Posts Tagged ‘fire’

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Mark Tansey, “Garden” (2006)

Modern Monetary Theorists are having a moment, as governments (many of them run by conservative regimes, such as Donald Trump and the Republicans in the United States) are running gigantic fiscal deficits in order to combat the economic crisis occasioned by the coronavirus pandemic.*

This time, with the $2 trillion CARES Act, the U.S. federal government has taken an additional step down the road of Modern Monetary Theory, by having the Federal Reserve buy an unlimited amount of Treasury bonds and government-backed mortgage bonds — whatever was necessary “to support smooth market functioning”—in other words, by simply creating the necessary money.

But, as Michael Hudson et al. explain, the idea that is being celebrated right now—that running government budget deficits is stabilizing instead of destabilizing—”is in many ways something quite different than the leading MMT advocates have long supported.”

Modern Monetary Theory (MMT) was developed to explain the logic of running government budget deficits to increase demand in the economy’s consumption and capital investment sectors so as to maintain full employment. But the enormous U.S. federal budget deficits from the Obama bank bailout after the 2008 crash through the Trump tax cuts and Coronavirus financial bailout have not pumped money into the economy to finance new direct investment, employment, rising wages and living standards. Instead, government money creation and Quantitative Easing have been directed to the finance, insurance and real estate (FIRE) sectors. The result is a travesty of MMT, not its original aim.

By subsidizing the financial sector and its debt overhead, this policy is deflationary instead of supporting the “real” economy. The effect has been to empower the banking sector, whose product is credit and debt creation that has taken an unproductive and indeed extractive form.

Let me back up for a moment. I’ve been an advocate of Modern Monetary Theory ever since I began to study it (at the prodding of friends [ht: br]), as can be seen in various of my blog posts. In particular, from the perspective of the Marxian critique of political economy, two formulations that represent both critiques of and alternatives to those of mainstream economics are particularly useful: government deficits and bank money.

Perhaps the best known (and, in many ways, most controversial) aspect of Modern Monetary Theory is the logic of running budget deficits. The mainstream view is that the government imposes taxes and then uses the revenues to pay for some portion of government programs. To pay for the rest of its expenditures, the state then borrows money by issuing bonds that investors can purchase (and for which they receive interest payments).** But, neoclassical economists complain, such borrowing has a big downside: budget deficits increase the demand for loans, because the government competes with all the loans that private individuals and businesses want to take on—thus leading, in the short run, to the so-called crowding-out effect and, in the long run, an increase in government debt and the potential for a government default.

Advocates of Modern Monetary Theory dispute both of these conclusions: First, they argue that governments should never have to default so long as the country has a sovereign currency, that is, so long as they issue and control the kind of money they tax and spend (so, e.g., the United States but not Greece). Second, taxes and bonds do not and indeed cannot directly pay for spending. Instead, the government creates money whenever it spends.*** Clearly, this is useful from a left-wing perspective, because it creates room for government spending on programs that benefit the working-class—including, but certainly not limited to, the much-vaunted jobs guarantee.****

The second major contention between mainstream economics and Modern Monetary Theory concerns the role of banks—in particular, the relationship between bank lending and money. As Bill Mitchell explains,

Mainstream economic theory considers banks to be institutions that take in deposits which then provides them with the funds to on-lend at a profit. Accordingly, the ability of private banks to lend is considered to be constrained by the reserves they hold.

In other words, banks are seen as financial intermediaries, funneling deposits and then (backed by reserves) allocating a multiple of such deposits to the best possible, most efficient uses.

From the perspective of Modern Monetary Theory, private banks don’t operate in this way. Instead, they create money, by making loans—and reserve balances play little if any role.

A bank’s ability to expand its balance sheet is not constrained by the quantity of reserves it holds or any fractional reserve requirements. The bank expands its balance sheet by lending. Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank.

This is exactly the opposite of the mainstream story, with the implication that banks create loans (and therefore money) based on the profitability of making such loans, an activity that has nothing to do with the central bank’s adding more reserves to the system.

Both points—concerning the financing of government spending and endogenous bank money—are well known to anyone who has been exposed (either sympathetically or critically) to Modern Monetary Theory. In my view, they fit usefully and relatively easily into modern Marxian economics, especially in terms of both the theory of the state (e.g., government finances) and the theory of (fiat) money.

