Krugman and depression economics

Paul Krugman’s latest book, End this depression now!, is easy reading (http://www.amazon.com/End-This-Depression-Paul-Krugman/dp/0393088774).  In this well-written piece, the Nobel prize winner and guru of Keynesian economics outlines many of the arguments that he has been making in his much followed New York Times blog (http://krugman.blogs.nytimes.com/).  He says this book is not really about the causes of the Great Recession and ensuing long depression, but what to do about it.  And Krugman reckons there are things that we can do.

But first he reminds us of how damaging this major slump in capitalist production has been for America.  One-third of Americans have either suffered from job loss or had family members who had and another third knew somebody who had been made jobless.  Around 40% of families had suffered reduced working hours, lower wages and benefits.  There are now four job seekers for every job opening.  Six million Americans, almost five times as many as in 2007, have been out of work for more than six months; four million for more than a year.  Many of those still in work have had to accept a drop in wages because they must take lower paying jobs compared to their education or skills.  It’s an even worse story in southern Europe.

Krugman makes an estimate of the likely permanent loss of value in potential GDP from the Great Recession and the subsequent depression of about $5trn.  This is fairly close to my own estimate made on this blog recently (The long depression – the waste of capitalism, 3 May 2012).  That’s an accumulated staggering 40% of current US real GDP.  The recession has not led to a quick recovery as in some previous slumps because businesses are not willing to increase investment.  Krugman’s response is firm.  If the private sector is not willing to invest, the public sector must step up to the plate.  But policy in the US, Europe and elsewhere is the exact opposite: austerity rules along with the savaging of public investment.

For Krugman, this solution is simple and would work if it were not for the pigheaded, ideological insanity on the part of the majority of economists and policy makers who want to see government spending cut, not increased.  You see, for Krugman, the crisis is not caused by any fundamental flaw in the capitalist mode of production,  No, it is as Keynes once put it, like a magneto problem in a car: “the point is that the problem is not with the economic engine, which is as powerful as ever.  Instead, we are talking about what is basically a technical problem, a problem of organisation and coordination – a ‘colossal muddle’ as Keynes described it.  Solve this technical problem and the economy will roar back into life”.

Really?  Does the weak economic growth that the mature capitalist economies have experienced even in the ‘booms’ of the 1990s and 2000s and which came to an end in a humongous slump in 2008, really indicate an economic engine as powerful as ever?  Krugman thinks so: the capitalist mode of production is fine: all it needs is a new electrical part, not a totally new engine.  But the new part is not being supplied because of the ‘colossal muddle’ on policy that economists and politicians have got themselves into.

For Krugman, it is obvious what is wrong:“we are suffering from severe lack of overall demand”.  So it’s obvious – just create some more demand.  I have discussed this Keynesian view of crisis in previous posts (see Effective demand, liquidity traps and debt deflation, 27 April and Paul Krugman, Steve Keen and mysticism of Keynesian economics, 21 April 2012). The Keynesians present a description of a slump as the cause, but they are not the same thing.  To use Krugman’s Keynesian metaphor, the magneto is bust: but why is it bust?

According to Krugman, in his baby coop example, again resurrected in this book, it is due to the hoarding of money.  Instead of people spending their coupons on babysitting services, they start to save them up.  Similarly, instead of businesses investing their money or households spending, they start saving for some unknown subjective, irrational reason, and that is what creates the lack of demand. “Collectively, world residents are trying to buy less stuff than they are capable of producing to spend less than they earn.  That’s possible for an individual but not for the world around us.  And the result is the devastation around us”.  It’s bleeding obvious, isn’t it?  And the solution is also: “big economic problems can sometimes have simple easy solutions.”  We can get out of this mess by increasing the supply of money.   To do that, governments and central banks must act to break the ‘liquidity trap’ (money hoarding).  In his interview in the Financial Times with Britain’s Keynesian journalistic guru, Martin Wolf, Krugman proposes yet more quantitative easing (QE), or more money injected into the US economy to the tune of another $2trn, doubling the ineffective QE already injected by Fed Reserve governor Ben Bernanke.  It may not be working, but keep trying is the message.

But then it is apparently not as simple as Krugman first tells us in the book.  There is a problem with capitalism beyond simply a sudden lack of demand.  It is the growth of excessive debt in the private sector of the economy “that is arguably at the root of our slump”.  So there is more to this than meets the magneto.  Leaning on the ideas of Hyman Minsky, Krugman brings in the problem of the financial sector: financial agents take more and more risk to make money and they borrow more and more to do it.  This is inherent in an unregulated financial sector, which becomes vulnerable if things go wrong.  So the economy at some point can then have a ‘Minsky moment’, when borrowers can’t pay their bills and lenders stop lending.  Krugman says that “anything can trigger this”.  But once the slump has begun and capitalists and households try to reduce their debts, or deleverage, they drive the economy further down by not spending (baby coop again).  The economy contracts faster than the debt can be reduced and we enter ‘debt deflation’ (as explained by 1930s economist Irving Fisher).  Then debtors can’t spend and creditors won’t spend.

So it was not quite as simple as we first were told.  In fact, it is quite complicated now. The Austerians claim that the depression cannot be overcome by more borrowing, on the contrary, you will only make things worse.  This view now sounds plausible.  But Krugman says it is a paradox (of debt), because, although “the root of the crisis” was excessive debt, now we must borrow even more, not deleverage, otherwise we shall remain in a long depression, as in the 1930s.

You can see that, although Krugman says he wants to discuss what to do now to get out of the depression, he cannot escape talking about how we got there in the first place.  His causal factors can be summed up: the deregulation of the US banking system under successive administrations, which led to excessive risk-taking, speculation and a credit binge.  But interestingly, he rejects the sharply rising inequality of income and wealth over the last 30 years as the cause of the eventual slump, contrary to the current fashion among left economists and some Marxists (see my recent post, Inequality: the cause of crisis and depression?, 21 May 2012).  As Krugman says: “there’s no reason to assume that extreme inequality would necessarily lead to economic disaster.”  Krugman prefers the Minsky cause: financial deregulation and instability, turning the “capital development of a country into a by-product of a casino” (Keynes).

Krugman scathingly exposes the complacent apologetics of the dominant neoclassical economists and the sad failure of the Obama administration to resist their rejection of Keynesian solutions.  For Krugman, the Obama administration has failed to get rid of the depression because it has cut government investment and discretionary government spending and has not stimulated the economy nearly enough.  He points out that the neoclassical warning that inflation will result from too much government spending has turned out to be crying wolf.

So the answer to the current depression is more government spending.  What turned things round in the Great Depression was a massive rise in government arms spending before Pearl Harbour.  As Krugman noted “in the summer of 1940, the US economy went to war.  Long before Pearl Harbour, military spending soared as America rushed to replace ships and armaments… and army camps were quickly built to house the millions of new recruits…military spending created jobs and family incomes rose…as businesses saw their sales growing, they also responded by ramping up spending”.

But can more government spending take the capitalist economies of the US, Europe and Japan out of this long depression?  You see, if we assume that the capitalist mode of production is to remain dominant and state-controlled production will not replace the private sector, then more government spending will only succeed in ending the long depression if it raises the rate of profit in the capitalist sector and thus kick-starts investment.  Even though corporate profits have recovered in the US from their trough in mid-2009, the rate of profit is still below the most recent peak of 2005 and the ‘neoliberal’ peak of 1997.  So corporations continue to hoard their cash and business investment growth is too weak to restore jobs and incomes to pre-crisis levels.

