Open Letter to Leftist Parties of the World (plus Switzerland)

When (or if, depending on your point of view) Global Warming begins to hit us all, there's one thing nobody is able to ask: Why weren't we warned?

Oh, we were warned! For more than 20 years climate scientists keep reminding us about the potential dangers of Global Warning, but we chose -- and continue to choose -- to ignore them.

The situation with our economic situation is strangely converse to the situation in climate science. Indeed, we did everything economists asked us to do. We lowered taxes for the rich and corporations so they could invest more. We privatized public utilities so they would operate more efficiently and cheaply. We deregulated (or stopped regulating altogether) financial markets so the free market could allocate capital resources optimally. We liberalized labour markets so that free enterprise could employ workers more flexibly and effectively. And still, the global economy collapsed under the weight of a financial crisis that exceeded even that of the Great Depression. And nobody within the economics profession saw it coming.

And it wasn't even an unforeseeable event like an earthquake. It was rather like a battered cruise ship running full with water and slowly sinking. Even an idiot like Captain Schettino recognized the danger and let himself "drop into a lifeboat" when the Costa Concordia sank. So why didn't economists see it coming? Or rather, why did the economy collapse in the first place, when we did all that was asked of us.

For the last 30 years the world's economic system has been market-liberalism (sometimes also called supply-side economics, trickle-down, neo-liberalism, globalization etc.). It centers around a set of claims made about economic subjects (that would be corporations. And us) and markets. These claims are the direct consequence of economic theory. These claims are positive, factual, verifiable propositions that can be tested. And when they are tested, they prove to be wrong, time and time again.

If competitive financial markets are efficient, as the efficient markets hypothesis claims (EFM, for which Eugene Fama received the Nobel price for economics), a financial crisis of the sort we witnessed in 2008 cannot possibly happen. We know (and economists agree) that financial asset markets are very close to the perfect competitive markets they believe in, because it has been vigorously deregulated -- or not regulated at all as in the case of derivatives -- and still the market imploded under its own weight in the credit crisis of 2008. Something can't be right.

We lowered the taxes on corporations and the rich (in Greece the latter seem not to be taxed at all), so why don't they invest as economists claim they will? Something can't be right.

Central banks flooded the markets with practically free money, so why don't banks extend credit? Or businesses ask for credit as economists claim they will? Why don't they respond to these incentives? Something can't be right.

The answer for us is obvious: lack of demand. But wait, according to economic theory supply creates its own demand, that's why it's called supply-side economics. The beneficiary of economic policy is supposed to be the supply side because demand-side economics that we had before the 80s didn't work. If the supply-side does well, demand will follow afoot. So why is there lack of demand? There can't be, if economic theory is right. Perhaps it isn't?

Economists claim that taxation of the wealthy depresses their incentives to work and invest, and will ultimately suppress all economic activity. But there had been a time called the Golden Age of Capitalism between 1946 and mid-1970s where the top marginal tax rate in the USA was 91% (until 1966 when it dropped to 70%). If the claim is correct there couldn't have been any economic activity in that time period -- at all! --, yet it is known as the Golden Age -- of capitalism. Something can't be right.

So why do economists make claims like these that when tested prove to be wrong, again and again? Why do they keep demanding economic policy that fails to fulfill any of their claims? Indeed, the regulated social market economy with strong publicly owned infrastructure industry (electricity, telephone, postal service, water supply, waste removal etc.) and moderate to high taxation consistently exceeded market-liberalism in every measure, from inequality, to output, to GDP growth rate, to the number and severity of crises and so on, and on, and on. We know that, because we have the figures to prove it. Why did we change it? The sad irony is that we used measures that according to economic theory can't work to fix a crisis that according to economic theory can't happen.

We know that market-liberalism does not work, because it never has in the 30 years we used its policies. We know that social market economy -- called Golden Age in the US, economic miracle in Germany -- exceeds market-liberalism in every measure. Isn't it time to finally stop the experiment and turn to something we know to work?

Why don't leftist parties base their economic policy on science instead of ideology? Why don't they tell the peoples of the world what they already know: namely that the economic system called neo-liberalism (or trickle-down, or supply-side, ...) doesn't work and indeed never has, at least on this planet? Why don't they argue for and advocate policies that support the middle-class that is and always has been the driver of the local (inland) economy? Why don't they ask, who is supposed to buy all the stuff being made, if incomes are being redistributed upwards? After all, a rich person may have 5 cars, but she doesn't have 5000 cars. So who's supposed to buy the 4995 remaining ones? And what are they supposed to pay them with? The wages that they have not earned, because wages keep being suppressed to pay for excessive bonuses of the CEOs? The tax increases that they had to pay, because the rich and corporations got tax breaks and somebody had to pick up the bill? The inflated prices of newly privatized formerly state owned enterprises that didn't have to make a profit and therefore could offer their services at lower prices?

In short, why don't leftist parties advocate policies that help the middle class (a.k.a "the people") and  hence the whole economy -- instead of policies that are allegedly business-friendly but consistently lead to more and deeper crises, more inequality and lower growth rates?

News From The Bookshelf

I'm just reading Economics: The User's Guide by Ha-Joon Chang, Professor of Economics at the University of Cambridge. It is a very accessible introduction to economics by the writer of the no. 1 bestseller 23 Things They Don't Tell You About Capitalism.  Both books are real eye openers, and required reading for anyone who wants to be taken seriously when debating economic policy.

Chang is a heterodox economist, i.e. he doesn't follow the economic mainstream which -- as you'll remember -- failed spectacularly in predicting the Financial Crisis of 2008. Or even recognizing it when it happened, and, no, it wasn't like an earthquake that nobody could have seen coming but rather like a ship running full of water. I mean, you can say what you want about Captain Schettino of Costa Concordia notoriety, but at least he knew that the vessel was sinking and made an exit.

Alright then. Buy the book and read it. NOW!