Monday, 22 October 2012
Antecedents to the Crisis of 2008
Uneven development & the State’s role
In the interwar era Sigmund Freud’s Civilization and its Discontents raised concerns about early 20th century Western civilization’s constrictive pressures on individual instinctual predilections and freedom. In the late 20th century, globalization poses a threat to freedom and identity as well as a danger to effacing national and cultural autonomy. Because as an integrative system free enterprise is predicated on perpetual expansion, inevitable contracting cycles built into the system necessarily entail continuous strengthening of globalization and compromising of both human freedom and cultural autonomy. This interpretive essay argues that ‘dismantling the modern welfare state’ has been at the core of the discontents of globalization. The process of chipping away at the welfare state started in the US and UK during the 1980s during the ‘Reagan-Thatcher decade’. Despite contractions that signal a danger to eliminating the social welfare safety net, which is at the core of social justice in modern bourgeois democracies, dismantling of the welfare state has spread globally and it continues to unfold.
From the Commercial Revolution to the present, global economic integration under the evolving capitalist system has exacerbated geographic and social polarization. Owing to capital accumulation concentrated within the core (most advanced countries) of the modern world-system, social inequality and uneven geographic development is inevitable and it entails the periphery remains perpetually less developed and experiences lower living standards. This is evident merely by considering that the US as the center of the core countries (G-7 by today’s standards) enjoys 26% of the world’s GDP, but it constitutes a mere 4% of the world’s population. Another indicator of uneven geographic development is evident when considering the per capita income ratio between periphery and core is 14:1 ($14 income average for the G-7, $1 average for underdeveloped countries).
Backed by the state, private capital incessantly appropriates labor’s value in both core and periphery. While a strong state structure is a characteristic of the core, a weak state structure plagues the periphery where foreign capital and organizations like the World Trade Organization (WTO), International Monetary Fund (IMF), World Bank, European Central Bank, European Investment Bank, among others of course, wield far-reaching influence in global trade, fiscal, monetary, and development policies. The process of capital accumulation floating toward the core during cyclical economic crises, like the one the world has been experiencing since 2008, further exacerbates income disparities and asymmetrical trade relations between advanced and less developed countries and results in downward economic pressures on labor and the middle class amid financial retrenchment.
To rejuvenate and continue on a course of expansion, the market economy must reduce production costs, which means reducing wages and benefits – further appropriation of labor’s value - while expanding markets, many of which are highly protected. More so today than during the era of classical economists from Adam Smith to Karl Marx analyzing the dynamics of political economy from disparate viewpoints, the role of the state is catalytic. Most economists and social scientists, especially neo-liberals do not acknowledge the role of the state as a pillar of the market economy, viewing it instead an impediment to free enterprise because fiscal and social policy have an impact on business growth. In the past century, finance capitalism has been unable to operate without government indirect intervention through fiscal policy during expansion cycles and direct intervention with massive injections of public funds during contracting cycles of the 1840s, 1870s and 1890s. In the aftermath of every contracting cycle during the 19th century, there was an effort by core countries to guide capitalism back to health, namely, through policies that resulted in imperialist ventures in Africa, Asia, and Latin America.
In the 1930s, British scholar John M. Keynes observed that capitalism left to its own devices cannot recuperate when in severe dislocation; at least it cannot recuperate without social upheaval that threatens the social order. Hence, state intervention to strengthen private capital and preserve the social order is necessary. Since the 1930s, governments adopted variations of Keynesian policies that remained at the core of bourgeois regimes for the past fifty years. The credit economy, which replaced the gold standard at the start of the Great Depression, is showing signs of over-extension, thus contributing to economic contractions. The question of how financial, political, military, and academic elites, especially in the core countries, address an over-extended credit economy is the key to social engineering and to the morphology of pluralistic society in the 21st century.
Neo-liberal Challenge to Keynesianism – Reagan-Thatcher Origins
Milton Friedman and ‘Chicago School’ economists, who advised Ronald Reagan, who came to office in January 1981, dismissed Keynesianism as outmoded and impediment to progress. Given that the post-war global economy had not experienced another depression, and given the need to stimulate the US economy after its massive losses during the Vietnam War and loss of US global competitiveness, there was a need for a new method for capital accumulation. One option to stimulate growth was to water down ‘Keynesian militarism’ (also known as containment militarism owing to America’s ‘containment doctrine’) by slashing the bloated defense budget and invest public funds in research and development for new sources of energy that the US needed to lower its external payments deficit. Early Cold War advocates of ‘Keynesian Militarism’ like Paul Nitze believed that America’s surplus capital could be absorbed by the defense sector thereby serving both geopolitical and economic goals by presumably keeping the economy balanced. An option that an influential group called ‘managerialists’ (represented by businesspeople like the Rockefellers, labor unions like AFL-CIO, government, and academia) proposed using the surplus capital to expand the civilian economy at home and globally, thus achieving a victory of capitalism over Communism without a ‘high-geared’ arms race. Managerialists conflicted with right-wing ‘Containment Militarism’ ideology and entrenched interests profiting from the military-industrial complex.
The managerialists became prominent during the Carter administration when the Vietnam War was over and the US and world economy was faced with structural problems. The question for the US elites was how to handle the credit economy for the future, while maintaining global military and economic preeminence. The solution coming from neo-liberals was to ‘water-down’ the social welfare system. Proposing a return to classical liberal economics based on Adam Smith’s theory, the ‘Chicago School’, which also advised other governments, including former Chilean dictator A. Pinochet, contended that greater wealth at a faster pace for more people could be generated if government limited regulation and privatized public enterprises. From the conservative era of Reagan-Thatcher to the present, globalization accompanied by deregulation of business and privatization of public enterprises promised to deliver an economic and social miracle; at least that is what neo-liberal apologists contended, and they enjoyed the political support of right-wing ideologues and advocates of bigger defense spending. Recent developments prove that the neo-liberal theory a fallacy, especially when accompanied by ‘Keynesian militarism’. Capitalist prosperity would not rise indefinitely if government allow greater market freedom and everyone would not benefit as neo-liberals maintained, while allowing for inordinate defense spending.
Rising Rich-Poor Gap & Globalization
Transforming the social welfare state into corporate welfare not just in the US but globally became policy. There was and there remains a major public relations effort by business, government and media on a global scale to indoctrinate the public that the social welfare state is the enemy of progress. At the same time, neo-liberals and advocates of corporate welfare argued that the free market system generates prosperity and reduces poverty. This argument of course became even more powerful with the downfall of Communism. Empirical studies, however, by the World Bank and UN confirm that in the past forty years, poverty has been rising and capital remains highly concentrated on a world scale. If it were not for the social welfare state, the lower classes would suffer a great deal more during the cyclical contracting cycles of the market economy.
The crisis of 2008-2010 has added millions more to the poverty pit with one out of six Europeans living below poverty levels. Similarly, there has been a widening gap between rich and poor nations, about to widen further during the 2010s decade owing to the current crisis. Many social scientists, business people, and politicians contend that the return to economic growth and development rests with neo-liberalism accompanied by the dissemination of the ‘consumerism doctrine’ floating outward from developed to underdeveloped regions and from upper to lower classes; a trickle-down theory. Maxime Laguerre’s Innovation & Growth, points out: “Only through the acceptance of the dogma that growth in consumption equals a growth in happiness does every capitalist system legitimize itself.” Therefore, the multifarious and ubiquitous marketing of the illusion imbedded in “consumption equals growth” dogma is far more significant than the reality of material progress and human happiness.
Globalization-privatization-driven growth since the 1980s resulted in massive capital accumulation concentrated in a small percentage of private ownership, especially energy multinationals, mostly in the advanced capitalist countries. If the state had vigorously regulated and progressively taxed businesses to absorb surplus private capital, the inevitable contracting cycle of 2008-09 would have been far less severe. Long-term causes of the recent crisis include:
a) US fiscal policies favoring a small percentage of the richest Americans;
b) a trade policy undercut by a weak dollar and prejudicial quotas;
c) massive capital concentration winding up in speculative enterprises instead of productive ones;
d) exorbitant defense spending that has added enormous debt and left the bill to the next generations.
In varying degrees, EU and other countries including former Communist bloc nations tried emulating US-style capitalism, thereby creating similar conditions.
