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Political Science
Political Science 2211E
Adam Harmes

Business and Government Notes The Crisis of the Welfare State and the Rise of Neoliberalism Lecture: From the Welfare State to Neoliberalism Topics 1. The stagflation crisis 2. The political implications of stagflation 3. The collapse of Bretton Woods and the shift to neoliberalism Defining Stagflation - Stagflation = stagnation + inflation - High inflation and unemployment at the same time - Emerged in 1970s Keynesianism and stagflation - Was supposed to be impossible in Keynesian economics - Inflation and unemployed supposed to move inversely - Demand increases, unemployment decreases, inflation goes up Milton Friedman - Conservative professor at University of Chicago - Predicted stagflation in his 1968 presidential address to the American Economics Association The Phillips Curve - Keynesians believed unemployment and inflation moved in opposite directions in a direct trade off - Lower unemployment could be achieve by accepting slightly higher inflation Economic Causes of Stagflation - Friedman argued the trade off between unemployment and inflation was not stable - Higher inflation that lasted for a while would eventually begin to snowball - Usually around 2% inflation - Inflation: purchasing power of your currency is weakening - Keynesians o Unemployment 6% o Inflation 5% o Trade off was stable - Friedman o Unemployment 6% o Inflation 5% -> 6% -> 7% o Trade off between unemployment and inflation was not stable o Inflation would eventually soar Union Wage Demands - Inflation 5% - Wage increase 5% - Net gain 0% - Inflation 5% - Wage increase 7% - Net gain 2% - Unions incorporate inflation rate into wage demands Wage Price Spiral - More stimulus required to lower unemployment creates more inflation - Workers demand higher wages to compensate for inflation - Higher wages force firms to raise prices and hire less workers Increased Union Power - Welfare state increased power of unions: o New deal pro labour laws o Fordism o Lower unemployment o Less free trade Unions and stagflation - Power of unions o Allowed inflation to be incorporated into wage demands o Prevented governments from raising interest rates Undermined Keynesianism - Stagflation undermined Keynesian economics - Boosted Friedman’s free market economics - What the depression was to the free market, stagflation was to the welfare state Business mobilized politically - In postwar decades, opposed welfare state but didn’t mobilized - Profits still good - Stagflation was last straw - Mobilized by creating and expanding business lobby groups o National Association of Manufacturers o US Chamber of Commerce - Business roundtable o CEOs of largest companies o Members accounted for 50% of US’ GDP o Coordinated lobbying activities and political donations of its members Lobbying - In 1970, only a few Fortune 500 firms had lobbying offices in DC - By 1980, over 80% - Lobbying aka government relations - K Street o Where all lobbying firms used to be located o Become synonymous with lobbying o Finance = Wall Street Political Donations - 1971 Federal Election Campaign Act - Prohibited direct donations from business and unions - Led to creation of intermediaries known as PACs (Political Action Committee) - In theory, levels playing field - In practice, business dominated - By 1980, business outspending unions 4 to 1 - Became more targeted towards free market politicians/Republicans Canadian Business Mobilizes - Stagflation also led to creation and expansion of Canadian business lobby groups o Business Council on national Issues (now CCCE) o Canadian Chamber of Commerce o Canadian Manufacturers’Association - Coordinated lobbying and donations Business Mobilized Economically - Increasing internationalization of production and finance The Bretton Woods Order - Fixed exchange rate + discretion in monetary policy Bretton Woods Dollar-Gold Standard - Currency pegged to US dollar pegged to gold ($35/ounce) Collapse of Bretton Woods - Low interest rates and high inflation caused investors to evade capital controls - Possible due to: o Use of computers o Weak enforcement o Growth of offshore financial markets - Capital mobility increases and violates the impossible trinity - Money leaves and causes dollar to drop out of exchange rate - President Nixon had three choices: o Enforce capital controls (Wall Street opposed) o Maintain fixed exchange rate (Would require higher interest rates) o Maintain discretion in monetary policy - 1971 Nixon gave up fixed exchange rates and the pegged gold standard - Inflation continued to rise and led to stagflation - Capital mobility increased 1973 OPEC Oil Shock - OPIEC massively raises oil prices - Organization for Petroleum Exporting Countries o Determine what prices for oil should be - Inflation spikes to 15% by 1975 and then somewhat drops Stagflation continues - By 1978, inflation again rises to 10% - President Carter and the public were convinced that inflation must be dealt with - Appoints Paul Volcker, chairman of Fed Fighting stagflation - Vonder raises interest rates to fight inflation - 