Avoiding Another Lost Decade – Richard Kozul-Wright (pt1/4)

If current trends continue, in 10 years’ time wages will be back to the brink of the abyss level of 1930. If governments opt for premature fiscal tightening, the recovery will fizzle out by 2022, says Richard Kozul-Wright, the Director Division of Globalization and Development Strategies at UNCTAD.

Transcript

Paul Jay
Hi, I’m Paul Jay, welcome to theAnalysis.news podcast. Don’t forget there’s a donate button
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United Nations Conference on Trade and Development, has released its 2020 report titled,
‘From Global Pandemic to Prosperity For All: Avoiding Another Lost Decade’. It’s an
excellent review of our current situation and full of proposals about what to do about it.

Here are a few quotes from the document:

“The world economy is experiencing a deep recession amid a still unchecked pandemic.
Now is the time to hammer out a plan for global recovery, one that can credibly return even
the most vulnerable countries to a stronger position than they were before. The status quo
ante as a goal not worth the name. And the task is urgent for right now. History is repeating
itself, this time with a disturbing mix of both tragedy and farce. If governments opt for
premature fiscal tightening and attempt to bring down public debt and businesses adopt an
aggressive cost-cutting strategy, in an attempt to boost exports, the recovery will likely fizzle
out, with a double-dip recession and a real possibility in many countries in 2022″.

Further down, the report states:

“The rise of Footloose capital and its greater freedom to move production and investment
around the globe has over recent decades strengthened the bargaining power of capital
compared to that of labor. This has triggered a steady increase in the share of income going
to profits that began well before the global financial crisis but continued after it. In the last
decade, the profit share has increased in all but, three G20 countries. If these pre-COVID-19
forces of wage repression remain in place, the labor share will likely continue its decline in
many economies in the next years, exacerbating inequalities. In the United States, after a
50-year descent, the labor share is now back to its 1950s level. If current trends continue, in
10 years time, it will be back to the brink of the abyss level of 1930″.

Let me do that one again and I mean to do that one again. The wages will go down to the
levels of pre-crash in 1930.

Now joining us from Geneva to discuss the report, is its principal author, Richard Kozul-
Wright. He is the Director Division of Globalization and Development Strategies at UNCTAD.
That’s the United Nations Conference on Trade and Development. He’s the author of
‘Transforming Economies: Making Industrial Policy Work for Growth, Jobs, and
Development’. Thanks very much for joining us.

Richard Kozul-Wright
Thanks for the invitation, Paul.
Paul Jay
So we’re going to do a sort of series of interviews about the report, cause it’s very rich in
analysis, and I think requires more than just one podcast. I don’t know how many it’s going to
wind up being, but we’re going to work our way through the report and really dig into various
paragraphs because it’s a great take, I think, on how we got here, as well as some important
proposals about what to do.

So let’s just start with this line right off the top, in the introduction. Why do you think history is
repeating itself with the disturbing mix of tragedy and farce?
Richard Kozul-Wright
I mean, what we want to do Paul in the report, is to remind people about what was promised
in 2009 after many of us expected would be a transformative shock. You know, the kind of
gloss of neo-liberalism and hyper-globalization that you peeled off. We were expecting
significant changes. The G20 meeting in London in 2009 promised big changes, led by
Gordon Brown. There was talk of a new Bretton Woods. There was talk of a Sarkozy, talk of
a new international economic order. There were signs that it was going to happen. The initial
reaction to the crisis, as you know, was expansionary and to some extent coordinated by the
G20 itself. There was talk about reform and regulation of the financial system. There was a
recognition that developing countries need particular help.

I mean, there was the kind of talk that we hear today about recovering better. We were
beginning to hear in 2009, but very quickly, once the balance sheets of banks have been put
into some sort of order and financial markets had regained something of their poise. We
know that the major economies reverted back to a kind of combination of austerity and re-
globalization of pre-trade agreements and bilateral investment treaties as a way to export
your way out of the crisis and attract foreign direct investment.
Paul Jay
Especially in Europe, where Germany beat the hell out of Greece and Spain and Portugal.
Richard Kozul-Wright
Beyond Europe, too, with the exception of China, to some extent. Under one kind of
impulse, the kind of expansionary impulse that was retained was unorthodox monetary
policy, quantitative easing in its various forms. That combination of austerity, unorthodox
monetary policy, and re-globalization, produced this very weak, prolonged but weak recovery
and papered over all the underlying conditions that had produced the crisis in the first place.
Financial markets were slapped on the wrist. The legislation, Dodd-Frank, and other things
did put some constraints on some of the bigger banks. A lot of the financial activity, as a
consequence, shifted into the shadow banking sector. Wages remained largely stagnant,
inequalities increased. Most of the liquidity that was pumped into the economy moved into
financial markets and we got an asset price bubble. We got the kind of conditions that were
present just before COVID-19, were precisely the conditions that we’d seen in place in the