Hedge Funds, Neo-Liberalism & Globalization
Operating under the dogma of neo-liberalism, globalization-privatization is only partly to blame for the financial and economic crisis the world is currently facing. Another factor that resulted in the current crisis and accounted for the absence of rising productivity or horizontal economic development was market speculation in the form of Hedge Funds (unregulated mutual funds in all areas from energy and currencies, to stock, precious metals and mortgages). Very loosely regulatory environment and the assumption the government would come to their aid, emboldened corporations to engage in duplicitous accounting and take immense risks with Hedge Funds that were beyond regulatory mechanisms. In the past few months, the press has uncovered that Goldman Sachs among other financial institutions were responsible for selling high-risk products to clients. They were then shorting the same products they sold to clients knowing those products would decline in value, thus making money. Moreover, Goldman Sachs was responsible for striking deals with a number of countries, including Greece, to ‘cook the books’, that is, to falsify public accounts in the same manner that accounting firms in the 1990s and early 2000 were helping corporations do the same thing. The US and the EU were aware of the operations of such investment banks. Governments looked the other way and Goldman Sachs continues to operate with impunity.
Because the influence of Hedge Funds was far reaching, the assumption was that the federal government would rescue them. Although the FED was aware of the dangers, it permitted their operations to spread and play a major role, thus contributing to volatile stock markets that drove many otherwise solid companies like AIG to engage in Hedge Fund speculation that the world had not seen since the collapse of energy-trader ENRON. Via computer stock market trading, hundreds of billions exchanged hands. None of it reflected rising or falling productivity in the real economy. Only timing of the market mattered, a process more fitting for Las Vegas gambling. For a tiny investment, speculators were buying insurance betting on shorting certain firms and government bonds that were bound to decline.
For a dollar worth of insurance, Hedge Funds were buying insurance betting that AIG would decline, or that countries with weak fiscal structures like Greece and others would not be able to meet its bonded debt. Because multi-millionaires and finance capital fund political campaigns, the US and other governments would not regulate Hedge Funds. In January 2010, Barak Obama proposed tougher measures for financial institutions investing in Hedge Funds. French President N. Sarkozy concurred. Some EU leaders going along and others hesitated. Stock market reaction was negative reflecting the inordinate influence of Hedge Funds. In April 2010 the Securities and Exchange Commission and the US Congress is investigating Goldman-Sachs for ‘improperly’ if not illegally manipulating the housing market. EU governments are following in the footsteps of the US government with regard to Goldman-Sachs.
Obviously, the issue is larger than Goldman-Sachs and larger than Hedge Funds; it is one of how parasitic capitalism helped to undermine the entire world economy and drove it to the worse contracting cycle since the 1930s. Here is a case where governments failed in their responsibility to protect the public from predatory capitalists. The reasons of course include everything from heavy lobbying to campaign contributions that account for the inexorable relationship between finance capital and the state. Even after receiving about one-third of US GDP in subsidies and loans, finance capital wants an ideal marketplace of no investment restrictions and no corporate accountability; it wants a return to the same environment that caused the recent crisis. The artificially glittering quarterly reports accompanied by the promise of future earnings was enough to keep more investors coming much like a pyramid scheme. Because there was very little behind speculative capital in terms of productive capacity to support the investment build on a paper pyramid, it was only a matter of time before the reality of actual values of companies caught up with the hyper-inflated stock market paper values. High oil and gas prices combined with the real estate bubble, and saturated markets chasing limited consumer demand accounted for finance capitalism’s cyclical crisis.
Consultancy & Outsourcing
Along with Hedge Fund and real estate mortgage speculation, both aspects of parasitic capitalism, consultancy and outsourcing, in some cases one-and-the same entity was an additional contributing element to recycling of money toward parasitic instead of productive sectors. From the early 1980s to the present, the utmost parasitic element of ‘consultancy’ emerged to infect everything from banking and high finance to universities and government. This phenomenon reflected first the neo-liberal demand that government must create a larger and stronger private sector and second the trend for greater bureaucratization of the private sector. While not every ‘outsourcing’ endeavor and every consultant can be classified as parasitic, in fact some are productive, for the most part outsourcing was carried out as part of the ‘privatization’ trend. Consultants and consultant committees offered advice for the most part that was common sense, already known, some combination thereof, or something called ‘coffee table reports’ to the ‘contractor-client’. Nevertheless, the ‘contractor-client’, whether the State Department or Exxon-Mobil, justified having ‘consultant committees’ on the payroll because it was part of the corporate culture.
In some cases, consultants and consultant committees were simply on the payroll serving a political agenda, or because of some interest group’s pressure, or because of a quota needed to secure a public or private sector contract. In those cases where consultants for private or public sector actually worked for their money, the advice had to be cloaked in what served the client management’s interests, and not necessarily the company or government’s broader interests. Often justified as ‘outsourcing’, consultancy became a fad and it resulted in enormous amount of capital siphoned off without any productive result. The madness of consultancy spread globally. It became a way of doing business to the degree that even small and debt-burdened countries like Greece were notorious for ‘consultant committees’ composed of politically-connected people that siphoned off public funds.
Fall of Communism-Failed Capitalism
Despite the tremendous rise of parasitic finance capitalism that included consultancy as an obstacle to growth and development, the world economy in the 1980s and 1990s was sufficiently dynamic and had enough impetus to expand without suffering a crisis of the 2008-09 magnitude. The integration of former Communist countries into the world-capitalist system in the 1990s, the low energy/raw materials prices for most of the decade, and the new high tech revolution should have been sufficient to sustain the expanding economic cycle without the experience of a mini-depression crisis. The Euro as a reserve currency and relatively cheap labor in the Third World as well as advanced countries where trade unionism has been eroding along with real wages were additional stimuli for global economic growth. Such synergy of global developments could have strengthened capitalism only if the state and IFIs (International Financial Institutions) had vigorously regulated the corporate world, and better managed and coordinated the world capitalist economy through monetary, fiscal, and trade policies. Only by absorbing surplus capital instead of allowing its greater concentration could the state mitigate the crisis. Therefore, the catalysts to the mini-depression crisis of 2008-09 rests partly with the role of the state and IFIs that pressured all governments around the world to privatize, liberalize, and strengthen the strongest within the private sector. The net result is the continued weakening of the social welfare state and the corresponding strengthening of corporate welfare.
Blame Game & Damage Control -- US Banking Crisis & EU Reaction
The inevitable contracting economic cycle notwithstanding, what specific forces were responsible for the biggest economic crisis since the Great Depression? Who must be accountable to the public? US banks like Citi-Group and Bank of America, insurance giants like AIG, investment firms like Lehman Brothers, a corporate culture based on deception and speculation together with government regulators who failed to regulate financial institutions, greedy and corrupt bankers around the world that invoked a neo-liberal ideology to secure greater profits, or all who took part in the globalization-privatization euphoria. When the financial crisis erupted in the US, European businesspeople, expert analysts, and EU officials confidently predicted that the banking problem was limited to the other side of the Atlantic. Hence, there was no threat from the ‘American-made banking-real estate crisis’ to the EU or to other parts of the world.
Within weeks after it became clear how inter-dependent and how high-tech-rapid the world financial system has become, EU governments scrambled for political and financial ‘damage control’ followed by the ‘blame game’. Yet, they seemed at odds and in panic mode about a concerted solution given the uneven economic strengths of each EU member, and associate Balkan and East European members waiting to join. Initially it was every country’s central bank buttressing its own banking system in coordination with the European Central Bank. The delayed coordinated EU-wide approach sent the markets into a tailspin, bank loans to a halt, and the ‘real economy’ beginning to feel the pain in terms of drop in producer and consumer demand, and job losses. When EU finance ministers finally agreed on a more coordinated approach, the bailout plan appeared similar to what US was doing. For the World Bank to publicly accuse the G-7 of not doing enough to control the crisis means that the time for wider coordination had come after many months of each country fending for itself, each bank for itself, each multinational corporation for itself.
As a world system, capitalism operates under the same rules of capital accumulation, thus requiring similar solutions despite variations in modalities. For example, Ireland adopted an IMF-style austerity program that the EU applauded as a model for other countries like Greece, but at a great social cost. By contrast, social-democratic Sweden, whose manufacturing sector suffered immensely, has social safety mechanisms to lessen the impact on labor and middle class. The ‘bail-out’ solution to the crisis of 2008-09 benefited the strongest financial institutions that were actually partly responsible for prolonging and deepening the crisis by using public loans to buy out weaker institutions. One course of action available to governments to ensure market stability and return to growth would have been to nationalize all banks and provide liquidity to stimulate growth, instead of purchasing stock and imposing stricter regulations mainly regarding management bonuses while the bailout loan remained outstanding.