The problem, it seems to me, arises in the terms of the major complaint registered by Hudson et al.—namely, that government stimulus plans have mostly been directed to the finance, insurance and real estate (FIRE) sectors, which are considered unproductive and extractive, and not to the “real” economy, which is not.

Readers who know something about the history of economic thought will recognize that these productive/unproductive and extractive/non-extractive distinctions have a long lineage and can be traced back, first, to the French Physiocrats and, later, to Adam Smith—in other words, to the beginnings of modern mainstream economics.

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Using his Tableau Économique, François Quesnay attempted to show that the proprietors and cultivators of land were the only productive members of the economy and society, as against the unproductive class composed of manufacturers and merchants. It follows that the government should promote the interests of the landowners, and not those of the other classes, which were merely parasitic. Smith took up this distinction but then redeployed it, to argue that any labor involved in the production of commodities (whether agricultural or manufacturing) was productive, and the problem was with revenues spent on unproductive labor (such as household servants and landlords). The former led to the accumulation of capital, which increased the wealth of nations, while the latter represented conspicuous consumption, which did not.

Marx criticized both formulations, arguing that the productive/unproductive distinction had to do not with what workers produced, but rather with how they produced. Within capitalism, labor was productive if it resulted in the creation of surplus-value; and, if it didn’t (such as is the case with managers and CEOs who supervise the production of goods and services, as well as all those involved in finance, insurance, and real estate), it was not. So, the Marxian distinction is focused on surplus-value and thus exploitation.

And that, it seems to me, is the major point overlooked in much of Modern Monetary Theory. FIRE is extractive in the sense that it receives a cut of the surplus created elsewhere in the economy. But so are industries outside of finance, insurance, and real estate, since the boards of directors of enterprises in those sectors extract surplus from their own workers. And those different modes of extraction occur whether or not there’s a jobs guarantee provided by the creation of money by governments or banks.

From a Marxian perspective, then, the crucial distinction—both theoretically and for public policy—is not that between FIRE and the so-called real economy, but between classes that appropriate the surplus and otherwise “share in the booty” and the class that actually produces the surplus.

Right now, in the midst of the coronavirus pandemic, the class that is working to produce the surplus and provide the commodities we need is the one that is carrying the burden—either because they have been laid off and mostly left to their own devices, without paychecks and healthcare benefits, or been forced to continue to labor under precarious and unsafe conditions.

It’s that class, the American working-class, that is suffering from the ravages of the current economic crisis precipitated by the pandemic. They’re the ones, not their employers (whether in FIRE or the “real” economy), who deserve to be bailed out.

 

*Although this is certainly not the first time Republican administrations have run fiscal deficits, and allowed the public debt to soar—as long as they’re in power. They did it under Ronald Reagan, both Bushes, and long before the pandemic with Trump’s tax cuts. The only time American conservatives seem to worry about deficits and debt is when Democrats hold the reins.

**Wealthy individuals and large corporations long ago determined they prefer to be paid to purchase government debt instead of being taxed.

***So why, then, does the government need to tax at all in Modern Monetary Theory? Best I can figure, there are two major reasons: First, taxation makes sure people in the country use the government-issued currency, because they have to pay taxes in that currency (and not, e.g., in some kind of local or digital currency). Second, taxes are one tool governments can use to control inflation. They can take an amount of money out of the economy, which keeps consumers and corporations from bidding up prices.

****But that’s clearly not a new idea. Back in 1943, Michel Kalecki argued that governments had the ability to use a spending program (e.g., through public investment or subsidizing mass consumption) to achieve full employment. But it would likely be opposed by an alliance of big business and rentier interests based on three reasons:

(i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment.

In other words, capitalists are against both the government’s usurping of their private role as masters of the economy and society and the strengthening of the working-class, for whom “the ‘sack’ would cease to play its role as a disciplinary measure.”

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Mainstream economics presents quite a spectacle these days. It has no real theory of the firm and, even now, more than nine years after the Great Recession began, its most cherished claim to relevance—the use of large-scale forecasting models of the economy that assume people always behave rationally—is still misleading policymakers.

As if that weren’t embarrassing enough, we now have a leading mainstream economist, Havard’s Martin Feldstein, claiming that the “official data on real growth substantially underestimates the rate of growth.”

