‘Free markets’ and global wealth

In a new paper, Ricardo and Robert Fernholz have updated research on the distribution of global household wealth (Wealth distribution without redistribution, 27 February 2012, www.voxeu.org).  I have reported on this in several previous posts (Inequality: rich and poor, 10 January 2010 and 1% versus 99%, 21 October 2011).  And the Fernholzs look again at global household wealth.

They construct a model of household wealth distribution that assumes there are no redistributive mechanisms (taxation etc) to change the impact of the capitalist market on household wealth distribution.  They find that “in the absence of those, the distribution of wealth is unstable and becomes increasingly concentrated over time until virtually all wealth is held by a single household”!  In other words, free markets will automatically increase the concentration of wealth if left to their own devices.  It does not matter how skilled and educated households are or how much they try to save.  Those who start with more money or wealth accumulate more and so inequality grows.

In effect, the Fernholzs provide a mathematical (exponential) explanation of the empirical evidence on the inequality of global household wealth provided by other researchers.  The best of these is the report released in 2009 by the UN which looked at the assets of 39 countries based on data from 20 that account for 59% of the world’s population and 75% of its wealth (The level and distribution of global household wealth, Economic Journal, September 2009).  That report found that the top 10% of world’s households owned 71% of the world’s wealth and the degree of inequality of wealth, the so-called gini coefficient, was 0.80, an extremely high level.  The top 1% of the world’s households had $518,364 in assets.  The richest 1% of American households have 33% of total wealth and ‘earn’ 25% of all income in the US.

All these studies confirm that free markets do not deliver anything like equality of income or wealth.  More, without social intervention, they consistently increase inequalities over time.   It confirms one of Marx’s main observations of capitalism: that the market leads to increased concentration and centralisation of capital.  Of course, here Marx was referring to the ownership of the means of production.  But it seems it also applies to the ownership of personal wealth too.

Billy Crystal at the Oscars: “Nothing can take the sting out of the world’s economic problems like millionaires presenting each other golden statues”.

Is public spending good for you?

Of course, it’s the wrong question.  Public spending is good for all, almost by definition.  The question is really whether public spending is good for capitalism i.e. the private profit mode of production.  The answer is yes and no and depending on who you listen to.  Take the US budget for 2012.  The White House has just announced its proposals.  As mainstream economist (going radical) Jeffery Sachs commented, it is “a budget for the rich and powerful” (FT, 13 February).  President Obama wants to cut non-interest federal government spending from 22.6% of GDP to 19.3% by the end of the decade, while revenues would rise from 15.4% to 19.7%, turning a budget deficit into a surplus through a programme of austerity rather than economic growth.   The Republicans under Mitt Romney would cut spending even more, to 17% of GDP, while keeping tax revenues from rising to no more than 18%.

Both Obama and his likely Republican rival Matt Romney are agreed that government spending is not good for you right now and we should cut it back. This means swingeing cuts in so-called discretionary programmes like education, environmental protection, children’s services, jobs training and infrastructure.  Even though federal tax revenues as a share of GDP are at a low not seen since 1950, both the Democrats and the Republicans plan to keep that share below the average of the 1980s and 1990s throughout this decade.  While Obama would tax those earning over $250,000 a year a bit more, so that they paid about 36% of income in tax on average (although many – like Romney himself – pay much less because their income is not from work but from dividends and profits), Romney would tax the top 1% even less than now, at just 26% of income, while so-called middle-class earners would see an increase in their tax burden.

Cutting spending would be less necessary even within the confines of an economic belief in the need to do so, if taxes were raised.  But this, of course, is anathema to the ruling elite if it means higher taxes on rich individuals and on large corporations.  On the contrary, both Obama and Romney want to lower corporate taxes.   What a stupid idea says, Albert Edwards, the strategist for the French bank, Societe Generale, when referring to the same proposal for the upcoming UK budget coming from various Conservative party sources (SG Global Strategy weekly, 23 February 2012).  “I can still recognize a bloody stupid idea when I see one. The right wing of the UK’s ruling Conservative Party is calling for a reduction in company taxation. This could be dismissed as a laughably stupid idea given the ruinous state of public finances if this government hadn’t already got a track record of cutting corporation tax as one of their very first fiscal acts. 

Edwards went blisteringly on: “Why do I regard the idea of cutting UK company taxes as laughably stupid at this time? It is simply the fact that UK corporations, like their US counterparts, are sitting on piles of “excess”cash with very little evidence that they want to either spend or distribute these surpluses.  Indeed UK corporations have been running HUGE financial surpluses for some years (i.e. the excess of profits over investment spending and dividend distributions).   And to the extent that sectoral balances MUST sum to zero, if the government wants to reduce its deficit, another sector must reduce its surplus, most probably the corporate sector. This can either be done by reducing profits or boosting their spending. At a time when it is estimated that UK (and US) companies are sitting on huge cash piles, it seems totally senseless to boost profits still further by lowering taxes in the hope that they will spend this on hiring and investing. If they had wanted to do this, there is most certainly no shortage of funds. Indeed if the government really does want to reduce its bloated budget deficit, and if as appears to be the case, the UK (and US) corporate sector can’t find useful things to do with its cash mountain they should be relieved of this troublesome burden via HIGHER not lower corporate taxes. Alternatively a one-off levy on excess cash corporate piles should be applied.  After all, deficit reduction is this UK government’s number 1 priority.”

But both Obama and Romney are opposed to raising taxes, so government spending must be cut.  Indeed, both parties in Congress are agreed that discretionary spending must be reduced by $1trn up to 2022, from 8.7% of GDP now to 5%.  Under Obama’s proposals, for every $1 in extra revenues gleaned from the top 1%, $2.50 will be cut from government spending.   And these cuts in discretionary spending are centred on civil spending not on the military sector.  So their impact on economic growth and jobs is that much worse.  According to a study by PERI (The US employment effects of military and domestic spending priorities, December 2011, http://www.peri.umass.edu/), $1 spend on civil sector spending creates substantially more jobs than $1 spent on the military.  The US government spends nearly $700bn annually on its military, or $2,200 per person.  This figure has risen massively since 2001 to cover wars in Iraq and Afghanistan and for ‘homeland security’.    The military budget is up from 3% of GDP in 2001 to 4.7% now.  Military spending provides jobs directly and indirectly for 6m Americans, but the same spending in the civil sector could provide for 30-100% more jobs (or over 2m more).  But such spending on infrastructure, education, healthcare and the environment are the very sectors that are going to be cut.

Of course, the reason for this ‘stupidity’ is that vested interests of capital are behind the call for a cut in corporate tax, even though it is already low and counterproductive even to reducing the public sector deficit.  It is what Marx called ‘vulgar economics’, based on crude class interests, not on a scientific analysis.  Many right wingers rail against public spending under virtually any circumstances.  Government is just bad.  We are continually informed that we are spending “beyond our means”, that public sector debt has reached uncontrollable heights and budget deficits must be turned into surpluses (but not by tax rises for the rich and corporations).

As Robert Skidelsky put it in a recent review of a book by H Wood Brock, The American Gridlock, on US public finances (see www.project-syndicate.org), “there are many that are convinced that all state-sponsored capital spending is just so many roads, bridges and railway lines to nowhere that soak up their money in corruption and inefficiency.  Those who believe this are unfazed by the corruption and waste that characterises much of private sector spending.  They prefer the total waste of letting millions of people sit idle to the possible partial waste of programs that put then to work, nurture their skills and equip the country with assets”.

The Great Recession was fundamentally caused by falling profitability for capitalist investment, but it was eventually triggered by the bursting of a huge credit bubble and excessive debt in the private sector not the public sector.  Public sector debt is now huge by historic peacetime standards because governments had to bail out the banks and other wasteful private sector corporations.  But apparently, a build-up in private sector debt can be okay but any build-up of public sector debt is bad.

The classical economist of capitalism and the so-called guru of free markets, Adam Smith recognised the need for public spending in his Wealth of Nations.  Smith explained: “The first and last duty of the sovereign is that of erecting and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society are, however, of such a nature that the profit could never repay the expense to any individual. “ And Smith meant by this “good roads, navigable canals, harbours and education”.  In contrast to Smith, there is outright opposition to public spending and government.  Vulgar economics rules.