In the years leading up to Pearl Harbour and the subsequent war, government spending not only rose massively, government took over the control of production as civilian goods production was switched to armaments.  Wages did not fall but workers saved (buying war bonds) and consumption was curbed (rationing and lack of credit).  Thus extra government spending went directly into raising the profitability of a war-driven capitalist sector.

In an appendix in his book, Krugman considers the evidence that government spending on armaments is the way out of depression. He notes that World War 2 military spending was actually ‘disappointing’ in boosting growth because of “rationing and restrictions on private construction” while the Korean war was also less than effective because of “sharply raised taxes”.  But are wars the only way to get big government spending implemented? According to Krugman, “the answer, unfortunately, is yes. Big spending programs rarely happen except in response to war or the threat thereof.”   So more government spending does not really seem to be a promising solution to the depression, after all.

Marxist economics can explain why.  Capitalists only invest more if it is profitable to do so, not because it might be in the ‘national interest’.  The role of profitability is totally missing in Krugman’s nicely written book.  For him, profit is irrelevant: what matters is incomes, spending and saving.  And yet Marx’s law of profitability best explains why there will be recurring slumps caused by the tendency for profitability to fall.

The only way to revive that profitability is through slumps that destroy the value of accumulated capital, so that profitability (relative to remaining value) will then rise and allow the process of accumulation to resume.  After a period of a huge buildup of both tangible and fictitious capital over the last 20 years, capitalism went into a Great Recession.  But, as in the Great Depression, it cannot get out of this long slump without a massive destruction of dead capital.  World War 2 eventually managed to do that.  In the 1880s and 1890s, it took a series of major slumps before sustained growth resumed.  That is more similar to now.  Just more government spending designed to ‘stimulate’ the private sector will not do the trick.  Only the replacement of capitalist accumulation with state-planned investment as the dominant mode of production would do so.  Otherwise, we can expect another slump down the road, whether Krugman’s policies or those of the Austerians predominate.

Sensible and popular Keynesians – the sophistry of Raghuram Rajan

Raghuram Rajan is a professor at the University of Chicago Booth School of Business, the heart of neoclassical mainstream ‘vulgar economics’, as Marx called mainstream economics – vulgar because it acted as an apologia to capitalism and was no longer an objective critique as the classical economists of Smith, Malthus and Ricardo had been.  Rajan is also author of Faultlines, a book that claimed Rajan had been first to warn governors of central banks that excessive credit was leading to crisis.

Now in an article in the  Financial Times, Rajan seeks to suggest in discussing what needs to be done to get the world economy going, it is necessary to make a distinction between “sensible” and “popular” Keynesians (http://www.ft.com/cms/s/2/17166454-a366-11e1-988e-00144feabdc0.html#axzz1vC0Lcu00).  The sensible ones know that little can be done while popular ones are raising hopes unnecessarily.

Can we meet this sensible Keynesian that Rajan poses as alternative to a popular Keynesian?  When we meet him through Rajan, he or she seems much more like the very mainstream neoclassical economists of the Chicago school that Rajan comes from. Thus the distinction he makes is just a piece of sophistry.

Apparently ‘sensible Keynesians’ recognise that demanding more government spending is counterproductive.  This is because there is no mass unemployment at all in the US, but simply some pockets of unemployment left over from the housing bust areas of the US.  This is poppycock and even more so when applied to vast swathes of Europe where there was no housing bubble (Italy, Portugal, Greece) and where the unemployment rate is in double-digits and the youth unemployment (not construction workers) rate has reached 50% in many countries.

Then Rajan denies that government infrastructure projects like the New Deal in the 1930s would restore employment and growth in 2012 because “today’s built-up US is less in need of infrastructure on that scale.”  Really?  Has Rajan not read the reports of the American Society of Civil Engineers (ASCE)?  It found that one in five American bridges were “structurally deficient”.  While the number of miles travelled by cars and trucks had doubled in the past 25 years, highway lane miles had risen only 45%.  Demand for electricity had increased by 25%, but the construction new transmission facilities had fallen by 30%. This deterioration had lost 870,000 jobs that could have been secured with new projects, while the costs of moving goods had risen significantly. The ASCE reckoned that there was $100bn of potential work available. Instead the US Congress intends to cut such spending by 35% over the next six years. Does he not know of the crying need for a second rail tunnel under the Hudson river, or high-speed rail projects in various states?  Of course, he does – this is sophistry.

Then he tells us that unemployed building workers in the US cannot switch to doing sophisticated hi-tech projects: “Moreover, it is not clear that a worker used to putting up drywall can move easily to laying fibre-optic cable.”  This sort of argument was used against New Deal projects in the 1930s.  It proved to be rubbish then.  And it stands against the reality of how all the mass unemployed were very quickly put to work in the armaments industries in the build-up to Pearl Harbour.  This sort of argument reveals Rajan’s real agenda: stopping public projects that might interfere with the interests of private capital.  As he puts it: “Perhaps it would be better policy to support retraining for private jobs.”

Indeed, public sector spending not only won’t work, it is the cause of the crisis!  Rajan tell us that “For Greece, government spending is the problem, not the solution.”   Public sector workers have been living the life of Riley.  Now with austerity, “public sector workers (can) share the private sector’s pain, (so) national solidarity could improve.”  The grain of truth here is the corruption in the Greek (and Irish) political elite in supporting rich Greeks and private enterprises to avoid taxes, while public sector workers were taxed at source.  Rajan’s sophistry is to connect that truth with the idea that public sector workers had an easy life compared to those in the private sector.  Yet we know that Greek workers in both sectors work the longest hours in Europe, are on low wages and modest pensions, while Greek government spending as a share of GDP is relatively low compared to most in Europe (see my post, Default or devaluation?,16 November 2011).

Rajan reluctantly concedes that “Targeted government spending, or reduced austerity, along the lines suggested by sensible Keynesians, might be feasible in some countries and helpful in speeding recovery.”  But he says that we should be particularly wary of populist Keynesians “who parrot “in the long run we are dead” to justify any short-sighted government action. They do the world a disservice by suggesting there are easy ways out. By misleading people and their leaders, they may well precipitate revolution rather than recovery.”

Yikes! Apparently if popular Keynesians suggest government spending as an easy way out, they risk ‘revolution’.  Much better that we tell people that under capitalism there is no ‘easy way out’, only misery ahead.   So we are back to ‘there is no alternative’.  We are back to the TINA of the Austerians.  It may be that the popular Keynesians are misleading people into thinking that some more government spending can restore capitalism to health.  But according to Rajan, sensible Keynesians must instead advocate more austerity and cuts in government until the private sector recovers of its own accord.  That’s neither sensible nor Keynesian.

Inequality: the cause of crisis and depression?

The inequality issue has risen its head again.  Paul Krugman took it up big time again in his New York Times column: “Did the rise of the 1 percent (or, better yet, the 0.01 percent) cause the Lesser Depression we’re now living through? It probably contributed. But the more important point is that inequality is a major reason the economy is still so depressed and unemployment so high. For we have responded to crisis with a mix of paralysis and confusion — both of which have a lot to do with the distorting effects of great wealth on our society…..There would have been a broad bipartisan consensus in favor of strong action, and there would also have been wide agreement about what kind of action was needed.  But that was then. Today, Washington is marked by a combination of bitter partisanship and intellectual confusion — and both are, I would argue, largely the result of extreme income inequality.“

Krugman sees the role of inequality in policy action i.e. rich people don’t want to change anything.  But there is a much bigger body of left economists including Marxists who reckon inequality is not just unfair, it is the main economic cause of the crisis.  There is a long line of academic papers supporting this view.  I cannot go through all of them in this post.  Indeed, I don’t know where to start and to stop, with so many books and papers coming out explaining that the rising inequality of income and wealth in the major capitalist economies has created instability and depression.  But let me outline some the key arguments presented.