2 OPEC shock - Inflation hits 12% - Volker shock: a massive increase in interest rates - Recession/end of stagflation Volcker Shock and Debt - High interest rates raised third world interest payment costs - Worldwide recession lowers demand for third world exports - More spending + less earnings = debt crisis IMF and Neoliberalism - IMF provides loans in exchange for Structural Adjustment Programs (SAPs) - Forces countries to adopt free market policies to attract foreign corporations - Globalization of production Conservative Governments and Neoliberalism - Volcker shock recession hurts Keynesian governments - Leads to election of conservatives - Implement free market policies Shift to Neoliberalism - Cut taxes - Cut social programs - Privatization - Deregulation - Weakened unions - Most important was the push for free trade Lobbying Lecture: Business Lobbying Today’s Topics 1. Building the Conservative Movement 2. Types of Lobbying Campaigns Building the Conservative Movement - Business mobilized politically in response to stagflation - Created and expanded business lobby groups aka trade associations - Built support for free market policies among politicians and public Lobby Groups at Different Levels - Municipal and provincial chambers of commerce - Regional lobby groups - International lobby groups - Issues specific groups The Powell Memorandum - The attack on the American enterprise freedom - US Supreme Court Justice Lewis Powell - 1971 memo for the US Chamber of Commerce - Argued that business had to build a conservative movement Conservatives in Canada - 2005 book: Rescuing Canada’s Right - Outlined strategy for building a Conservative movement o Free market lobby groups and think thanks o Media and academia o Political infrastructure to support Conservative political parties Free Market Think Tanks & Groups - Growth funded by companies and business people - Promote free market policies by o Research reports o Committee testimony o Conferences o Press releases and op-eds o Media commentary - Similar trend in Canada - Transnational links between think tanks in US, Canada, UK, etc. Building a Conservative Media - Began with business media and key conservative magazines - 1987 removal of “fairness doctrine” in US broadcastings regulations allowed for one sided media - Rise of talk radio - Existing Conservative media included: o Financial Post o Globe’s Report on Business o Sun newspaper o Western Standard magazine o Blogging Tories o Slow growth of talk radio Expansion of Conservative Media - Rupert Murdoch, Conrad Black create new conservative outlets - Pierre Karl Peladeau and Harper staffer create Sun news Political Infrastructure - SuperPACs (PAC = political action committee) o 2011 Supreme Court decision o Can promote but not coordinate with candidates o Unlimited donations from corporations, unions and wealthy Political Infrastructure in Canada - Corporate and union donations banned at federal level - Manning Centre o Trains strategists, campaign managers o Works to unite conservative movement Use of Populism - Focus on views and prejudices of ordinary people - Nationalism and patriotism - Anger points and creation of us vs. them o Taxpayers, makers and takers - Tea Party, Ford Nation Firm Specific Lobbying Campaigns - Conducted for and by individual firms o Can be proactive or reactive - Government procurement contracts o Very specific policies - Application of a policy o Focus can be on regulatory agencies and civil servants o Proactive: Sun News and CRTC o Reactive: BP and oil spill - TransCanada and Keystone XL Pipeline - Started as proactive behind-the-scenes campaign - Became reactive in response to politicization by environmentalists Lobbying ROI for Firms - Lobbying pays off for firms - Large firms have in-house government relations - Hire lobbying firms that specialize in political strategy and communications Lobbyists - Ex politicians, political staff and civil servants - Political consultants - Emphasize knowledge of process but contacts matter most - Lobbying is about persuasion - Create arguments to support their position - Present arguments to decision-makers - Knowledge of process - For ex-officials, contracts are key - For inside information o Contract info o Who to lobby when o Decision-maker interests - For access to decision makers - For political consultants, emphasis is on specific skills: o Political strategy o PR and communications o Issues management - Many are campaign managers and ex-journalists Dark Side of Lobbying - Shift from persuasion to quid pro quo - Campaign donations linked to specific policies: o Airlines after 911  Airlines had to pay for implementation of new airlines  Campaign donations from airlines increased significantly after 9/11 o Wall Street after recession - Junkets: company or lobby organization that hold conferences in vacation hot spots Influence Peddling - Form of bribery - Person rather than political benefit - Post government jobs - Jobs for spouses and children - Special deals Use of threats - Investment strike: threaten to relocate factory - Withdraw services - 2101 shoppers in Ontario o Hiring freeze o Shortened