Bretton Woods 2011

[stefano]

So the Soros-funded [jarring chord] Insitute for New Economic Thinking held a confab in Bretton Woods from Friday 8 to Sunday 10 April. The videos are all online at INET's site: go to the conference page and click on each panel session to see them. Some transcripts are out (but not all), and there are some drier acedemic papers presented as part of the conference but not read on the dais. Unfortunately only a few of the speeches have been transcribed so a lot of the "presentations" are just the Powerpoints.

Jean-Paul Fitoussi, who worked with Joe Stiglitz and Amartya Sen on Mis-measuring our lives, opened on Friday. A paper of his presented this weekend is here (pdf). Excerpts, my bold.

Contemporary capitalism’s shortcomings can be traced back to the inversion of the hierarchy between politics and economics, and to what, in many cases, is the outright subordination of the former to the latter, as in a good number of developing countries. What is even more scandalous is the acceptance of an intolerable level of inequality by democratic regimes. It has to be underlined that during the last thirty years or so, the yearly rate of growth of real incomes has been well under average for 80% of the population of OECD countries and above average for the fifth quintile.
[...]
A normal hierarchy of values thus requires the economic principle to be subordinated to democracy rather than vice versa.
[...]
The impoverishment of the middle class almost everywhere in the developed world, the stagnation of median wages, mean that democracy has not accomplished its task of preventing market based exclusion. This, together with the spectacle of easy money, when the primary value is capital accumulation, clouds time perspectives. Abnormally high financial returns contribute to the depreciation of the future, to impatience with the present and to disenchantment with labour. This is at odds with the inevitably long-term horizon of democracy. This contrast is prejudicial to the provision of essential public goods by states and notably those satisfying the needs of future generations.
[...]
So it appears that capitalism can survive only if it is “contaminated” by some elements of socialism, I mean by the concern for justice and social welfare that springs from the spontaneous functioning of democracy.
[...]
The illusion that the crisis was just a brief interlude and that the post-crisis world should resemble the world as it was before, is still alive and well. And there is great pressure to re-write the story of this crisis by depicting effects as if they were causes.

As a consequence the fire-fighters came to be accused of causing a flood. In Europe, public and social spending is being slashed to please the ratings agencies. In the United States, policies seem still to benefit the most privileged, and voices to curtail public and social spending are becoming louder. The afflictions that presided over the crisis – inequality, debt, and short-termism – have thus no prospect of being curtailed. What I consider as one of the main cause of the crisis, namely the long run increase in inequalities, seems thus to be worsened by policies. In doing so, we have no chance of breaking out the vicious circle in which a rise in inequality leads to the need to prop up demand so as to offset the consequences of this rise, with both one and the other fuelling the rise of private debt and the development of speculative bubbles. If one thing is certain, it is that the impact of the crisis on unemployment, social precariousness, and poverty means that there is greater inequality today than before. Indeed, the growing confidence that a catastrophe has been averted is paralleled by growing pressure on government to cut public and social spending and to refrain from coming up with investment programmes in preparation for the future. In a way the rich countries seem to be characterized by a regression of democracy, as doctrine-ready thinking seems to have more influence than democratic debate.

Soros's talk on the first day hasn't been transcribed (and it's disappointingly dull) but the video is here, I've tried to type out the most important. My bold.

