Monday, 19 November 2012


The Problems: 
1. Chronic high unemployment and underemployment
2. Chronic income erosion and downward social mobility
3. Crisis of Democracy

1. High rate of structural unemployment (chronic unemployment) on a world scale, but especially in developed nations where historically (from the 1950s until the stock market collapse of October 1987) they did not confront such a problem. Within this framework, it must be added that the rate of underemployment (part-time, seasonal, limited contract employment) as well as youth unemployment and underemployment skyrocketed. This poses not just an economic problem, but a social and political one as well.

2. Gradual drop of income from the middle and working class from the 1980s to the present. This is accompanied by a continued higher rate of college graduates unable to experience upward socioeconomic mobility that presumably college degree guarantees and politicians and businesses promote as the panacea. In fact, the problem today in many advanced capitalist countries is too many college graduates chasing too few jobs, and this includes graduates with advanced degrees in most fields. The question of disequilibrium between the college-educated class and the jobs available in the actual economy poses a challenge for the political and socioeconomic elites that forge policy and present it as the solution to achieving upward social mobility.

3. Can any society, especially a pluralistic society sustain itself for very long without addressing the problems of high structural unemployment and the downward mobility of the middle classes and workers, or can it expect social revolution at some point? Why is revolution possible across Muslim countries where armed rebels receive weapons from Western countries, but eventually in the Western countries where democracy is eroding? This is not to say that social discontinuity as it took place during the period from 1350 to 1650 is around the corner, but the crises I have outlined above will hasten such a process.

Global Unemployment

In January 2012, the UN's Internal Labor Organization (ILO) noted that despite the moderate recovery from the economic recession of 2008-2011, there were 27 million unemployed than before the crisis that banks and financial firms precipitated. Given that 2012 was a year of very serious financial problems across southern Europe, causing a eurozone economic crisis, combined with a global slowdown in India, China and the rest of the world, structural unemployment is likely to rise for the next five years and remain high for at least a decade, in the absence of radical state intervention.

This is especially true if we consider:
1. 2013 will be a very difficult recessionary year for the entire world, and it will likely continue well into 2014, for much of the world;
2. Global youth unemployment is at 13% according to the ILO, but that number according to BBC research is very low. Not only is the rate of unemployment calculated of those actively seeking work, thus excluding those that stopped trying, but it also factors in the total population that includes the underemployed in order to calculate the rate of unemployed.  In any case, the Middle East and North Africa, where Arab Spring has been in the headlines, leads the world in youth unemployment withe 27%. Shockingly, the EU and developed economies rank second worldwide in youth unemployment at 18% and expected to rise above 20%, with southern Europe suffering near 50% youth unemployment. 2013 will be a year much worse than 2012 for the EU because:
A) Spain will need in the neighborhood of half a trillion euros - banking system and public sector (debt service and fiscal operations);
B) Portugal and Greece will probably need between 200 and 300 billion euros for same reasons as Spain, but also in possible new 'hair cuts' and/or new extensions of existing debt service;
C) Italy's 10-year bond is under 5% today, and Italian investors command 8 trillion euros representing more than 4 times the public debt that is at 120% of GDP. However, Italian austerity measures contribute to continued rising unemployment currently at 11% with young unemployment above 30%.
D) France is likely to sink into recession and face debt difficulties amid austerity, also translating to higher unemployment and further budgetary cuts resulting in lower GDP growth;
E) Germany will probably experience a GDP drop in the second half of the year, dragging down farther the rest of EU;
F) Debt-to-GDP ratio for the eurozone rose from 54% in 2001, 59% in 2008, 80% in 2009 to 94.5% in 2013. Given that US debt-to-GDP ration is at 100% and Japan's twice the US rate, the eurozone is not in as bad shape as it seems. However, there is a huge difference comparing sovereign nations with a monetary union bloc, though in all cases it does mean that structural fiscal and monetary problems will result in much higher chronic unemployment and lower incomes for middle class and workers. In the absence of a liberal monetary policy that Germany and a few other nations following its lead strongly resist, at least until the 2013 election in Germany, all of the above point to structural unemployment hitting a new record across Europe, dragging down the rest of the world economy.
The eurozone's combined debts are equal to about 93 per cent of the region's gross domestic product this year and that figure is forecast to rise to peak at 94.5 per cent next year. In 2009, the eurozone's debt-to-GDP ratio was 80 per cent. A ratio above 90 per cent is generally considered high and can put pressure on governments' borrowing costs.

Read more:

Role of the State and International Agencies
Are 'pure market forces' solely responsible for the rise in structural unemployment? NO! The role of government, pressured by large corporations, especially banks, and by the IMF, World Bank, European Central Bank, FED, and other central banks have been advocating lower wages and higher unemployment to reduce production costs; a theory based on the assumption that surplus capital would then flow toward the 'new investment sector'; a theory very far from reality, as those who have studied economic history know.

