In “On Economics Putin is on the Defensive. Spending Personal Political capital”, the Saker, who blogs at http://vineyardsaker.blogspot.ru/, criticises Putin’s economic and financial policies. His blog has fervently pushed Mikhail Khazin’s views on the necessary future direction of Russian economic and financial policy. A summary of these views was run by Russia Insider in article “US Consumes Far More than it Produces. Threatens Global Division of Labor”.
Khazin’s views on the global economic situation are broadly correct, in that, immediately after the 2008 crash and at the very beginning of his first term, Obama said “… the world should not expect the American consumer any longer to drive world economic growth”. This was a reflection of the fact that the American consumer was “maxed-out” on debt. Since the 1970s industrial overcapacity has led to “financialisation” of the US and European economies, to try to drive consumption forward on the basis now of credit.
We reached the end of the effects of this restructuring by the 1990s, with financialisation principally growing through the mortgage and real estate markets, in order to push consumption through a “wealth-effect”, with borrowing encouraged through the method of “equity-release”. As increased monetisation of the resulting financial pyramid became necessary through “Quantitative Easing” (QE), interest rates have fallen, totally disabling monetary policy as an effective policy tool in the current environment. Indeed, Western governments have racked up debt on their Central Bank balance sheets through this process to such a extent that any future interest rate rises would be extremely costly, if not destructive events, for them.
Given this impasse, and given that no social restructuring in the form of debt forgiveness to the consumer lies on the horizon, the world economy, which once revolved around the US consumer, has now to enter a phase of reconstruction such that different regions begin to seek self-sufficiency. This is what Khazin means by the end of “global division of labour”. Regionalisation is the only way that consumers from other parts of the world can begin to take over from the US consumer in order to drive the world economy forward once again. Local/regional surpluses now have to start being generated and the resulting wealth, which is currently is being sucked into the vortex of the massive pile of US/UK/Japanese debt, has to be somehow retained “locally” for re-investment.
The US/UK/Japan offer no fundamental economic opportunities to the world and are forced to either use political/military means to command a surplus from the rest of the world by force, or promote new technologies (such as fracking) that are unprofitable, wasteful, and environmentally disastrous, for the same type of short-term survival on the industrial side, that QE seems to be providing on the monetary side. There is no getting away from the fact that US/UK/Japanese consumers urgently need consumers in the rest of world to experience a rise in living standards to get themselves out of the impasse they are in. The only problem is that the governments of these populations are getting in the way of such potential developments, because the few in those countries see themselves as losing political power in the process. Just as they don’t want to redistribute wealth domestically through debt forgiveness, they don’t want to submit to an international version of this via a collapse of their currencies.
So far so good as far as Khazin’s analysis is concerned. The problem comes in regard to what policies Russia should follow in this context. Khazin sees (and the Saker agrees with him) that there should be greater control of the banking system by the state, that capital controls should be imposed to strop ruble depreciation on the one hand, and that there should ruble monetisation i.e. ruble QE to push local Russia investment to take advantage of ruble depreciation through import substitution, on the other. However, I believe you can still achieve the local investment and growth – which would presumably be the goal of such a strategy – in the context of “free” markets, so long of course as “free” is defined not as the “free-for-all” of the Russian 1990s, but in the context of sensible regulation.
To go back to 100% state control I think Putin sees as a mistake which would take Russia back to the economic situation of the Soviet Union. In fact, it would would be a serious economic error – one that the West is trying to goad Russia into making, and that I think Putin is highly conscious of trying to avoid. Such a policy on the part of Western governments is the analogue on the economic side of them goading Russia into overt military action in the Ukraine on the political side. Overt ill-considered military action on Russia’s part would immediately lead to massive militarisation in the West and a very dangerous situation. If there were many causes for WWII, we must remember that, woven through most of them, was the fact of economic depression.
