Dominique Strauss-Kahn and the lost chance for an economic debate

Dominique Strauss-Kahn’s arrest under very serious charges obviously threatens, if not destroys, his presumed presidential ambitions. However, in so doing, it also eclipses the chance for France to engage in a substantive and balanced discussion about economic policy during the upcoming elections. At a time when the European Left seems stuck wandering the hinterland while the “Very Serious Men” of conservative parties dominate this discussion, this is unfortunate for democratic debate.

Strauss-Kahn’s stature, not least as director of the IMF and long-time professor at France’s leading social sciences school, meant that he had the weight to potentially bring economic policy to the center of political debate. As European headlines are dominated by economic issues – stabilizing the euro, debt ceilings and budget cuts – a balanced and intelligent discussion could not have been more timely.

A few weeks ago, DSK (as the French call him) made an interesting speech at George Washington University that could readily be interpreted as an election platform. It bears a striking resemblance to Nobel Prize winner Joseph Stiglitz’ article in this month’s Global Policy Journal. This can be loosely organized around four points: greater state intervention, sustainable and shared growth, representative and effective international governance and finally, responsible business practices.

Greater state intervention
First, DSK addressed the “Washington consensus” that prevailed before the financial crisis noting its “basic mantras” that governments should step aside and let self-regulating free markets do the work. These would “police themselves effectively” and “lift all boats”. He noted that these ideas were discredited and that the pendulum would now have to shift back to the state with a greater role for fiscal policies. This is the same policy prescription given by Stiglitz who notes that fiscal policies can be “effective mechanisms for reducing unemployment and restoring growth” while “simultaneously reduc[ing] debt over the long run”. The ideological rift here is whether government spending or instead private investment could spur growth in the short-term.

Sustainable and shared growth
He then turned to the issue of rising income inequality, within and between states, and the need for redistributive thinking. He noted that economic inequality threatened social cohesion, which in turn, affected macroeconomic stability and could produce the kind of upheaval going on in the Middle East. This position has gained credence not only in the European Union’s broad Sustainability Strategy but also around the world, where both India and China in their respective 5-year plans have sought to address income inequality as a way of preserving political stability.

The idea that redistributive policies can be rooted in pragmatism instead of utopianism is echoed in Stiglitz’ recent Vanity Fair article where he wrote that self-interest “properly understood” means “that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being” and that “looking out for the other guy isn’t just good for the soul—it’s good for business.” Again, there is an ideological difference here about whether wealth does eventually “trickle down”.

Representative and effective international governance
DSK then warned against the danger of countries turning inwards during difficult economic times. Just as redistribution was key domestically, he noted that internationally, it was precisely at this time that a cosmopolitan and cooperative outlook was most pressing. Solutions would necessarily have to be regional and/or international. In a thinly-veiled critique of Germany and China, he indicated that “surplus countries must go in the opposite direction, shifting from external to domestic demand.”

This is perhaps where his own track-record at the IMF is strongest. First, he has played a key role in urging Germany to be more lenient and generous in the Greek bailout, not least out of self-interest. And second, he has made strides in reforming the institution to better reflect the existing international balance, giving greater voting rights to the BRICs (a short-hand for Brazil, Russia, India, China). This is in notable contrast to the UN Security Council.

Responsible Business
In both Strauss-Kahn’s speech, and in Stiglitz’ article, there is a final point about the need for responsible businesses, particularly in the financial sector. There are three inter-related points here: an assessment of the crisis’ causes, what the solution is and again, why it’s important to develop international solutions.

On the first point, DSK noted “the crisis originated in a culture of reckless risk-taking, a culture that is unfortunately still alive and kicking.” From there, derived his policy prescription for a financial activities tax that could produce the right set of incentives to change this culture and make these institutions responsible for some of their “social costs”. Stiglitz arguably goes further in suggesting “tight supervision and regulations” to encourage “banks to focus on lending, especially to small and medium-sized enterprises,” noting that “credit availability may be as important as or more important than interest rates”.

But here again, DSK highlighted the shortcomings of local solutions. While he saw some progress on financial regulation (in the so-called Basel III framework), he observed that the “shadow banking system” had fallen through the cracks and that the issue of “too big too fail” hadn’t been addressed. And most importantly, he warned that local solutions would be inadequate as other countries could “entice business by easing financial sector regulations or undermining social protections.” This is in keeping with the exodus of hedge funds from London to Zurich or the insinuation by bank executives facing regulation in Europe that they might be more “comfortable” in Shanghai or Hong Kong.

What now?
Obviously, this family of thought is greater than one man and a number of economists, not least Stiglitz, share his views. But the challenge is to bring this debate from the pages of policy journals and academic circles to voters. For this to happen, the Left needs charismatic and pedagogical spokespeople. Irrespective of what happens in the New York courts, it’s looking more and more likely that, for France, another victim of this week’s events is a broader and informed political debate.