Take James Galbraith’s new book called Inequality and Instability.  In this book, by the son of the famous ‘New Deal’ Keynesian economist, JK Galbraith, it is argued that “As Wall Street rose to dominate the U.S. economy, income and pay inequalities in America came to dance to the tune of the credit cycle.“  Galbraith argues that the rise of the finance sector was the driveshaft that linked inequality to economic instability.

And the ex-chief economist of the World Bank, Nobel prize winner and now scourge of mainstream economics, Joseph Stiglitz, takes the same position.  Why might widening inequality lead to a banking crisis?  Stiglitz’s theory is that  “growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can’t spend it all.”  This flood of liquidity then “contributed to the reckless leverage and risk-taking that underlay this crisis,” he asserts.  In a related view, called the Stiglitz hypothesis, Sir Anthony Atkinson and Salvatore Morelli propose that “in the face of stagnating real incomes, households in the lower part of the distribution borrowed to maintain a rising standard of living,” and “this borrowing later proved unsustainable, leading to default and pressure on over-extended financial institutions.”  And in previous posts, I have noted that the great guru of crisis economics, Nouriel Roubini, raised growing inequality as the key cause of capitalist crisis (see my post, 1% versus 99%, 21 October, 2011) – in particular, see Roubini’s, The instability of inequality, http://www.economonitor.com/nouriel/2011/10/17/fu).  

Michael Dumhoff and Romain Ranciere from the IMF argue that “long periods of unequal incomes spur borrowing from the rich, increasing the risk of major economic crises”  (http://www.imf.org/external/pubs/ft/fandd/2010/12/pdf/kumhof.pdf).  According to Dumhoff and Ranciere, something happens to lead to income stagnation for middle and low-income workers, while high-income households acquire more capital assets.   This increases the savings of wealthy households relative to lower-income households.  In order to keep their living standards from declining, the middle class borrows more.  Financial innovations, including new types of securitization, increase the liquidity and lower the cost of loanable funds available to the borrowers.  So the “bottom group’s greater reliance on debt— and the top group’s increase in wealth — generated a higher demand for financial intermediation and the financial sector thus grows rapidly as do the debt-to-income ratios of the middle class relative to the wealthy. The combination of rising middle class debt and stagnant middle class incomes increases instability in financial markets, and the system eventually crashes.”

It’s true that US aggregate debt-to-income across all income groups grew consistently with the income share of the top 5% both before the Great Depression and Great Recession.  This increase was a considerably sharper in recent years for the bottom 95% than the top 5%.

But is this growing inequality and rising debt the cause of slumps?  A paper by Michael Bordo and Christopher Meissner from the Bank of International Settlements analysed the data and concluded that inequality does not seem to be the reason for a crisis. Credit booms mostly lead to financial crises, but inequality does not necessarily lead to credit booms. “Our paper looks for empirical evidence for the recent Kumhof/Rancière hypothesis attributing the US subprime mortgage crisis to rising inequality, redistributive government housing policy and a credit boom. Using data from a panel of 14 countries for over 120 years, we find strong evidence linking credit booms to banking crises, but no evidence that rising income concentration was a significant determinant of credit booms. Narrative evidence on the US experience in the 1920s, and that of other countries, casts further doubt on the role of rising inequality.“

Edward Glaesar also points to research on the US economy that home prices in various parts of the US did not always increase where there was the most income inequality. That calls into question the claim that income inequality was inflating the housing bubble. He concludes: “Professors Atkinson and Morelli’s international data also suggest little regular connection between inequality and crises. Looking at 25 countries over a century, they find ten cases where crises were preceded by rising inequality and seven where crises were preceded by declining inequality.”  Moreover, inequality was higher in two of the six cases where a crisis is identified, which is exactly the same proportion as among the 15 cases where no crisis is identified.

Now don’t get me wrong.  I am not saying that there has not been rising inequality of income and wealth in most major capitalist economies during the so-called ‘neoliberal ‘ era from the 1980s.  Indeed, in various posts (Karl Marx was right (partly),16 August 2011; Inequality, poverty and riots, 6 December 2011), I have highlighted the growing body of research that reveals this grotesque feature of modern capitalism.

Now let me add the very latest research to that.  In a working paper from the OECD, Kaja Bonesmo Frederiksen (Income inequality in the European Union, OECD Working paper 952, 16 April 2012), found that inequality had risen quite substantially since the mid 1980s and that the large gain accruing to the top 10% of earners was the main driver of this inequality.   The reason that the top 10% did better was down to a decline in progressive taxation, rising capital gains from property and share ownership, so-called performance related pay, weaker trade unions and globalisation – indeed all the elements of the neo-liberal era.

I did some analysis of the OECD paper and found that the ratio of the share of real disposable income growth going to top 10% over growth in income going to the bottom 10% averaged 2.6 times for the European Union, 9.1 times for the UK and a staggering 21.9 times for the US.  That means the top 10% of income earners in the US got 22 times more growth in income that the bottom 10% between the mid-1980s and 2008.  Only in France and Greece was income growth for the bottom 10% faster than for the top 10%.  The most ‘neo-liberal’ capitalist economies saw the most unequal expansion in incomes.  While the bottom 10% of income earners in Europe managed just 0.87% annual increase in real disposable income from the mid-1980s to 2008, the top 10% got 2.23% a year.  And the top 10% of British income earners did best in the whole of the OECD, experiencing 4.2% average annual growth in real disposable income, while the bottom 10% got only 0.5% annual increase a year over the last 3o years.

But it is one thing to recognise that inequality has rocketed in the last 30 years and quite another to claim that this explains the credit crunch and the Great Recession.  What is wrong theoretically with this argument is that it assumes, as the Keynesians do, that the fundamental weakness of capitalism lies on the demand side of the economy. Since many people had insufficient income to consume they borrowed money to maintain their living standards.  Radically different conclusions follow if the problem is located on the supply side (with the cause to be found in profitability).  From this perspective, falling profitability explains the sluggish character of the productive economy and is at the root of the crisis.  If the economy had been more profitable, there would have been less need for such a rapid or ‘excessive’ expansion of credit.   From this perspective the widening of inequality is more of a symptom than a cause of economic weakness. The rich became richer with the emergence of the asset bubble, but the underlying economy was far from healthy in the first place.

Also it is odd to claim that the cause of the Great Recession of 2008-9 was growing inequality.  We did not hear that argument to explain the crises of the 1970s and 1980s.  The cause then was not assigned to inequality of income or wealth.  Indeed, many mainstream and heterodox economists argued the opposite, namely that it was caused by wages rising to squeeze profits in overall national income – see chapter 20 in my book, The Great Recession.  But now, many Marxist economists argue that this current crisis is a product of wages being too low and profits too high.  This leads to low wage earners being force to borrow more and thus eventually causing a credit crisis.  So it seems that the underlying cause of capitalist crisis can vary.  The trouble with this eclectic approach is that it becomes unclear what the cause of capitalist crisis is – is it wages squeezing profits as in the 1970s or is it low wages leading to excessive credit in the 2000s and then a collapse of demand in 2008?

And then there are the policy implications.  If the cause of capitalist crisis – or at least this particular crisis – is due to growing inequality of income and wealth, then it easy to see what the policies are needed to correct this faultline in capitalism: more equality.  With higher wages, more progressive taxes and more regulation of bankers and their bonuses, the current depression can be overcome and future crises can be avoided.  There is no need to replace the capitalist mode of production, just the current structure of distribution.

