Disembedding Liberalism.docx

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Political Science
Political Science 2211E
Adam Harmes

Disembedding Liberalism: Ideas to Break a Bargain  Embedded liberalism originated from Keynesian concepts, in particular in its “neoclassical” form The Changing International Context: Bretton Woods and Other Unsustainable Structures  Bretton woods agreement: sought to reconcile domestic political stability with an international financial order that facilitated trade in commodities thought to be welfare-improving o A tool that established the foundation of embedded liberalism o Designed to attain domestic policy autonomy with an ability to practice expansionary policies without having to keep an eye on the exchange rate (pegged) o Allowed Europe to be financially dependent on the USA o Acting as a world banker had a cost:  If US ceased to run a deficit the world’s money supply would contract and cause deflation  Exchange rate was the dollar-gold standard – sustainable so long as no country actually tried to change dollars for gold  Permanent deficit = increased world supply of dollars  When supply goes up, price comes down, creating discrepancy between par and market value of the dollar (creating many unintended problems)  USA introduced Interest Equalization Tax (IET) in 1963: o Intended to discourage foreign borrowings since capital mobility became an issue at the time o Enabled government to slow flow of dollars without raising interest rates – worked well o Also produced unintended side effects:  Euromarkets came into existence after the deposit of Russian oil money in London (1958)  Surplus dollars flowed into Euromarkets where they were lent without regard for IET and other regulations  Booming markets enabled private finance to use these funds for capital mobility – investment in foreign sovereignty thus speculation against the dollar worsened  Uncertainty was further generated through the inflationary effects brought by the Vietnam War The Changing Domestic Context: How Not to Run a War Economy:  Johnson administration knew why there was inflation but was institutionally unable and politically unwilling to tackle the issue at hand  Unemployment began to fall to 4% and the budget was now in a surplus  Inflationary pressures started to effect wages and price increases  Johnson refused to raise taxes or discount interest rate – 2 basic tools to fight off inflation  Only tools that could be used were wage and price guideposts o JFK institutionalized such policies and sought to tie price and wage increases to productivity increases o Hopped to set a norm for wage and price throughout the economy o These policies created friction between labour and businesses in a war economy  Costs of Vietnam war was not being publicly acknowledged and hidden costs were not factored in economic analysis and policy statements o Actual economic performance and predictions diverged rapidly o Demand increased by $2billion while price increased by $11 billion – twice as fast as the guidepost o Discouraged investments  To mitigate investment shortfall the government increased share of GDP  Deficits ballooned which led to ever-higher interest rates and led to greater pressure on the dollar The Political Consequences of Regulation:  Business’ uncertainty have also been growing during the same period for different reasons o Growth of grassroots organizations increased business uncertainty  Aimed to enforce regulations on business that focused upon panindustrial responsibilities  Environmental Protection Act – created regulations that affected almost every business sector  Occupational Safety and Health Act (1970) created huge compliance cost for businesses  Also created unforeseen consequences for the political organization of business  Regulatory Institutions: o Generated massive transfer of wealth from businesses to the general public o Regulatory movement encouraged businesses to engage in collective action and act as coherent social actor – businesses began to rethink its own interests  Nixon Administration: o Ran a administration unexpected from a republican o Created tax reform policy “Tax Reform Act” (1969) – restricted business tax shelters (i.e. oil depletion allowance) o Stock values and corporate profits fell on the perception that inflation was not being dealt with seriously enough  Stagflation hit the economy for the first time 1969: o Burns (chair of the fed) attempted to control inflation through combination of higher interest rates and tighter monetary policy but failed  Vietnam war costs money, and as more plant and material are purchased by state despite of high interest rates, further stimulation and inventory growth became necessary which was reflected in higher end-user price  Nixon tried to seek solution which not only increased market uncertainty but further weakened embedded liberal institutions: 1) Suspended dollar-gold convertibility – marked the end of Bretton Woods regime  Currencies were free to float and began to sink  Transfer of exchange rate risk from public to private at the time where risk-management instruments (i.e. future markets) were very thin  Propelled further increase uncertainty 2) Imposed price controls Destabilizing Embedded Liberalism: Supply Shocks and a New Stagnationism  Nixon’s New Economic Policy (1971) – prompted more regulation and interventional policies: o Phase I:  90 day freeze on wages and prices  10% surcharge on imports  Hoped to resolve pressure on the dollar  Pay rounds negotiated by unions would be limited by the freeze  Inflationary expectations would decreased  Surcharge intended to avoid extra import inflation o Phase II:  Establishment of a price commission and a pay board  Pay increases no large than 5%  Limitation on profit margins  Strong and clear effect on inflation  Employment proved difficult to shift  Activities of the Fed undermined the effect of Phase II o Phase III:  Price commission and pay board abandoned  Main guidelines dropped  Businesses were given the right to administer phase 3 itself  Businesses ignored the guidelines completely  Inflation soared o Phase IV: nd  2 freeze on wages and prices after failure of Phase III – did not work  Nixon’s monetary policies were loose – inconsistent & ineffective with Nixon’s controlling policies o Money stock grew  1973 Arab-Israeli war: o OPEC prices hiked which created two immediate results:  Oil supply panic  Huge inflationary boost o Oil = important commodity, thus its inflation had massive effects o State had to one of 3 things to avoid inflationary pressure:  Reduce imports (only choice)  Reduce consumption (nonsensical)  Find alternative energy sources (impossible) o Emergency Petroleum Allocation Act: Promoted panic buying and drove prices even higher o Fed attempted to tighten money and spending simult
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