hours in key ridings Attack opposition - Attempt to discredit or intimidate opponents - Opponent research: Identify weaknesses and leaks to media - SLAPP lawsuits: Strategic lawsuits against public participation Sector-Specific Lobbying Campaigns - Relate to issues that affect a specific sector - Banking, oil and gas, telecoms, etc. - Can be proactive or reactive - Organized by sector trade associations and lobby groups - Proactive campaign o Assembly research o Lobby quietly behind the scenes o Coordinate lobbying of member firms o Consult stakeholders o Avoid politicization - Reactive campaign o More focus on PR after issue is politicized o Generate positive earned media o Run advocacy ads o Like the air war of an electoral campaign - Use of front groups o Create third party advocacy group o Masks who is advocating policy - Framing the issue o Universalize interests o Frame as no alternative o Language  Bureaucrats  Union bosses  Job creators  Corporate agenda Sector Trade Associations - Focus on specific industry sector issues - Monitor government and stakeholders to provide early warning on issues - Run sector specific lobby campaigns The Globalization of Finance and the Offshore World Lecture: The Globalization of Finance and the Offshore World Today’s Topics 1. The globalization of financial markets 2. The growth of the offshore world Globalization of Financial Markets - Investors move money abroad to escape stagflation - Collapse of Bretton Woods capital controls/fixed rates - Massive growth in capital mobility - Capital mobility + discretion in monetary policy New Financial Instruments - Shift from bank loans to securities (stocks and bonds) - Securities are more liquid - Increase speed of finance system - Growth of derivatives o Specialized financial contracts which are derived from an underlying asset o Options and futures Options - Contract which gives the holder the option of buying a particular asset in the future at a pre-set price - Example: Stock option - CEO given stock options when stock was trading at $10/share - If stock goes higher, CEO can still buy stock at $10/share - Creates incentive to increase share price Futures - Contract to buy or sell an underlying asset at a future date - Allows someone to sell an asset which they don’t yet own Short-Selling - Profit from falling asset prices - Sell high first then buy low Other Derivatives - Make financial markets more flexible and liquid - Combine less liquid assets (i.e. mortgages) into an overall contract that can then be sold New Financial Actors - Institutional investors o Institutions which invest money, on behalf of individuals o Mutual funds and pension funds - Hedge funds o Unregulated form of mutual f und that caters to firms and wealthy investors o Us short-selling and leverage o Take greater risks - Long term capital management o Russia 1998 o Borrowed almost $1 trillion o Asian crisis hit and they lost money o Posed systemic risk (too big to fail) The Offshore World - Export processing zones - Offshore tax havens - Offshore financial markets - Offshore Internet sites - Flags of convenience - Characterized by low taxes, regulations and government oversight - Legal construct within states where normal laws don’t apply Export Processing Zones - Special economic zones within a country where taxes and regulations are lower - Ex: Maquiladoras in Mexico - Used to attract TNC investments Offshore Tax Havens and Financial Markets - Taxes/regulations are lower across whole country for foreigners - Ex: Cayman Islands - Benefits of lower taxes/regulations without having to relocate - Name plate residence o Country becomes your official country of residence o Official corporate headquarters location Flags of Convenience - Like a name plate residence for ships - Foreign ships fly another country’s flag to benefit from lower taxes and regulations - Ex: Panama, Liberia and Bahamas Recent Trends in Corporate Governance Lecture: Recent Trends in Corporate Governance Today’s Topics 1. The Impact of institutional investors on Corporate Governance 2. The 1980s Takeover Wave 3. The 1990s Shareholder Activism Wave Corporate Governance - How corporations are governed - Nature of relationship between owners and managers - Technical issues such as board organization, management pay, company charter, etc. The Berle-Means Model - Large number of small, individual shareholders - CEO/management runs company - Board oversees management - Shareholders vote on key decisions/board - Individual shareholders -> board of directors -> CEO and management - Reality was that modern corporation was characterized by managerial autonomy - Shareholders had little influence over management for 3 reasons: o Unconnected shareholders don’t organize votes o Own shares in many companies – therefore exit rather than voice o Complaint boards rubber-stamp CEO  Able to stack the board with friends, unqualified people Rise of Institutional Investors - Mutual funds and pension funs as key financial actors - Invest heavily in stocks - Replace individual shareholders - Change nature of corporate governance Decline of Managerial Autonomy - Centralization