That this the policy conclusion that will be reached is confirmed by a recent post from Robert Reich on his blog (http://robertreich.org/).  Reich, a former advisor to Clinton, has been a tireless fighter against the bankers, the neo-liberal Republicans and injustices of modern capitalism.  He wrote a book arguing that inequality was the main cause of crisis (Aftershock, 2010).  In a recent post, he drew the following policy conclusions: “Socialism isn’t the answer to the basic problem haunting all rich nations.The answer is to reform capitalism. The world’s productivity revolution is outpacing the political will of rich societies to fairly distribute its benefits. The result is widening inequality coupled with slow growth and stubbornly high unemployment. The problem is not that the productivity revolution has caused unemployment or under-employment. The problem comes in the distribution of the benefits of the productivity revolution. A large portion of the population no longer earns the money it needs to live nearly as well as the productivity revolution would otherwise allow. It can’t afford the “leisure” its now experiencing involuntarily.  Not only is this a problem for them; it’s also a problem for the overall economy. It means that a growing portion of the population lacks the purchasing power to keep the economy going.“

So what’s the answer?  “It doesn’t mean socialism. We don’t need socialism. We need a capitalism that works for the vast majority. The productivity revolution should be making our lives better — not poorer and more insecure. And it will do that when we have the political will to spread its benefit. “ 

Inequality of wealth and income: the rich alongside a mass of poverty.  This has always been a feature of class societies, including capitalism. As Marx said, all history is really the history of class struggle.  What that means is the struggle to control the surplus created in any society.  But inequality is not the cause of crises.   Booms and slumps took place before inequality rose to current extremes. They can take place even when there is relative equality: indeed the drive for equality of income now would eat into profit shares and could exacerbate the crisis.  And more equality will not stop slumps.

Greece: heading for the exit?

The Greeks are having another election on 17 June.  The 6 May election was a disaster for the Troika.  An anti-austerity party, Syriza, gained the balance of power and ensured that no pro-Troika government could be formed. Now Greece is in a limbo for another month under a surprised premier, Panagiotis Pikrammenos, the president of Supreme Court.

But the Greek economy is not standing still.  On the contrary, the economy is beginning to melt down.  First, the austerity measures are collapsing.  In June, Greece should have improved tax collection by 1.5 percent of GDP, reduced social spending by 1% of GDP and implemented another pay cut and reduced public sector jobs by 12%.   It has not done so.  Also, unpaid debts owed by the government to third parties for over 90 days now stand at €6.3bn euros, or 3.1% of projected GDP this year.  Athens is supposed to shrink its budget hole to 6.7% of GDP this year based on a supplementary budget approved by parliament earlier in the year.  The EU Commission’s spring forecast sees the deficit at 7.3%.

More immediately, the Greek president announced during coalition negotiations last weekend that deposits in Greek banks are falling by up to €1bn a day.  At that rate, the banks will be under water before we get to the election result.  The banks will have to rely on emergency lending assistance (ELA) from the Greek central bank.  But that requires collateral and Greek banks are running out of those too.

Worse, the ECB is not willing now to take collateral from some Greek banks because they have not yet restructured their balance sheets since private sector involvement (PSI) bond swap, which required them to recapitalise.  Recap funds from the EFSF have been delayed because of the political impasse and the ECB wants to wait for that funding.  So, in the meantime, the banks must again rely on ELA from the central bank.  All these demands for ELA will drive up the central bank’s liabilities to the Eurosystem (already at €125bn) to new heights.  So a financial crisis is brewing in Greece while its politicians start an election campaign.  I

It seems that Mrs Merkel and other Euro leaders still do not get it.  A Greek default is seen as a ‘one-off’ without serious consequences for the rest of the Eurozone.  But that’s wishful thinking.  I have estimated the exposure of other Eurozone states (and their taxpayers) to a disorderly Greek sovereign debt default.  Adding up what the Greek government owes to other EU governments from the two bailouts, what the central bank debts are to the Eurosystem and how much the ECB has already lent to Greek banks and holds in Greek government debt, we find that the Eurozone is exposed to around €500bn of potential losses, or near 5% of Eurozone GDP.

Germany and France alone are exposed to around €150bn each.  And this is just exposure to sovereign debt.  If the Greek private sector should also default on its loans.  French and German banks will take a sizeable hit (French banks have about €25bn lent to Greek companies.  When you add all this in, the total exposure is closer to €750bn.

The Germans and other Euro leaders seem unwilling to renegotiate the bailout package to reduce Greek public debt and reverse the austerity measures as any Syriza-led government will demand.  That poses the likelihood that the Euro leaders will force Greece out of the euro by cutting off funding to the government and to the banks from the ECB.  The Greek government only has cash to last until the end of June to pay for public sector salaries and services.  With the ending of Troika money, it will default on its debt obligations.  Then the Euro leaders can expel it from the euro system, even if the Greeks go on using the euro for money.  The IMF reckons that this will cause a 10% contraction in Greek real GDP over the next year and with a 50% devaluation in any new Greek currency, inflation would jump to 35%.  Credit for companies and households would disappear, so bankruptcies will mushroom.  The Greek government would have to act to nationalise the banks, impose capital controls on any flight of money out of Greece and also take over major companies.

The rest of the Eurozone and Europe will not escape from the consequences of a Greek exit. The whole of Europe would be plunged into a deeper recession, probably contracting the European economy by up to 5% in one year, while inflation would rise too.  So the Germans and the other Euro leaders will have to decide what to do or the euro itself could head towards break-up before the year is out.  The firewalls against ‘contagion’ are not adequate.  The new European Stability Mechanism (ESM) is still not in place and its effective functioning could be delayed until the autumn while the German parliament gets round to ratifying it.  The ECB does not appear willing to consider any more extraordinary measures for liquidity support to the PIIGS.  And the Euro leaders are bickering about austerity or growth.

And austerity is not working.  The irony is that before the crisis, fiscally-prudent Germany saw public spending rise at a much faster rate than in Greece or Spain, but since the crisis, it is Greece that is taking a truly humungous hit to public services and conditions.

There is a way out of this. But it’s not on the basis of the pro-banking, pro-capitalist policies of the Euro leaders. Greek state finances would be fine if the richest Greeks paid taxes and did not spirit their money offshore to buy property in Kensington, London or Monaco, with the connivance of Greek banks and politicians granting their wealthy friends and multinationals all kinds of tax advantages and favours that have diluted tax revenues to the point where there is not enough in the kitty to maintain public services.  According to the Tax Justice Network, over a trillion dollars lie in offshore banks and companies in tax havens (not all Greek money of course).  Recover this money and governments could not only reduce their debts but pave the way for a lowering of taxes across the board to encourage investment and growth and increase spending power for the majority.

Capital controls, public ownership of the banks and major corporate sectors to organise a plan for investment and growth: this is not just an alternative programme for Greece but for all of Europe.

Choonara, McNally and the US rate of profit

Dave McNally wrote a very good book last year called, Global Slump (http://www.amazon.co.uk/Global-Slump-Spectre-David-McNally/dp/1604863323Global Slump).  Joseph Choonara wrote a critical review, Once more (with feeling) on Marxist accounts of the crisis, http://www.isj.org.uk/index.php4?id=762&issue=132).  In his review, Choonara says that McNally’s claim of a doubling in the rate of profit from 1982 to 1997 is incorrect.  Choonara goes on to argue that just looking at the cyclical rise in US profitability from a trough in 1982 to a peak in 1997 leaves out the secular downward trend that is evident in the US rate of profit in the post-war period.  Choonara is right, but that does not deny the cyclical upturn.  There is a secular downward trend, but it is broken up by cyclical up phases that can last some time, decades.

