The failure of economies to generate social outcomes that are politically sustainable is the central driver of the domestic and global crises we face today. Economists need to face the reality that our profession has failed to deliver economic discourses and policy frameworks that prioritize social impact. In addition, we have allowed the financial system to dominate the real economy of output, growth and jobs.
The disregard for social impact and the prioritization of the financial system are deeply embedded in economic thinking and economic policy. It is no secret that the failure to consider the impact of financial policies on the real economy has created political polarization. This polarization threatens domestic and global governance at the very moment when humanity needs to unite, take responsibility and work together to ensure a livable future.
In my professional life as a development economist working on Latin America, the debt crisis following the oil price shock in the 1970s dominated the development debate. At the time, “structural adjustment” sounded good to those of us who were “structuralists” instead of “monetarists.” However, in the end, the structural adjustment programs from the World Bank and IMF through the 1980s were financialist remedies.
The prioritization of the financial system was effectively “baked in” to development work.
In the 1990s, the best textbook for teaching open economy international economics (Krugman – Obstfeld) still prioritized three policy goals (growth, inflation and balance of payments equilibrium) and three policy instruments (monetary, fiscal and exchange rate policies). Social impact was regarded as the spillover effect of economic growth on job growth. It was an unspoken derivative of the macroeconomic picture, not a priority in-and-of itself.
One result of these two failures — not prioritizing social impact and allowing financial markets to dominate the real economy — is a global distortion of housing markets. In most countries, housing markets are no longer about providing shelter and homes for people and families. Instead, they have become financial markets with speculative bubbles and high prices that crowd out lower-income people, leaving them without a place to live. In many areas, middle-class workers also struggle to find stable, affordable housing.
This is frankly unacceptable. Efforts are now being made to boost “affordable” housing as a separate sector of activity. This is fine, but not the solution to the problem. The financial system needs to be forced to incentivize access to finance for low and middle-income workers who will otherwise be “left out” of the housing market.
Let’s not forget that the Great Financial Crisis of 2008 was triggered by subprime interest rate mortgage defaults in the US “housing market.” Financial regulatory reform was supposed to ensure such a crisis couldn’t happen again. In the United States, reform consisted of the Dodd-Frank legislation, which gained global prominence with the formation of the Financial Stability Board in Basel at the London 2009 G20 Summit. Unfortunately, regulatory reforms have been eroded by legislators and regulators around the world who still think that “the market knows best.”
Regulatory reform needs to come back as a global priority before the next financial shock contracts the real economy — the economy where people live and work.
Another factor that fuels political polarization and paralysis is the difference in educational access and outcomes. There is increasing awareness in the United States, at least, that disparities in education drives the great social divide. The problem in the U.S. is that public schools are financed primarily by local property taxes. The result is that poor neighborhoods have poor schools and rich suburbs have great schools.
This is unacceptable. But there is no nationwide push to change the financial base for U.S. public schools and make equality of education a national priority. Again, the social impact of financial policies is ignored.
There is a small Department of Education program to channel money to schools that outperform the norm in their regions. However, it is a trivial percentage of total public school costs even in those districts receiving funds. Investing in people is the best source of economic growth. And yet, we place the burden — and the blame — on parents in rural and low-income areas who do not have the financial resources to upgrade their schools. If the United States is to be a unified nation once more, the disparities in funding and educational access must change.
The word “tax” is a dirty word in the United States. Yet, what are taxes but revenues which every entity on the face of the globe must have to do anything? The American people cannot take charge of our future if we are not willing to provide our representatives with the resources needed to invest in that future. Instead, we will inherit the divided country that markets, left to themselves, will provide.
We do not need a welfare state to fix these problems. We need an investment state to create the futures we want. Joe Biden began this journey, breaking the hold of neoliberalism on American political discourses and policy making.
In place of neoliberalism, we need a new vision: pragmatic progressivism. Bernie Sanders said on CNN that Joe Biden has been the most progressive president of the United States since Franklin Roosevelt. While Sanders once called himself a “democratic socialist” he is, in fact, a pragmatic progressive. There is nothing wrong with being progressive. It is the path forward.
The time has come for pragmatic progressivism to define the terms of global politics and economic models. We must face the new reality of simultaneous crises with bold new ideas which squarely and directly address the hurt people feel when they do not benefit from global prosperity. The far-right has connected itself to the anger but has no program. The center-left has lost touch with the unrest but has the combination of pragmatism and progressivism to redirect the course of history.
Featured image by Valentin Salja on Unsplash