Capitalism is when private owners run businesses

What government must do to save capitalism

KEVIN RUDD

Special to Globe and Mail Update

March 3, 2009 at 12:00 AM EDT

From time to time in human history, there occur events of seismic significance, when one orthodoxy is overthrown and another takes its place. Today, the scale of the global financial crisis demands that we re-evaluate the economic policy and philosophy that brought us to this point.

George Soros has said that "the salient feature of the current financial crisis is that it was not caused by some external shock. ... The crisis was generated by the system itself." He is right. The current crisis is the culmination of a 30-year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism or economic fundamentalism. The central thrust of this ideology has been that government activity should be constrained, and ultimately replaced, by market forces. In the past year, we have seen how unchecked market forces have brought capitalism to the precipice.

Instead of distributing risk throughout the world, the global financial system has intensified it. Neo-liberal orthodoxy held that global financial markets would ultimately self-correct - the invisible hand of unfettered market forces finding their own equilibrium. But as economist Joseph Stiglitz has caustically observed: "The reason that the invisible hand often seems invisible is that it is not there."

Just as it fell to Franklin Roosevelt to rebuild American capitalism after the Depression, and to the American Democrats, strongly influenced by John Maynard Keynes, to rebuild postwar domestic demand, to engineer the Marshall Plan to rebuild Europe and to set in place the Bretton Woods system to govern international economic engagement, so it falls to a new generation to reflect on and rebuild our national and international economic systems.

If centrist governments are to save capitalism, they must face three challenges. First is to use the agency of the state to reconstitute properly regulated markets and to rebuild domestic and global demand. With the demise of neo-liberalism, the role of the state has once more been recognized as fundamental. The state has been the primary actor in responding to three clear areas of the current crisis: in rescuing the private financial system from collapse; in providing direct stimulus to the real economy because of the collapse in private demand; and in the design of a national and global regulatory regime in which government has ultimate responsibility to determine and enforce the rules of the system.

The second challenge for social democrats is not to throw the baby out with the bathwater. As the global financial crisis unfolds and the hard impact on jobs is felt by families across the world, the pressure will be great to retreat to some model of an all-providing state and to abandon altogether the cause of open, competitive markets both at home and abroad. Protectionism has already begun to make itself felt, albeit in softer and more subtle forms than the crudity of the Smoot-Hawley Tariff Act of 1930. Soft or hard, protectionism is a surefire way of turning recession into depression, as it exacerbates the collapse in global demand. Social democracy's continuing philosophical claim to political legitimacy is its capacity to balance the private and the public, profit and wages, the market and the state. That philosophy once again speaks with clarity and cogency to the challenges of our time.

A further challenge for governments in dealing with the current crisis is its almost unprecedented global dimensions. Governments must craft consistent global financial regulations to prevent a race to the bottom, where capital leaks out to the areas of the global economy with the weakest regulation. We must establish stronger global disclosure standards for systemically important financial institutions. We must also build stronger supervisory frameworks to provide incentives for more responsible corporate conduct, including executive remuneration.

The world has turned to co-ordinated governmental action through the Group of 20: to help provide immediate liquidity to the global financial system; to co-ordinate sufficient fiscal stimulus to respond to the growth gap arising from the global recession; to redesign global regulatory rules for the future; to reform the existing global public institutions - especially the International Monetary Fund - to provide them with the powers and resources necessary for the demands of the 21st century.

The IMF's governance arrangements must be reformed. It is only reasonable that, if we expect fast-growing developing economies such as that of China to make a greater contribution to multilateral institutions such as the IMF, they should also gain a stronger decision-making voice in these forums.

The longer-term challenge for governments is to address the imbalances that have helped to destabilize the global economy in the past decade: in particular, the imbalances between large surplus economies such as that of China, Japan and the oil-exporting nations, and large debtor nations such as America.

The magnitude of the crisis and its impact across the world means that minor tweakings of long-established orthodoxies will not do. Two unassailable truths have already been established: that financial markets are not always self-correcting or self-regulating, and that government can never abdicate responsibility for maintaining economic stability.

For governments, it is critical that we get it right - not just to save the system of open markets from self-destruction, but also to rebuild confidence in properly regulated markets, so as to prevent extreme reactions from the far left or the far right taking hold.

Governments must get it right because the stakes are so high: There are the economic and social costs of long-term unemployment; poverty once again expanding its grim reach across the developing world; and the impact on long-term power structures within the existing international political and strategic order. Success is not optional. Too much now rides on our ability to prevail.

MSNBC.com

WASHINGTON - In the 50 years that Grant Goodman has known and corresponded with a colleague in the Philippines he never had any reason to suspect that their friendship was anything but spectacularly ordinary. 

But now he believes that the relationship has somehow sparked the interest of the Department of Homeland Security and led the agency to place him under surveillance.

Last month Goodman, an 81-year-old retired University of Kansas history professor, received a letter from his friend in the Philippines that had been opened and resealed with a strip of dark green tape bearing the words “by Border Protection” and carrying the official Homeland Security seal.

“I had no idea (Homeland Security) would open personal letters,” Goodman told MSNBC.com in a phone interview. “That’s why I alerted the media. I thought it should be known publicly that this is going on,” he said.  Goodman originally showed the letter to his own local newspaper, the Kansas-based Lawrence Journal-World.

“I was shocked and there was a certain degree of disbelief in the beginning,” Goodman said when he noticed the letter had been tampered with, adding that he felt his privacy had been invaded. “I think I must be under some kind of surveillance.”

Goodman is no stranger to mail snooping; as an officer during World War II he was responsible for reading all outgoing mail of the men in his command and censoring any passages that might provide clues as to his unit’s position.  “But we didn’t do it as clumsily as they’ve done it, I can tell you that,” Goodman noted, with no small amount of irony in his voice. “Isn’t it funny that this doesn’t appear to be any kind of surreptitious effort here,” he said.

The letter comes from a retired Filipino history professor; Goodman declined to identify her.  And although the Philippines is on the U.S. government’s radar screen as a potential spawning ground for Muslim-related terrorism, Goodman said his friend is a devout Catholic and not given to supporting such causes.

A spokesman for the Customs and Border Protection division said he couldn’t speak directly to Goodman’s case but acknowledged that the agency can, will and does open mail coming to U.S. citizens that originates from a foreign country whenever it’s deemed necessary.

“All mail originating outside the United States Customs territory that is to be delivered inside the U.S. Customs territory is subject to Customs examination,” says the CBP Web site.  That includes personal correspondence.  “All mail means ‘all mail,’” said John Mohan, a CBP spokesman, emphasizing the point.

“This process isn’t something we’re trying to hide,” Mohan said, noting the wording on the agency’s Web site.  “We’ve had this authority since before the Department of Homeland Security was created,” Mohan said. 

However, Mohan declined to outline what criteria are used to determine when a piece of personal correspondence should be opened, but said, “obviously it’s a security-related criteria.”

Mohan also declined to say how often or in what volume CBP might be opening mail.  “All I can really say is that Customs and Border Protection does undertake [opening mail] when it is determined to be necessary,” he said.