robin blackburn
CRISIS
2.0
that what began as the Great Credit Crunch o 2007 has developed into a contraction o wider scope and great tenacity,, centred in the main oecd countries. Governments acted tenacity to avert collapse, but in doing so themselves became a target. Bail-out measures adopted during the early phase o the crisis between 2007–09 saw the us, uk and eurozone authorities increase public indebtedness by 20–40 per cent o gdp, with large current-account decits. The transer o debt rom private to public hands was carried out in the name o averting systemic ailure, but in some ways it aggravated the debt problem since bank ailure, however disruptive, is actually actuall y less devastating than state ailure. Beore long, the bond markets were demanding plans to cut these decits by slashing public spending and shrinking social protection. The centre let and the centre right were already persuaded that the welare state was too expensive and bureaucratic, and needed to be downsized and handed over to private suppliers. Public services and institutions were leveraged by means o commercial debt, at the expense o uture revenues and the intelligibility o the public accounts. Determined not to waste a good crisis, neoliberal policymakers and commentators seized on the disarray to urther advance such schemes. Japan, the us and the uk are heavily waterlogged, but their control over their own currency allows them to print money and to devalue. Such expedients have been denied the eurozone states so ar. However, the more ortunately placed countries are still highly vulnerable to euroland’s miseries because they are invested in its assets and count on it as a s a trading trad ing partner. partner.
I
t is now clear
The governments o the us and the eurozone do not ace exactly the same problems but are seemingly paralysed, stumbling rom one palliative to the next. The weaker eurozone countries have austerity imposed upon them while the stronger states proclaim the need to liquidate liquid ate decits even though a chorus choru s o eminent economic analysts—rom anal ysts—rom Martin Wol to Paul Paul new left review 72
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Krugman, Wolgang Münchau to Nouriel Roubini—insist that austerity will only hamper recovery. No case more ully bears out their warning than the uk, since its government has voluntarily used its margin o autonomy to commit to a thoroughly counter-productive retrenchment. While governments and international organizations wrestle with the crisis, they seem to nd it impossible to act on the scale such a momentous contraction requires. Public opinion has turned against aga inst the bankers but governments are still in thrall to bond markets that demand cuts in social protection and a urther boost to the privatization and commodication o pensions, health and education. Social protection is being dismantled as employees, young and old, are a re thrown on the scrap heap. The jobless ace misery, those still employed are ‘nudged’—i not shoved—into the arms o expensive private suppliers. As more countries commit to austerity they help to aggravate the Great Recession, drive their citizens towards commercial suppliers, and strengthen the grip o a new regime o nance capital. But commodication and private nance are beset by inherent limits and obstacles. Private nance, no matter how skilully leveraged, lacks the scale needed to overcome the contraction. Commercial suppliers o pensions and other social protection are plagued by insecurity, insecurity, marketing costs and a logic that encourages them to discriminate against women and minorities. At an even more undamental level, the web has weakened ‘intellectual property’ rights, sapped the commercial media and broken the music industry. The sequencing o the human genome and the deployment o nanotechnology have likewise resisted commodication. The colonization o cyberspace by capital—or example through Facebook’s Facebook’s intimate commodication—is, as yet, on too small a scale to compensate or these blockages. As the crisis deepens, constructive proposals or a genuine exit rom it to the let will be ever more urgently needed. In what ollows, I discuss some o the alternative policies that have been proposed within the existex isting system, and set out some more radical—transitional—perspectives or the longer term. Firstly, Firstly, however, however, I will look in more detail at some o the ‘rescue measures’ measures’ applied so ar and give an a n account o the multiplying woes o the Crisis 2.0 world, in which governments, households and nancial concerns are all seeking to unwind their debts, or ‘de-leverage’. ‘de-leverage’. The result has been stagnation, unemployment, the destruction o welare and the installation o technocratic coalitions beret o an electoral mandate. I argue that eective resistance strategies will need to address
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the underlying causes o the crisis—global over-capacity, decient demand and anarchic credit creation. I urge a broad-based expansion o aggregate global demand based on higher wages in low-wage countries, debt relie in poor and richer countries, new schemes o social protection and a nancial architecture geared to public utility u tility..