What you have is markets that are inherebtly unstable. This is where I think economics went off the rails in not recognising this - or forgetting it, rather, because after all Knight pointed it out beautifully and Keynes elaborated it - it's just that when mathematics took over and the modelling had to be so precise, it was forgotten. When we started modelling risk we forgot about uncertainty, which by its very nature cannot be quantified. [...]You have special interests and national interests that are influencing the behaviour of the authorities. ...]There are seven or eight [situations] that preoccupy me[...]The first one is the need for regulation of the financial institutions.[rips into Alan Greenspan] When you look at the Dodd-Frank act it is obvious that it does not actually properly deal with the problems that need to be dealt with and the financial institutions that survived now have a very important voice in protecting themselves. The banking system has become pretty concenrated in the US, where maybe four banks account for 2/3 of the total volume of transactions in credit, and five institutions account for practically 100% of the CDS market. [...]They have an important impact in protecting what has become a very profitable business indeed. [...]A globalised market that has to be regulated has to reconcile national interests, as we still have a political system based on the sovereignty of states. [...] You've got the euro crisis where it's clear that the solution is not workable, it's designed for a non-existent future. You are at the same time protecting the banks by regarding existing debts outstanding as sacrosanct, [while making it impossible for indebted governments to raise money cheaply] so you are casting in stone a two-speed Europe, creating political tensions within Europe. The third [problem] is the US where you have this question of balancing the budget that has been totally politicised. Then you have the international currency system where you now have two systems competing with each other: the now-defunct Washington consensus where capital is free to move from one country to another, and the Chinese system which is a two-tier system where capital markets are very closely regulated and managed. As long as you're the only one who has a two-tier system, and you have a good system, it gives you a definite competitive advantage, which is in my opinion at the core of China's success. [...] Then you can take climate change which is really happening but our ability to confront it is non-existent.

The stuff below is from Legislators Never Bowl Alone: Big Money, Mass Media, and the Polarization of Congress by Thomas Ferguson (link is a pdf). More politics than economics but some good stuff, explaining the polarisation of US politics by money and by institutional spite coming down from Nixon's days. Most of what I'm quoting is from near the end of the paper.

As one energy-related environmental disaster after another hits and the world price of oil shoots up again, Congress has done little besides talk about climate change or energy policy. Both friends and foes of the health care legislation that finally passed in 2010 express disgust at the process that produced it. Many acknowledge that the failure to permit the government to bargain with pharmaceutical firms will cost the public trillions of dollars in the next few years (Stiglitz, 2010), while event analysis of Senate committee voting confirms widespread suspicions that major features of the final bill mainly aided the bottom lines of insurers, not the populace as a whole.
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What matters for this paper is what mattered in reality: That the leaders of the Republican surge lucidly understood that that in sharp contrast to the world of classical democratic theory, where the cost of political action barely registers, real life politics is now very expensive. Despite occasional appearances to the contrary, political money is not available in perfectly elastic supply just for the asking. Money, in other words, does not grow on trees. Whatever else they are – “networks” of campaign consultants and specialists, party leaders, allied interest groups – political parties are first of all bank accounts that have to be filled.

Gingrich and his allies were painfully aware that transforming the GOP’s gains at the presidential level into a true “critical realignment” of the political system as a whole required breaking the Democratic lock on Congress. So they shattered all records for Congressional fundraising in their drive to get control of the House. Their success in this is what polarized the system. The tidal wave of political money they conjured allowed Gingrich, Gramm, Barbour and their allies to brush aside the older, less combative center-right Republican leadership and then persist in their efforts to roll back the New Deal and remake American society in the image of free market fundamentalism.
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George Stigler was surely right in arguing that the reason so many lawyers flock to politics is not extraordinary zeal for the public welfare, but because they can be so easily paid off legally by throwing legitimate business their way (Stigler, 1975). But while IRS investigations confirm his point, they have been too few and far between for anyone to say with confidence what percentage of all legal receipts really represents payments for political services. The heavy representation of lobbyists - who are often lawyers – and attorneys on most lists of campaign contributions is clear, however, and is surely no accident. Another big slice of the spectrum reflects consulting fees and payments flowing to essentially political figures by investment houses and other outside groups with clear interests in public policy. In recent years, studies using event analysis methods to analyze political influence on firm profitability have proliferated. These indicate that some directors carry significant political weight; at least part of the fees received by such directors should count as payments for political services. Many such payments, however, go to complete outsiders. Payments to academics or think tank-based researchers who derive substantial parts of their living from giving over-priced speeches, academic studies, and “advice” to business groups and individual firms also belong here.