Mr. Feldstein likes to illustrate his argument about G.D.P. by referring to the widespread use of statins, the cholesterol drugs that have reduced deaths from heart attacks. Between 2000 and 2007, he noted, the death rate from heart disease among those over 65 fell by one-third.

“This was a remarkable contribution to the public’s well-being over a relatively short number of years, and yet this part of the contribution of the new product is not reflected in real output or real growth of G.D.P.,” he said. He estimates — without hard evidence, he is careful to point out — that growth is understated by 2 percent or more a year.

This is not just a technical issue for Feldstein:

it is misleading measurements that are contributing to a public perception that real incomes — particularly for the middle class — aren’t rising very much. That, he said, “reduces people’s faith in the political and economic system.”

“I think it creates pessimism and a distrust of government,” leading Americans to worry that “their children are going to be stuck and won’t be able to enjoy upward mobility,” he said. “I think it’s important to understand this.”

Here’s what folks need to understand: mainstream economists like Feldstein, who celebrate an economic system based on private property and free markets, build and use models in which market prices capture all the relevant costs and benefits to society. And, since GDP is an accounting system based on adding up transactions of goods and services based on market prices, for mainstream economists it should represent an accurate measure of the “public’s well-being.”

Mainstream economists can’t have it both ways—either market prices do accurately reflect social costs and benefits or they don’t. If they do, then Feldstein & Co need to stick with the level and rate of growth of GDP as the appropriate measure of the wealth of the nation. And, if they don’t, all their claims about the wonders of free markets simply dissolve.

Notice also that, for Feldstein, the problem is always in one direction: GDP statistics only undercount social well-being. What he and other mainstream economists fail to consider is that whole sectors of the economy, like financial services (or, more generally, FIRE, finance, insurance, and real estate), are counted as adding to national income.

As Bruce Roberts has explained,

because “financial services” are deemed useful by those who pay for them, those services must be treated as generators in their own right of value and output (even though there is nothing there that can actually be measured as output at all). . .

the standard (neoclassical) approach embedded in GDP accounting means, in concrete terms, that profits in FIRE must be treated as a reflection of rising real output generated by FIRE activities, requiring a numerical “imputation” of greater GDP. And, worse, that *rising* profits in FIRE then go hand in hand with *rising* levels of imputed “output” and hence enhanced “productivity.”

If Wall Street doesn’t add to GDP—if FIRE activities just represent transfers of value from other economic sectors (both nationally and internationally)—then its resurgence in the years since the crash doesn’t contribute to output or growth.

The consequence is that GDP, as it is currently measured, actually overcounts national output and income. Actual growth during the so-called recovery is much less than mainstream economists and politicians would have us believe.

That’s the real reason many Americans are worried they and “their children are going to be stuck and won’t be able to enjoy upward mobility.”

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Soon after I read about the latest fire in a Bangladeshi garment factory, I contacted John Pickles, who is the Phillips Distinguished Professor of International Studies and Chair of Geography at the University of North Carolina. John is currently involved in four different research efforts as part of the Global Apparel Project. I am pleased to publish his guest post here.

 

On 25 March 1911, the Triangle Shirtwaist Factory fire in New York City resulted in the death of 146 garment workers. They died from the fire, smoke inhalation, or by jumping out of windows to avoid the flames inside. It was the deadliest industrial disaster in the city’s history and one of the deadliest in U.S. history. Most of the victims were young immigrant women and the horror of the event mobilized workers and state officials to respond with new regulations and controls to protect the lives and livelihoods of workers.

Times haven’t changed much, but where such catastrophes take place certainly have. On 24 and 25 November, the nine-floor Tazreen Fashions factory near Dhaka, Bangladesh burned, killing 111 workers trapped inside, having been told to return to work despite the fire alarm. The factory employed about 1,500 workers making T-shirts, polo shirts, and fleece jackets for Tommy Hilfiger, the Gap, and Walmart among others. Media coverage of the event has been extensive and none more extensive that the 25 November New York Times coverage of the fire. In his report, Jim Yardley correctly points to a critical aspect of global value chains. The globalization of sourcing has resulted in arms-length contracting where buyers and suppliers are only indirectly connected through trading companies, a relationship in which responsibility for working conditions has been fragmented and weakened. As Yardley indicated, the factory contracted for orders through local middlemen, with the factory owner suggesting that: “We don’t know the buyers. The local man is important. The buyer — I don’t care.” Nor, it seems, do the buyers.