In all countries where the IMF has been operating it has been advising cutting the public sector workforce, lowering wages and benefits in both public and private sectors, ending collective bargaining, and weakening trade unions that are invariably linked to political parties, and in many case union bosses are corrupt and part of the problem. The main argument that both the state and international agencies use as they pursue neo-liberal policies driving unemployment higher is it is all in the name of making the economy competitive, meaning labor costs as low as possible, short of causing social and political upheaval.

Despite the lofty rhetoric about corruption, neither the IMF nor the World Bank actually base policy on the high level of corruption in the public sector, least of all defense where most of the corruption takes place, and they do absolutely nothing to encourage the reduction of massive corruption in the private sector - from corrupt banks and offshore companies to corrupt multinational corporations greasing palms to secure deals with governments.

The fact that the parasitic nature of capitalism has reached astronomical levels. Although the percentage of the world's GDP representing official and private sector corruption cannot possibly be accurate, estimates range  from a low of 5% to as high as 15%. Public and private sector corruption is an integral part of capital concentration that contribute to higher structural unemployment, and lower living standards for the middle class and workers, while reinforcing the view that democracy is just a word operating against the reality of a socially unjust oligarchic system.

Jobless Recovery 
Are there prospects for lower unemployment five to eight years from now? Yes, but structural unemployment will likely remain at historic highs. Owing to rapid advances in science and technology as well as massive transfer of jobs from West to East and from the northern  to the southern hemisphere, the recovery will not bring along with it sharp reduction in unemployment (the jobless recovery phenomenon will prevail) and there will be no corresponding income rise owing to high structural unemployment. The jobless recovery is a reality not just in the US as the FED chair has admitted, but across the world, with exceptions in the BRIC (Brazil, Russia, India, China) nations, although the double-dip recession the world in currently experiencing has impacted BRIC economies as well.

Labor Supply-Job Demand Asymmetry
It has been argued for many decades that job hunters lack the proper training and that is the reason for their lack of employment. It is true that science and technology contribute to a changing market economy, but not nearly as much as government policies and corporation relocating to the lowest cost markets possible, and then expecting that a worker in Detroit or Hamburg retrain to chase the very limited jobs available in the area. It is true there is an asymmetry between the available labor force, which is highly-educated in most of the northern hemisphere nations, does not reflect the realities of the economy. In short, there is a considerable surplus professional labor force when there is no corresponding demand. This asymmetry will likely continue for at least a decade, pending changes in public policy.

Income erosion

I have written a number of essays on the blog regarding income erosion from 1980 to present across the Western World, while income concentration has also been taking place. Watching a recent conference with the IMF Managing Director, German and Indian finance ministers, I was amazed when the chief economist of CITI group stated that the greatest challenge of governments is to forge a policy mix that restores the middle class which has been eroding in the past decades.
Let us take the example of one company that has been in US headlines.
2004: HOSTESS files for bankruptcy; workers agree to $110 million in cuts, but the management doe not reinvest the savings back into the company;
2011: one private Equity Fund, and two Hedge Funds take over the company and sink it into deep debt, just as it has reemerged from bankruptcy, while at the same time demanding more concessions from labor.
2012: HOSTESS cut the pay of its workers wages (average of $20 per hour) by 8% and benefits by 32%, quit paying $160 million into workers' pension, while management gave itself a 60% pay hike and the CEO's pay rose 300%, from $750,000 to $2.5 million. The factory opted closing down, blaming workers for not accepting more cuts! This case is but one of countless similar to it, and the question is where is capitalism headed under such a model of hedge and equity funds raiding companies and undermining society as though it is a motion picture - WALL STREET?

The eurozone's combined debts are equal to about 93 per cent of the region's gross domestic product this year and that figure is forecast to rise to peak at 94.5 per cent next year. In 2009, the eurozone's debt-to-GDP ratio was 80 per cent. A ratio above 90 per cent is generally considered high and can put pressure on governments' borrowing costs.

Read more: factory blamed workers for the closing,

Small enterprises effaced
It is the law of the market economy to eliminate or weaken smaller and weaker enterprises as the market economy expands and especially amid contracting cycles. The assumption is that firms unable to best serve the market place in terms of providing the best (desirable by the consumer base) product/service at the most competitive price possible cannot survive because of capitalism's competitive nature. To some extent this has always been the case, but this theory of free enterprise assumes that public policy making plays no role - everything from labor policy, to trade and fiscal policy that in essence is a means of redistributing wealth. In point of fact, the role of the state has always been the catalyst and not nearly as much the 'free market', which has never been free of influences by the state. 