As much as the US banking crisis, chronic external equilibrium problems, and skyrocketing defense spending have contributed to the global crisis originating in the US with the real estate sector and speculative below-prime lending at its core. Vladimir Putin was correct to claim that under US unilateral financial leadership the world economy had faltered, thus the world needs multilateral economic leadership. However, the European Central Bank’s (ECB) decision to keep interest rates high at the outbreak of the crisis was even more irresponsible than anything Washington was doing under the inept and perilous Bush administration. The idea of fighting inflation and keeping a strong currency amid rising unemployment and economic stagnation was one only the IMF would recommend on behalf of finance capitalists that benefit under such conditions at the expense of the middle and lower classes.
At the Rome Conference on global poverty in November 2008, ECB’s announcement to hold steady interest rates and thus maintain a strong euro against a weak US and Chinese currencies indicated incredible confidence in IMF-style monetarist policies that invariably redistribute income from the bottom income earner toward the wealthy. Instead of providing more liquidity for the civilian economy at the dawn of the crisis, ECB was keeping it tight; instead of raising taxes on high-income groups, EU governments were providing subsidies and making it easier for further corporate consolidation, asking the average taxpayer to pay the bill.
Global Campaign to Save Finance Capitalism
With central banks and IFIs (IMF, World Bank, OECD, European Investment Bank, etc.) helping to analyze and coordinate a concerted policy to stimulate growth by injecting inordinate public funds into the financial system, it was possible to moderate the impact of the stock markets’ crash on the ‘real economy’. The ultimate goal, however, was to save finance capitalism as the economy’s backbone, instead of focusing on a jobs-based economic growth that would generate consumer spending and faster revival. As expected, there were rifts within G-8 and even more within G-20 where President Ignacio Lula of Brazil argued that the Third World was suffering from a First World crisis. Although all evidence pointed to Wall Street and US financial institutions, common fear to get a handle on the crisis before it was out of control drove the summit leaders to strengthen world finance capitalism.
World leaders and public opinion realized that the worst economic crisis since 1929 took place against the background of the war and occupation in Iraq and Afghanistan and perpetual instability in the Middle East owing to the Israeli-Palestinian conflict. The long-standing policy of ‘Keynesian militarism’ designed to stimulate growth at a time the US was suffering balance-of-payments and budgetary deficits weakened the American economy that was spending about five percent more than it was producing; deficit that needed external financing. Concurrently, out-of-control energy prices fueled by speculative investment climate in a number of sectors that accounted for inter-sector imbalances – real estate values rising to unrealistic levels because banks were expecting to make money with below-prime loans. At the same time, balance of payments and budgetary deficit contributed to the dollar’s decline, thus resulting in a further loss of investor and marketplace confidence.
When the crisis erupted, there was a scramble by governments to save their own economies, even if they had to resort to mild economic nationalist measures. As the largest dollar holder, the Chinese government proposed a world reserve (supra-national) currency above the dollar, euro, yen, sterling pound, etc. Russia agreed with the Chinese proposal, but Obama promptly rejected it and naturally supported the dollar as the preeminent reserve currency. Could the Russian-backed Chinese proposal inspire monetary stability and thus prevent future mini-depressions as the one we are currently experiencing, or are the Chinese regretting investing two trillion dollars in US bonds out of necessity? A number of economists and politicians maintain that the world economy may not be in ‘real growth mode’ until 2012 – much longer for non-energy producing countries in the periphery - and there may not be dynamic growth until the end of the decade.
Structural weaknesses, which includes immense public debt combined with low consumer demand and unemployment, will continue to rise in the next 12 to 24 months. Outside of China, India, select Asian countries, energy-rich Russia, and perhaps Brazil, this decade may be one of slow growth. Even as countries aim to lower public debt and even if the Chinese ‘reserve currency solution’ were adopted, will such measures avert another cyclical crisis? If the single super-reserve currency is not the solution, is there a need as the Europeans, Russians, and others claim, for a new Bretton Woods system? Some economists and social scientists have suggested that the world needs a Green Bretton Woods, one rooted in new eco-friendly science and technology of self-sufficiency, especially in the energy sector, if the world is to avoid economic dislocations like the one we are currently experiencing.
The gradual power shift in the world economy from the Atlantic to the Pacific, with calls for a new Bretton Woods or a ‘New Deal’ that British PM Gordon Brown proposed, and the Chinese proposal for a new reserve world currency placed immense pressures on the US at the G-20 meeting in London in April 2009. Given that the EU and Japan together account for 38.1% of IMF contributions, and given that Gordon Brown has repeatedly asked the Arab countries to make a multi-billion contribution to strengthen the IMF, the question arises about the US role in that organization headquartered in Washington and essentially run as a US bureaucracy since Bretton Woods.
Global Crisis and Realignment of Elites
The fall of the Communist bloc reinforced and emboldened the ‘Markets-over-State’ (financial over political elites) theme. After the fall of Communism, there was an enormous rise of stock markets (‘irrational exuberance’, as FED chair A. Greenspan once called it) around the world in the 1990s. The ‘end of history’ was here, so proclaimed true believers in the market economy, neo-liberals, and right-wing ideologues celebrating the death of their nemesis Communism. Presumably, serious academics lined up behind the ‘Cold War winner’ and ready to sound the trumpet on behalf of a social order that seemed to transcend history. Prevalent since the Reagan-Thatcher era, the ‘markets-over-state’ theme filtered down to the middle classes throughout the world, operating under the Hegelian (G. W. F. Hegel) assumption of steady upward progress for the market economic system.
From fixed-income retirees to millionaires, euphoric individuals invested their savings in an institutionalized fallacy that drove stock markets higher along with the boundless speculation bubble. The new reality today is that the financial elites have recognized the global economic crisis diluted if not obviated the ‘markets-over-state’ ideology and culture. Obviously more serious and far reaching in its economic and social impact than most people believed before autumn 2008, the current crisis temporarily forced governments toward a quasi-statist course – greater role of the state in guiding, managing, regulating the market economy which would collapse in the absence of public funding. However, this was only an ephemeral phase that quickly gave way to the same old neo-liberal policies.
As a last resort and presumed arbiter in society, the state in the hands of political elites is far more significant in times of crisis to guide the course of the economy than the financial elites. Besides the monumental weight of fiscal policy, government subsidies, public contracts, and legislation, the reality is that the public sector is becoming increasingly larger in the developed nations and smaller in semi-developed and developing ones.. The neo-liberal crusade since the Reagan-Thatcher era was precisely to create a larger private sector and stronger financial elites, while retaining ‘Keynesian militarism’ responsible for ‘winning’ the Cold War.
Political party machinery is the foundation of the political elites, although in some cases, those who are part of the political elites may also be a part of the financial hierarchy, as in the case of Silvio Berlusconi. Under mechanisms (at least some depending on the individual country) of public scrutiny and accountability, political elites have a responsibility for all institutions to preserve social harmony and avert instability that may lead to systemic change. Assuming they are operating under legal and regulatory guidelines, financial elites’ accountability does not extend beyond corporate management, followed by investors and consumers.
As the largest entity in the economy and main engine of economic stimulus, the state determines the economy’s fate, institutions and social order. Given that markets require such intervention in times of crises to survive, political elites are currently more hegemonic than they have been in the last 30 years. Such realignment of financial and political elites of course takes place depending on whether society is undergoing economic crisis, war, revolution, or other destabilizing episodes. The current contracting economic cycle will result in a long-term rather than temporary realignment of elites because it will be a long time before the political climate is such that it permits the revival of the unfettered ‘market-over-state’ culture of the last three decades. Another reason for realignment of elites is the relative success of countries where statism in some form takes precedence in comparison with countries that followed the neo-liberal route.