run-up to the financial crisis. The huge accumulation of debts in both the public and private
sectors, growing income disparities, weak, productive investment. These were the features
of the global economy in 2019 and then the pandemic hit. Not only did it reveal those
underlying conditions, but it exaggerated them as well. Part of this is a reminder to people
about, we have been here before and if we repeat the kind of response that emerged out of
the global financial crisis, then we’re in for an even worse decade than the last decade.
Given that we didn’t deal with the problems that we inherited from that crisis.

We want to try and in this report, remind people about the failures of the response to the
global financial crisis, as a warning of what could come if we don’t do something different
this time.
Paul Jay
Do you see signs that that’s what’s happening?
Richard Kozul-Wright
There has been a lot of talk about doing things differently. Of course, things have been done.
The fiscal component in some countries in stimulus packages has been more significant.
There’s been talk of a kind of de facto, universal basic income, has been employed in many
countries, and the notion of a basic income has now become fashionable again. The Modern
Monetary Theory has become part of the lingua franca of policy circles.

If it’s not clear that everyone understands what they mean by that, the Financial Times,
which we quote liberally in this report, in its editorials, has taken a pretty radical line. The
only way to get out of this crisis is if, the government takes a strong, active role if
redistribution policies are put into place if public services are given the resources that are
needed to build resilience into society. A lot of the kind of language that we have been
pushing over the last decade has certainly resurfaced since March of this year.

Of course, we also get the inflation hawks, beginning to be heard. We get the voices that
say we can’t continue with these levels of debt beyond early 2021, without major imbalances
undermining the economy. I think it’s a mixed picture, to be honest. You can see it in the
United States, Jay Powell says, on the one hand, he’s going to keep interest rates down to
zero percent for the next three years. At the same time, Congress can’t come up with a
follow up to the CARES Act and goes on holiday. So this is real. I think we’re in a knife-edge
situation really.
Paul Jay
Well as we speak, there was a report just a few minutes ago, that Nancy Pelosi, is back in
negotiations with Mnuchin, and she said that maybe Trump coming down with COVID might
change the dynamic of the negotiations. Like it takes Trump getting sick, for them to realize
there needs to be another stimulus package, it’s kind of part of the insanity of our times.
Richard Kozul-Wright

I believe there’s evidence as some of the payments have come to an end, there’s evidence
of declining incomes for certain groups over the course of the last month in the U.S. You
can’t paper over this kind of shock to employment, the threat of being evicted from housing,
for very long in the United States. Most of the working population are living paycheck to
paycheck. A 500 dollar emergency spending will lead to a major crisis. I think it’s a very
precarious situation that many people face.
Paul Jay
In the report in one of the paragraphs, you use the sentence, “governments need to just
keep spending as much as they have to”. And it’s interesting, I was listening to Bloomberg
Radio, and heard the head of one of the larger hedge funds say almost exactly those words.
It was kind of interesting to hear from Wall Street that governments should just keep
spending in terms of stimulus.

Now, we know a ton of that money they just keep spending is actually going right to Wall
Street and is propping up the stock markets. But in this conversation, I was listening to, the
person was talking about the need to prop up people’s incomes as long as necessary
because what would follow would be catastrophic. So it seems like a section of finance have
changed their minds about this kind of stimulus, at least in these conditions.

On the other hand, the Republican Party, which reflects a lot of the elites and certain
sections of finance, on the whole, seems to be already starting the austerity language.
Richard Kozul-Wright
I think there are sections of finance that understand that given the shock to the system, the
private sector cannot spend its way out of this crisis. Businesses have not only accumulated
large debts, but they’re uncertain about their future markets and they won’t be investing
significantly over the coming period. And how similarly households fear for their job security.
They also have accumulated very large debts over the course of the last decade. They’re not
going to run out and be spending large amounts of whatever income that they have available
to them.