Small businesses are defined differently in the US than they are in the rest of the world, considering that a small business in the US could very easily pass for a mid-sized one in Spain or Taiwan, while the same small business could also pass for a fairly large one in Portugal or Malaysia. Where the state in South Korea has opted to carve policies favoring large-scale enterprises, Taiwan by contrast tried a more balanced policy (mainly fiscal) approach that preserved small businesses operating alongside larger domestic and foreign companies.

Small businesses have been significant in the evolution of capitalism, especially in the less developed countries where the labor force is mostly engaged in family-type businesses and small-scale agriculture. In conventional economic thinking it would seem unthinkable to have two-three thousand automakers in the US, Japan and Western Europe, instead of a handful. It would be unthinkable to have two-three thousand telephone companies, etc., and all because the assumption is that concentration and centralization of production equals: 1. lower production costs; 2. lower consumer costs; 3; lower product cost to consumer

The evolution of capitalism necessarily entails greater concentration and centralization of production, thus the increasing effacing of family-owned and small businesses in favor of larger ones. But what if the "invisible hand" is not the catalyst to this process? What if the key is the role of the state  and the policies it forges to eliminate small businesses while strengthening larger ones?

Government’s role in this is to provide assistance in the form of policy and change in regulatory framework. Where relevant, additional funding and investments are put forward to pave the way for projects. It is obvious even to a non-expert that when the state adopt a tax system intended to burden small businesses out of existence so that they make room for larger enterprises the invisible hand is no longer invisible. This is the case today through IMF-World Bank policy around the world. The logic is that bigger is better, cheaper, more efficient, etc. But is it not the case that the big banks and financial firms created the global economic crisis of 2008-present? Moreover, can large enterprises solve the problems of chronic unemployment and declining incomes?

Persistence of monetarism by Western neo-liberals
Beside the fact that money is the asset they hold and do not wish for it to lose value, there is the reality that the US, Japan and northwest Europe will suffer a reduction in their share of global economic output in the course of the 21st century, while Asia will see its share rise sharply. This according to the OECD that sees the current developed nations losing half of their global share. The estimates are not as significant as the reality that this is Asia's century, and one way Western neo-liberals are fighting back is by lowering labor costs sharply, thus transforming Western societies more radically than has been the case since the Great Depression.

Crisis of Democracy

There are obvious threats to democracy from high structural unemployment and downward income trends for the middle class and workers:
1. Higher social instability in the form of crime;
2. Higher rate of mass protests and demonstrations;
3. Higher level of cynicism and loss of confidence in democratic institutions;
4.Higher level of poverty and growing gap between poor and rich, projecting the image that society belongs to political and socioeconomic oligarchs;
5. Higher sense of 'dependency' (semi-colonial status) by those living in developing or semi-developed nations. The perception that the fate of the poorer and weaker nations is determined by the rich nations is not only very high among Africans, Latin Americans and many Asians, but even Southern and Eastern Europeans as well.

Unemployment is the highest in five decades and unlikely to come down dramatically in this decade. Can capitalism create at least 600 million jobs in the 2010s to meet the growing demands of a rising population, while securing the existing political economy and institutions? My guess is that it is indeed possible for capitalism to meet the demands of the job market with good living wages well above subsistence levels, but it is not nearly as profitable to do so.

Therefore, we are much more likely to see:
1. escalations of regional conflicts, backed or directly involving US and/or NATO as well as Israel, as the ultimate distraction for the masses to rally behind their national flags;
2. escalated rhetoric regarding terrorism threat to national security;
3. escalated rhetoric regarding the dangers of any progressive political party or movement advocating a systemic change in policy away from the neo-liberal model and corporate welfare capitalism. 
4. political polarization and people seeking solution outside political parties, trade unions, schools, churches, and other established institutions.

It is ironic that while the NATO allies have been selectively assisting Muslim rebels to bring down authoritarian regimes in the name of freedom and democracy, the same Western regimes have been undermining democracy in their own countries as well as in those countries where the US and EU have been imposing austerity measures through the IMF. 


Anonymous said...

Ultimately, you are saying that the liberty to prosper especially in countries like America are hindered due to factors that you've noted.

But, I do not read where factors such as executive orders like 13603 signed by Obama, where persons can now be conscripted into areas of their expertise without compensation during peace time, were mentioned.

What types of frameworks are in place to address this strategy and how does conscription without compensation fit into the broader scheme economically, politically, and socially?

Before you answer, "Go tell that fox," works of mercy, feeding the fatherless and widow, and drawing our brother near will continue today, tomorrow, and everyday thereafter.

Because more graves than huts have been made during catalyst decades in American history, but the heart of gratitude survived and the spirit of Liberty lives on.

Happy Thanksgiving Jon

Raycen said...

"any progressive political party or movement advocating a systemic change in policy away from the neo-liberal model and corporate welfare capitalism."

That seems like the seed of a potential Solution.