Quasi-Statist Alternative to Neo-Liberalism
Can the welfare state, which neo-liberals fear as a form of statism, co-exist under globalization predicated on corporate welfare? China, India, and Brazil, three countries where statism in varying degrees prevails did not suffer nearly as much as a result of the current global crisis and have the best prospects for rapid growth in the rest of the decade when most other countries will struggle. Brazil, for example, did not have to bail out its banks largely because the Lula da Silva regime had imposed transparency and accountability in banking. Foreign investment in BRIC (Brazil, Russia, India, China) nations is driving growth - $45 billion for Brazil in 2008 vs. $2 billion in 1994. Such reliance on foreign capital entails ‘dependent development’. While the combined BRIC nations have the largest population of poor on the planet, their development prospects are better than those of advanced nations.
According to some estimates by 2014, Brazil’s economy will be fifth in the world, surpassing France and England. BRIC nations have demonstrated first that political elites enjoy paramount influence in guiding the economy, and second that statism is here to stay because it works to save national and international capitalism. Scandinavian style social democracies operating under statist policies are another model with historical roots of the relationship between political and financial elites. Regardless of models, political elites will remain strong first because capitalism thrives under a strong state structure and secondly because their role in protecting and preserving the political economy and existing social order will remain more significant than that of financial elites.
Public Debt & Living Standards
In the last three decades, there is a correlation between runaway public debt and astronomical corporate and consumer debt in most countries. There is nothing wrong with public borrowing when it contributes to horizontal economic development that meets society’s broader needs. Nor is there anything wrong with corporate debt, if the goal is asset building and adds value to the company, and not intended to reward a handful of ‘insider’ investors, executives, and consultants engaged in fraudulent accounting and investment schemes. The convergence of rising public debt, partly for the parasitic defense sector, the rise of private debt – corporate and consumer – reflects the reality of a consumer-oriented capitalist economy that spends more than it produces. Servicing loans is not a problem when the economy is expanding, even on credit. The problem arises when the state, businesses, and individuals cannot service loans on a chronic basis because they have overextended. Inordinate public borrowing coinciding with similar trends in private borrowing in the last 30 years weakened the economy and resulted in mini-recessions culminating in the current crisis.
Of the $3.6 trillion US budget that Obama presented in February 2010, $1.6 trillion is in deficit, money that must be borrowed and paid by future generations through lower living standards. Given the US is currently suffering a budgetary deficit that accounts for 9% of GDP, at a time that official unemployment is at 10% (at least 15% unofficially, growth rates must be above 5% for the next ten years to bring down both percentages. Otherwise, the result will be sustained official unemployment of above 6%, poverty above 15%, and weaker middle class.
Cyclical crises of capitalism are inevitable because the dynamics of the system predicated on continued expansion with periodic contraction upon market saturation. Established to maintain market growth in the world economy and help alleviate the symptoms of crises by providing currency stabilization (IMF) loans and World Bank development loans, IFIs have proved beneficial, especially for corporate America and the other advanced capitalist countries whose corporations profit from stable currencies and open markets.
Conditionality of IFI loans, which entail the recipient must deregulate the market place and reduce labor costs while reducing corporate taxes, further benefit multinational corporations. Because loan ‘conditionality’ drains capital from loan recipients and does not lead toward self-sufficient development, the IFIs role has entailed cyclical debt-crises and perpetual dependence of the Third World on the core countries. Playing a key role in austerity programs that perpetuate asymmetrical trade and uneven geographic and social development, IFIs have been major obstacles to sustainable development and strong state structure in the Third World.
At the urging of the US and EU, during the 1980s the IMF, World Bank, European Investment Bank, OECD, and regional IFIs like the Inter-American Development Bank, Asian Development Bank fostered deregulation, privatization, cuts in social programs, reduction in the public sector, reduction in wages, raising indirect taxes, and cutting taxes on corporations and upper income groups. Backed by the G-7, the IFIs recommended to borrowing member countries that they offer all types of incentives from less regulation to lower taxes to attract domestic and foreign capital investment. Borrowing governments went along with IFI policy recommendations, and only then did the IMF-World Bank-Paris Club declare the loan recipient ‘credit worthy’ so that consortium loans led by the World Bank would approve funding for development projects.
Public and private banks would then provide guaranteed and commercial loans to the borrower. Such policies resulted in de-capitalization from the periphery to the core and from labor to capital and strengthened the process of globalization. Moreover, borrowing countries remained structurally weak to face the next cycle of global economic recession like the recent one when currency devaluation, lower wages, and higher indirect taxes are among the austerity measures become necessary to strengthen finance capital. The result was lower living standards for borrowing nations, especially labor, and the lack of sustainable development that would allow upward social mobility instead of widening rich-poor gap.
The Global Crisis & the Shrinking Middle Class
In all economic contracting cycles throughout finance capitalism’s history, blue collar skilled to unskilled labor, agricultural day laborers to small farmers, and white-collar employees to mid-management ultimately pay the price for economic dislocation. The middle class, as the media and governments define it today to include a very broad range from upper working class to highly paid professionals and managers, experiences downward pressure toward ‘proletarization’ status instead of upward mobility as it envisions its destiny in a pluralistic society. Very clear in the 1930s, this phenomenon is taking place amid the current crisis not only because people are losing jobs, homes, and retirement savings, but because the future looks bleak for their children’s opportunities for upward mobility.
Besides part-time and contract work, the middle class and workers are asked to accept pay cuts, reduced benefits, reduced work schedules, flexible working conditions, all of which will be accompanied by the expectation of retiring at a later age. That limited market opportunities means limited possibilities for upward mobility for the next generation translates into loss of confidence in bourgeois democracy. Where is the recent ‘proletariatized’ middle class headed; will it emerge stronger than it did after the Great Depression, helped immensely by the war-stimulated economy, or will the middle class society lapse into chronic decline? There is a fundamental question of whether the ‘middle class’ was on sound footing in the last four decades, or artificially created by a deficit-spending system now in crisis throughout the world.
On paper, the combination of low labor values in the Third World that allowed for higher incomes in the advanced countries and the postwar credit economy accounted for the quantitative and qualitative growth of the middle class in core countries. A large percentage of the population in western countries of the northern Hemisphere, as well as Japan, Taiwan, and South Korea experienced upward mobility in the past 40 years, and China more recently. Middle class mobility was based on the credit economy and the ‘wealth effect’ was a mirage because the middle class lived on credit and hoped values in everything from their incomes to homes and securities would continue to rise indefinitely. The current crisis has exposed the bourgeois facade of endless progress, and revealed that a large percentage of the middle class was really working to pay off debt until death. All along, the proletariatization of the middle class was taking place serving both the economic goal of capital accumulation and the political purpose of liberal democracy as a material utopia.
The US Congressional Budget Office estimates that in the next three years there will be a $2.9 trillion gap between productive capacity and actual output. In short, more than 300% the amount congress initially approved as part of Obama’s stimulus package. Such a gap will mean that the state must decide if the top 10% of income earners will bare the brunt of the bailout cost, or if the middle class and workers will have to endure lower living standards and downward instead of upward social mobility. Because capital accumulation on a world scale takes place by the more thorough exploitation of labor, the state will support financial elites’ efforts to squeeze out the maximum from middle class and workers short of precipitating social upheaval and political instability. Arbiter of social relations through control of the fiscal system, the political elites in each country will determine how weak the middle class will be for society to function without paying the price of radicalization and violence.
Because effective demand is limited by the earning power of workers and middle class in the post-credit crisis of the early 21st century, and the sharply reduced personal wealth (drop in real estate values, private pensions, and stock portfolios) the illusory middle-class ‘wealth effect’ will remain low and the accumulated surplus capital high. Of course, China with a strong state structure and dynamic economy growing faster than any other in the world is the exception, followed by India, despite very low average living standards.
Naturally, science and technology innovation will result in new growth, as will the degree to which the state in the core countries will intervene to limit capital accumulation by financial elites to keep a relatively stable middle class. Because there are multiple institutional means that condition people toward conformity, most exercise self-restraint toward the status quo as they are convinced that there are rewards in such behavior and punishment for social dissidence. In the end, the middle class perception of upward social mobility for their children may be a catalyst to a political solution or social action.
Global Crisis & the Working Class
Few would disagree that the most dramatic and lasting impact of the recent recession will be on workers especially in less developed countries. Even with G-8 coordination, as the IFIs urged throughout 2009, the recession of 2008-2010 will not turn into an expansion cycle before workers have paid a very high price to revive the ailing monster whose tentacles reach around the planet. Unemployment will rise – officially, averaging 10% in US and EU, closer to Great Depression levels if one counts those who have stopped registering for work and those working seasonally and part time. Wages will fall along with benefits and workers will be doing the tasks of two or more people because businesses reduce staff. Socioeconomic polarization will continue as price inflation reduces working class living standards.