In a recent study, the US investment bank Goldman Sachs tried to analyse scientifically the good and bad aspects of public spending for a capitalist economy (Restructuring the public sector in Europe, 9 December 2011).  It looked at GDP growth in 27 advanced capitalist economies against government expenditure.  Goldman Sachs concluded that greater government spending would initially raise overall economic growth in a newly emerging capitalist economy where government is necessary, as Adam Smith pointed out, to provide ‘public goods’ required to sustain and train the labour force, infrastructure, and even to generate new technology.  But according the GS,“there comes a point where more government spending starts to hinder economic performance “.  What’s the reason?  Government spending starts to “crowd out” private sector investment, “decreasing its returns”.  In other words, if public spending and the public sector grow too much, it starts to destroy profit in the capitalist sector.  And that cannot be allowed,  even though GS admits that public spending “reduces the volatility of business cycles” under capitalism.

Way back in 1943, Michel Kalecki, the Oxford left Keynesian economist pointed out (The political aspects of full employment) that “the economic principles of government intervention require that public investment should be confined to objects which do not compete with the equipment of private business.  Otherwise the profitability of private investment might be impaired and the positive effect of public investment upon employment offset by the negative effect of a decline in private investment.  This conception suits businessmen very well… as there is a danger that the government in pursuing this policy may eventually be tempted to nationalise transport or public utilities so as to gain a new sphere for investment.”  And we can’t have that as ” the social position of the boss would be undermined”.

So the capitalist solution to the economic crisis is not growth through public investment in jobs and civil sectors but a decade or more of austerity.  Indeed, Alan Milburn, former Trotsykist and subsequently Blairite minister for health in the UK’s New Labour government of the last decade and now adviser to private equity groups in Europe, echoed the conclusions of Goldman Sachs when he wrote in an article for the UK’s New Statesman journal of the ‘moderate’ left, that: “The truth is this: the era of big public spending is over … The implications for public spending of a more constrained fiscal environment are threefold.  First, governments will be forced to choose between spending programmes as well as within them.  Second, they will have to think in a new way about how to get better value from existing programmes.  And third, Europe’s largely tentative efforts to reform welfare and public-service provision will have to move up a gear” .  And what Milburn means about reform is privatising health and education so that private profits can benefit at the expense of investment in labour, the only force for creating new value.

The UK’s satirical journal, Private Eye this week:

“There was widespread shock today after the leading economist think-tank the IBO (the Institute for the Bleeding Obvious) claimed that the government’s austerity measures would lead to an era of austerity in Britain.  “We’ve calculated that the result of slashing government spending and sacking loads of people” said a boring man in spectacles,”is that government spending reduces significantly and the number of unemployed rises rapidly.  From these findings we’ve drawn the conclusion that austerity measures will lead to austerity.  The chancellor was quick to reject these findings saying everyone he knows has just been awarded a six-figure bonus by the bank they were working for, so happy days are here again”.

We don’t take care of our own

We take care of our own?

I been knocking on the door that holds the throne
I been looking for the map that leads me home
I been stumbling on good hearts turned to stone
The road of good intentions has gone dry as a bone
We take care of our own
We take care of our own
Wherever this flag’s flown
We take care of our own

From Chicago to New Orleans
From the muscle to the bone
From the shotgun shack to the Superdome
There ain’t no help, the cavalry stayed home
There ain’t no one hearing the bugle blowin’
We take care of our own
We take care of our own
Wherever this flag’s flown
We take care of our own

Where’re the eyes, the eyes with the will to see
Where’re the hearts that run over with mercy
Where’s the love that has not forsaken me
Where’s the work that set my hands, my soul free
Where’s the spirit that’ll reign, reign over me
Where’s the promise from sea to the shining sea
Where’s the promise from sea to the shining sea
Wherever this flag is flown
Wherever this flag is flown
Wherever this flag is flown

We take care of our own
We take care of our own
Wherever this flag’s flown
We take care of our own
We take care of our own
We take care of our own
Wherever this flag’s flown
We take care of our own

The words of the lead track in Bruce Springsteen’s new album Wrecking Ball sums it up.  The road of good intentions has gone as dry as stone (Obama?).  From the shotgun shack to the Superdome, there ain’t no help, the cavalry stayed at home (for workers, not for bankers).  Where’s the work that set my hands, my soul free? (the jobs are gone).  Where’s the promise from sea to the shining sea (The American dream is no longer).

Trying to understand the difference

There’s been a big debate on my blog about what is the correct way to value capital accumulation when trying to measure the rate of profit in a capitalist economy. This debate has been around a long time, but kicked off again following my generally favourable review of Andrew Kliman’s (AK) new book, The failure of capitalist production (see my posts, Andrew Kliman and The Failure of Capitalist Production, 8 December 2011 and The rate of profit: the devil in the detail, 15 January 2012).  The issues are important for Marxist economists precisely because Marx considered his law of the tendency of the rate of profit to fall as the most important of all the laws of motion of capitalism.  So how you measure the rate of profit is obviously key to reaching any conclusions on what is happening in a capitalist economy.

At the rub of the debate is whether the US rate of profit rose significantly after a trough in 1982 to just before the Great Recession or not.  If it did, then many argue that the Marxist law of profitability played no role as a cause of the biggest slump in capitalism since 1929.  The data from AK’s book show that if you measure the US rate of profit based on historic cost (HC), the perceived rise in the rate since 1982 based on replacement cost (RC) measures disappears.  That’s why this measurement issue would appear to be important.

Marx measured the rate of profit as the surplus value created by the employed workforce in capitalist ventures divided by the cost of the means of production (machinery, plant, raw materials etc) plus the cost of employing the workforce (wages and other benefits paid).  The surplus value is found by deducting the cost of employing the labour force from the overall income realised by the sale of the commodity in the market (so profit equals money realised from sale less money advanced for production, or M’ less M).  And the rate of profit is the profit realised divided by the capital advanced to realise it – or (M’-M)/M).

The big debate centres around whether you should measure the rate of profit on the basis of historic cost (HC) i.e. the original value in money terms of the investment at the beginning of the production cycle or on the basis of replacement costs (RC)  i.e. the current cost at the end of the production cycle of the capital advanced .  How can we distinguish the difference?  I’ll try with a few simple examples of the capitalist reproduction process.

First, let’s assume that there is one capital or capitalist economy, or ‘capital in general’.  At this level of abstraction, there are not ‘many capitals’ competing with each other.  Instead, we are dealing with the total value produced in an economy and the total profit appropriated by capital.  This is exactly the same abstraction that Marx makes in explaining his law of profitability.  So we have one capitalist representing the whole capitalist system.

Let’s say this capitalist starts with some money (M), say M20.  This M20 is equivalent to 20 hours of socially necessary labour time (SNLT), which is the average time it takes to produce a commodity that can be sold or realised on the market.   It does not matter if M is gold, corn or fiat currency, as long as it is the monetary expression of socially necessary labour time (MELT).  The capitalist now advances this M20 as capital to purchase means of production (MP10) and employ a labour force (V10).  Assuming that the rate of surplus value is 100%, then the workforce generates new value of 20 (V10+S10) to make a commodity worth P30 (MP10+V10+S10).  This is sold on the market for M30.  The profit is thus M10 (S10); and the rate of profit is M10 divided by the capital advanced M20, or 50%.

But now let’s say that, before the start of the next production cycle, it becomes possible to increase labour productivity and lower the SNLT by 20% for all the components that are need to make the commodity.  The rate of surplus value at 100% is assumed unchanged.  If we assume that the capitalist lives on air and does not use any of the money realised for a luxury way of life, there is now M30 available for investing in the new cycle.  Assuming all this money is reinvested, then the capitalist now buys physical means of production that would have been valued at MP15 in SNLT but is now valued at MP12 because of the fall in SNLT by 20%.  The capitalist also employs a workforce that would have been valued at V15 but is now valued at V12.  The surplus value created is thus S12 and total value of the commodity produced is now P36 (MP12+V12+S12).   This is sold in the market for M36.