So Choonara’s criticism of McNally on this score seems harsh.  McNally was not suggesting that the rise in the rate of profit after 1982 meant that Marx’s law played no role in the crisis.  On the contrary, McNally in a recent paper refers to the fact the mass of profits in the US rose only 6% from 1997 to 2007 and then fell absolutely in 2006 (quoting my post, Profits and investment in the economic recovery, 29 December 2010 by the way!).  As he says “underlying the crisis was a peak in business profits which then turned into a classic expression of the contradictions of capitalist accumulation, which rendered the system vulnerable to a dramatic financial shock”.  McNally

McNally says that some Marxists have become obsessed with the Golden Age of capitalism from 1948-65, regarding it as an exceptional period that eventually gave way to the long-term reality of secular decline.  In contrast, McNally points out that the period from 1982 can hardly be called a period of decline for US capitalism if profitability and growth are the criteria.  Profitability rose and so did economic growth compared to the period of falling profitability from 1965-82.  I had made this same point in my book, The Great Recession, when I showed that when profitability rises, so does economic growth under capitalism and when it falls, growth is generally slower.  It is what you would expect when an economy is driven ultimately by profitability.  Choonara seems to want to deny this by arguing that growth was slower from 1982 to now compared to the Golden Age.  But that is an unfair comparison, as growth was actually faster from 1982-97 than between 1965-82, but is now much slower in the downward phase of profitability since 1997.

McNally has now responded to Choonara’s criticisms in Explaining the crisis or heresy hunting? A response to Joseph Choonara, ISR Issue: 134.  In this, McNally comments: “My concern in this area was not with the methodologies and preferred data sets for tracking movements in the rate of profit, which involve questions that lie far beyond the range of Global Slump. My interest was in showing that, notwithstanding differences in methodology, multiple Marxist studies display a protracted upward trend in the rate of profit in the US from the low point of the last crisis until 2006-7.

McNally refers to my work in a note that says “At the time of writing Global Slump, I was not acquainted with the very important work of Michael Roberts, particularly his book The Great Recession (Roberts, 2009). Using historic costs rather than replacement costs for measuring capital stock, Roberts too comes to the conclusion “that the period of 1982 to 1997 (the so-called period of neoliberalism) does show a rise in profitability, however you measure it” (Roberts, 2012). Focusing more on the over-accumulation side of the equation, my argument about an upward cycle from 1982 to 1997 that was then extended increasingly through credit-creation accords closely with Roberts’s findings.”

I think McNally is trying to argue that we cannot consider the neo-liberal period one of renewed crisis like the period of 1965-82, and that the crisis of capitalism (at least in economic terms) did not continue without abate through the last quarter of the century, as Choonara seems to argue.  However, McNally goes too far to suggest that the neoliberal period was one of boom equivalent to 1948-73.  Also, I think the downphase or new period of slump began in 1997, although McNally is right to say that the massive expansion in fictitious capital in this first decade was a response to the end of the neoliberal ‘boom’ in the rate of profit.

As readers of my blog will know, ad nauseum, I think there has been a secular downtrend visible in the US rate of profit, but there is also a profit cycle in the US capitalist economy that lasts from trough to trough about 32-36 years.  I reckon that the last peak year of 1997 set the marker for the end of the ‘neoliberal’ up phase from 1982.  The down phase then began to exert pressure on the US capitalist economy.  It forced an even bigger switch from productive investment in manufacturing, transport and communications into financial and property sectors to maintain profits through the expansion of what Marx called fictitious capital, or credit.  That laid the basis for the crisis in 2007 and the ensuing major slump.  In that sense, Marx’s law of profitability did operate to cause the crisis.  The great up phase in profitability after 1982 had finished in 1997, some ten years before the Great Recession.  We are still in the down phase, which will last for at least another three to seven years, on my reckoning, in what is really a long depression like the 1880-90s in the US and the UK.

But remember the data for these arguments are for the US only.  I’m working on an analysis for the G7 economies and beyond at the moment.  That may produce some interesting conclusions.

Dimon with egg on his face

JPMorgan Chase & Co, the biggest US bank by assets, announced yesterday that it had suffered a trading loss of at least $2 billion from a failed hedging strategy.  Jamie Dimon, CEO of the banking giant, said  that “this puts egg on our face” .  Dimon said the bank had made a significant mark-to-market loss in its synthetic credit portfolio – these typically include derivatives in a way intended to mimic the performance of securities.   Dimon then put more egg on his face, making a complete makeover, when he added, “it could cost us as much as $1 billion or more,” in addition to the loss estimated so far.  Dimon said. “It is risky and it will be for a couple of quarters.”

The problem at JPMorgan, he said, was with the execution of the hedging strategy, which “morphed over time” and was “ineffective, poorly monitored, poorly constructed and all of that.“   The department responsible for this disaster, based in London, the Chief Investment Office, makes broad bets to hedge its portfolios of individual holdings, such as loans to speculative-grade companies.   So these losses were with that great phenomenon of the credit crisis: derivatives.

The banks are back to their old tricks of not doing any proper banking, but instead trying to make huge speculative bets on the movement in the prices of financial assets – the very actions that caused the biggest global banking collapse ever just three years ago.  At the same time, the likes of Dimon and other bank chiefs are awarding themselves the old grotesque pay packets and bonuses that they did before the crises as though nothing had changed.  And it seems that it has not – we are back to ‘business as usual’, even if the eggs keep hitting the faces of bank leaders.

It’s yet another example of the crying need to take the banks into public ownership and control so that banking becomes a public service to provide credit to businesses and loans to individuals, not be huge hedge funds that have to be bailed out by the taxpayer when they make the ‘wrong bets’.

Eurozone debt,monetary union and Argentina

Greek capitalism has failed.  So has capitalist production in the smaller Eurozone nations.  Nothing demonstrates more the need for a pan-European economy to use all the resources of the continent, both material and human. The smaller and weaker capitalist economies have been driven into a long winter of depression by the global slump.  The euro crisis is not really one of sovereign debt or a fiscal crisis.  Its origin lies in the failure of capitalism, the huge banking and private credit crisis and the inability of undemocratic pan-European capitalist institutions like the European Commission, the Council of Ministers and the pathetic European parliament to deal with it.

The ambition of France and Germany to compete with the US and Asia on the world stage through monetary union was fundamentally flawed.  The original dream of a united capitalist Europe, of free markets in production, labour and finance, ever utopian, has turned into a nightmare.  Now the single currency union is under threat.  It always was ambitious.

JP Morgan recently looked at whether the ‘right conditions’ under capitalism existed for setting up a currency union in Europe.  They measured the difference between countries using data from the World Economic Forum’s Global Competitiveness Report, which ranks countries using over 100 variables, from labour markets to government institutions to property rights. They found that there’s an incredible amount of variation among the euro zone’s member nations. The biggest differences come in pay and productivity, the efficiency of the legal systems in settling disputes, anti-monopoly policies, government spending and the quality of scientific research.

Indeed, the euro zone countries are more different from each other than countries in just about any hypothetical currency union you could care to propose. A currency union for Central America would make more sense. A currency union in East Asia would make more sense. A currency union that involved reconstituting the old USSR or Ottoman Empire would make more sense.  In sum “a currency union of all countries on Earth that happen to reside on the fifth parallel north of the Equator would make more sense.”  

But the currency union went ahead because of the political ambitions of France and Germany to have a Europe led by them, even after British capitalism refused to join.  Of course, the aim was to bring about a ‘convergence’ between the weaker and stronger economies.  That dismally failed in the boom years of 2002-7.  The Great Recession just exposed and widened the inequalities.