Some of the sociological consequences of this crisis include a rise in suicides, rise in physical and mental illnesses, rise in divorce rates and single-parenting, and a rise in crime to mention only a few. However, it will all be worth it knowing that capital concentration will thrive once again, that stock market speculators, bankers and investment gurus, and tough-talking industrialists make a few extra million in annual bonuses and other compensation! The media and ‘expert analysts’ will blame everything from workers lacking training for the ‘right jobs’ to bad character traits of the individual unable to cope in the otherwise ideal democratic society operating under the ideal market economy! The poorer the country the worst off labor conditions will be. However, regardless of whether the worker is unemployed and homeless in Manila or in Detroit, the painful consequences are the same. Although this scenario did not have to unfold as pessimistically as I am describing it, I fear that it has evolved somewhat so because the greater the wretchedness of the multitudes, the greater capital accumulation on a world scale. Therein rests the essence of the market economy as operates even with existing social safety nets – the somewhat more humane Scandinavian model notwithstanding.
Within the capitalist camp, there are of course, other ‘gentler kinder’ paths to follow that will be less painful for labor and the Third World that had nothing to do with precipitating the crisis but will have to pay for it. Instead of a policy mix intended to strengthen the financial sector, governments could absorb surplus capital from the top 10% of income earners and stimulate the economy. Transfer of income from the parasitic capital-intensive private sector to productive labor-intensive public areas as a way to stimulate job growth that results in consumer spending, greater stability in the investment climate and greater confidence in the economy can be carried out by more aggressive Keynesian measures. Although the current crisis presents the state with the opportunity to redistribute wealth from top down for a change instead from bottom up, so far there is no sign that is likely to occur.
More socially progressive policies always meet with vehement objections because they entail asking capitalists to share in the recovery of the economy they have debilitated. And behind finance capital are the political elites. Because capital accumulation on a world scale will be financed by the more thorough exploitation of labor, the state must continue to back capitalists to drain every ounce from workers short of precipitating social upheaval and political instability. Of course, apologists of capitalism ranging from social democrats to neo-liberals will try to mold public opinion that this is how life is in a pluralistic society; that indeed it is the fault of the individual worker who lost his/her job with all the consequences to follow, or that everyone must share in the ‘sacrifice’.
Given the weak trade unions in most countries, the fact that leftist groups have been co opted by the center in the last four decades or they are marginalized by their own archaic ideology, tactics, and corruption, workers in most countries lack effective leadership. Desperate, fearful, anxiety-ridden workers will run for help to bourgeois political parties that represent capital. They will demand crumbs; they will beg not to have so much blood drained from their veins this time around. It is indeed a testament of globalization that household pet in the core countries enjoy better health care, housing, and food than more than 50% of the world’s poor in the periphery!
Corporate Bailout or Corporate Welfare
In the US in 1970, the average worker-to-CEO compensation ratio was 20-30 times or $1 for worker to $20-30 for CEO. In 2007, the same ratio had risen to 350 times, or $1 for worker to $350 for CEO). Along with its products and services, the US exported its corporate and consultant culture and we now see such outrageous worker-to-CEO compensations in Europe. Government bailout funds for banks, insurance companies, and other corporations has been used primarily for consolidation, rather than easing the credit crunch.
With the approval and in some cases urging of government, European and US banks have used public funds to buy other banks, investment, and insurance firms on the cheap, and/or as reserve capital to stabilize their stock price. When British PM, Gordon Brown, approved Lloyds TSB purchase of HBOS in September 2008, did Mr. Brown know that on 13 February 2009 Lloyds would ask that the state to save the bank that had purchased $17 billion bad debt from HBOS? Similar cases abound in the US where the Bush administration urged banking consolidation more for ideological considerations than financial, namely, to save financial institutions from state control and/or ownership.
Because economic crisis can cause social and/or political instability as well as destabilize foreign relations, Obama’s election was actually necessary to de-radicalize the disgruntled workers and the middle class, while appeasing world public opinion that had turned decidedly against the US more than ever in its modern history. Many believed that Obama would follow in the footsteps of F. D. Roosevelt, and thus revitalize society in every sector from banks to social programs. As much as Obama represents hope for the masses at home and abroad as the ‘reformer Messiah’, he is in fact the Messiah of finance capitalism following watered-down Keynesian policies. Even billionaire Warren Buffet admits that no one really knows if Obama’s measures will bring about the publicly stated result.
Nor do we know that Obama’s policies and those of the other advanced countries will result in inflationary pressures once the world economy revives and their impact on labor. To control inflation it will mean higher interest rates and further credit tightening that will result in lower living standards for workers. Indicative of finance capital’s pervasive influence, in January 2010 the US Supreme Court ruled that limiting corporate campaign contributions constitutes an infringement of free speech. As the US economy improves, there will be greater pressures on Obama and the congress to revert to loosen government regulation of business and revert to the same policies that led to the current crisis. And the rest of the world will follow because capitalism is a world-system operating under the same rules.
The Poverty of Globalization
Despite GDP growth in the last two decades before the economic crisis of 2008-2010, social inequality, uneven social and geographic development and rising poverty are among the reasons that the legitimacy of capitalism and the myth that materialism engenders happiness comes to question. Besides the planet’s rapid environmental degradation, decline in the bourgeois lifestyle characterized by boundless consumption and self-indulgence, a weakened middle class today is possessed more by fear and anxiety for its children’s future than comfort that capitalism promises in the marketing of the “growth and happiness dogma”.
One of the major concerns is how higher education around the world is increasingly tailored to serve capital and that only the wealthy will be in a position to secure a classic Renaissance-style ‘liberal arts’ education in the future. There are many complex variables, among them objective conditions of how the evolving capitalist system is restructuring society. Progressives throughout the world have an undeniable responsibility for surrendering to the status quo or surrendering to fatalism. This is partly because bourgeois democracy no longer has a nemesis as it did during the Cold War to provide an alternative, but also because of thorough indoctrination of the masses.
Hovering just under 20% in the US and about the same in the EU, chronic poverty will remain a long-term legacy of the current recession. ‘Third World-type’ conditions already exist within the advanced capitalist countries – families in the American Deep South and northern inner cities subsist on a few hundred dollars per month and rely on food stamps to feed themselves. Conditions for the bottom 20% of the population are not that much better in the EU where the prospects for recovery are not as bright as in US, and even less so for Japan.
If finance capitalism is to survive with the inevitable wealth concentration within the top 10%, there must necessarily be downward income pressure on the middle class and workers. Generating greater surplus amid global contraction than the market can absorb will keep the capitalist economy in a limited-growth mode for at least a decade, unless the state absorbs the surplus capital from the top ten percent of income earners and spends it for labor-intensive socioeconomic development.
History’s most destructive holocaust may unfold in the next decade as one billion poor fight just to be fed unless the richest nations that control most of the wealth act fast to lessen the crisis. The pets of the wealthy and middle classes live better than one-third of the world’s population (two billion) that will experience further decline because of the current contracting cycle. Although international organizations (NGOs and official entities) and even some heads of state have been warning about this issue almost on a monthly basis, there is yet no concerted action by the G-20, which own most of the world’s wealth, to reduce poverty.
Meanwhile, there is no shortage of empirical studies warning about the rise in global poverty owing to everything from market speculation to the multi-trillion global financial crisis and the lack of the state to address capital concentration. The poverty holocaust will have social and political implications and cause instability and further weaken the world economy as the UN has warned to the shrugs of the richest nations responsible the crisis. To deflect attention from the poverty holocaust, the EU is accusing China of neo-colonialism in Africa, which suffers the lowest living standards in the world. I have no doubt that informed Africans are amused at blatant European hypocrisy at a time that food, water, and medicine are the key issues for hundreds of millions, especially given that a few multinationals control a large global share of water, medicine and foodstuff resources.
Greece & the Global Financial Crisis
Greece financed its War of Independence with European loans. Because throughout its modern history Greece has been financially dependent on the Great Powers, it suffered chronic underdevelopment. External financial dependence is continuing despite the fact that Greece is an EU member, which presumably projects the image of a First World country protected by the euro as a reserve currency. Financial dependence entails economic dependence that includes trade and manufacturing dependence. Structurally, Greece remains an externally dependent society that has raised living standards in the past four decades largely through public and private borrowing.
