This Time Is Different

This Time Is Different: Eight Centuries of Financial Folly

By Carmen M. Reinhart and Kenneth Rogoff
Princeton University Press, November 30, 2008, $38.50

This Time Is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff is a book of statistics intended to quantify the circumstances that lead to debt crises. Tables, charts and graphs on economic growth, trade and debt are gathered from national statistics as well as the League of Nations, United Nations, World Bank, IMF and OECD. These cover nearly all regions for the last 50 years, with some going back 200 years.

The data challenge prevailing political and media opinion. First, sovereign defaults are not as unusual as we are currently led to believe. Since 1800, governments have defaulted on domestic debt seventy times, and on external debt 250 times. Sovereign defaults have occurred in rich and poor countries, across the planet, in Europe, North America, Asia and Latin America.

Second, sovereign defaults need not have catastrophic consequences. Unsustainable debt can be made tolerable over time through growth and inflation, and immediately by negotiations to lower interest payments or reduce principal. That of course is not what major financial institutions or transnational investors want people to hear. From Iceland, Greece, Spain, France, the U.K., Ireland, Canada and the U.S., the media and governments are insisting that every cent of contracted government debt must be paid. To accomplish that, we are being told that governments have to curtail spending on healthcare, education, pensions and other public services. Public employment will have to be cut. Consumption taxes will have to be raised.

While rejecting current perception, Reinhart and Rogoff do not challenge current policies. (Others will have to do that.) Reinhart is an economics professor at the University of Maryland and a lecturer at the International Monetary Fund and the World Bank. Rogoff is an economics professor at Harvard and a regular contributor to NPR, the Wall Street Journal and the Financial Times.

Reinhart and Rogoff bow to current economic orthodoxy by calling the regulation of capital “financial repression.” Nonetheless, their statistics show that the freeing of capital leads to unsustainable booms and debt crises. The laissez-faire policies of the late 19th century led to the financial crashes before World War I. The free market policies of the 1920s led to The Great Depression of the 1930s.

This time was supposed to be different. From the 1980s, when Margaret Thatcher, Ronald Reagan and Brian Mulroney came to power, partisans of capitalism have maintained that growth could go on forever if only the rich were allowed to invest their money as they pleased. The “demand-side” policies of Keynesianism, neo-conservatives claimed, had led to declining profits, inflation and stagnation. “Supply-side” policies, putting more money in the pockets of the wealthy would mean more investment, more employment, more tax revenue and growth with little or no inflation.

As capital movements, interest rates and industries were deregulated, governments made it more difficult for unions to organize and win collective bargaining gains. As the competitive drive to maximize profits became a righteous pursuit, corporations moved manufacturing, technological, and service employment to countries where labour is cheaper. Although capital continued to flow to the old financial centers of New York and London, it was invested in mergers, acquisitions, pyramid scams, derivatives, real estate speculation, mortgages, collateralized debt obligations and credit default swaps. As manufacturing and infrastructure declined, financial corporations made billions in profits and fees. Their top executives were paid seven and ten figure bonuses annually, until the houses of cards collapsed.

Although Reinhart and Rogoff do not question current economic orthodoxy, their statistics raise obvious questions. Why should people who depend on wage and salary work pay the cost of the excesses of capital? For working-class majorities sovereign debt is far less of a problem than rising unemployment, declining markets for goods and services, stagnating and falling wages and worsening disparities. (For humankind generally, the profligate burning of fossil fuels is the most threatening problem. Here, a case can be made that material sacrifices will be required from all classes in more prosperous countries, but the environment is not a subject of This Time is Different.)

Why should creditors, who did not always act responsibly, be permitted to squeeze every last penny out of taxpayers? If governments were acting in the interests of majorities wouldn’t they attempt to balance the interests of creditors and debtors by negotiating and restructuring debt? Why can’t needed revenues be raised at the expense of those who benefited most from the boom that led to the crash? Instead of raising consumption taxes that weigh most heavily on people who live from paycheck to paycheck, why not return to steeply graduated income taxes? Doing that would not reduce the markets for most goods and services or much employment.

Cutting military spending could also substantially increase net government revenues. More revenues could be raised through excess profit taxes. A Tobin tax could be levied on international capital transfers and on mergers and acquisitions. Governments could raise average tariffs to 15 or 25 per cent from current levels of five to ten per cent. An increase of that level would not be a barrier to needed international trade, but would encourage more domestic production, increasing employment and government revenues everywhere.

Neo-conservative propaganda aside, heavier taxes on the highest incomes could lead to increased productive investment. If revenues paid out as dividends, executive salaries and bonuses were heavily taxed, enterprises would have more reason to retain earnings and invest these in environmentally sustainable means of production. Real investments in housing would continue to come from the savings of better-paid wage and salary workers.

Yes, making the rich pay substantially higher taxes would reduce the funds available for speculation on stocks, bonds and real estate, and would reduce the conspicuous consumption that makes it fashionable to disregard environmental consequences. But a shift in income from private wealthholders to the public would help pay down debt and would increase the funds available to expand public services and other employment not dependent on capitalist profit.—Allan Engler

Allan Engler is a longtime trade unionist and the author of Apostles of Greed. His Economic Democracy, the working-class alternative to capitalism has just been published by Fernwood.

Al Engler

Al Engler

Allan Engler is a longtime trade unionist and the author of Apostles of Greed. His Economic Democracy, the working-class alternative to capitalism has just been published by Fernwood.