What is the rate of profit now?  On a HC basis, it is M12 (S12) divided by the original money capital advanced (M30), or 40%.   But on a RC basis, the original M20 of advanced capital (AC) is also reduced 20% by the lower SNLT.  The rate of profit on this basis is M12 divided by M24, or 50%, the same as in the first cycle.  There is no change in the rate of profit under RC but it has fallen under HC.  See example 1 in the attached file.

HC versus RC

Supporters of the HC measure of the Marxist rate of profit argue that, as the M30 of AC was advanced, it cannot be altered in value even if the SNLT to produce the commodity in the new production cycle has fallen.  That’s because the original capital advanced was made with money capital and profits are also measured in money capital.  However, supporters of the RC measure argue that the M30 of advanced capital must be devalued as well by the decline in SNLT now available in the new cycle.  So the M30 of AC at the beginning of the production cycle will be revalued at the SNLT now operating up to the end of the production process, or to M24.  In other words, the SNLT sets the value not only of new investment in means of production and labour, but also sets the value of all previously accumulated capital.  The rate of profit thus stays the same at 50%.  The HC measure says the rate of profit will fall, other things being equal, if the value of the product declines. In my view, the latter is exactly what Marx wants to show in the process of capitalist reproduction.

The above example is not realistic, in Marx’s view, because to reduce the SNLT in producing the commodity, which is done by raising the productivity of labour, there must usually be an increase in technology and means of production relative to use of labour.  In other words, there should be an increase in the organic composition of capital, namely the amount of MP will rise relatively to the amount of V. So let’s assume that, in order to reduce the SNLT by 20% in each cycle of production, the organic composition of capital must also rise by 20%.  If I apply this assumption, we find that the rate of profit under both HC and RC falls because of Marx’s law of a rising organic composition of capital applies without any counteracting factors.  BUT the rate of profit is lower under HC (36%) than under RC (45%), because the money capital advanced is unaltered at M30 from the beginning of the cycle of production with HC while it is devalued along with the value of the commodity under RC (to M24).   See example 2 in the attached file.

We can add other examples, where Marx’s counteracting factors against a rise in the rate of profit come into play, namely, by the cheapening of the means of production (or constant capital) leading to a fall in the organic composition of capital; or by a straight rise in the rate of surpus value producing more profit.  In both these cases, with a 20% fall in the SNLT still operating to produce the commodity, we find that the rate of profit still falls with HC, but by not as much as without these counteracting factors.  With RC, the rate of profit rises with the application of these counteracting factors.  See examples 3 and 4 in the attached file.

Of course, none of the actual rates of profit in these examples should be taken as realistic.  The aim of these examples is to show that significant differences in the rates of profit will develop between the HC and RC measures.  The rate of profit is measured against advanced capital in money terms.  Under HC, the money capital accumulated from previous cycles is advanced at the beginning of each cycle.  The rate of profit under RC terms will also be based on the advanced capital (AC) BUT the value of this AC is assumed to have been reduced to a new level of SNLT.  So the rate of profit will be measured against a revalued AC.

It is not true that HC measure does not revalue the AC if the SNLT falls.  It does, but only that part created and realised in the new cycle of production.  The historic AC accumulated from previous cycles is not revalued. This measure thus recognises that capitalists have already paid in money capital for past means of production and labour which must go into measuring the rate of profit.  It makes no difference that the MELT falls subsequently.  In contrast, the RC measure assumes that all the accumulated AC must also be revalued at the new SNLT and not just new AC consumed in the current production process.

Which measure you adopt does make a difference. In my examples, the rate of profit under HC falls more than the RC measure when the SNLT falls (example 1) and when the organic composition of capital rises (example 2 as Marx argues would be the usual case).  And it also falls when the means of production is being cheapened and there is a falling organic composition of capital (example 3), while with RC, the rate of profit rises (example  3).  And it still falls under HC when the rate of surplus value rises while it rises with the RC measure (example 4).

Which is more realistic and which is closer to Marx’s view?  Supporters of HC argue that this measure is more realistic as it measures what capitalists get back in money profit in each production cycle against what they have paid in money for the capital advanced, even though the value of current production may have fallen with a fall in the SNLT.  You cannot revalue the money that has already been advanced and converted into means of production and labour power.  The supporters of the RC measure must explain why they want to revalue all the old money capital at the current SNLT when that makes no sense in reality.

Supporters of the RC measure argue that a change in the SNLT must mean revaluing the capital consumed in the production cycle.  This is true, but this is a red herring.  The HC measure allows for the change in the SNLT to affect the additions to advanced capital but not to previous advanced capital.  Advanced capital (AC) differs in definition from the means of production (MP) and labour power (V); it exists in money only, both before and after the production process.  So there is no need to revalue the old AC simultaneously with the capital consumed in production – indeed that would be to fly in the face of reality.

Which measure does Marx agree with?  That is a matter of interpretation.  The supporters of the HC measure say that this is Marx’s view and the only one consistent with all other Marxist categories and equivalents.  They argue that the interpretation that proposes the RC measure is not Marx’s and is also inconsistent with Marx’s other equivalents.  Indeed, as the RC measure is not realistic, it is not a measure of the rate of profit at all, but merely a theoretical figment.

This brings me to depreciation, which was another big issue of the recent debate on my blog.  None of the above discussion on the correct way to measure the rate of profit, given the effect of a changing SNLT, has anything to do with the need to account for the depreciation of the means of production during each production cycle.   HC supporters are not denying that the value of the means of production (MP) will depreciate.  Depreciation is necessary to account for physical wear and tear of machinery and plant and also through moral depreciation caused by new technology making existing equipment obsolete.  But this depreciation is exogenous to measuring the value of that advanced capital as SNLT changes.  Depreciation can take place against the MP measured in HC or RC (indeed, the US official sources do just that, although they only account for physical depreciation).

Anyway, that’s how I see it.

Greece in a straitjacket

So there we have it.  Greece’s technocrat-led government finally got the Euro leaders to agree to a second bailout package to fund the government through to end-2014.    Greek capitalism is now in a straitjacket strapped on by the Euro leaders and guarded by the dreaded Troika (the EU Commission, the IMF and the ECB).  Troika officials will move into offices in Athens and check every euro coming in and out of the government to see that the targets for public spending, taxation and privatisation are kept to.  In addition, all the funds guaranteed by the Eurozone governments and raised through the emergency funding body, the EFSF, will be placed in an escrow account run by the Troika and will be doled out as and when creditors must be paid.  The Greeks will not control this account and must wait for handouts from the Troika.  It is as though a private company had gone bust and called in the administrators who now run the company, hiring and firing.  Greek capitalism is on its knees and bowed.

This straitjacket will be in place at least until 2014, but probably until the end of the decade.  As most private sector holders of Greek bonds are participating in the so-called bond swap (PSI) at a loss of 53% on the face value of the bonds they hold, around 85% of the remaining outstanding debt of the Greek government, at around E280bn, will be held by the IMF, the ECB and the EFSF, as well as by Greek state pension funds and its banks.  So most of the bailout package money will be used to pay back these loans!  What a roundtrip farce!

The reason it is happening is that the Greek government can no longer raise funds in the private bond markets except at ludicrously high interest rates.   At least, the official creditors will charge a much lower rate and won’t ask for any money back for three years.  So instead of paying 25% on bonds to the private market, Greece will pay about 3.5% a year.  But this means nearly all the funding is going to pay bond holders and very little is going to help the Greek economy recover from its deep slump, now in its fifth year.  On the contrary, the bailout package has only been delivered under the most draconian conditions.

On top of the already imposed cuts in public spending, the government was forced to agree to an extra budget for 2012, cutting spending by another 1.5% of GDP through reductions in public investment projects and defence as well as yet further cuts in pensions.  Public sector wage reductions are being brought forward, while the monthly minimum wage is to be slashed by 22% (and 32% for young people under 25 years!).  Up to 15,000 state workers will be put in ‘labour reserve’ for a year reducing their incomes to 60% and then sacked.  The aim is to cut the state workforce by 150,000 by 2015.  The government has now to run a significant surplus on its annual budgets (an excess of taxes over spending excluding interest payments) for the foreseeable future.