I mean there’s always that hope that somehow you can export your way out of the crisis. If
you do keep wages low, then somehow you will gain competitiveness and you will be able to
boost demand through export growth. That’s not a solution available to all economies. To
some extent, I think China’s recovery, partly reflects a successful improvement in its export
performance, and all the evidence points to that. But that’s not a strategy that’s available to
the global economy in its entirety.
Paul Jay
Well, the United States, when they look at these issues, especially if you look at domestic
media, they barely look at really what’s going on in the rest of the world. If you think there’s
going to be an increase in the export market, in much outside of China and maybe Japan,
but much of Asia, Africa, and Latin America, people better think again.

I’m quoting from your report, “The urgent need for increased health spending, along with
declining tax revenues, combined with a collapse in export earnings and pending debt
payments, has exposed that two to three trillion dollar financing gap, in the developing world,
which the international community has so far failed to address”. Let me add a little comment
to that, which is it’s more than they’ve failed to address. They’re looking at ways to take
advantage of the situation.

Let me continue, quoting, “the inability of the international community to agree on
comprehensive debt, standstills and write-downs. The resistance to the rapid provision of
appropriate levels of emergency liquidity and the reluctance to rein in rogue bondholders in
sovereign debt negotiations, along with the sight of vulture capital, already hovering
ominously over distressed economies, are early warning signs that things could get worse,
far worse”. The American media, American politics, there’s this crazy ignoring, that if they
think there’s some continued propping up of the American economy, it’s not even clear
they’re even going to do that. But to think you can do it and let the rest of the world, much of
the rest of the world, go down the toilet, they’re crazy. But that seems to be what’s
happening. Talk about that section of the report.
Richard Kozul-Wright
To some extent, it just shows how far we’ve kind of gone backward. We quote, at some point
in the report, the statement from Roosevelt, in his address to the Bretton Woods conference.
Let me just read it because it’s worth reflecting on, given the current state of U.S. thinking
and indeed on the state of multilateralism more generally.

In his address to Bretton Woods, Roosevelt said, “economic diseases are highly
communicable. It follows, therefore, that the economic health of every country is a proper
matter of concern to all its neighbors, near and distant. Only through a dynamic and soundly
expanding world economy, can the living standards of individual nations be advanced to
levels which will permit a full realization of our hopes for the future”. That was in a way, the
principle of Bretton Woods that in an interdependent world, everyone needs to see that their
boats rising and the multilateral system should be geared towards, ensuring that the kind of
expansionary conditions is available to all. Clearly, that’s not the attitude of the current US
administration. I think that’s true of previous administrations, too. The Bretton Woods
institutions do not operate in a way that ensures this kind of dynamic, expanding global
economy is the norm.

On the contrary, their job has been to let loose, footloose capital, and to convince countries
that the only way that they can grow is to import growth by making the economic
environment attractive to foreign capital, which does not have a good record. The alternative
as we try and suggest in the report is that all countries need to be able to expand their
economies through domestic resources.

The problem, of course, for developing countries is that they lack the fiscal space, to engage
in the kinds of stimulus packages that we’ve already seen adopted in many of the G20
countries.
Paul Jay
Meaning they can’t just create their own money the way the Americans can, because if they
do, the international finance will say, well, we don’t believe your currency is worth anything
anymore, so we’re not going to loan you any more money.
Richard Kozul-Wright
They face a threat in that environment. They face this threat of a deflationary spiral, which
we already saw happen immediately after COVID-19 here. Even before the health pandemic
hit many developing countries the immediate impact of the lockdown, and the likely
lockdown, was for capital to dramatically flee emerging economies. On a scale much bigger,
in fact, that happened after the global financial crisis. Then you got this vicious circle kicking
in, in which, capital dramatically fled the economy. Currencies collapsed, compounded by
declining export revenue, declining remittances, declining commodity prices, which put
further pressure on the finances of developing countries. You got this sense of a very vicious
circle, that the developing countries have been experiencing on and off, really since the
1980s, in one form or another.