of share ownership - Firms now owned by a small number of large shareholders - Fund managers pay attention and vote - Individual investors -> fund managers -> board of directors -> CEO and management Short Term Pressures on CEOs - Fund managers under pressure to boost fund in short-term - Quarterly evaluations - Short-term contracts - Long term investment horizon = time you invest in your stocks (the younger you are, the longer your investment horizon) - Fund manager pressure CEOs to quickly boost stock price - Shareholder value - CEOs had to listen to large shareholders Takeover Wave of the 1980s - Hostile takeover: corporate raider attempts to accumulate a controlling block of a firm’s shares against the wishes of the firm’s management - Raider offers to pay shareholders a premium for their shares (higher than market value) - Management would promise profits over long term - Once raider acquired a company, it would often sell it off into parts - Realize an immediate profit Junk Bonds - Growing use of junk bonds - High risk bonds with low credit ratings - Many junk bonds together could be less risky - Allowed high risk ventures to raise money Junk Bonds and Takeovers - Allowed raiders to raise money for hostile takeovers - Done through a leveraged buyout or LBO - Takeover funded by debt Institutional Investors and Takeovers 1. Undervalued stocks making takeovers more profitable - Short termism meant market price was less than break-up price - Made takeover profitable - Could pay premium 2. Sold large blocks of shares to raiders - Concentrated ownership made getting shares easier - Short-termism made funds want to sell for premium 3. Invested in junk bonds and provided raiders with financing - Raider sells junk bonds to institutional investors The CEOs respond 1. Sought to boost undervalued share price to make takeovers more expensive - Debt for equity: borrow and repurchase shares - Led to large increase in corporate debt 2. Poison pills - Legal defense mechanism created by management - Provision for discounted shares for existing shareholders - Golden parachute severance packages: a large payment guaranteed to a company executive if the executive is dismissed as a result of a merger or takeover 1990s Shareholder Activism Wave - Institutional invests did well from the takeover wave: o Sold shares at a premium to raiders o Invested in junk bonds o Benefitted from share buy-backs - When takeover wave ended, fund managers looked for new ways to promote shareholder value Reforms to Corporate Boards - Make directors more accountable to shareholders: o Separation of chairman and CEO o More independent directors o Removal of poison pills Direct Intervention to Fire CEO - Shift from exit to voice - Dumped many underperforming CEOs - Created a new stick to force CEOs to focus on shareholder value Use of Stock Options - Linked management pay directly to the share price - Incentive for the CEO to boost share price in the very short-term The Downsizing Wave of the 1990s - Short-term focus on stock price led to: o Wave of downsizing despite healthy profits o Firms laid off workers and cut R&D spending - Used savings for share buy backs Implications of Downsizing Wave - Many workers laid off - More work, stress for those who remained - Many firms were left with too few workers and too little R&D CEO Salaries - Dropped, went up, then dropped again - As stock prices go up and down, the CEO pays moves along with it - CEO pay is 360x of a production worker Infotainment Media - Media companies also subject to short-term pressure and shareholder value - Greater focus on ratings - More sensationalism The Debate over Globalized Finance Lecture The Debate over the Globalization of Finance Today’s Topics 1. The neoliberal efficient markets hypothesis 2. The Keynesian-welfare critique 3. The US housing bubble debate The Neoliberal View - Financial markets operate efficiently o When they are free, efficiency is a natural result - Regulation should be thus kept to a minimum - Financial markets are efficient when asset (stocks/bonds) prices reflect fundamentals Efficient Financial Markets - Prices reflect fundamentals - Fundamentals: real economic conditions that affect an asset’s value - Debt, market share, earnings and managers - If fundamentals improve, investors buy stock and stock prices increase (same for any other asset) - An efficient financial market is one where the prices reflect the fundamentals Why Efficiency Matters - Invisible hand based on price signals o Supply and demand intersect, set prices and prices send signals to consumers about how much to consume/producers how much to make and how to make economic decisions - If prices do not reflect fundamentals, they send false signals o Leads to poor economic decisions - If a stock price goes higher than the fundamentals, it’s a bubble o Can cause people to think they have more money than they actually do and lead to unwise spending Efficient Markets Hypothesis - Created by Eugene Fama in 1970, won Nobel prize o Free financial markets should operate efficiently because they are compri
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