What the New York Times missed in its rush to detail the specifics of the factory tragedy and to try to assign responsibility was that the factory, which opened in 2010, is indicative of a broader shift in the global apparel industry. This shift has resulted in an extremely rapid expansion of contracting and production in China, Bangladesh, Vietnam, and Pakistan. As factories that formerly produced for export closed down throughout sub-Saharan Africa and Central America, in Bangladesh the potential gains from this growth have encouraged a largely unregulated industry-wide boom on an unprecedented scale, new factories have been built and existing ones expanded, and millions of workers have been drawn into sewing jobs.

In this boom-time, the 1979 Factories Rules Law and 2006 Bangladeshi Labor Law are not enforced, while factory owners are tripping over themselves to acquire expanded orders and meet the tight price and scheduling demands of their buyers, adding factory floor-space, machines, and operators without any local or state government oversight. As a consequence, between 1990 and 2012, there have been at least 33 major fires in Bangladeshi garment factories, and since 2005 more than 600 workers have died in garment factory fires. While many have gained access to jobs and wages not previously available, for many workers the consequence of export expansion has been disastrous.

Doug Miller at Northumbria University and the International Textile, Leather and Garment Workers Federation has recently documented this crisis in his new book Last Nightshift in Savar: The Story of the Spectrum Sweater Factory Collapse (McNidder and Grace, 2012). In it he shows how rapid growth led to unregulated factory extensions with tragic consequences in the collapse and fire at the Spectrum Sweater Factory in April 2005. (Readers can listen to Miller’s account of his book here and view his presentation here.)

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The Spectrum collapse and fire resulted in the deaths of 62 clothing workers and injury to a further 84 workers, and it mobilized trade unionists and NGO activists concerned about the state of factory safety and the inadequacies of social protection in the Ready Made Garment industry in Bangladesh. In his book, Miller presents a detailed account of the national and international campaign efforts to make the owner and his multinational buyers responsible for the disaster and for the compensation and remediation that ought to follow.

Savar is not an isolated case. Fire, collapse, lock-in, injury, and death are an all-too-common aspect of the current export boom in Bangladesh and other low-wage countries in South and East Asia. In this Wild West boom in ready-made garments for export it is workers who pay the price.

But why has this spate of disasters emerged, why have buyers found Bangladesh so attractive, and how has this attraction led to such neglect of working conditions and safety? A key driver of expansion has been low wages which, despite increases in the minimum wage in 2006 and 2010, remain woefully behind rising living costs.

However, the main cause of this export boom has been preferential market access agreements. In many ways, Bangladesh is a model for a country benefitting from trade agreement-stimulated export growth. Through the Generalized System of Preferences (GSP) since the early 1980s and from the Everything But Arms (EBA) initiative since 2001, Bangladeshi export production has expanded and the contribution of apparel exports to total exports has also risen year over year. Ready-made garments (RMG) mainly go to the U.S. and European Union (EU) markets. Together they absorb more than 90 per cent of Bangladeshi apparel exports; woven products to the United States, knit clothing to the EU.

Bangladesh’s apparel exports to the EU-15 and the US

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As a result, the number of apparel factories and the number of employed workers have increased year over year.

RMG

As the number of fires and deaths continues to remind us, the opportunities for profiting from such state investments in a booming export market continue to produce risk for workers. They will continue to do so until buyers themselves assume responsibility for their supply chains in both strategic and occasional supplier factories, until state regulators act on the protections already in place, and until trade agreements actually take into account the very conditions they generate.

Out of the New York City Triangle fire came the Factory Investigating Committee that recommended new labor laws, which created some of the most progressive labor reforms in the country, establishing rules governing ease of access, fireproofing, fire extinguishers, alarms, sprinklers, and extending to working conditions, toilet facilities, and the length of the working day.

To date, the Bangladeshi disasters have yet to have a similar effect on the consciences of local and national state officials. . .on the behavior of brands sourcing throughout South Asia that were so neglectful in monitoring their suppliers in their efforts to source at low cost. . .or on the conditionalities embedded in the trade agreements that stimulate such cavalier practices.