Philip Booth: There Has Never Been A Neoliberal World Order

Are you neoliberal?

I believe people should have freedom and autonomy in the economic sector. The absence of freedom and autonomy in various ways makes the economy less human, and prevents us having the ability in the economic sphere to use our reason and action to do good in the economic sphere. I am not sure that labels are especially helpful in this respect, but as an economist I would regard myself as a classical liberal.

In Central Europe, the communist regimes demolished the traditional free market and the virtue of the market, so the state has to fill this gap, doesn’t it?

This is a difficult question. The biggest problem is not that the free market was demolished. The main difficulty is that the institutions of civil society were demolished. And these often take a long time to emerge. And if the state carries on providing health, education and other forms of welfare services, these institutions of civil society will simply not emerge. They emerged in countries like Britain, because organically people’s incomes grew and at the same time there was a strong Christian culture and the economy was very free. There is a strong Anglo-Saxon tradition of community-based institutions for welfare provision, and it’s difficult to know how to recreate that in a society where they were previously demolished. And the Church is also not very helpful in her social teaching, in saying how to get from A to B, because the circumstances are different in different countries. The education is the easiest area to deal with in the terms of decentralization. You shouldn’t think that people in Central Europe are in a worse position than we in England. In the United Kingdom 93 percent of people go to state schools, over 90 percent of healthcare is provided by the state.

The common explanation of the causes of the recent crisis is that there was too much free market. You have a different view. Why?

The real cause of the crisis, especially in the United States was that the government underwrote people’s reckless financial decisions. Although the common interpretation of the crisis is that the financial system was too liberal and not sufficiently regulated, actually it was incredibly regulated. In the UK there were probably a million paragraphs of regulation. Also banks are regulated not just by the state, but by the European Union also. In the United States, there will be thirty thousand pages of new bank regulations under the new Act. Most of the countries of EU now are trying to develop a legal framework so that banks can fail safely. I think that this is the right way, because it ensures that banks will take financial responsibility for their risks and that they will behave in a more prudent manner. And if a bank fails, it will fail safely, so the cost won’t be paid by the taxpayers, and banks won’t be bailed out.

Do you think that the crisis was foreseeable?

Very few people foresaw the crisis and how it would actually played out. Regulators didn’t foresee it any more than people in the market. You can’t direct markets to ensure that this type of thing never happens, but you can make sure that those people who operate in the market take responsibility for their financial decisions. The basic principle of the market economy is that you pay the cost of your financial mistakes. That didn’t happen in the case of banks, so you can’t say that the cause of the crisis was the free market.

Shorting has become a scapegoat nowadays as well as "speculation." Similarly, we now hear claims that the so-called "real economy" should be the first priority and not overwhelmed by the "money economy." Is it dangerous?

The exchange of securities within the securities market, whether it’s buying, trading, selling or shorting doesn’t reduce the amount of capital within the real economy. Shorting is an important activity because if you hold a share in a portfolio and you believe that the company is performing poorly, then the maximum amount that you can sell is the amount you hold. But if you can short the stock, it means you can send a stronger signal that you are concerned by the behavior of the management of the company. It’s strange that people talk about this issue as part of the problem because the whole point about the banking crisis is that bank management were allowed to do the wrong things for far too long without discipline by the markets. Shorting helps discipline managers.

The prime minister of Hungary, Viktor Orbán used to say that the "neoliberal world order" is over and it will be replaced by a new one. Do you agree with him?

Well, there never has been a real neoliberal world order. There has been an era of increased globalization, increased trade and openness of economies, which has been a good thing especially for the poorest people in the world. But what Mr Orbán says is a serious misinterpretation of the causes of the crisis. As I said, the banking system didn’t respond to free market principles. They where compensated by governments when their decisions turned out to be bad. He also needs to think about what other principles he wants the economic system to be based on, other than individuals and families having autonomy in the economic sphere circumscribed by the rule of law. Does he want a situation in which bureaucrats arbitrarily tell people what they can and cannot do? Or the governments can go around – as it happened in Hungary – and nationalize private pension funds, so people don’t have any confidence that they can save for the long term and that their savings won’t be taken away by governments? There is no other successful economic system other than one that is built broadly on economic freedom, protection of property rights, the enforcement of contracts and limitation of arbitrary government actions.