Can the existing currency union survive?  Well yes, if economic growth returns big time or if German capitalism grasps the nettle and is prepared to pay to help the ailing smaller capitalist economies through fiscal transfers.  It is no good the Germans saying they will do so if the likes of Greece, Portugal, Ireland, Spain etc “stick to fiscal targets”.  They cannot.  So Germany will have to decide on more transfers without more austerity.

And it won’t be cheap.  The Cologne-based IW economic research institute reckoned that West Germans paid about $1.9 trillion over 20 years, partly via a “solidarity surcharge” on their income taxes, to help integrate and upgrade Eastern Germany. That was roughly two-thirds of West Germany’s GDP then. The subsidies helped cover East Germany’s budget shortfalls and poured money into its pension and social security systems. At the same time, nearly 2 million East Germans — a full one-eighth of the population — moved west to seek work.   That is the sort of transfer of funds and jobs that will have to take place to save the currency union.

Currency unions cannot stay still – Europe’s has been around for only 13 years. Either they break up or they move onto full fiscal union where  the revenues of the state are pooled, especially when crisis concentrates the minds.  That means the smaller states agreeing to German control of their budgets in return for fiscal transfers and the Germans allowing proper fiscal transfers to the poorer ‘regions’ of the currency union.

Take the example of the UK.  This is a government of four nations and many regions.  Taxes are raised by a central state (although there has been some devolution to Scotland, Wales and Northern Ireland) and raising debt is mostly made by the central state (there are some local government bonds or loans).  Wales is a poorer part of the UK.  It runs a ‘trade deficit’ with the rich south-east of England.  Its inhabitants contribute way less in tax revenue than they receive in government handouts.  So Wales has twin deficits on its government and capitalist sectors, just as Greece has with the rest of the Eurozone.

But it is not an issue for Wales because it is part of the United Kingdom of Great Britain and Northern Ireland.  Sometimes there are grumbles from the rich south that they have to pay for the unemployed Welsh but that argument does not have much traction.  After all, the extreme logic of that is to say that the extremely rich inhabitants of Kensington in the posh part of London should not have their tax revenues redistributed to the poor inhabitants of east London.  That would mean Kensington would have to break with the fiscal and currency union that is Britain, put up border controls and find their own government, armed forces and central bank.  Of course, their riches would soon disappear because they are based on the labour of all the people in Britain and even more from abroad.  It is a point that many nationalist elements in Germany and northern Europe forget.  If the Eurozone breaks up into its constituent parts, the ongoing (not just immediate) losses to GDP for northern Europe would be considerable.

The example of the US also shows the advantages of a federal state over the commonwealth of states that existed to begin with.  It took a civil war of bloody proportions to establish a unified state that wiped out the idea of secession for good.  Now the US federal government raises taxes and debt and provides funds to the states (even though they raise their own taxes).  A full financial union came later than fiscal union in the US, when the Federal Reserve Bank  was set up by the large private banks after a series of banking collapses.  Now dollars are redistributed through the federal reserve system to cover ‘deficits’ on trade and capital between states.

So what happens now to Europe’s currency union?  In the absence of German capitalism bailing out the south with huge fiscal transfers, the only way that the peripheral countries have to restore growth and avoid the break-up of the EMU is by defaulting on the debt they have accumulated – in effect a forced fiscal transfer.  Remember most of this debt is the result of the collapse of the banking system and the Great Recession.  It is not due to ‘excessive ‘ spending by governments.  The excessive debt was in the private sector: in mortgages and banking debt.   That debt got transferred onto government books through bailouts and social benefits.

Take Greece.  I have made an estimate how much the rest of the Eurozone is exposed to Greek sovereign debt in one way or another.  Greek government debt stands at €337bn as of March 2012. Of that, about €220bn is held by the EU institutions (EFSF, ECB) and the IMF. Foreign banks have reduced their holdings dramatically to about €36bn in long-term debt.  In addition, the ECB and Eurozone central banks have lent the Greek banks about €250bn directly and indirectly.  So when we add it all up, the  Germans, French and others face default by Greece on a total of €500bn, or 5% of Eurozone GDP.  So if Greece defaults on its sovereign debt, it will be Europe’s official sector that will take the blow.   And this does  not account for losses in GDP in the euro area if Greece defaults, causing a new credit crisis.  The Institute of International Finance reckons the total cost is closer to €1trn, or 10% of Eurozone GDP.  This is all the more reason why the Troika and the European Union could be forced to abandon their fiscal austerity approach and replace it with a real plan for Greek economic and social recovery.

Debt ‘deleveraging’ is necessary under capitalism.  If dead capital remains stuck on the books of companies, then they won’t invest in new production; households won’t spend more if they have mortgages hanging over their heads and the value of their house is worth less.  And governments cannot take on new public projects if the interest cost of existing debt eats into their available revenues.  In their very latest report, the historians of debt, the Reinharts and Kenneth Rogoff confirm the relationship between debt and growth under capitalism (see Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff, Debt Overhangs: Past and Present, NBER Working Paper No. 18015 (April 2012)).  They looked at 26 episodes of public debt overhangs (defined as where the public debt ratio was above 90%) and found that on 23 occasions, real GDP growth is lowered by an average of 1.2% points a year.  And GDP is about 25% lower than it would have been at the end of the period of overhang.  It is the same when private sector debt gets to very high levels.  Such is the waste of capitalism and fictitious capital.

The correlation between high debt and low growth seems strong, but it is a matter of debate within mainstream economics on the causal direction.  Is it the contraction of the economy that leads to high and rising debt (Krugman and the Keynesians) or is it high and rising debt that leads to the contraction of the economy and low growth (Rogoff, the Austrians and the Minsky).  I think that it is the contraction of profitability that leads to a collapse in investment and the economy which drives up debt.  But until debt is deleveraged, profitability and growth cannot be restored.

What is clear is that debt cannot be reduced for the smaller capitalist states of Europe without default.  If Greek public debt was written down to 60% of GDP, as the new Euro fiscal compact demands, it would allow the government to spend on investment another 5% of GDP a year.

Growth will not be restored by the neoliberal solutions demanded by the Euro leaders and the Troika.  The OECD claims that ‘structural reforms’ would deliver a rise in the level of GDP per capita over ten years worth 13% of GDP for Portugal, 18% for Greece and 15% for Spain because these economies are so ‘uncompetitive’ i.e. about 1.3-1.8% a year.  But what are these wonderful growth-enhancing structural reforms?  For Portugal, the Troika has decided that they are a reduction of four public holidays a year, three days less minimum annual paid holidays, a 50% reduction in overtime rates and the end of collective bargaining agreements.  Then there would be more working time management, the removal of restrictions on the power to fire workers, the lowering of severance payments on losing your job and the forced arbitration of labour disputes.  In other words, workers must work longer and harder for less money and with less rights and a higher risk of being sacked.  Southern Europe must become a cheap labour centre for investment by the north.  That’s the Troika’s reforms.

Then there is deregulation of markets.  Utilities are to be opened up to competition.  That means companies competing to sell electricity or broadband to customers who must continually change their suppliers to save a few euros.  Pharmacies are to have their margins cut, so small chemists are to earn less but there is no reduction in the price of drugs from big pharma, the real monopolies.  And the professions are to be deregulated, so lawyers cannot make such fat fees but anybody can become a teacher or taxi driver or drive a large truck with minimal or no training.   Finally, there is privatisation of the remaining state entities sold cheaply to private asset companies in order to pay down debt and enlarge the profit potential of the capitalist sector.  It’s more or less the same proposals for Greece, Spain, Italy and Ireland.