All Greek politicians were well aware during the national elections of autumn 2009 that the country would have to ‘put its house in order.’ Under pressure to satisfy ‘market conditions’, the EU compelled Greece to undertake a series of deficit-reduction measures that are as harsh as those that the IMF imposes on underdeveloped and semi-developed countries. The fundamental prescription for austerity measures has not changed in the past fifty years and they are essentially the same for all IMF borrowers, including Greece today. That bond rates rose sharply in order for Greece to borrow is an indication of its lack of creditworthiness, speculation by Hedge Funds, and the extremely tight global market for loans at a time that most of the world suffers staggering budgetary and balance of payments deficits.
Austerity or IMF-style stabilization is not about the funds applied to the country that needs it but about fiscal and economic policies that the country adopts which make it attractive for domestic and foreign capital. More political than they are economic, stabilization programs serve as the pretext for unpopular privatization/liberalization policies. While IMF austerity entails cutting public sector spending, wages and benefits, and providing incentives for capital investment, the unique aspect about Greece having to resort to the IMF as Germany demanded is that it is a full member of the EU and a stab at the monetary union’s integrity.
Associate members in Eastern Europe are IMF borrowers, but they are outside the common currency. Tested under the extreme economic contracting conditions of 2009-2010, the EU integration model is not nearly as cohesive as it had promised in the past decades. On the contrary, the EU integration model ostensibly more egalitarian than the US or Japanese models proved rather tenuous. Moreover, the entire eurozone area also proved a more vulnerable against intense global competition and less communitarian.
The Greek and foreign press presented the course toward financial regression, if not near-bankruptcy, in 2009 just before the national elections, but the seeds for regression have their origin in the transfer of dependency from Great Britain to the US during the 1940s and then back to dependency on Europe upon its induction into the EU. How could near-bankruptcy happen to a country that hosted the Olympic Games in 2004? How could Greece, once EU’s best examples of how integration works for smaller members. The answer is that the Greek economic miracle in the past 25 years was largely financed by a combined public and private sector debt that may amount at least 300 billion euros and perhaps as high as one trillion.
The current recession accompanied by a stabilization program will have an impact on the economy and living standards for the rest of the decade. This is because of international economic slowdown, limited domestic growth prospects, and Third World-type official and private sector corruption combined with a marked absence of EU-style institutional mechanisms to deal effectively with a fiscal system designed around a corrupt private and public sector. Despite the Greek economy’s impressive growth rate in the previous decade, the socioeconomic gap has widened sharply once again after it had been closing in the past three decades, as it did in Spain, Portugal, and Ireland. As the EU’s weak link, Southern Europe may in fact reflect the greater flaws in the monetary union’s structural integrity, namely, that the EU was never prepared to confront a crisis of the magnitude as it is currently facing.
In 2008, one study indicated that by 2012 Greece and Spain could approach Italy’s living standards. That prediction based on the infamous “Greek statistics” and boundless optimism now seems only a dream for Spain and Greece. IMF-EU privatization recommendations that have been implemented under the ‘reform’ label and more are on the way, which are designed to strengthen big businesses and attract direct private investment. Curbing social security benefits and keeping wages low, which are among the lowest in the EU entails that Greece is hardly Southern Europe’s economic miracle of the early 21st century that some observers once praised.
Baksheesh Capitalism & Austerity’s Political Price
Some of the chronic problems facing the country and keeping it from enjoying higher living standards and upward social mobility include unrelenting rampant corruption in all sectors of society from church and state to health and education. The current regime has used corruption as a pretext to undertake austerity measures and strengthen the private sector. Greece suffers chronic and widespread tax evasion not much different from a Third World country, but the majority of fiscal income not flowing to the state is from big business. The thriving subterranean economy estimated at 70 billion euros, or about one-third and it includes everything from street vending to narcotics and sex traffic and money laundering activities, is of course a serious drain on the fiscal system. The World Bank ranks Greece’s corruption at about the same level as some Latin American and African countries.
The issue of speculators targeting Greece is both accurate and a pretext for the austerity measures. The real issue is one of horizontal development that Greece lacks during its entire history, including the period from its induction in the EU. Despite receiving EU development funds, for various projects from infrastructural development to subsidies for building hotels and cheese factories, there has never been central economic planning, especially absent of bribery and corruption, aimed to generate sustained development. As one of the smaller EU members without a manufacturing sector, Greece entered the current crisis later than Western Europe. Although Greece accounts for a tiny percentage of EU’s GDP, its monumental fiscal deficit, combined with public and private external debt payments deficit (estimated at more than one trillion euros), and chronic public and private sector corruption has resulted in threats that threaten the currency’s integrity.
After PASOK’s election in autumn 2009, the EU immediately demanded speedy austerity measures, preferably similar to those of Ireland, so that the Europeans (mainly Germans) do not pay for the costs for Greece’s chronic budgetary and balance-of-payments deficit that have weakened the euro. Some Greek analysts have wondered why the US government helps bail out states like California, while the EU refuses to bail out Greece. Why is it that the EU offers loans for associate members in Eastern Europe, but no comparable aid to its own members? First, as a sovereign nation, member of a common market and common currency, Greece is not a state like California. Second, bailing out Greece would set a precedent for all full members to spend above the 3% of GDP. Finally, the EU as a common market competes globally, which means that its strongest members are apprehensive about their global competitiveness diluted by weaker members. Therefore, just as the US would impose IMF austerity on its common market neighbor Mexico to stabilize its currency and make it attractive to investors, so does the EU demand austerity from Greece. That Germany encouraged the IMF to take part in a bailout program of a Eurozone member is indicative that the reserve currency is much more vulnerable than politicians or financiers believed until 2010.
EU political support for stabilization has come at a high price. Stabilization programs weaken national capitalism, strengthen foreign capital; they weaken labor and the middle class and strengthen finance capital; they weaken the public sector and strengthen the private sector. For example, there are several thousand foreign firms in Greece (perhaps as many as 16,000) which are exempt from many of the taxes imposed on national firms, at least those national firms that actually pay taxes in the required amount. That Germany became the obstacle to the EU bailout for Greece is understandable, given Germany’s preeminent role in the EU and in Greece. Eastern Europe that borrows from EU and other sources including the IMF has less freedom to decide its fiscal program than Greece. Papandreou acknowledged that in fact Greece has lost a part of its fiscal autonomy, in reality most of it. However, the \experience of Greece amid the current contraction threatened EU monetary stability, thus the idea of an EU super-fund for future financial crises is a valid proposal and it may come to pass, if the richest EU members agree.
Although unemployment is hovering around 25% in autumn 2012, or 15% above the EU average, it is expected to rise an additional 5% during 2013, while the combined budgetary and balance-of-payments deficits will amount to 17% of GDP, and the country will remain in negative GDP growth for the fifth straight year. Spending 4.3% of GDP for defense, Greece has one of the largest military budgets owing to its NATO commitments and unstable relationship with Turkey. Even when Papandreou announced austerity measures, defense contracts were not canceled, despite revelations about bribery scandals involved with each contract.
Corruption on a global scale shaves off about 10% of the legitimate economy and public finances. In the case of Greece, the percentage is much higher and approaches the levels of sub-Saharan and South American countries. Paradoxically, the government is using the stabilization program to integrate a greater segment of the informal economy into the legitimate economy that the ministry of the finance can document and tax accordingly. Under the guise of EU-imposed austerity, the government is reforming the fiscal structure that was one of the weakest in EU.
Equally alarming to the abyss of public spending, it is estimated that an ever-larger percentage of households are over-extended and as many as one-third may not be able to service them on time this year. Loan-payment delinquency is a global problem the credit economy created, and its impact entails widening rich-poor gap. All of this was before the current stabilization program, which will result in lower living standards. In short, Greece, along with many other core and semi-periphery countries, built a credit middle class that will be facing retrenchment during this decade. On the optimistic side, GDP growth may reach just under one percent, but capital flight and high interest rates for bonds will remain an obstacle to such growth.