Anyway, is it a correct interpretation that there are economic models on the shelf, and you can select which one you actually think would be the best choice for the given situation?

I don't think that there are any economic models on the shelf. There are principles that you can apply. And one of these principles is that you will be in trouble if individuals and businesses do not have to take responsibility for their mistakes. That was the problem in the banking sector, as I mentioned.

How would you appraise the discussion between Mr. Orbán and the EU?

This is difficult because the EU does place checks on the abuse of power by governments. And I think one could be concerned about things that are going on now in Hungary.

Have you heard about the so-called "unorthodox" approach to economics of the Hungarian minister of economy?

Well, I have taken a slight interest in some aspects of what is going on in Hungary, most particularly in what happens with the pension funds. As I already commented, what the government has done was really dangerous. It reduced it’s explicit national debt by nationalizing pension funds, and at the same time increased the implicit debt, because the government promised to pay people pensions in the future financed by other taxpayers. It just sweeps the problem under the carpet as we say in Britain. It also means that people who are undertaking very long-term savings in the future have to question whether or not the government will confiscate their savings. It’s a terrible concern. Because of this kind of governmental act, the economy becomes much more short-term and short-sighted, which is not healthy from a Christian nor from a general economic point of view.

What do you think of flat taxation?

In general, the flat tax is a good principle. Most people expect that better-off people should pay more tax, but it seems to be a reasonable principle that we all should pay the same proportionally from our income. In fact, I’d like the flat tax to be a constitutional principle because it would put an end to the abuse in a democratic system where one group of people tries to obtain benefits for themselves by imposing the costs upon another group in society. So I am in favor of the flat tax.

And what do you think of some of the other taxes, like the taxation on banks, a transaction tax and the so-called "chips tax," which purports to be about "unhealthy" foods?

With regard to the bank tax, the core of the problem is that in most economies banks are poorly capitalized, so taxing banks from a pure pragmatic point of view is not helpful policy. The chips tax I think is arbitrary, secondly it is ineffective in dealing with the problem. If people are somehow addicted to eating too much, small changes in the prices won’t change their habits. Also it is very difficult to administer: how do you decide whether something should be the subject of a tax on unhealthy, fatty foods? Cheese is fattier than chips. Actually the best incentives we could have for people to keep healthy is if they pay some of the costs of their healthcare. Regarding the financial transaction tax, it does not raise much money, partly because it reduces economic activity and will lead to economic activity switching to other countries. And it is an entirely arbitrary tax because it is not clear who will pay it: bank customers, bank managers, stockholders? Nobody really knows. I think we should have an honest and transparent tax system, rather than a tax system made up of hidden taxes.

Should Greece leave the eurozone?

There is a possibility, but I think that’s not the most likely outcome. If Greece is not allowed to leave the eurozone, I think it will experience a very long period of economic stagnation and social dislocation. If, on the other hand, it is allowed to leave the eurozone, it’s difficult to know what the consequences would be especially in the short term. It’s an extremely difficult situation. My preference is for Greece to remain part of the eurozone, for the euro to remain legal tender, but for the Greek government to simultaneously issue its own currency alongside the euro. I think it would help to deal with some problems without dislocation.

Can the euro survive?

It’s not sustainable in a strict sense, but there is a sense that the euro could be kept going as long as the EU authorities wish by continuing to print euro. The strategy now is to monetize the debt and print new money in order to buy the debt of the indebted countries, and it’s difficult to see what the endgame is. Somewhere along the line there would be very high levels of inflation.

Would becoming a federation be good for the EU?

If governments are going to be bailing each other out in one way or other, or through the ECB, which is backed by the governments, it is difficult to see how this can continue without European Union authorities having control over fiscal policy. It is also desired to centralize the banking system on the eurozone level, which is also a step toward federation. My preference is to go in the other direction, which is to more clearly separate fiscal policy from monetary policy so that the ECB is not involved at all in guaranteeing government debt. It’s really almost too late to go in this direction, however.