The problem is that these measures of fiscal austerity increase the difficulty of the economy to recover from its depression.  The IMF has still to sign up to the deal (it meets next week), but in its published debt sustainability analysis, it reckons that after the PSI, the public sector debt would still be around 168% of GDP in 2013 because of the falling GDP.  The idea is that annual primary surpluses will drive that figure down towards 120% of GDP by 2020.  But it does not take much to miss that target.  If the government does not sell enough state assets (it is planned to sell off E46bn by 2020), or if economic growth does not recover as quickly as expected, or if interest rates across Europe start to rise over the next few years, then the debt ratio could spiral upwards and not get much below 160% in 2020, which is where Greece is now.

The bailout plan assumes that the Greek people will stick to what their technocrat government has agreed and start selling off huge chunks of their country’s wealth, while at the same time imposing enormous budget cuts.   We shall see if that is the case in the upcoming elections, mooted for early April.  Current opinion polls show that the conservative New Democracy is polling just 19%, while the social democrat PASOK party is polling 11%.  Both these parties are pledged to honouring the bailout.  The opposition left parties are not and they are polling over 40% together (but they are split and bickering).

The Euro leaders know this.   They’re buying time with markets to avoid catastrophic capital flight from Greece and give them more time to work out how to shore up the likes of Portugal if and when that happens.  We shall know if they have succeeded in hoodwinking the Greek people and the markets within a month or so.

Exiting the euro

Should the Greek left argue strongly and first and foremost for Greece to leave the euro as the best way out of its mess?  After all, the Euro leaders, the Troika and the private bondholders are imposing a humiliating and damaging degree of fiscal austerity on the Greek people through the upcoming ‘bailout’ package.  Would it not be better to be free of the ‘imperialist euro’ currency and let Greece stand on its own?

Argentina is often cited as an example of a country that escaped the tyranny of a ‘foreign-imposed’ currency (the US dollar) by ending its currency board, a device that set the amount of Argentine pesos automatically in line with the country’s reserves of dollars.   In the crisis of 2001, the Argentines eventually defaulted on their debt and ended the currency board.  Subsequently, after a deep economic slump., the Argentine capitalist economy recovered and raced ahead.  Thus breaking with the euro and devaluing the Greek currency might offer the same way out.

Argentina’s former central bank governor at the time, Mario Blejer discussed this issue in last week’s Financial Times (URL).  Blejer commented: “Given the grim outlook for Greece, many analysts suggest that it would be better for Greece to exit the euro zone. They often cite Argentina’s exit from its currency board in 2002 as evidence of the benefits that would accrue to Greece if it reintroduced its own currency.  It is true that, following the peso devaluation and after a painful (but short) adjustment period, Argentina enjoyed six years of rapid growth.  But Argentina’s experience was singular. Strong export prices resulted in sustainable external surpluses.  Greece, on the other hand, cannot rely on favourable external conditions and is already in a deep recession.  In practice, moreover, Argentina had no choice after defaulting but to ditch its peg, since the currency board was a unilateral arrangement that did not envisage counterparty support or institutional safety nets. Unlike Argentina, Greece belongs to a formal multilateral arrangement that could provide the intensive care and official finance needed to smooth the adjustment.”

Blejer goes on to state that “an analysis of the costs incurred by Argentina strengthens the case for Greece to remain within the euro zone.”  Once it became clear that Argentina was going to devalue the peso, there was a run on the banks which lasted for over 18 months and used up two-thirds of dollar reserves.  Capital controls had to be imposed, which then made it impossible for businesses to fund their operations.  The government fell.   And remember Argentina had never stopped using its own currency, the peso.  Greece has, so it would have to introduce a new currency to replace the euro.  Who would want to be paid in this currency and who would agree contracts in it?  Blejer concludes:  “in normal circumstances, in order to cut real wages (and this is what central bankers want to do – MR) , devaluing the currency is more palatable than reducing nominal wages.  But when devaluation requires exiting a monetary union, the resulting financial implosion has to be factored in”. 

In other words, a national capitalist economy can try and escape a depression by devaluing its currency to gain competitive advantage in world markets, but it is much harder to do it without major disruption when there is no currency to devalue and it means coming out of a wider currency union.  Blejer did not add that, eventually, devaluation would not work, unless a national capitalist economy can improve competitiveness and raise exports to pay for foreign investment.  Without that, devaluation can only make the foreign debt burden even worse.  Indeed, competitively priced exports will be difficult to achieve if so much capital and raw materials must be imported to make those exports.  And Greece’s import component of exports is high.  Indeed, the experience of five recent devaluations of economies in crisis (including that of Argentina) shows that they lead to a 10-20% fall in real GDP and take five to ten years to recover to previous real GDP levels (www.cepr.org/meets/wkcn/1/1621/papers/Rebelo.pdf)  – that’s no picnic.

None of these arguments are put forward to suggest that Greece staying in the euro and accepting so-called ‘internal devaluation’ through wage and pension cuts etc is ‘better’.   It’s just that neither external nor internal devaluation will save Greece from years of depression and a generation of lower living standards for most Greeks (see my points on Latvia in my last post, Greece: a Sisyphean task, 13 February 2012).  Devaluation is not a quick way out.  As Blejer says “what is required is not an abandonment of the euro but a framework adapted to the specific context of the Eurozone and Greece itself”. 

Of course, what Blejer means by a “framework” is lowering wages, privatising the state sector, reducing taxes for the corporate sector (especially big business) and ‘deregulating’ labour markets i.e. the super-exploitation of the Greek people to raise profitability.  But the left could also find an alternative policy to exiting the euro where Greece negotiates a full default on its debt to private and foreign bondholders; takes over the banks; and uses the savings from bond and interest repayments (€17-20bn a year) to start state directed investment in jobs, technology and funding small businesses, while staying in the euro to protect the savings of the people from destruction, keeping down inflation and avoiding a rise in foreign debt.  The question of exiting the euro then becomes an issue for the Euro leaders to impose (and to be resisted by a campaign within Europe), not as the main policy plank of the left.

Greek update

Today, New Democracy leader Antonis Samaras finally buckled down to the demands of the Eurozone finance ministers and the Troika to pledge in writing that he would back the fiscal austerity measures and the other conditions of the EU-IMF bailout package.  Samaras said he was “committed” to the “objectives and key policies” of the country’s new loan deal with its foreign creditors, adding that “if New Democracy wins the next election in Greece, we will remain committed to the program’s objectives, targets and key policies”.

Samaras, when voting for the package in the Greek parliament on Sunday had hinted that he wanted to renegotiate the terms of the bailout if he formed a government after an election mooted for April.   That was too much for the Euro finance ministers and they called off the euro meeting planned for today to approve the deal.  The Euro ministers demanded that Samaras make a written pledge on the deal, that the current bankers government under Lucas Papademos identify exactly where some $320m in cuts would be made to meet the Troika’s fiscal target and to show that the proposed ‘voluntary’ public sector debt default was in place.  There was a shortfall because Samaras opposed cuts in supplementary (occupational) pensions demanded by the Troika.  Now it appears that the government cannot find enough cuts from defence, health and elsewhere and so it is reverting to the pension cuts after all!

Of course, Samaras was not holding out because he wanted to protect the interests and living standards of the Greek people.  Remember he had already expelled 20 of his MPs on Sunday for opposing the bailout agreement.  He wanted to appear to the electorate before the election as defending their interests.  But in reality, his plan to adjust the bailout package is designed to protect the interests of the Greek capitalist class.  His proposed changes to the fiscal austerity package are to be ‘fiscally neutral’ ie they still deliver the same amount of austerity that the Troika wants.  But Samaras wants to cut taxes for corporations and introduce a flat tax on personal incomes (again delivering lower taxation on the rich), while cutting public spending even more and introducing even greater measures of privatisation of state assets than the Troika proposes.

However, even the capitulation by Samaras is not enough for the Euro leaders.  They are worried that Samaras might backtrack on his pledge or that an April election will produce an unviable coalition at best, or, at worst, elect a leftist coalition government that opposes the bailout package and the Troika.  So the Germans, Finns and Dutch are proposing that the package be delayed in part or in full until the election is over.

By refusing to provide funds to pay off the bond holders, the Euro leaders hope to pressure the Greek people into voting for the parties that support the deal or face calamity in the form of expulsion from the Eurozone and the EU.  Remember that over two-thirds of Greeks asked want to stay in the euro and yet nearly 80% oppose the package.  The proposed delay by the Euro leaders is trying to break the will of the Greek people.