Two similar forms of political money that never show in anyone’s official campaign finance statistics also elude precise specification. One reflects the value of tips and inside financial advice on legislators (and perhaps other officials – for now, existing statistical studies cover only them). Some excellent work on the investment portfolios of U.S. Senators has been published; a similar study on the U.S. House is in the pipeline, but has yet to appear. Both show that in the latest stages of party polarization such assistance
reached disturbing levels, until perhaps the press began to pay attention. The knowledge that someone was watching may have encouraged better behavior – an illustration, perhaps that real reform is not impossible at all, if the press pays more than fleeting
attention.
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So-called “deep public relations” that aims at preparing the public’s mind and defusing criticism over the long run is a fact of life, as a spokesperson for one of the world’s largest chemical companies forcibly explained to me some years before he made a splash as an adviser to George W. Bush’s White House. I would not take seriously denials by oil companies and other large firms that contributions to PBS, public radio, and some internet sites (such as Politico.com) are not fraught with political implications. A good part of what appears as “public relations” in the national income accounts is really politics, even if no lobbying is involved – enough, I think, that jibes about how advertising expenses tower over actual campaign expenditures are really jokes on the skeptics who find the comparison so amusing. The legal meaning of “lobbying” is also quite narrow, so that the common sense application of the term applies to far more than the admittedly gigantic sums nowadays on record.
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When The Force is with them – when, that is, Congressmen and women, their staffs, presidential aides, and federal regulators can be sure of walking out of their offices to become multimillionaires when they retire or step down – expecting them to act consistently in the public interest is idle, even if all representatives were elected on 100% public funding.

As the Eisenhower quotation from 1954 that opens this paper suggests, the conservative and center-right investor blocs that are the final cause of the polarization of American politics have come a long way. They are closer than ever before to rolling back the legacy of the New Deal. Accordingly, they have little incentive to compromise. We are not watching a rerun of Cabaret, but plenty of people out in the heartland who know little of the subtleties of political money appear to believe that bringing back laissez faire will
somehow snatch back the broad based prosperity that the regulated, interventionist New Deal state once secured them. Big money playing on aroused minorities, amid low voter turnout (with often strenuous efforts to keep it that way), has been a potent political
formula for a generation. A few faint signs suggest that that formula is wearing through. But that is a topic for another day.

Those are the ones I've had the chance to go through. Some that look interesting but that I haven't read are (links are pdfs):

High Wealth Concentration, Porous Exchange Control, and Shocks to Relative Return: the Fragile State of China’s Foreign Exchange Reserve by Victor Shih

Global Imbalances: past, present and future by Marcello de Cecco

[stefano]

This is from The Keynes plan, the Marshall Plan and the IMCU Plan by Paul Davidson. It's from the panel discussion called "What Can We learn from the Past in Designing the Future?", and contains some concrete specifics of what the author considers a desirable new balance of payments mechanism. (I don't agree with his angle that the persistent US trade deficit is to be seen as an act of munificence toward the rest of the world or that the Marshall Plan was a selfless act.)

