Neoliberal Crisis, Globalization, Austerity and the Transfer of Debt from Private to Public Sector

A great Italian economists and colleague of mine, Ricardo Fiorito (Ricardo spent a few years in residence at the University of Wisconsin) has suggested (here) that we think about the work of Stephen D. King who wrote a recent article in the Financial Times (here) and also wrote the book Loosing Control. The article in the FT was entitled "The eurozone deal will fail".

King's basic point is that Austerity is no guarantee of lasting economic and financial stability. Much more is at stake and it has to do with the positive and negative aspects of Globalization. There are severe imbalances in the World economy. Current account surpluses in Asia (think China) and the EU (think excess German savings) are having the effect of fueling speculation (hot money moving quickly in and out of countries and the financial fuel for excess debt). Another Wisconsin alumnus, Calla Wiemer has made the same point in a Wall Street Journal Editorial Don't Revalue the Yuan yet. King points out that the West has borrowed too much and now the debt has been transferred to the Public Sector. The consequence will be a long period of austerity that will damage the West.

Here are some of the questions King goes on to ask in Loosing Control:

• We are entering a period of competition for scare resources (think commodities such as oil and grain), a competition between the developing world (Brazil, Russia, India, and China the BRICS) and the West, a competition the West has not had to face in the past. What will be the result? Resource access and ability to rig markets has been essential historically to Western development.
• Why have financial markets become unstable? Has the pursuit of inflation targeting by Western monetary policies become a source of instability?
• If globalization is a triumph of market forces, why are we seeing a resurgence of state capitalism (think China)?
• Economic success in the past owed much to mass migrations. What will the affect of Western anti-immigration policies be especially when free flow of capital is allowed? Economic theory requires that all factors of production move freely for comparative advantage to work.
• Does reform of the international monetary system along the lines of the Eurozone offer a blueprint for monetary reform or a lesson in neoliberal catastrophe?
• Why has inequality increased substantially in the West? What does it have to do with Globalization and unequal income distribution between countries?
• We have reached an unprecedented level of sophistication in economic analysis. Why did economists miss the financial crisis?

As Ricardo has noted, there is a lot to think about in Stephen King's work. A first step would be to step back and view what's happening right now in the world system from the standpoint of globalization.