In the last analysis, the tourism-shipping industry are hardly sufficient to stimulate new vertical growth, at a time the country needs ‘horizontal development’, that is to say, development in new sectors that will serve domestic needs and reduce import dependence so that there is a drop in the external payments deficit. Hardly a microcosm of EU’s northwest members, Greece is a reflection of the periphery and future members in Balkans and Eastern Europe. Moreover, the recent problems with the public deficit may in fact be a reflection of the fragile EU system and its lack of proper centralized mechanisms to prevent any member from jeopardizing the Union’s monetary integrity. That a small EU member caused the euro’s decline by several percentage points was a hard lesson to Europeans who will have to institutionalize more rigorous safety net mechanisms in the future to prevent a similar eventuality.
Partly of because Greek officials have been falsifying statistics for many years, the fiscal deficit stands not at 6% they presented as fact last summer but at 12.7%, or more than double that of Germany, which explains the much higher interest rate. Since last summer/autumn bondholders had been speculating on a debt crisis and purchasing insurance betting on the existing shortfall nearly bankrupting the country. In February 2010 the New York Times revealed that Goldman Sachs was helping the previous administration conceal its real debt from the EU, and Goldman was interested in buying Greek debt, a scheme that never materialized. Greek accounting methods of the public sector in the last decade or more are actually a reflection of how some corporations also operated, namely, falsifying numbers and hoping to cover the gaps with future receipts. However, such accounting methods were not very different from mega-corporations engaging in fraudulent accounting. Fraudulent accounting is based on the assumption of continued economic growth to cover gaps.
In November 2009, Goldman approached the newly elected Socialist Government of George Papandreou in Greece and proposed purchasing the Greek debt, at least a portion of it, presenting it to the EU lower than it actually is, and in exchange take control of the airport tolls and other frozen income sources. In October 2009, Greece’s official debt presented to the EU was 6% of GDP as opposed to 12.83% that was the real debt. Having run a campaign to clean up rampant corruption involving both domestic and foreign firms, Papandreou rejected the Goldman-Sachs proposal. What followed was a campaign by Goldman-Sachs to expose Greece along with all of Southern Europe as EU weak links whose bonds should command much higher bond yields than what Germany pays.
Before the NYT published the Goldman-Sachs story, Papandreou went public with implicit accusations that the EU was complicit in covering up fraudulent statistics that Greece was submitting for a number of years in exchange for policy measures that it (EU) wanted Greece to adopt. The German government acknowledged that the EU had not done its job properly. Ironically, in March 2010, the Greek government used Goldman-Sachs as one of the investment banks for the issuance of bonds. Besides their working relationship with investment banks like Goldman-Sachs and bond investors, accrediting agencies like Moody’s and Fitch responsible for assessing Greek bonds are essentially in the business of pursuing a neo-liberal agenda that strengthens finance capital. Concerned that Greece would have difficulty refinancing past debt was what bond traders focused on and one of the key reasons for the high interest rates until of course the EU and IMF agreed on a bailout with interest rates much higher than developed countries are paying.
Stabilization’s Economic Growth & Social Impact
In the era of globalization and privatization, the inherent characteristics of ‘Greek-style baksheesh capitalism’ are evident in other countries and contribute to social instability and radicalization of the masses. The rapid rise in public and private debt during the past 30 years in Greece as much as in many western countries, combined with the expected higher interest rates once western economies recover in 2010 posed another impediment to economic growth for the next five years. That the public sector and the various social security funds are in debt to the tune of billions and the government must borrow to finance such staggering debt entails high interest rates, which incidentally benefit German investors who hold an estimated of 80% of Greek bonds. The price for EU backing Greece financially carries the same quid-pro-quo as any Third World borrower, which means Greece will be making large trade deals that involve everything from defense contracts to consumer items from Germany and France, which are the main financial supporters.
Hyper-debt and the current EU-imposed stabilization program entails stagnation that may last for the entire decade and result in lower living standards and contraction of the middle class, in the absence of rationalizing the otherwise chaotic market economy that is externally dependent and not inwardly oriented – designed to serve the domestic consumer’s needs. While France was relatively cordial toward Greece, Germany has been much tougher. Merkel’s conservative government favored monetarism at the cost of cuts in social programs. Having to contribute the largest amount for Greece’s bailout, Germany has immense debt of its own and it does not know how much it will have to devote to help other EU members in the future. As the third-largest buyer of French defense supplies Greece has earned a receptive audience in Paris. Austerity in the Greek economy is also a signal that Germany wants to send to the rest of the members that fiscal discipline will be observed at the national level.
Radicalization of workers and middle class will only intensify not just in the weaker EU members like Greece, Spain, and Portugal, but in other countries where protests are expressed in different modes from student riots and labor strikes to rising crime. The gap between these social groups and political parties and trade unions, invariably extensions of political parties, will widen. The result will be spontaneous uprisings indicative of far reaching indignation with those who claim that democracy means lining up behind established political and labor organization. In short, bourgeois democracy’s challenge in the early 21st century, as much in Greece as in the EU and elsewhere, will be the widening gap between the under-represented broader social classes and institutional structures like political party and trade union bosses. Entrenched political, business, trade union, and academic elites divorced from the lives of the masses contributes to social alienation and sociopolitical instability.
Greece’s Prospects for the Future
The extremely difficult phase, which Greece is undergoing owing to austerity measures, will come to an end in a three to five year period. Assuming that the state modernizes and utilizes its enormous talent in the form of an educated work force, there is reason for guarded optimism. Greece under the EU ‘inter-dependent’ model of integration has performed much better than it had under the US-imposed ‘dependency’ model. The natural gas deal with Russia and the Black Sea Trade and Development Bank consortium present opportunities for capitalist growth. Greece has untapped mineral resources that can be used to stimulate new capitalist growth.
Assuming the current regime succeeds in curbing corruption and addressing tax evasion by going after the top ten percent income earners, while at the same time pursuing multilateral commercial relations, Greece as a national economy may actually do better than its northern Balkan neighbors, despite lower living standards for workers and the middle class. Consortium investment represent considerable impetus; Greek-owned firms have been taking advantage of low-cost labor and have been expanding in the Balkans and the Near East where Greece has created its own mini-zone of limited influence. Moreover, Greece has benefited from cheap immigrant labor that continues to fuel its economy, and it looks for further stimulus by expanding its Russian natural gas pipeline connection.
Some politicians claim that Greece is the 30th richest country in the world and that may very well be correct, is we count the assets of the top 10% of wealthy people whose assets are outside the country. There are options before the Greek government, ranging from a mixed economic model that South Korea and Taiwan are following to the Scandinavian that Papandreou likes but does not emulate. Moreover, there are sources claiming that Greece has enormous unexplored strategic mineral resources that can be the basis for new economic development. Assuming that Greece will follow the example of other countries around the world to curb parasitic consultants and outsourcing, there can be some savings realized along with continued pursuit of legitimizing the subterranean economy and addressing rampant corruption and tax evasion. However, the plan is to privatize and pursue IMF-EU liberalization measures. While the austerity program will work as it always has, namely, to weaken the public sector and strengthen private capital at the cost of a weaker middle class and laborers, the state can prevent ‘brain drain’ (the exodus of educated workforce) and develop a modern economy under a socially just system with domestic and EU resources.
Global Macroeconomic Prospects
The core issue for the early 21st century is the degree to which globalization will continue to erode the social welfare state in order to strengthen corporate welfare. Although some economists and investment gurus remain guarded about economic growth owing to rising unemployment and very high public and private debt, the IMF is optimistic that 2010 will yield global economic growth slightly above 1%, whereas 2009 plunged the world economy into negative territory. Given that the G-20 have invested about one-third of GDP to bail out financial institutions from 2008 to the present, the IMF is correct that a recovery is imminent, led by China, India, and developing countries in the Pacific, with the G-8 following. China may enjoy double-digit GDP growth in 2010, while Germany has declared it would take at least three years to emerge from the current crisis that has resulted in a budgetary deficit 6% of GDP.
Assuming relative political stability with the major powers led by the US, 2010 may be a much better year than the IMF is predicting, but growth will be limited to corporate profits amid a jobless economy. To the degree of it may be political plausible option, economic nationalism and statism are ways to lessen the burden on labor and the middle class. For countries like China, Russia, India, or energy-rich Iran, such a course is much easier than for dependent countries in the periphery and semi-periphery of the world-system. For example, historically dependent economies whether it is Greece and Turkey, or countries undergoing dependent development do not exercise economic nationalism under bourgeois regimes to the degree Germany can. Of course, a radical government such as those in Bolivia for example could adopt quasi-nationalist policies to mitigate economic inequality and the power of foreign capital. Given that international organizations like the IMF, World Bank, and the World Trade Organization best serve the interests of the most advanced capitalist countries under the globalization model, economic growth will continue under the existing framework.