Now it may be that the French, Italians and Spanish, who also have debt problems, will not back this idea.  After all, on 20 March the Greek government is supposed to pay back around €16bn to bondholders.  It does not have the money, unless the EU leaders cough up the funds and/or the private sector haircut on the debt is implemented.  And that is before the election takes place.  Most likely, the EU leaders will find the funds for that payment, but then hold back on any more until the Greeks capitulate.

There is another problem with funds too.  If the voluntary ‘haircut’ deal to reduce Greek government debt goes ahead, then €35bn must be found to sweeten the deal for the bondholders and another €58bn must be found to recapitalise the Greek banks or they will go bust and have to be nationalised.

Is there any way out of this?  One of the leftist parties opposed to the Troika is the Coalition of the Radical Left (SYRIZA).  It has called for a renegotiation of the Greek government debt to exclude any losses for the state pension fund that the Troika plans to include in the deal; an end to interest payments on any outstanding debt (costing €17bn a year) and a switch of resources from bailing out the banks to investing in public sector projects for investment and employment.

Such an approach, moderate as it is (there is no call to leave the euro), is anathema to New Democracy, the Troika and the Euro leaders.  But SYRIZA leads the public opinion polls on such a programme.  The decisive test between the interests of Greek capitalism as represented by New Democracy and the interests of the capitalist European Union (as represented by the Troika) on the one hand, and the interests of the Greek and European people on the other, is coming to a head in just the next few weeks.

Greece: a Sisyphean task

The Greek coalition party leaders carried through their capitulation to the Troika’s demand (see my post, Greek capitulation, 8 February 2012) by passing the terms of the new fiscal austerity package in the Greek parliament.,  The legislation was passed by 199 votes in favour to 74 against, with the party leaders expelling about 20 MPs from each of the two major parties who refused to vote for the deal, while  ignoring the massive street demonstrations outside parliament.  The Troika is now demanding that the party leaders commit themselves to implementing the measures whatever the result of the upcoming parliamentary election that the conservative New Democracy is demanding for early April.

As I explained in my last post (see above), the leftist parties that are opposed to the Troika deal are actually commanding around 40% of the vote in public opinion polls, enough to ensure the defeat of the existing coalition of conservative New Democracy, social democrat PASOK and far right LAOS (which has now quickly left the coalition).  So it is very likely that the Greek people, the majority of which are opposed to the Troika’s measures, will vote out the capitulators.  Remember under the deal, another 15,000 public sector workers are to lose their jobs with a target of 150,000 losses by 2015.  There will be a 20% cut in the minimum wage, the end of job security and union rights, the sacking of all supply teachers in schools and massive cuts in health spending.  Indeed, the Greek economy has already lost 500,00 jobs since 2008 and the share of employment among the working age population is now at it lowest since the overthrow of the military regime in the 1970s.

The shocking feature of this deal is that 90% of all these fiscal austerity measures are going to repay bondholders and not to promote economic growth or investment in jobs in the Greek economy.   Instead. by the end of next year, real GDP in Greece will have fallen by 20%, almost three-quarters of the total decline during the US Great Depression (29%).  The human cost of all this is difficult to comprehend.  This has provoked even the conservative Archbishop of the Greek Orthodox Church to protest.  Archbishop Ieronymos of Athens and All Greece sent a letter to Prime Minister Lucas Papademos saying that “the phenomenon of the homeless and the famished, a reminder of WWII conditions, has taken the dimensions of a nightmare,” adding that “the homeless increase by the thousands everyday, while small and medium-sized enterprises are forced to go out of business. Young people, the country’s best minds, choose to emigrate, while our fathers are unable to live after the dramatic cuts in pensions. Family men, particularly, the poorest, those with many children, wage earners, are in despair due to repeated wage cuts and unbearable new taxes. The unprecedented tolerance of the Greek people is being exhausted, rage pushes fear aside and the risk of social upheaval cannot be ignored anymore by those who are in the position to give orders and those who execute their lethal recipes.” 

He went on:  “in these difficult and undoubtedly, crucial times, we should realise that every Greek home is plagued by insecurity, despair and depression, which unfortunately, have caused, and sadly enough, continues to cause the suicides of those unable to bear the ordeal of their families and the pain of their children.”   The Archbishop warned the ruling Greek elite that “it is obvious that the drama our country is experiencing will not end here but it could take up new uncontrollable dimensions.”  The Archbishop then went on to condemn the Troika’s imposition of what is called ‘internal devaluation’ of Greek production costs (see my last post).   “Even tougher, more painful and unfair measures are being demanded within the same ineffective and unsuccessful policy that is being followed. We are forced to have even larger dosages of a medicine that has proven to be deadly. We are being demanded to undertake commitments that do not solve the problem and only temporarily postpone the foretold death of our economy while, at the same time, we surrender our national sovereignty. They use as collateral our country’s wealth and the wealth that we can recover from our land and our seas,”   The Archbishop added “the voices of the desperate, the voices of the Greek people, are being provocatively ignored in decision-making.”  

He then outright opposed the deal with the Troika:  “Greece will be able to make it if it will resist the blackmail that comes from abroad and rejects these deadly recipes … the Greece of culture, history and traditions cannot be lost because a few believed that this is possible.”  Such is the opposition of the majority to this capitulation to the Troika that it is no wonder the Greek police union has threatened to issue warrants for the arrest of the EU and IMF Troika officials!  The police unions stated that it “refuses to stand against” fellow Greeks.   And yet the coalition leaders continue with the mantra that THERE IS NO ALTERNATIVE (TINA) , the infamous slogan of the UK’s ‘Iron Lady’, Margaret Thatcher, when her government carried through the rape of British industry in favour of a rentier economy and the bankers in the 1980s.

The irony is that, once the proposed ‘voluntary’ default agreement on Greek government bonds is implemented by getting Europe’s banks and pension funds to agree to a ‘haircut’ of up to 70% in the value of the bonds they hold in return for new Greek bonds and a cash sweetener worth €30bn, Greek government debt will still be around 140% of GDP, more than double where it is supposed to be under Eurozone rules.  And up to 80% of that debt will now be owned by the official creditors (the EU, the ECB, the IMF and the EFSF).  The banks and pension funds will have been paid off (even if they take a small hit) and the Greek banks will be bailed out with public money to the tune of another €30bn.  The remaining problem will now be with the Greek people and Eurozone taxpayers.

In Greek myth, Sisypheus was a king punished by being compelled to roll an immense boulder up a hill, only to watch it roll back down and to repeat this throughout eternity.  This is what the Troika is asking the Greeks to do now.  The policy of austerity being imposed won’t work, as the Archbishop says.  The model that the EU and the IMF are following is that of Latvia.  Latvia is a small Baltic state with a currency that is pegged to the euro.  During the Great Recession, foreign creditors stopped lending to the small country.  Latvia’s leaders, on the advice of the IMF, decided to maintain its currency peg and reduce costs to get ‘competitive’ by ‘internal devaluation’.    As a result of public spending cuts, tax increases and the slashing of wages and employment, Latvia suffered the worst loss of output in the world during the Great Recession, a fall of 24% of GDP.   Unemployment rose from 5% to 20%, as it has now reached in Greece.  Unemployment would have been closer to 30% if some 10% of the labour force had not left Latvia for other parts of Europe looking for work.  Latvia’s small population fell 120,000.

Did the policy of internal devaluation restore Latvia’s fortunes?  No,  employment is still some 15% below its peak in 2007 and three years after the crisis, Latvia’s GDP is still 21% below its peak.  It would have been worse but the Latvian government finally decided to stop further its fiscal austerity measures in 2010 and the economy began to make a small recovery last year.  Despite a drop in unit labour costs of over 21%, net exports (after imports) have still made little contribution to economic growth.   So internal devaluation has achieved nothing.   Of course, this does not mean to say that if the Latvians had adopted a policy of devaluing their currency and expanding  spending, that Latvia’s small capitalist economy would have been in great shape by now.  Latvia is not Argentina, where devaluation and state spending (and outright government debt default) did enable a significant economic recovery after the deep recession and crisis of 2001 (at a time when the rest of the world was not in deep recession too).  It’s quite possible that if Latvia had adopted the Argentine solution, it would have ended up defaulting on its debts and would have needed a bailout from EU and IMF money that may well have not been forthcoming.