For more than three decades, orthodox economists, policy makers in government and central bankers and their economic advisors, using some variant of old classical economic theory [OCET], have insisted that (1) government regulations of markets and large government spending policies are the cause of all our economic problems and (2) ending big government and
freeing markets, especially financial markets, from government regulatory controls is the solution to our economic problems, domestically and internationally.
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Keynes [1936, p. 192] noted that OCET theorists “offers us the supreme intellectual achievement ... of adopting a hypothetical world remote from experience as though it were the world of experience and then lived in it consistently”.
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The fundamental principles underlying Keynes’s theory of liquidity and in his proposals presented at the 1944 Bretton Woods meeting (the “Keynes Plan”), can be used to explain why free trade, freely flexible exchange rates and free international capital funds mobility are ultimately incompatible with the economic goal of global full employment and rapid economic growth. Moreover, Keynes’s principles provide policy prescriptions to either completely prevent or at least quickly alleviate the distress caused by such real world experiences.
[...]
Yet, economist Robert Lucas [1981, p. 287] has boasted that the axioms underlying classical economics are “artificial, abstract, patently unreal”. But like Samuelson, Lucas insists such unreal assumptions are the only scientific method of doing economics. Lucas insists that “Progress in economic thinking means getting better and better abstract, analogue models, not better verbal observations about the real world” [Lucas, 1981, p.276]. The rationale underlying this argument is that these unrealistic assumptions make the problem more tractable and, with the aid of a computer, the analyst can then predict the future. Never mind that the prediction might be disastrously wrong.
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In contrast to the OCET view of the desirability of liberalized markets, Keynes’s position at the Bretton Woods conference suggested an incompatibility thesis. Keynes argued that free trade, flexible exchange rates and free capital mobility across international borders will be incompatible with the economic goal of global full employment and rapid economic growth. Between 1947 and 1973 policy makers in their actions implicitly recognized Keynes’s ‘incompatibility thesis”. This period was an “golden age” era of sustained economic growth in both developed and developing countries. The free world's economic performance in terms of both real growth rates and price level stability during this 1947-1973 period of fixed, but adjustable, exchange rates was historically unprecedented.
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The significantly superior performance of the free world's economies during the 1947-1973 fixed exchange rate period compared to the earlier gold standard fixed rate period suggests that there must have been an additional condition besides exchange rate fixity that contributed to the unprecedented growth during the 1947-73 period. That additional condition, as Keynes explained in developing his “Keynes Plan” required that any creditor nation that runs persistent favorable trade payments must accept the major responsibility for resolving these trade imbalances. The Marshall Plan (as explained below) was an instance where the creditor nation adopted the responsibility that Keynes had suggested was required.
[...]
Accordingly, an essential improvement in designing any international payments system requires transferring the onus of adjustment from the debtor to the creditor position. This transfer would substitute an expansionist, in place of a contractionist, pressure on world trade [Keynes, 1941, pp. 29-30]. To achieve a golden era of economic development Keynes recommended combining a fixed, but adjustable, exchange rate system with a mechanism for requiring any nation persistently “enjoying” a favorable balance of trade to initiate most of the effort necessary to eliminate this imbalance, while “maintaining enough discipline in the debtor countries to prevent them from exploiting the new ease allowed them” [Keynes, 1941, p. 30].
[...]
In the 21 century interdependent global economy, a substantial degree of economic cooperation among trading nations is essential. The original Keynes Plan for reforming the international payments system called for the creation of a single Supranational Central Bank. The clearing union institution suggested infra is a more modest proposal than the Keynes Plan, although it operates under the same economic principles laid down by Keynes. Our IMCU plan is aimed at obtaining an acceptable international agreement (given today’s political climate in most nations) that does not require any nation surrendering control of either local banking systems or domestic monetary and fiscal policies. Each nation will still be able to determine the economic destiny that is best for its citizens without fear of importing deflationary repercussions from their trading partners. Each nation, however, will not be able to export any domestic inflationary forces to their international neighbors.

What is required is a closed, double-entry bookkeeping clearing institution to keep the payments ‘score’ among the various trading nations plus some mutually agreed upon rules to create and reflux international liquidity while maintaining the purchasing power of the created international currency of the international clearing union. The eight provisions of the international clearing system suggested here meet the following criteria. TThe rules of the proposed system are designed [1] to prevent a lack of global effective demand due to a liquidity problem arising whenever any nation(s) accumulate excessive idle reserves. [2] to provide an automatic mechanism for placing a major burden of correcting international payments imbalances on the surplus nations, [3] to provide each nation with the ability to monitor and, if desired, to control movements of flight capital, tax evasion money movements, earnings from illegal activities, and even funds that finance terrorist operations, and finally [4] to expand the quantity of the liquid asset used in settling international contracts (the asset of ultimate redemption) as global capacity warrants while protecting the purchasing power of this asset.

There are eight major prprovisions in this clearing system proposal. They are:

1. The unit of account and ultimate reserve asset for international liquidity is the International Money Clearing Unit (IMCU). All IMCU's can be held only by the central banks of nations that abide by the rules of the clearing union system. IMCUs are not available to be held by the public.

