government in the place of the meat packers, the Chinese people being the Lithuanian immigrant workers, and the American public… is still the American public, being poisoned by Corporatist pigs defended, now as then, by a complacent and complicit intellectual class (back then, stodgy laissez-faire men; and now, neoliberal economists and globalization cheerleaders) whose anger is only aroused by the muckrakers and dissenters whose position Dodd, to his immense credit, echoes [...]

While the current FDA is amazingly incompetent and corrupt even by normal Bushite standards of incompetence and corruption (which is saying a lot), even the “best” Clintonoid FDA couldn’t possibly inspect all the food imports. The problem can only be solved by insisting through trade pacts that imported food is produced according to American environmental, labor, and safety standards. They want our market, fine; they must treat their workers, the environment, and consumers by our rules (which admittedly aren’t all that great right now, either, also largely in thanks to Corporate-whorish Sensible Liberals, but better by far than China’s). However, demanding such a remedy requires moral courage, something economics textbooks don’t teach — though there is apparently an esoteric chapter in them that instructs in the fine art of dishonestly using moral language.

If you want to see trade and globalization rocket up to the top of the public consciousness, you'll join with me in broadcasting Senator Dodd's call to action far and wide. I don't think he's the most populist candidate in the Presidential race; he's not calling for the cancellation of NAFTA or the WTO, for example. But he's bringing to light a very pervasive issue in completely rational and sensible terms, namely that we shouldn't let poison into our homes. This would be a bold first step into unmaking the ridiculous economic consensus that globalization is a net positive and "wouldn't you rather have lead paint in your toys than have to pay a dollar more for them?"

Senator Dodd's going to take a lot of heat for this one, let's get his back.

About the OIl

Earlier this week Iraq's government actually got something done, coming together around the only thing that can unite - money, bushels and bushels of money. And really, this is the same kind of "opening up the country's market" stuff that we've seen crush other nations and put them in near-total servitude to corporate hegemony:

Iraq's government has agreed on a plan to divide the country's oil wealth and open the industry to international investment, a move seen as necessary to a political settlement of the nearly four-year-old war, ministers announced Monday.

"This law will guarantee for Iraqis -- not just now, but for future generations, too -- complete national control over this natural wealth," Oil Minister Hussain al-Shahristani told reporters at a Baghdad news conference [...]

"This law affirms ... all the revenues will be shared at the federal level and redistributed equitably among all Iraqis," Deputy Prime Minister Barham Salih told CNN.

Deciding how to distribute the proceeds of the country's oil industry was a key political benchmark laid out by U.S. officials trying to broker a settlement of the country's political differences.

"This is the first time since 2003 that all major Iraqi communities have come together on a defining piece of legislation," said Zalmay Khalilzad, the outgoing U.S. ambassador in Baghdad. "This law is a major pillar of a national compact among Iraqis."

And of course, that sounds good, until you read the fine print. And unfortunately for the corporations, it appears that some Iraqis have.

Barely two days have passed since Iraq's Prime Minister Nouri al-Maliki hailed the country's new petroleum law as a "solid base for unity of all Iraqis" — a rare boast these days. President Bush has also trumpeted it as proof that Iraq has a viable future. But parliamentarians and Iraq's oil unions have already begun mobilizing against the draft legislation, arguing that it is a desperate attempt by al-Maliki's government to satisfy Western demands, which could damage Iraq's economic future and speed the country's ultimate disintegration [...]

Under the new law, agreed on Monday by Iraq's cabinet, foreign oil companies will be allowed to cut long-term exploration and development deals with the government for 20 years, renewable for a further five years. Companies willing to operate in a country with high physical risks — insurgents regularly blow up pipelines and kill contractors — will be allowed to export their oil after paying the government a minimum 12.5% royalty, although there are usually also cash signing bonuses to the government, and most "profit oil," extracted after operating costs are met, would likely go to Baghdad. Regional governments — only Kurdistan has one right now — can sign their own contracts under the law, a dizzying change from decades when Saddam dictated the terms and stifled oil production in Kurdistan. A Baghdad-based Federal Council on Oil & Gas will be formed; it will have 60 days to appoint a team to arbitrate a contract, if it has strong concerns.

Despite the grumbling from politicians, it is still unclear whether opposition to the law is strong enough to kill it. Among the parliamentarians arguing against the law are Moqtada al-Sadr's bloc, which fears that foreign oil companies will move into Iraq in force, and stay long after U.S. soldiers have left. But logistically they will have to race back to Baghdad to vote against it. Many parliamentarians, like al-Mutlaq, spend much of their time outside Iraq — al-Sadr himself is frequently in Iran. "I'm going back for this very reason," al-Mutlaq says. "We cannot yet figure out how many people will stand against it." He says he is certain he will find allies among his colleagues, who he says believe that the law is geared to the needs of Western oil companies rather than Iraqis. There has been no public hearing on the draft, whose details have largely been kept secret. Iraqi lawmakers fumed last July when U.S. Energy Secretary Samuel Bodman discussed the draft during a trip to the region, "when hardly a single parliamentarian had seen it," says Kamil Mahdi, an Iraqi who is senior lecturer in Middle East economics at the University of Exeter in Britain, and who spent Tuesday discussing the law by phone with several parliamentarians. He said several believe that the government should wait until the war ends before locking Iraq into long-term deals with foreigners, he says. "This draft is totally out of synch with any notion of the interests of Iraq," he says.

And who knew this, but Iraq has oil unions, and they're the strongest voices of opposition to this new law. Since their members are the ones who, you know, actually get the oil out of the ground, I would say this may have an impact.

In one sense this is about Iraqis who are tired of seeing American interests trump their own. But really this is the same grassroots resistance to globalization we have seen since the late 1990s. The whole world has seen the lessons over the past 40 years, where corporations come into the developing world, open their markets, practically enslave their people, and take out all the natural resources (and all the profit) for themselves. The reason Latin America and many other countries have this streak of what is called "anti-Americanism" here is not a foreign policy issue, it's an economic one. Simply put, the Iraqi people don't want their oil stolen from them by multinationals. They don't want to end up like Nigeria. I question the motives of groups like al-Sadr's (who probably want to minimize the amount of oil wealth they must share with the Sunnis), but the language they're using is undoubtedly very appealing to the Iraqi in the street.

Whether they'll succeed is another matter. It may not be that the whole war was fought to open up these oil markets, but as long as we're there, I'm sure the White House considers it a pretty important thing to get done. At some point the bombs will stop dropping and there has to be another way to make money off of Iraq. They've clearly got Maliki in the tank, as he probably knows that upsetting the Americans will cause his government to collapse. It'll be interesting to see if they can ramrod this through the Parliament, which frequently doesn't even show up to meet. Stay tuned.