The choice for weak and small capitalist economies like Greece or Latvia is fiscal austerity or devaluation (but probably both) or a willingness on the part of the stronger capitalist economies to subsidise the weak.  That is the issue for the Eurozone leaders with Greece. In a way, this is a political issue for European capitalism.  If the strong capitalist states want to ‘unify’ Europe through a federation with fiscal and monetary transfers, they must pay a price in transferring back some of the surplus value they have captured through trade and capital flows out of the weaker states.

Take the UK.  This is a centralised nation state.  But regions like London and South East capture most of the value generated by the workforce.  As a result, London’s tax revenues constitute 45% of its regional GDP compared to public spending of 35%, a surplus of 10% of regional GDP compared to the national figure of a 10% deficit.  The North East of England raises only 29% of its region’s GDP in revenues while public spending reaches 62% of GDP, a deficit of 33%!  Wales, an annexed province of the UK from medieval times raises only 30% of its GDP in taxes but spends 66%.  Northern Ireland, another annexed part of the UK from the 16th century, raises 27% and spends 67%.  Thus the weaker region shave to be subsidised by the nationbal government to balance their books.  The British ruling class and the bulk of British citizens allow these fiscal transfers because they see the UK as a unified country or state that they wish to preserve.  If the political will changed, then maybe some of these ‘deficit’ regions would be ‘let go’ (the Scots are thinking about doing so anyway).

Is there political will on the part of Europe’s ruling class and the citizens of Germany to go on subsidising Greek capitalism while forcing it to accept bitter poison?  Greek capitalism is too weak to get out of this debt crisis on its own either through fiscal austerity and cutting costs internally or by devaluation and export growth.  So either the EU leaders must agree to subsidise economic recovery with more funds or they must cut Greece loose to its own fate.  Up to now, the EU leaders have been reluctant bail Greece out or to cut it loose.  To do the latter would set a precedent for other weak EU states and damage the status of the currency in world markets and the EU on the world political stage.  Remember what EU Commissioner Joaquin Almunia said at the start of the Greek debt crisis back in May 2010:  “Greece will not default.  In the euro area, default does not exist”.  But now a default agreement will be implemented this week.

Whatever the Greek coalition leaders agree to and try to implement, such is the weakness of Greek capitalism, it will not be able to meet its fiscal targets or get its debt down to reasonable levels.  Before the end of the year, the Troika will have to report that Greece is not delivering.  Then the EU leaders will have to decide whether they ‘let Greece go’ or not.  The EU leaders have agreed to more money for Greece  (or more accurately its bondholders and banks) in return for draconian cuts in living standards in order to provide more time to try and ‘ring-fence’ other vulnerable Eurozone states like Portugal and Ireland (where they are preparing extra funding).  So when Greece goes down, it will not affect the rest (or so the EU leaders hope).  Of course, the Greek people may force the issue earlier if they vote in an anti-Troika government in April.

Greek capitulation

As I write, the leaders of the three main parties in the current ‘bankers’ government’ in Greece are preparing to capitulate yet again to the demands of the dreaded ‘troika’ of the IMF, the EU and the ECB to make yet further cuts in the living  standards, public services and jobs of the Greek people in order to receive yet another bailout package.  This is a package designed to make Greece pay debts built up by successive governments owed to the banks of Europe and to restore the competitiveness of Greek capitalism so it can stay in the euro.

The draft of the bailout includes plans to cut the minimum wage by about 20-22%.  This will lower the minimum wage to the level of social benefit. Private sector pensions worth over 1,200 euros a month will be cut by 15-20%.  This time, the bailout package will include private sector involvement (PSI), namely Europe’s banks will accept a ‘haircut’ on the value of the debt they are owed of up to 70% of the value of the Greek government bonds they hold.  This sounds a lot but it will cut Greek government debt by only 20% of GDP, still leaving the debt ratio at around 140% by the end of the decade.  And the banks will receive new Greek government bonds with a maturity of 30 years earning 3.5% a year guaranteed by all the Eurozone governments plus a little cash as a sweetener.  Even this deal is unacceptable to some speculative hedge funds who are holding out for their full pound of flesh, comforted by the thought that they have insured fully against default in the credit derivatives market.   On top of this, the privately owned Greek banks will receive up to €50bn of taxpayers money to recapitalise after their losses so that they remain in private hands.

But there is no such aid to the Greek people.  The party leaders are being asked to impose 150,000 job losses in the public sector (civil servants, hospitals and teachers), along with the wage cuts on top of the already imposed austerity measures (mainly massive tax increases) introduced in previous bailouts and Troika demands.   The Troika is furious that Greece has not kept to its side of the bargain in imposing austerity up to now.  In May last year, then Finance Minister George Papaconstantinou announced a plan to collect an extra 2.5 billion euros in 2011 from fighting tax evasion and 4.4 billion euros this year.  But the plan was abandoned because revenues were too weak and Greece now aims to collect 1.5 billion euros in overdue payments this year, which officials view as more realistic. Tax officials have seen their own pay cut, reducing for some the incentive to tackle reforms.  The shadow economy still accounts for more than a quarter of the 220-billion-euro official output — the highest proportion in the euro zone. Annual tax evasion stands at 40-45 billion euros.   Tracking down rich Greeks who have not paid taxes and sneaked their money abroad or getting them into court to pay up is failing.

The negotiations have been stretched and tortuous because the main party leaders in the coalition are basically being asked to capitulate to the Troika.  They have been reluctant to agree because they know that when it comes to the planned election in April, the electorate is likely to give them a sharp message.  A recent poll showed that 90% of those asked were not prepared to accept this new round of austerity measures! The former government party, the social democrat PASOK, has seen its poll rating plummet from 44% it got in the 2009 election to just 8% now!  Even the conservative New Democracy party which likes to claim that it opposes austerity (it is in favour of the decimation of the public sector, but not in favour of higher taxes on the private sector) can only poll 30% of the vote.  If there was an election tomorrow, the smaller leftist parties outside the coalition would probably hold the balance of power in the new parliament and they are opposed to the Troika demands.  No wonder PASOK now wants the election called off and the banker Papademos to continue as prime minister.

Nevertheless by the weekend it will probably be announced that the party leaders have all lined up like ducks to agree to Troika demands – indeed, the current PASOK finance minister Venezelos has said that his reputation depends on it!  For the social democrats and conservatives alike, they see no alternative way out.  That’s because they accept the economic arguments of the Troika that, if Greece is to stay in the euro, then it must cut costs and become ‘competitive’.  Thus, there must be what is called an ‘internal devaluation’ of production costs of the Greek economy.  Greek capitalism is not efficient and so is not pricing for its goods and services competitively.  Consequently, it runs a huge deficit in its trade with the rest of the world and runs up more debt to pay for these deficits.  Compared to Germany, its unit labour costs (the cost of labour per unit of production) are higher.  This is because Greece’s productivity level is lower, even though Greek wages are much lower than in Germany.

The answer to this problem from mainstream economics is that, to get costs down, wages must be cut.  Chief economist at the Bank of America, Mickey Levy tells us that the answer for the ‘bloated south’ of Europe is to “keep wages low”(Diverging competitiveness among EU nations: Constraining wages is the key; http://www.voxeu.org/index.php?q=node/7536).  He admits that productivity growth in Greece, Portugal and Spain in the last decade has kept pace with Germany or surpassed it (Greece) – see my post, Europe: default or devaluation?, 16 November 2011.  The reason for Germany being more competitive in the last decade “contrary to the commonly held notion that German workers are more productive, was German wage restraint”.  As Levy admits, this was forced on German workers through companies moving production to cheaper eastern Europe and employing more temporary labour, while governments cut social benefits to force workers accept lower rates.  Levy sums up the policy answer for the Greeks: “For Eurozone nations unable to devalue their currencies and with limited upside potential to increase productivity, there is only one way to restore competitiveness: deflationary reductions in real wages”.