So the neo-liberal solution to restore growth is to raise the rate of exploitation of the workforce, destroy pensions and public goods like healthcare and education and to squeeze small businesses.  The argument goes, this would boost profitability and so the private sector will then invest to create jobs and more GDP, assuming, of course, that capitalism does not have another slump before then. But the UK and US economies already implemented all these ideas a decade of more ago and what was the result?  Did these economies avoid a financial collapse or a slump?  On the contrary. There is no mention of public investment. Investment is down to the private sector because government is ‘unproductive’ (which it is in a capitalist sense).

The idea of a pan-European economy must be right – but it just cannot be achieved through wage reductions, deregulation and fiscal austerity.  Equally, just leaving the euro would be no panacea for the likes of the Greeks or the Portuguese.  Argentina is usually cited as a successful example of a capitalist economy sticking its fingers up to the IMF and achieving fantastic growth after defaulting and devaluing.  Clearly, writing off what Greek left leader Alexis Tsipras has called  ‘odious’ debt must be part of the escape from recession.  But leaving it at that and devaluing the currency by leaving the euro is no answer, even in the short term.

A recent report by the Federal Reserve Bank of Dallas (Default and lost opportunities: a message from Argentina, May 2012) showed that Argentina was lucky in 2001 when they defaulted and devalued the peso.  After a big drop in GDP, real GDP per capita rose by 7% a year for next seven years.   But that coincided with the huge global commodity boom benefiting sales of agro products that Argentina produced.  A similar default and devaluation of 1983 did not deliver a great recovery.  Then, in the depths of a global recession (much like now), real GDP fell 15% and did not recover to pre-crisis levels until 10 years later.

Under the capitalist mode of production, the smaller economies of Europe are stuck in a generation of austerity, whether they leave the euro or not.  With public ownership of the finance and productive sectors of the economy and a plan for state-led investment, growth could be restored.  Even then, that won’t be possible unless it moves onto a pan-European level, where fiscal and capital transfers are integrated to reduce the imbalances and differences highlighted by JP Morgan’s study.

Greek election: defeat for the Troika

The two collaborationist parties in Greece have lost the election.  Together they have polled only 32% of the vote with the leading party, the conservative New Democracy, getting under 19% and the Blairite PASOK just 13%.  So, even with the boost of 50 extra seats in parliament, the two parties will have only 149 seats, two short of a majority.

The anti-austerity parties that managed to cross the threshold of 3% for seats in parliament did well, polling over 46% of the vote.  But the anti-austerity vote is hopelessly divided between the outright fascists and nationalists on the right, polling about 17% between them; and the left including SYRIZA (which finished second), the stalinist Communists and pro-Euro moderate left, polling just under 29% combined.

The collaborationist parties’ votes were mainly from the better-off and middle-class professionals in the private sector.  The anti-austerity parties were backed by the pensioners, the poor, the unemployed and the youth, but their alternative to austerity was confused by nationalists and fascists who want to blame the Eurozone leaders and immigrants from Turkey and Eastern Europe for unemployment.  On the left, the Communists’ main demand was to leave the Eurozone and a refusal to join any anti-austerity coalition.

The result is a bad defeat for the Troika and the policies of austerity.  The argument of the collaborationist parties was that there is no alternative to the bailout agreement and austerity.  Of course, there is an alternative.  I have outlined this in previous posts (An alternative programme for Europe, 11 September 2011) and it has been presented to some extent by the leaders of SYRIZA.  It would mean reversing the austerity measures without leaving the euro.  How?  The first measure of an anti-austerity government would be to write off the debt burden with the banks and the Eurozone governments.  The now defeated collaborationist government already agreed to a version of debt restructuring imposed by the Troika.  But this  restructuring was a joke.  The Greek government and its people are still left with a huge debt burden through the rest of this decade that will mean its debt ratio will still be larger than that of Italy now even if all goes well on austerity, which it won’t.

The Troika’s restructuring just replaced part of the government debt owed to foreign banks with new debt backed by European governments and imposed a full recapitalisation of Greek banks without any allowing move towards public ownership.  Now Greek government debt will owed not to banks, but mainly to other European governments.  The IMF leaders were desperate to ensure that this package was sustained by the new government.  They secretly invited Greek pro-austerity leaders to meetings to discuss policy just before the election.  In these private discussions, the IMF argued in favor of those parties that accept the necessity of the austerity package. The ultra neo-liberal Drasi candidate Miranda Xafa, a former Greek representative to the IMF, attended the IMF’s spring session of the fund.  Fortunately, the IMF and the Troika have failed – for now.

Look at how the IMF and the Troika doled out their money.  Less than 10% of the new funding is going to help the Greek government fund its deficit or get the economy going.  Over 90% has gone to fund foreign and Greek banks. Instead, if Greek government debt had been written off and new money lent directly to the Greek government to recapitalise the banks through public ownership and launch a programme of public works to revive the Greek economy, there would have been no need to condemn millions of Greeks to a generation of austerity.  But of course that cannot be allowed to happen because it would mean the curbing of the failed and corrupt Greek capitalist business sector and would pose a real threat to Europe’s banking sector and multinationals.

It may be that the New Democracy can find one of the opposition parties to agree to join a coalition.  But to do so, would probably mean having to try and renegotiate the bailout deal with the Troika anyway.  Alternatively, the Greek president may call another election in June.  If the Greek people have not reached the right decision this time, then they must do it again until they do!

Any attempt to meet Troika demands is hopeless, anyway.  The Greeks cannot deliver what the Troika wants.  With the Greek economy contracting by 6% this year, the fiscal targets cannot be met.  Indeed, next month the new government must find another €11bn in austerity measures to keep to Troika targets for 2012 and 2013.  How are such measures going to be greeted by the Greek people and the new parliament?  At some point, either later this year or early next, the Troika will have to announce that the Greek government is failing in its commitments.  Then the Euro leaders will have to decide whether to provide yet more funding with yet more austerity measures to tide Greece over, or not.  That will be a decision for German Chancellor Merkel and new French socialist President Hollande.

Stephen King, taxes and charities

What’s wrong with charities?  Well, nothing in themselves; people want to help others in difficulty and do so every day. It’s just that in a modern capitalist world, charity has been usurped into a business that employs thousands to raise funds (some of whom earn fat salaries administrating it) to squeeze ordinary people on the streets to make donations, while the very rich make donations in order to avoid paying huge amounts of tax that they ought to make.  Thus, charitable organisations now oppose any attempt to reduce exemptions and tax allowances for the rich in case it damages charitable donations, while democratically-elected governments are starved of tax revenues from the very people who could afford to pay up.  This reduces what an elected government has to spend on the ‘public good’.

Charitable donations backed by tax exemptions make helping the worse-off at the whim of the rich.  As you can guess, it does not work very well. It leaves the decision on who gets what in help to the rich individual and not a democratic government, while at the same time letting the rich pay lower taxes, so many of these rich people are not make any net contribution at all!

Indeed we know from surveys that the rich pay less as a share of the annual incomes that the average income earner.  On the whole, the poor help the poor and the rich don’t.  And yet they are feted in the media and by politicians etc as great ‘philanthropists’.  So they pay less proportionately, but get all the praise for being great people!  Such is the charity business.

The American author, Stephen King, summed it well in a recent expletive ridden article: Tax Me, for F@%&’s Sake!. The writer scolded the super rich (which includes himself) for Scrooge-like attitudes. “In February, while discussing New Jersey’s newly amended income-tax law, which allows the rich to pay less (proportionally) than the middle class, Chris Christie (the Governor of New Jersey) was asked about Warren Buffett’s observation that he paid less federal income taxes than his personal secretary, and that wasn’t fair. “He should just write a check and shut up,” Christie responded, with his typical verve. “I’m tired of hearing about it. If he wants to give the government more money, he’s got the ability to write a check—go ahead and write it.”