One of the big challenges that we see, and try and offer solutions to in this report, is to find
ways to expand the policy space that developing countries can employ, allowing
governments in the developing world to increase their own domestic capacities. But to do so,
they will rely on support from the international system. And so far, that support really has not
been forthcoming. Along with a lot of other people, we’ve called for the use of special
drawing rights, which is this international reserve asset that is issued by the IMF, as one way
of ensuring that there is sufficient policy space for developing countries. It’s been so far
resisted as a new allocation. We suggest something in the order of a trillion dollars, and
that’s being resisted by the United States, so far, on various grounds, some of which are not
completely unfair, but most of them are. There’s been no debt relief. There’s been this
exercise in suspending debt servicing of the 73 poorest countries. But I mean, the amounts
involved are pitiful, right? I think the amount in principle is something in the order of 12 billion
dollars, although many countries have not opted for that option because they think it has a
negative impact on their credit rating and therefore might have a problem subsequently in
terms of access to capital markets. I don’t know what the actual figure is, but it’s in the 10
billion dollar range. This is insignificant given the amounts that you’ve mentioned, we’ve
calculated, and the IMF has also calculated, in terms of the likely financing constraints, the
developing countries are going to be facing over the next 18 months as a consequence of
COVID-19.

So in that sense, the multilateral system has really not lived up to the expectations of people
like Roosevelt and Dexter White and Morgenthau and Keynes, when they hoped to establish
a system, that would precisely prevent austerity, as the default policy option, for adjusting to
any sort of external shock.

Paul Jay
So an American worker listening to our conversation, listening to a two to three trillion dollar
hole, in terms of the developing countries debt, and it’s probably more than that, and the
need for the continued and large scale stimulus package, and a second one in the United
States, certainly on the scale of at least another trillion or two trillion.

The scientists I’m reading, are really expecting that once the Biden administration gets in,
assuming it is, I mean crazy shit can happen, but right now it looks like it will be a Biden
administration. They’re going to be facing an already deep depression, but very likely a
second third wave of the pandemic, and even to the point where they have to actually try to
close down the entire American economy for a month or two months if they’re going to get
serious about preventing even more out of control pandemic.

But one way or the other, workers listening to this, is going to say, well, where’s all this
money come from? What are the limits when you say the government has to spend, to keep
spending, as long as it takes, not only for the American economy, but really the Americans
and Europeans, but mostly to a large extent, it’ll be the Fed, helping in developing countries?
How how long can they just keep spending as much as it takes?
Richard Kozul-Wright
In that funny sense, one of the things that both, the previous crisis and this crisis, has tended
to show is that there’s a pretty limitless tap, that can be turned on by countries that issue
their own internationally accepted currency. That is one of the things that we have learned
over the last decade.

There are genuine constraints, in terms of potential inflationary threats, in terms of structural
bottlenecks in the kinds of sectors of the economy that we want to see job creation taking
place in, etc. From a purely monetary point of view, there appear to be central bank balance
sheets that have just exploded enormously, both before and after the global financial crisis
and after this crisis. That doesn’t seem to be where the constraint lies.

In that sense, we’re not really Modern Monetary Theorists. We believe that there has to be,
accompanying any sort of monetary expansion, also some resort to generating tax revenues
on a significant scale, to balance the books over the longer term. So we want to see, in
addition to the use of monetary instruments, also much more active use of fiscal instruments,
both to generate revenues, but also to address the problem, the issue of inequality.

If you go back to the point I made about the money that was being made available to the 73
poorest countries, through debt servicing suspension, something in the order of 10 billion
dollars. According to the Institute for Policy Studies Analysis recently, the wealth of American
billionaires, over the course of the pandemic, has risen by something like 845 billion dollars.
Here we are patting ourselves on the back, saying that we might have found 10 billion
dollars for the world’s 73 poorest countries that year.

These kinds of inconsistencies have been exposed by COVID-19 has raised the issue of the
tremendous imbalances that have built up, both within and across countries, under this
hyper-globalization kind of model of growth and development over 20, 30 years.
Paul Jay
I think one of the things that maybe doesn’t get talked about enough, especially for ordinary
people to understand, in answering this question, how much can the Fed, the Treasury, and
some of the other countries in somewhat similar situations, Europe, Canada, how much can
they keep spending? That this idea that if the Americans do too much of this, people will lose
faith in the U.S dollar?

Even Ray Dalio, who’s the head of some big hedge funds is talking that way, and the
Republicans talk about that. The issue of how much wealth the country holds has a lot to do
with how much you trust that dollar because whether they’re taxing it now or taxing it later,
it’s there to be taxed. So, you know, it’s there if it has to be there.