Internal devaluation means a massacre of real wages.  But does it work?  This was the policy adopted in the small state of Latvia when economic crisis hit them back in 2008.  They cut wages by over 50%.  Latvia has become more ‘competitive’.  But that has done little to restore production to pre-crisis levels, let alone the living standards of the people.  They remain some 25% below where they were in 2007.   This ‘supply-side’ policy has been a manifest failure for the people.  Yet it is what the Troika and the Bank of America offer.

They present Germany itself as the model for this policy.  Germany’s competitiveness has been sustained in the last decade not by rising productivity. Productivity growth has not been high. Competitiveness has not been maintained by cutting jobs.  German unemployment rates are relatively low.  It has been done by cutting wages for a whole layer of workers.  Under various reforms, first introduced under a social democrat government and followed by the conservatives, wages for a whole range of low value added jobs were slashed.  This kept unit labour costs from rising.

The social consequences for a whole layer of German workers has been devastating.  Poverty wages are the order of the day in one of the richest economies in the world.  The German low wage sector grew three times as fast as other employment in the five years to 2010. Germany has no nationwide minimum wage and wages can go well below one euro an hour, especially in the former communist east German states. Data from the European Statistics Office suggests people in work in Germany are slightly less prone to poverty than their peers in the euro zone, but the risk has risen: 7.2% of workers were earning so little they were likely to experience poverty in 2010 versus 4.8% in 2005. It is still lower than the euro zone average of 8.2% but the number of so-called “working poor” has grown faster in Germany than in the currency bloc as a whole.

According to the commonly-used international definition of low-wage work i.e  earning less than two-thirds of the median hourly wage, about one-fifth of German workers are low-wage compared to one in eight in Greece and one in 12 in Italy .  In Germany, the number of full-time workers on low wages rose by 13.5% to 4.3 million between 2005 and 2010, three times faster than other employment.  Jobs at German temporary work agencies reached a record high in 2011 of 910,000 — triple the number from 2002 when Berlin started deregulating the temp sector.  But no prizes for guessing where this super-exploitation of workers is most prevalent in advanced capitalist economies!

So there is a layer of German workers in what are called mini-jobs that don’t provide a living, along with casual, temporary jobs at poverty rates. Temporary jobs have been key to ‘competitiveness’ in Spain, where temporary workers have become a way of life for millions: no security of employment, no training, no holidays or benefits.  This forces millions to join the so-called ‘informal economy’ where incomes are paid on the sly by employers without taxes or social security.  This divorce is a deliberate way of keeping many EU capitalist economies ‘competitive’.

Ironically, there is a growing realisation from mainstream economics that such an approach is destroying the value of human capital, lowering its productivity.  And yet, this will be the result of the Troika’s demand to sack 150,000 government workers, cut the minimum wage and rights of the private sector workers and ‘liberalise’ labour markets.  The Troika highlights ‘protectionism’ in Greek (and other) labour markets. It has tried to break various safeguards that workers have established over the years: an expensive licensing system for truck drivers was scrapped in a 2010 law hailed as a victory over vested interests. It has yet to be implemented. The government agreed to open up ‘closed professions’ such as taxi drivers, where operators cannot work without hard-to-obtain licences.  And the Greek parliament resisted a measure from Papademos to ‘free up’ and extend pharmacy opening hours.

The problem is that the Troika demands won’t work and indeed are impossible.  Greece has reduced its public deficit from over 15% of GDP in 2009 to 9.4% last year.  But as a result, the country has just entered a fifth consecutive year of recession, making it harder to bring the debt and deficit ratios down.  Greece’s debts, both public and private, are too large; its capitalist sector is too weak.  So tax revenue targets cannot be met as the economy slumps into a major depression.  The government has fallen far behind on a Troika target to raise €50 billion from privatisations by 2015.  It raised just €1.7 billion last year, mainly from a pre-arranged stake sale in telecoms company OTE and gaming concessions, missing an initial €5 billion target and even a revised €4 billion target.  The government has promised to raise another €9.3 billion this year by selling assets such as buildings and stakes in oil refinery Hellenic Petroleum and gas companies DEPA and DESFA.  But  privatisation agency chairman Ioannis Koukiadis has said that the target is not achievable and the agency is now aiming for €4.7 billion.  The main reason is that the market value of state-owned companies has plunged, together with most Greek stocks. And Greek workers are already experiencing the policy advocated by the Troika and Bank America: to cut real wages.  Hourly earnings fell 4% in 2011, or over 6% in real terms and yet Greece is still not ‘competitive’.

Default on Greece’s debts is inevitable.  Indeed, a ‘voluntary’ default is about to be announced. But even that will not save Greek capitalism.  Down the road, probably in not more than six months, Greece will have to admit defeat on meeting the Troika’s demands.  It could happen earlier if Greeks elect a government opposed to more austerity.  Then a new policy will have to be adopted.

I have discussed an alternative policy in previous posts (An alternative programme for Europe, 11 September 2011).  It would mean a programme aimed at creating jobs and restoring incomes to get the economy going, not the opposite.  This is not utopian if the banks and major industries come under public control and are used to invest in new projects (Chinese-style if you like), ideally with EU help.  If a Greek government adopted a policy based on negotiating away its current debts and applying a state-led investment and employment programme, no doubt the current conservative European leaders (as well as Greek conservatives) would oppose it and wash their hands in ‘bailing out’ Greece.  They would probably demand that Greece leave the euro.  The government could mount a pan-European campaign to win support for its policies.  Even if that failed, at least Greeks would have some control over their own destiny instead of capitulating to the Troika.

Davos dilemma

The strategists of capital are attending their annual jamboree in the snow playground of the super-rich in Davos, Switzerland for the World Economic Forum.  Many of the top 0.1% of income earners are there.  And this year the main theme is whether capitalism works and is fair. Capitalism is in crisis – and this time the word ‘crisis’ is not hyperbole.  Even the 2600 attendees at Davos recognise that.  According to a survey by the financial broadcaster, Bloomberg, almost 70% of those asked believed that the capitalist system is in trouble, with 32% saying it needs “radical reworking”.  Less than 20% reckoned ‘free enterprise’ is working.   Most Davos 0.1 percenters are really worried that this failure of capitalism to work could lead to ‘social instability’ in one form or another.

And more than half who were asked at Davos thought that inequality of income and wealth under capitalism was damaging economic growth.  But only one in five wanted any urgent action on the issue!  It seems that greed triumphs over economic logic – or should we say, class interest rules   According to a new study by the OECD, the top 10% of income earners in the world have on average nine times as much income as the bottom 10%.   You can imagine the ratio between the top 0.1% and the bottom 10%.  One of those top 0.1%, Mitt Romney, the main contender for the Republican nomination for the US presidency,was obliged to reveal how much he earned each year and what tax he paid out.  Romney is head of one of the biggest private equity companies (Bain Capital) and one of the highest earners in the US, making over $20m a year.  But he paid only 13.9% of his declared income in tax, way less than the average earner pays as a proportion.  It’s another example of how class rules under ‘free enterprise’.

Take income inequality in the UK.  It has been growing faster than in any other rich country, according to the OECD.  And is this based on reward for successful profit-making?  No.  As Andrew Haldane of the Bank of England has pointed out, when referring to the US, if bankers’ pay were linked to return on assets (ROA) a figure based on profits, it would be much closer to median household incomes than if based on return on equity (ROE), a figure based on the stock market.  Haldane calculated that, if the CEOs of the seven largest US banks had in 1989 agreed to index their salaries not to ROE, but to ROA, by 2007, their compensation would not have grown tenfold.  Instead, it would have risen (only) from $2.8 million to $3.4 million.  Rather than rising to 500 times median US household income, it would have fallen to (only) around 68 times.

Nevertheless, the world’s second richest man in wealth (a Mexican telecoms tycoon is the richest), Bill Gates of Microsoft told the Davos faithful that capitalism was a “phenomenal system” because there is no other system that has improved humanity.  He left aside the question of whether all humanity has benefited from capitalism or the role of capitalism in wars, pollution, global warming, unemployment etc.  Despite these things, Gates supported capitalism because “it has generated so much innovation – it gave me the chance I had as a young boy to start Microsoft and hire my friends.  Other systems don’t allow that to happen”.