2. Each nation's central bank or, in the case of a common currency (e.g., the Euro) a currency union’s central bank, is committed to guarantee one way convertibility from IMCU deposits at the clearing union to its domestic money. Each central bank will set its own rules regarding making available foreign monies (through IMCU clearing transactions) to its own bankers and private sector residents . Ultimately, all major private international transactions clear between central banks' accounts in the books of the international clearing institution. The guarantee of only one-way convertibility permits each nation to institute controls and regulations on international capital fund flows if necessary. There is a spectrum of different capital controls available. Each nation is free to determine which capital controls is best for its residents.

3. Contracts between private individuals in different nations will continue to be denominated into whatever domestic currency permitted by local laws and agreed upon by the contracting parties. Contracts to be settled in terms of a foreign currency will therefore require some publically announced commitment from the central bank (through private sector bankers) of the availability of foreign funds to meet such private contractual obligations.

4. The exchange rate between the domestic currency and the IMCU is set initially by each nation’s central bank-- just as it would be if one instituted an international gold standard. Since private enterprises that are already engaged in trade have international contractual commitments that would span the changeover interval from the current system, then, as a practical matter, one
would expect, but not demand, that the existing exchange rate structure (with perhaps minor modifications) would provide the basis for initial rate setting.

5. An overdraft system should be built into the clearing union rules. Overdrafts should make available short-term unused creditor balances at the Clearing House to finance the productive international transactions of others who need short-term credit. The terms will be determined by the pro bono publico clearing union managers.

6. A trigger mechanism to encourage any creditor nation to spend what is deemed (in advance) by agreement of the international community to be accumulated "excessive" credit balances. These excessive credits can be spent in three ways: (1) on the products of any other member of the clearing union, (2) on new direct foreign investment projects, and/or (3) to provide unilateral transfers (foreign aid) to deficit members. Spending via (1) forces the surplus nation to make the adjustment directly by way of the trade balance on goods and services. Spending by way of (2) permits adjustment directly by the capital account balance, while (3) provides adjustment without setting up a contractual debt that will require reverse current account flows in the future. [...]The important thing is to make sure that continual oversaving by the surplus nation in the form of international liquid reserves are not permitted to unleash depressionary forces and/or a building up of international debts so encumbering as to impoverish the global economy of the 21 century.[...]

7. A system to stabilize the long-term purchasing power of the IMCU (in terms of each member nation's domestically produced market basket of goods) can be developed. This requires a system of fixed exchange rates between the local currency and the IMCU that changes only to reflect permanent increases in efficiency wages . This assures each central bank that its holdings of IMCUs as the nation's foreign reserves will never lose purchasing power in terms of foreign produced goods. If a foreign government permits wage-price inflation to occur within its borders, then, the exchange rate between the local currency and the IMCU will be devalued to reflect the inflation in the local money price of the domestic commodity basket. If, on the other hand, increases in productivity lead to declining production costs in terms of the domestic money, then the nation with this decline in efficiency wages [say of 5 per cent] would have the option of choosing either [a] to permit the IMCU to buy [up to 5 per cent] less units of domestic currency, thereby capturing all (or most of) the gains from productivity for its residents while maintaining the purchasing power of the IMCU, or [b] to keep the nominal exchange rate constant. In the latter case, the gain in productivity is shared with all trading partners.[...]

8. If a country is at full employment and still has a tendency toward persistent international deficits on its current account, then this is prima facie evidence that it does not possess the productive capacity to maintain its current standard of living. If the deficit nation is a poor one, then surely there is a case for the richer nations who are in surplus to transfer some of their excess credit balances to support the poor nation . If the deficit nation is a relatively rich country, then the deficit nation must alter its standard of living by reducing its relative terms of trade with its major trading partners. Rules, agreed upon in advance, would require the trade deficit rich nation to devalue its exchange rate by stipulated increments per period until evidence becomes available to indicate that the export-import imbalance is eliminated without unleashing significant recessionary forces. If, on the other hand, the payment deficit persists despite a continuous positive balance of trade in goods and services, then there is evidence that the deficit nation might be carrying too heavy an international debt service obligation. The pro bono officials of the clearing union should bring the debtor and creditors into negotiations to reduce annual debt service payments by [1] lengthening the payments period, [2] reducing the interest charges, and/or [3] debt forgiveness .