i. a sel-perpetuating crisis
The current travails o the oecd economies are a product o trends strongly promoted by neoliberalism and globalization—extreme inequality, inequal ity, poverty, nancial deregulation, privatization and a pervasive commodication o the lie course, via mortgages, credit-card debt, student ees and private pensions. Low wages in emerging economies, and growing indebtedness in the richer countries, created mounting trade imbalances. Together with the deregulation o nancial markets, this generated a succession o asset bubbles. The investment banks and hedge unds urther expanded credit through the creation o new types o derivative valued at ‘model prices’ and sold ‘over the counter’ counter’ to institutional investors, thus giving rise to an o-balance-sheet ‘shadow banking system’’ which soon dwared the ormal, regulated exchanges. system ex changes. The banks’ heedless pursuit o short-term advantage led to the largest destruction o value in world history during the Crash o 2008. Government rescue measures were to oer unlimited liquidity to the nancial sector, while leaving the system largely intact.
Rescuing Wall Street October 2008 saw the apparent assertion o government discipline over America’s nine largest banks. Their ceos were summoned to Washington Washington by Hank Paulson, the Treasury Secretary, who inormed them that they aced bankruptcy unless they accepted government recapitalization. In less than an hour, all had signed a letter Paulson had prepared, oering the Federal authorities equity stakes in their concerns in exchange or injections o new capital rom the just-established $700bn ‘Troubled ‘Troubled Asset Relie Programme’. Goldman Sachs changed its legal status to a bank holding company in order to qualiy or tarp unds. The government acquired a majority holding in Citibank, the largest bank on Wall Street. At At the moment o greatest danger all the banks undertook to abide by certain rules. These measures ollowed a state takeover o aig, the
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world’s biggest insurance insu rance company comp any,, and o Fannie Fannie Mae and Freddie Mac, the two largest mortgage brokers. For its part, the British government had been orced to rescue rst Northern Rock, then Lloyds tsb group and the Royal Bank o Scotland. Barclays and hsbc did their utmost to avoid becoming entangled in rescue operations, but were nevertheless obliged to accept help rom the us tarp. At no point, however, did the Treasury use its position as owner and creditor to impose on the nancial companies that it had saved lending policies that would benet the broader economy. The Dodd–Frank Act, signed with great anare by Obama in July 2010, contained a ratio o law to loophole o 13:87, according to one analysis. 1 Strange to relate, both Wall Street and the City o London emerged essentially unscathed rom legislators’ attempts to rein them in; ‘too big to ail’ banks, outrageous bonuses, perverse incentives, slender capitalization, obscure accounting rules, o-balance-sheet items and special-purpose entities remained untouched. The rescued banks declined to resume normal lending to small and medium-sized businesses, ensuring a lingering ‘credit crunch’. crunch’. The Treasury and the Fed were unhappy but gave no marching orders. The banks, keenly aware o one another’s problems—they were still sheltering huge unacknowledged losses—also shunned inter-bank lending. All had invested in a range o very dubious assets, not just sub-prime mortgage and other credit derivatives, but also vulnerable corporate and public bonds, not least those issued by weaker members o the eurozone. Only the imminent prospect o the collapse o the us nancial system— a ‘near-death experience’—had allowed or such an extraordinary use o the public purse. Congress had been reluctant to endorse tarp— the Emergency Stabilization Act that established the programme was rejected when rst voted on, in September 2008—and only did so when the legislation had been amended with warm words about the restraints that would apply to banks and the help that would be extended to amilies acing eviction. But as tarp’s ‘inspector general’ Neil Barosky himsel observed in his balance sheet o the programme, little o the help ltered through to those threatened with oreclosure, whose problems were ater all at the root o the sub-prime crisis: Treasury provided the money to banks with no eective policy or eort to compel the extension o credit. There were no strings attached: no 1
Nomi Prins, It Takes a Pillage , 2nd edn, New York 2011, p. xi.