King goes on: “Heard it all before. Cut a check and shut up, they said. If you want to pay more, pay more, they said. Tired of hearing about it, they said.  Tough shit for you guys, because I’m not tired of talking about it. I’ve known rich people, and why not, since I’m one of them? The majority would rather douse their dicks with lighter fluid, strike a match, and dance around singing “Disco Inferno” than pay one more cent in taxes to Uncle Sugar. It’s true that some rich folks put at least some of their tax savings into charitable contributions. My wife and I give away roughly $4 million a year to libraries, local fire departments that need updated lifesaving equipment (Jaws of Life tools are always a popular request), schools, and a scattering of organizations that underwrite the arts. Warren Buffett does the same; so does Bill Gates; so does Steven Spielberg; so do the Koch brothers; so did the late Steve Jobs. All fine as far as it goes, but it doesn’t go far enough.”

King then commented about the role of charity versus social spending “What charitable 1 percenters can’t do is assume responsibility—America’s national responsibilities: the care of its sick and its poor, the education of its young, the repair of its failing infrastructure, the repayment of its staggering war debts. Charity from the rich can’t fix global warming or lower the price of gasoline by one single red penny.  And hey, why don’t we get real about this? Most rich folks paying 28 percent taxes do not give out another 28 percent of their income to charity. Most rich folks like to keep their dough. They don’t strip their bank accounts and investment portfolios. They keep them and then pass them on to their children, their children’s children. And what they do give away is—like the monies my wife and I donate—totally at their own discretion. That’s the rich-guy philosophy in a nutshell: don’t tell us how to use our money; we’ll tell you.”

And as for arguing that rich people getting richer helps the economy with the usual story that rich people’s incomes ‘trickle down’ to the rest of us, King retorts “Here’s another crock of fresh bullshit delivered by the right wing of the Republican Party (which has become, so far as I can see, the only wing of the Republican Party): the richer rich people get, the more jobs they create. Really? I have a total payroll of about 60 people, most of them working for the two radio stations I own in Bangor, Maine. If I hit the movie jackpot—as I have, from time to time—and own a piece of a film that grosses $200 million, what am I going to do with it? Buy another radio station? I don’t think so, since I’m losing my shirt on the ones I own already. But suppose I did, and hired on an additional dozen folks. Good for them. Whoopee-ding for the rest of the economy.”

As King says, it is the other way round. The rich are rich because the poor helped them to get rich.  “What some of us want—those who aren’t blinded by a lot of bullshit persiflage thrown up to mask the idea that rich folks want to keep their damn money—is for you to acknowledge that you couldn’t have made it in America without America.  That it’s not fair to ask the middle class to assume a disproportionate amount of the tax burden. Not fair? It’s un-fucking-American is what it is. I don’t want you to apologize for being rich; I want you to acknowledge that in America, we all should have to pay our fair share.”

King’s points are brilliantly clear.  The rich are rich not because they are wildly clever but because millions have worked for them to deliver their wealth and yet the rich moan if they have to make even an equal contribution to society through taxation.  And as we know, multi millionaires like US Republican presidential candidate Mitt Romney paid only 13% of his income in tax last year, or less than 40% of the burden for the average American.

And the Great Recession has not led to the rich losing their wealth.  The Sunday Times Rich List reveals who are the richest people in the UK.  The report shows that the 1,000 richest persons in the UK have increased their wealth by so much in the last 3 years – £155bn – that they themselves alone could pay off the entire UK budget deficit and still leave themselves with £30bn to spare which should be enough to keep the wolf from the door.   The ultra-rich are now sitting on wealth even greater than what they had amassed at the height of the boom just before the crash. Their combined wealth is now estimated at more than £414bn, equivalent to more than a third of Britain’s entire GDP. They include 77 billionaires and 23 others whose wealth exceeds £750m.  And these are some of the very people to whom UK chancellor George Osborne gifted £3bn in his recent budget by cutting the 50p tax rate. That measure alone gave 40,000 UK millionaires an extra average £14,000 a week, at the same time as those on very low incomes in receipt of working tax credits who couldn’t find an employer to increase their hours of work from 16 to 24 a week were being deprived in the same budget of £77 a week, around a third of their income, through their tax credits being withdrawn.  In 1997 the wealth of the richest 1,000 amounted to £99bn. The increase in their wealth over the last 15 years has therefore been £315bn. If this increase in wealth were subject to capital gains tax at the current 28% rate, it would yield £88bn, and that alone would pay off more than 70% of the total budget deficit.

A proper democratic society (socialist?) would have a progressive tax system that built on the principle that the rich should pay more proportionately for the public good if they get richer.  This is so much better a system than charitable donations.  The poor, the disabled, the deprived and the sick and dying would not have to depend on the whims of rich benefactors but on the power of the whole of society.  It would be from each according to their abilities and each according to their needs.  Where have I heard that before?

The long depression – the waste of capitalism

The latest high frequency data on the state of the world economy are now available for April.  I use a combined index of activity in manufacturing and services in the major capitalist economies based on the so-called purchasing managers indexes (PMIs).  Starting with the US, it shows that the US is still in a low-growth trajectory and not in recession or boom, although the direction is downwards.

This is confirmed by the even more frequent, but less reliable, ECRI weekly index.

And for the world as a whole and other regions, it is much the same story – when the PMI for a country is above 50, it is expanding and below means contraction.

Only the Eurozone is in a confirmed recession.  Even the UK is still in a low growth expansion, contrary to the first estimates for UK GDP in Q1’12 that indicated that it was in a technical recession (see my post, Britain’s technical recession, 25 April 2012).  It is likely that those UK GDP figures will be revised up to a small positive position.  But overall, it suggests that the world economy is growing at about 3% a year, with the US at around 2% and the rest at under 1%.  The graphic below shows where the G7 top capitalist economies were sitting at the end of 2011.

World capitalism’s recovery from the Great Recession is the weakest turnaround from a slump since the 1930s. In effect, world capitalism, at least its mature capitalist economies, is in a long depression.  In many economies, the previous peak in output before the slump has not been surpassed.  Only the GDPs of North America and Germany have achieved that.  The rest of Europe and Japan are still in a slough of despond some four years since the Great Recession began.

Even more defining is the sheer waste of the capitalist mode of production.  Factories are idle or under-used, many more millions are out of work (labour participation rates in the major economies have never been lower) and output has been lost forever.  After the deep ‘double-dip’ recession of the early 1980s, the US economy took three years to get back to the level of GDP that it would have achieved if there had been no slump.  Potential output of some $1 trillion was lost forever (that’s the gap between actual output and potential output from 1982 to 1985 in the graph below).

But this time it ‘s much worse.  About $1.5 trillion dollars of output (or over 10% of potential GDP) was lost in the Great Recession of 2008-9, but the recovery is so weak this time that output cannot catch up to where it would have been without the slump and there is now a permanent loss of output of nearly $1 trillion a year (6% of potential GDP) and no sign that the gap is going to be closed.   And this is just the US economy, which is doing relatively better than others.

And, despite all the ‘deleveraging’ of ‘excessive debt’ , massive job losses and the shrinking of assets, profit growth in the major economies continues to slow.  US profits are still growing at a 7% annual pace, but in Germany, the UK and Japan, profits are now contracting.

The depression in Europe is particularly severe.  The Eurozone unemployment rate has hit 10.9% — its highest level since the euro was launched in 1999.

The long depression continues.