Given the US is currently suffering a budgetary deficit that accounts for 9% of GDP, Germany at 6%, and at a time official unemployment is at 10% (at least 15% unofficially, growth rates for US and EU must be above 5% for the next ten years to bring down both percentages. Otherwise, the result will be sustained official unemployment of above 6%, poverty above 15%, and weaker middle class. This is social engineering designed to strengthen capitalism! Within the EU, growth prospects are even worse for Europe’s “PIGS” – Portugal, Italy, Greece and Spain, (Ireland also belongs in this group) all of which are targets by bond speculators and partly responsible for the euro’s and stock market slumps since January 2010.
With 11.5% of the EU’s GDP, Spain is the fourth largest Eurozone economy confronting a budgetary deficit that is 9.3% of GDP (lower than the US percentage) and cumulative public/private debt that amounts to 207% of GDP (equal to Japan’s), while European average currently runs about 180%. As of December 2009, Eurozone’s private debt as a percent of GDP was divided as follows: Businesses – 73.6%; Households – 61%; Mortgages – 44.5%; and Credit card & consumer – 16.5%. Credit will become much tighter as interest rates will be rising and banks will be reluctant to float loans. Because banks receiving bailout public funds reinvested to consolidate by strengthening their own and/or purchasing other banks, credit tightening has already choked the real economy and in 2010 interest rates will be going higher according to several EU central bank forecasts.
As banks and other corporations continue to dish out huge bonuses, while governments do not impose restrictions and refuse to regulate effectively, the question is whether structurally anything has changed since 2007, and if the conditions that structural causes of the current crisis may precipitate another crisis during the next downward economic cycle five-to-seven years hence. A number of social scientists have written that this entire decade will be one of modest recovery and paying off debt, thus lower living standards and relatively low growth on a global scale. Technological and scientific innovations in a number of areas from nanotech to biotech, from bio-fuels to ‘green economic models’ that impact agriculture, transportation, building and manufacturing sectors may hold a window of opportunity for growth and development, assuming there is relative geopolitical stability. On the other hand, the internet revolution of the 1990s was a major stimulus to the world economy. However, because it operated under the rules of speculative capitalism, by the end of the decade, the bubble busted like all bubbles throughout history. I expect the future high tech and science revolutions to follow the same pattern of over-speculation and eventual retrenchment.
Global Social Prospects
In the next 18 months at the very least and perhaps for the next three years, rising unemployment, lower wages, social security and social benefits cuts will mean lower living standards for labor and the middle classes that must work longer to secure the ‘retirement dream’ they seek. Urban and rural labor and student unrest will accelerate in many countries in the next few years, as it becomes clear that governments will demand that the lower classes will pay for the banks’ bailout. Social unrest will result in political realignment within existing systems whether more conservative or progressive. Since the Reagan administration in its first term broke the air traffic controllers union in the name of national interests and security, governments throughout the world manipulate inter-sector interests and invoke transcending ‘national interests’ to quell labor unrest. For example, if French farm workers engage in mass strikes and protests, the government points to truck drivers and retailers as interests that will be hurt along with consumers. Whereas the state immediately funds banks facing default, it will not use public funds to support labor in its grievances. In short, quasi-statism is limited to buttressing finance capital not labor. Therefore, under such policies class solidarity becomes difficult partly because bourgeois regimes use the ‘national interest’ as a shield against strikes, and because the state in a populist, almost ‘Bonapartist’ manner uses one sector against the other.
The most intense social unrest will take place in underdeveloped countries that will suffer the worst from the recent recession’s lingering effects. In underdeveloped countries, radicalism and militancy finds expression in secular movements of leftwing or rightwing orientation, or religious movements like Islam. Therefore, we can expect rising tensions in areas already afflicted by disparate political, social, and economic problems. Increase in crime, suicides, divorce rates, single-mother births, and continued erosion of the otherwise cohesive bourgeois social fabric will take place at the same time that there will be political, ideological and religious polarization widening the gap between the privileged few and the multitudes in despair. The current economic crisis may translate into a crisis of confidence in bourgeois democracy. For example, in January 2010, the more cynical voters in the Ukraine were offering their national election votes and those of their families for sale on the internet.
Global Geo-Political Developments
World economic recovery will be hastened with the end of US military engagement in Iraq and Afghanistan and a settlement of the perennial Israeli-Palestinian conflict. Continued Middle East instability is a certainty, although the Obama administration has demonstrated the symbolic willingness to discipline Israel, a foreign policy we have not seen since Secretary of State Cyrus Vance tried to bring some balance in the region. Unless the US utilizes Russia, China, and especially EU to secure stability in the Middle East, Obama-Clinton policy will fail and Israel, not Iran or Afghanistan, will remain the key source of regional instability. The latest developments in Israel (especially in Gaza Strip) prove there is reason for pessimism in any type of permanent peace settlement.
While there is a great deal of optimism about U.S.-Russia and U.S.-China relations, there may be a widening rift in EU-US relations over dollar-euro reserve currency competition, trade, and market share in each other’s domain as well as in the rest of the world. In short, the competition-cooperation dynamic between EU and US will intensify as the struggle for global influence increases amid tightened economic conditions. Finally, the futile attempt by the US to use Afghanistan and Iran as focal points to appease the right wing and Israel will prove a continued drain on the US budget, and it may contribute to unexpected instability with oil prices rising and the world economy experiencing an unexpected return to global recession.
The global balance of power will continue to shift increasingly toward the EU as the ‘new old center’ of world power, with China, Russia, India, and much of the Third World looking to Europe for economic and political leadership. Increasingly a Hemispheric power, the US will hold on the strongest nuclear force and largest military budget on the planet, hoping that translates to political, economic, and financial power as in the early Cold War. Such a scenario of America’s decline in not inevitable, if the US faces a domestic catastrophe more or less like the Great Depression, or a very serious foreign policy crisis that requires collaboration with the EU on an equal partnership basis. In the absence of such developments, the new administration will re-package more or less the same policies, continue to create mini-crises as a way to divert focus from significant domestic problems and from Iraq, Afghanistan, and/or the Palestinian question, and it will pay lip service to multilateralism. Is America’s decline as inevitable as the Roman, as predictable as its determination to retain a unilateralist course in a multi-polar world? Can America renew itself like imperial China under various dynasties?
Absence of Alternatives to Global Capitalism
Since the downfall of Communism and China’s thorough integration into the world capitalist system, there are no apparent alternatives to the status quo. Of course, there is the ‘green solution’ but the capitalist establishment has absorbed it thoroughly. There is the ‘terrorist alternative’ (undeclared war or random violence against the establishment and imperialist targets), but history shows the severe limitations of such tactics. There are the varieties of ‘reformist options’ that include the ‘greens’, community-based organizations NGOs, etc., but the establishment quickly co-opts anything with a ‘reform label’. The most efficacious method of co-optation is some form of populism that appeals to a broad segment of the population on the basis of nationalism, class, mutual group interests, and banding together for the good of all. Such populist tactics work especially in times of crises and especially in countries with strong nationalist or religious proclivities.
Among the concrete reformist suggestions that governments have co-opted, mostly in rhetoric only, include stronger regulation of banking and finance, and the return to the public sector of major industries that were privatized. The neo-liberal belief ever since the Reagan-Thatcher decade was that the private sector can do it better, faster, cheaper, and more efficiently for the consumer. While public sector employees invariably do not have the best reputation for efficiency, the last three decades proved the private sector is far more costly to the consumer and pays much lower wages to workers, while amassing capital for a handful of managers and investors.
The question today is whether the public sector is in the position to re-purchase public enterprises – everything from transportation to communications and utilities. There is a sense of contentment for about one-fifth, at best, of the world’s population mostly in the developed countries, tolerance for about one-fifth, and despair for the rest mostly in the Third World. That capitalism remains the only ‘game in town’ actually entails inherent stability, despite the inevitable acts of non-state violence (terrorism) that is more a symbolic threat than real, and inadvertently helps to engender conformity to the capitalist regime.