I saw the Brookings Institute in 2018, did a study of how much wealth is in private hands in
the United States. And that’s 2018, and as you say, it’s a heck of a lot more now than it was
in 2018. But they came up with a number of 98 trillion dollars, are in the hands of private
individuals. This is assets after liabilities. So actual real assets. That’s 98 trillion dollars, in
theory, could be taxed. So what they’ve done so far in terms of this stimulus spending is like
nothing, not even scratching the surface of the kind of wealth that’s there.
Richard Kozul-Wright
Which is of course, why we have, again, another prudent measure that has surfaced over
the course of the last few months. The idea of a wealth tax, which we have advanced that in
some of the work that we’ve done over several years without getting any traction. But it’s
begun to get traction, I think, for the very reasons that you talked about.

Behind all these problems, at least for us, is the ongoing concern that we have. That the
rules of the international game, continue to be rigged, in favor of high wealth individuals and
large international corporations that continue to accumulate these huge amounts of wealth.
Unless we have a serious conversation about those rules and what to do about them, all the
talk of recovering better or building back better, that we are now hearing, will, in the end,
amount to very little. Because these are systemic problems. These are not simply con
junctural problems, that have emerged as a consequence of the spread of the pandemic, but
they are long-standing structural problems that have been left to fester.
Paul Jay
When you look at the conversation that’s going on in the American election campaign, you
get this different level of degree, of this kind of nationalism between Biden and Trump. This
concept of beggar thy neighbor, I’m quoting from your document, “Ardent free marketers are
using the disruption in international supply chains to push new rules on international trade

and investment and new privileges for owners of intellectual property and vital technologies
that would further reduce the policy space of developing countries”.

So it seems to me this is happening in two ways. One, in terms of not wanting to renegotiate
trade agreements and impose onerous regulation on developing countries, not to protect
themselves on issues of copyright and generic drugs and other sorts of things.

But you hear Biden talking about how everything needs to be produced in America. All
government spending is going to be linked to American production. This idea that America
will be OK if the rest of the world, especially the developing world doesn’t matter.
Richard Kozul-Wright
It’s not something I follow closely. Biden did say that there would be no more trade
agreements until he sorted out some of the underlying problems of the U.S economy. We
ourselves in the report, we call for a moratorium on certain parts of the trade and investment,
rules, and resulting disputes. I think that’s necessary.

Unfortunately, this gets caught up in the U.S, in this debate about China. Basically, as being
the reason why the multilateral trading system has somehow been turned upside down, in
recent years, and no longer functions in a way that works for the benefit of all players. From
a development point of view, that’s just not a credible argument as far as we’re concerned.

The Uruguay Round was a set of rules and practices, that were designed by the United
States and the leading advanced economies, to the advantage of the large corporations in
key sectors of the economy.

That includes, as you rightly say, a lot of the sectors that are now heavily dependent on
intellectual property rights, which should never have been included as part of the rules of an
international trading system.

Even Bhagwati eventually came around to kind of complaining, who is an ardent free trader.
Jagdish Bhagwati came around to complaining about the inclusion of intellectual property
rules in the international trading system.

Economists have this idea of international trade as a comparative advantage, where
countries trade with each other based upon their factor endowments. But of course,
countries don’t trade with each other. Firms trade essentially with each other. International
trade has become more and more dominated by these very large corporations, that are one
percent of the world, and yet corporations account for over 50 percent of global trade. They
manage trade, through the various affiliates that they control, in ways that are based upon
power relations and not on the niceties of a general equilibrium modeling. That’s a very

different world that works significantly to the disadvantage of those countries that lack the
capacities and the infrastructure and the skills required to be able to engage in international
trade in a constructive and fulfilling way. The current rules of the game, continue to work
against many developing countries. And China is the exception, that somehow has managed
to swim in these waters, without getting eaten alive. Which is what has happened to most of
the developing countries.

I think it’s going to be imperative moving forward that the American policymakers somehow
overcome this fixation they have with China and really take a very hard and frank look at the
rules of the international trading system, in terms of whether they’ve been good for jobs,
whether they’ve been good for effective demand, whether they’ve been good for the
environment. They haven’t and because of the China syndrome, they don’t seem to be able
to kind of take a dispassionate view of those rules.
Paul Jay
Well, we’re going to pick up this conversation in part two of our discussion and just going to
end with another quote from the document. “The measure of our success cannot be whether
we ward off another financial crisis and avoid increased public debt. Succeeding generations
will not applaud higher share prices or fuller treasuries if we fail to meet the challenge and
sacrifice an untold number of lives and livelihoods in the process”.

So thanks for joining us, Richard. And I’ll come back for part two and thanks all of you for
joining us on theAnalysis.news podcast.