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requirement or even incentive to increase lending to home buyers, and against our strong recommendation, not even a request that banks report how they used tarp unds . . . [In February 2009] the Home Aordable Modication Programme was announced with the promise to help up to our million amilies with mortgage modications. That programme has been a colossal ailure, with ar ewer permanent modications (540,000) than modications that have ailed and been cancelled (over 800,000) . . . As the programme founders, oreclosures continue to mount, with 8 million to 13 million lings orecast over the programme programme’s ’s lietime.2
I a large slice o tarp unds had gone to debt orgiveness or the lowpaid, it might have stimulated consumption in an economy threatened by stagnation as well as lightening the load o bad debt. Instead, plus ça change, plus c’est la même chose best describes the remarkable resilience o the basic practices o the nancial sector in the years 2008–11. Despite all the write-os and bailouts, overall debt levels within the oecd (national debt, non-nancial corporate debt, banking debt and household debt) remained stubbornly high, at three to ve times gdp.3 Transerring debt rom banks to government did not solve the problem i the government ailed to commit great chunks o gdp to a massive counter-cyclical counter -cyclical programme and wide-ranging industrial policy. The us scal stimulus, meanwhile, was proportionately on a much smaller scale than those undertaken in the uk, continental Europe and China.4 The very tentative recovery o 2010 ran out o steam and a return to ‘stagfation’ loomed. us joblessness was ocially tallied at 9 per cent o the workorce, but the number looking or work was 25 million—closer to one sixth. Most employees ound the value o their savings slashed and, as noted above, millions were threatened with oreclosure as well as the prospect o poverty in old age. The British banks received a particularly generous bailout, being even more heavily compromised by toxic debt than Wall Street. Yet this generosity did not lead the large banks to attend to the modest credit needs o small and medium businesses. businesses. A study ound that loan approvals had allen rom 2
Neil Barosky, ‘Where the Bailout Went Wrong’, New York Times, 30 March 2011. 3 Stephen Cecchetti et al., ‘The Real Eects o Debt’, bis Working Paper 352, September 2011, p. 7, Table 1. For the dynamic o ‘historical cycles’ o debt see Elmar Altvater, The Future o the Market, London 1993, pp. 87–177. 4 The Obama Administration’s scal stimulus was persuasively criticized at the time by Paul Krugman and Joseph Stiglitz, both or its small size and or its heavy reliance on tax cuts.
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90 per cent to 65 per cent, despite the act that there were many ewer applications because o poor trading conditions. 5 The modest eect o the stimulus packages made necessary massive ‘quantitative easing’, i.e., the printing o money to buy banking assets. The qe undertaken by the us and uk central banks served to boost nancial-sector assets and prots but had only weak eects on overall demand and ailed to ignite investment in the ‘real’ economy. The us Federal Reserve revealed in December 2010 that its qe programme had purchased bonds to the value o $3.3 trillion rom us banks, using the newly minted money to pay and dramatically boosting bank liquidity. These institutions used this help to reduce their own indebtedness. They could then invest, at little or no risk, in public bonds or high-quality consumer debt. To get that $3.3 trillion into perspective, we might note that it is more than our times as large as the tarp, which was just the visible tip o the bank bail-out eort. 6 The sot money lent to the banks allowed them to borrow at bargain-basement rates—1 per cent or less— and then to place it in government bonds paying 4 or 5 per cent, or consumer credit paying 12 to 18 per cent. It is not surprising that the big banks once again reported huge prots and that bankers’ bonuses ballooned. Beore long, however, the nancial authorities in Brazil and China were complaining that ‘quantitative easing’ easing’ in the us and Europe was exporting infation and ostering new asset bubbles in real estate in the emerging economies. Further down the line, these sums will be hacked back rom core social programmes. In 2010 Obama appointed a bi-partisan bi-parti san commission to propose ways to reduce the public decit. Some o its members suggested that Social Security benets should be cut by raising the retirement age, weakening indexation and other measures. In July 2011 Obama oered a ‘grand bargain’ to the Republican Congressional leaders, whereby they would agree to lit the ceiling on ocial us debt in return or $4 trillion o savings, with the programme o government spending cuts to include Social Security.7 While the Republicans reused this tempting concession, 5
Katie Allen, ‘Banks accused o ailing small rms ater lending plunges plunges’,’, Guardian, 29 October 2011. 6 Gillian Tett, ‘Lessons in a $3,300 billion surprise rom the Fed’, Financial Times, 3 December 2010. 7 Jackie Calmes, ‘Obama Grasping Centrist Banner in Debt Impasse’, nyt , 12 July 2011; Clive Crook, ‘Obama’s ailed debt ceiling gamble’, ft , 11 July 2011.