Thus Gates promotes the myth that innovation is only possible through the incentive of profit.  Marx too recognised that the capitalist system was a mode of production that drove technology and raised the productivity of labour more than any previous mode of human organisation.  But he reckoned that a socialist, collective mode of production that melded cooperative labour to social need would be even more productive and would not generate the huge inequalities and economic destruction.

Indeed, many, if not most, key innovations that have benefited humanity in the last hundred years were more the result of the incentive of public funding for research in genetics, satellites, health and the environment, much of it done in publicly-owned institutions where profit played no role.  The internet, after all, was invented in the military sector as a form of communication.  And many other innovations like radar came through military funding by the state.    The software basics of Microsoft were already developed in academic circles.   Gates was an entrepreneur who came up with a model to capture those innovations in a profit-making operation.  Indeed, there is much better software available free as ‘open source’ material.  But Microsoft’s monopoly in marketing and links with hardware have kept such free alternatives from being used globally.  Publicly-funded research would just as well have developed such software innovations without the need for a mega corporation that has made a few people super rich by charging for what could be free to all.

Francis Fukuyama once wrote a famous book in the 1990s called The end of history, in which he argued that Western capitalist democracy was the conclusion of all human development.   Now after the Great Recession and the revelations about the extreme inequalities that exist under ‘liberal democracy’, Fukuyama obviously  thought he should do something more.  This week he wrote another article called “The Future of History” in the current issue of Foreign Affairs.  He mused that if some “obscure scribbler … in a garret somewhere (is this him?)” would “outline an ideology of the future that could provide a realistic path toward a world with healthy middle-class societies and robust democracies“… he “could not begin with a denunciation of capitalism as such, as if old-fashioned socialism were still a viable alternative. It is more the variety of capitalism that is at stake and the degree to which governments should help societies adjust to change.  The new ideology would not see markets as an end in themselves; instead, it would value them to the extent that they contributed to a flourishing middle class, not just to greater aggregate national wealth.”   

Fukuyama uses the word ‘middle-class’ as all apologists for capital now use it, as a euphemism for ‘working-class’, a word that no longer exists to describe the majority of people.  There are either the rich, the middle-class or the poor (see my post, The working  poor, 7 June 2011).  But whatever word you use, the 99% are not flourishing under modern capitalism.   Both the IMF and the World Bank have now presented reports that show that the major capitalist economies are struggling to sustain any recovery out of the Great Recession (see my post, The world economy – where are we now?, 18 January 2012). The IMF reckons the Eurozone will contract by 0.5% in 2012, with southern Europe dropping by around 2% or more.  Emerging capitalist economies will grow at a slower pace (5.4%) than the IMF thought back last September.  American capitalism looks a little better, but only with growth at 1.8% in 2012, hardly a rate that can get unemployment down or raise real incomes.  Indeed, Christian Lagarde, the head of the IMF, commented that “It is not about saving any one country or any one region. It is about saving the world from a downward economic spiral. It is about avoiding a 1930s moment … in which a combination of inaction, insularity and rigid ideology could cause a collapse of global demand.’

The figures for the UK economy were released this week.  In the last quarter of 2011, the UK economy contracted by 0.2% qoq after growing 0.6% in Q3’2011.  For the whole of 2011, real GDP rose just 0.9%, half the already paltry rise achieved in 2010.  Another quarter of contraction and the UK economy will be back in a ‘technical recession’, two consecutive quarters of decline.  This is still way short of the slump during the Great Recession of 2008-9, when British capitalism contracted 7.1%.  But it ain’t good.  While the government sector managed a small rise in Q4 of o.4%, the private sector declined, with manufacturing down 0.9%, the biggest drop in over two years.  The recovery from the trough of the Great Recession is stuttering, with only 45% of the output lost in the slump recouped so far.

The chief economist at the IMF, Oliver Blanchard, commented that the global economy is driving “with the brakes on”.  What are those brakes?  Well, one is the draconian measures of fiscal austerity being imposed on households and the public sector across Europe, but soon in the US and Japan.  This is squeezing back the only areas of growth in the economy since the Great Recession, the public sector.  But the other brake is the size and level of debt, both private and public, that capital is burdened with.  A recent report by the McKinsey Institute shows that debt relative to GDP in the major capitalist economies rocketed prior to the credit crunch in 2007.  But since then, ‘deleveraging’ that debt has made only limited progress in the major economies (MGI_Debt_and_deleveraging_Uneven_progress_to_growth_Report).

Now there are those who argue that debt does not matter and the burden of servicing it will fall when economic growth is restored to a sufficient level or, alternatively the real burden can be reduced by higher inflation.  Well, neither of these options is happening.  So the real burden of debt servicing is high.  The other argument is that one man’s debt is another’s credit.  So the size of debt does not matter because it just means that assets are up too.  But that assumes that debts are honoured and there is no default.  If there are defaults, then the reckoning comes.  We have already seen the impact of that when the housing market in the US collapsed and defaults on mortgages rocketed.  The banks found that their assets were worth way less than they thought.  Similarly, there is every possibility that the Greek government will default on its debt to the banks in Europe.  Indeed, it is currently negotiating a 60% ‘voluntary haircut’ on the value of its bonds held by those banks.  That entails huge losses to the banks.

Debt does matter and this form of deleveraging is a severely damaging to the real economy.  In effect, as debt or credit rises, the value it represents gets out of line with real value.  Its value becomes the buyer or seller’s expectation of its real value.  The value is thus fictitious, as Marx called it, which at a certain point will be exposed as such and forced to its real value through deleverage, ie liquidation, bankruptcy and, of course, job losses.

It is not debt as such that is the issue; it is what credit is used for.  Government borrowing used to invest in new industries and employment could pay for itself.  But borrowing to bail out banks that have taken losses on fictitious capital is clearly not productive, but a deduction of resources available for productive investment.  In the 13th century,at the beginning of capitalism, it was bankers bankrupting banks. In the 21st century, in modern mature capitalism, bankers are still bankrupting banks. But it is no longer just banks. In the UK, over half a million individuals and nearly 100,000 businesses have found themselves in insolvency since 2007.

What is clear is that the UK economy, along with other major capitalist economies, is suffering from a long depression similar to that experienced by Japanese capitalism after the collapse of its credit bubble in the late 1980s.  During the decade of the 1990s, Japan’s economy could only grow in real terms by 0.8% a year.  The huge private sector debt mountain was only written down very slowly to avoid a major slump.  The banks were bailed out by the taxpayer and Japanese households had to take the pain in a stagnation of real living standards.  Public sector debt rocketed to over 200% of GDP and household savings fell.

Japanese capitalism did not adopt the policies of fiscal austerity that are advocated by mainstream economics and implemented now.  So Japan avoided a significant rise in unemployment, but the economy stagnated and profitability remained in the doldrums.  Japan’s example shows that the option of fiscal austerity can be avoided, but without deleveraging to cleanse the corporate books of ‘dead capital’ and restore profitability, economic recovery will be weak.  Without profitability restored, capitalism stays in depression.

According to a new report by the International Labour Organisation (ILO), the world faces a challenge of creating 600 million jobs over the next decade.  Global unemployment is now 200 million – an increase of 27 million since the start of the crisis.  In addition, more than 400 million new jobs will be needed over the next decade to avoid a further increase in unemployment.  Even if those jobs were created, it would still leave 900 million workers living with their families below the US$2 a day poverty line, largely in developing countries. Young people are nearly three times as likely as adults to be unemployed.  Even those young people who are employed are increasingly likely to find themselves in part-time employment and often on temporary contracts.

Falling labour force participation masks an even worse global unemployment situation. In the world as a whole, there were nearly 29 million fewer people in the labour force in 2011 than expected based on pre-crisis trends, with 6.4 million fewer youth and 22.3 million fewer adults. This is equal to nearly 1 per cent of the actual global labour force in 2011, and nearly 15 per cent of the total number of unemployed in the world. If all of these potential workers were available to work and sought work, the number of unemployed would swell to over 225 million, or to a rate of 6.9 per cent, versus the actual rate of 6 per cent.  Globally, the employment-to-population ratio declined sharply during the crisis, from 61.2 per cent in 2007 to 60.2 per cent in 2010. This represents the largest such decline on record (since 1991).

Those meeting at Davos who defend capitalism as the only or best system of human social organisation have no answer to this appalling mess.