So just as caution is necessary on the political side, caution is necessary on the economic side. The reason for this is that the modern state, whichever state it is and wherever it is, is not as all powerful as we think it is. The state needs to work on economic matters with the help of and through the private sector, which, after all, is supposed ultimately to be the beneficiary of state policy – not (incestuously) the state itself. The state thus needs to set out frameworks which make the private sector feel confident. What would make the private sector (not specifically either the Russian or the Western private sector, but a mixture of both) feel confident in Russia, is the sense that there is the rule of law. Sudden changes now of the statist type would completely undo all those painful gains that have been notched up since the 1990’s in making Russia an open economy with a responsible legislative that moves rationally in its law-making and always considers the business climate.
The fact that the US/UK/Japan are badly managed open economies, doesn’t mean that an open economy is a bad thing per se. The US prides itself on being a capitalist country, but capitalism is a vague (and actually useless) term which comes in many varieties. We find for instance that in the US, the military is the largest employer, and is a “cradle-to-grave” employer not unlike any socialist organisation. Also weapons production and development in the US is driven by corruption and greed factors in the relationship between corporate bosses and politicians, and has nothing to do with “effective competition”: quantity is not quality. As far as Europe is concerned, we have a collection of open economies, but they are now saddled with an unelected government in the EU which has a bureaucracy not dissimilar to that which used to function in Russia in Soviet times, and again the EU will always make decisions that will on the whole favour the few rather than the many, against the very idea of an open economy.
Thus having an open economy means particularly not pandering to oligarchs, because a responsible legislative running an open economy would need to enforce proper payment of taxes, a proper progressive tax system which is fair (unlike the US), and one where real estate gains are taxed more than income or sales. This would ensure that there isn’t a bias in the economy (as in the US and the UK) towards real estate speculation and away from productive investment, with the associated disincentive to work rather than speculate. Most importantly, avoiding speculation through a balanced tax system reduces the amount of the economy’s surplus which is siphoned off into seignorage gains for bankers and for the few. In return for taxes, the state is also responsible then to use its power and it resources to create a level playing field for everybody to succeed in business, especially with regard to the provision of free universal high-quality education and free internet, and to protect the vulnerable, especially with regard to free health.
Russia is in the good position now of having a much more open economy than any of the other BRICS, including China, and although the short-term cost of that is a falling ruble at the moment, the long-term gain of toughing this period out, as Putin is doing, will be enormous. This is especially the case since Russia has such enormous economic potential in all kinds of markets (both consumption and investment markets) in terms of potential high returns – much higher returns than in Western economies. It is these high returns that will attract investment in the future from the private sector and will encourage the Russian private sector to stay at home, as long as they are confident. If they know the government is committed to freedom of exchange, why should they take their money abroad, especially if economic returns in Russia are amongst the highest in the world? If the investment scenario improves in this way, then future profits will be also continue to be reinvested.
All this doesn’t stop the Russian state from controlling certain key sectors, as long as it does so efficiently. Privatisation isn’t a panacea. We find for instance William Waldegrave, a key minister in the Thatcher government, admitting that in the Thatcherite ideological drive to privatisation, their policies went too far. For instance, the concept of “internal markets” in organisations that are natural monopolies (energy, health, railways, education) is a mere mirage of profitability. It only creates gains for management consultants at the cost of the organisations involved in a repeat of the worst excesses of Soviet management. The state, after all, represents the people at large and should do their bidding in this respect, instead of simply handing all the country’s assets to rapacious accountancy firms and financial organisations, as in the case of the UK government, which has sold everything off which could have contributed to a reduction of its unmanageable debts. Further, in the technological field it is clear that major developments have always begun within government research programmes, and the private sector (as in the example of route 66 companies in the US) always developed technology for the marketplace which was initiated in government research facilities. It is a fallacy that the majority of technological development comes from private sector R & D.
In conclusion, Khazin’s broad economic views, while correct, don’t lead to specific policy conclusions, and the Saker’s analysis is wrong. Putin isn’t “being strong” politically and “being weak” economically, he is being cautious and long-term in both cases: he is not responding to the military provocations of the West politically, except within the bounds of reasonableness, and he is not responding to the currency provocations of the West economically, except within the bounds of reasonableness.