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cuts to Social Security were no longer o-limits so ar as the White House was concerned. The deal eventually reached in August 2011 committed Congress to cutting the ederal budget by $2,400 billion over ten years, but entrusted the task o speciying these cuts to a super-committee that reported its inability to reach any conclusions in November. This was the signal or new horse-trading horse-tra ding to commence. Social Security and Medicare, the health programme or older citizens, will be candidates or butchery. Though they will be reluctant to admit it, enough Democrats believe in ‘saving’ these programmes by cutting benets to make a deal a possibility, despite the sharpness o actional cleavage.
Eurozone aws In Europe, meanwhile, banks that had also indulged in reckless lending were hit hard. Large-scale rescues were required in Iceland, Greece, Ireland and Portugal in 2009–10, with double doses and uncertain results. By 2011, Italy and Spain were next in line. Once again, banks had lent unwisely but expected to escape any o the negative consequences. The eurozone proved vulnerable, however, because the currency was not supported by a signicant signican t scal authority. The ecb was not established as a ‘lender o last resort’. The Merkel government was unwilling to permit it to print trillions o euros in ‘quantitative easing’, easi ng’, as central banks in the historica lly us and uk had done; a stance refecting some combination o historically rooted debt and infation phobia, tough bargaining tactics and distrust o the banks. The bail-outs required elaborate negotiations negotiat ions between the various national nancial authorities, each o which had special interests to deend, especially where their own banks aced a deault or ‘haircut’. The rescues imposed drastic austerity programmes on recipient governments, destroying pension entitlements and driving down living standards while sometimes allowing the banks to be paid in ull. Attempts to expand the European Financial Stability Facility ( es) in the summer o 2011 did not calm ears or long—despite pledges rom national governments totalling €440bn, o which €211bn came rom Germany—because it was both cumbersome and inadequate. 8 Each national government had to endorse the scheme and when it became clear in October that Greece would absorb most o the acility, leaving nothing or Italy with its €1.9 trillion o debt, the response was not to contribute more resources to the 8
Quentin Peel, ‘Germany and the eurozone: Besieged in Berlin Berlin’,’, ft , 26 September 2011.
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es but instead to resort to cdo-style nancial engineering, such that its
cash base would be used to insure loans totalling nearly a trillion euros. From any point o view European nancial institutions had been ound wanting. Many o the eurozone’s nancial titans—notably Deutsche Bank and Société Générale—had taken part in the credit-derivatives orgy and have yet to admit their ull exposure, whether to us credit derivatives or to eurozone bonds. The plethora o deault swaps in the sovereign bond markets made mad e it harder to tackle the return retu rn o the Greek debt problem in 2011. As the crisis ground on, eurozone ocials proposed in July 2011 that a new Greek bailout should be nanced by a levy on the banks. Such a tax would not count as a ‘credit event’ or deault, and would thus not trigger payouts rom those holding Credit Deault Swaps on Greek bonds. One report commented: ‘The plan, which advocates believe could raise €30 billion over three years, could help satisy German and Dutch demands that private holders o Greek bonds contribute to a new €115 billion bailout.’9 (The ‘private holders’ being, o course, the banks.) However, resistance rom the banks was sucient to block the proposal, despite the seriousness o the situation and the modesty o the proposed levy. The banks accepted only a €17 billion write-down o their bond-holdings, which they regarded as preerable to a 0.025 per cent levy on their assets throughout the eurozone—seen as the thin end o a very undesirable wedge. The British government was prepared to allow a very modest bank levy (its banks are comparatively well capitalized), but exerted itsel mightily to block a tiny Financial Transaction Tax avoured by the French and Germans as a gesture to public opinion (the City and the hedge unds see the tt as a nasty threat). The eurozone heads o government eventually concocted a plan in late October 2011 whereby the private holders o Greek debt would accept a ‘voluntary’ write-down o 50 per cent. This was a shock to institutional investors, insurance houses as well as pension unds, that had acquired euro-denominated bonds covered by cds insurance as a ‘risk-ree ‘risk-ree’’ asset, in conormity with their clients’ mandate. While some were insured against a partial write-down, most were not. According to a Financial Times report, the terms o the write-down were deliberately chosen to 9
Peter Spiegel, Quentin Peel and James Wilson, ‘Move to tax banks seen as key in Greece plan’, ft , 20 July 2011.
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avoid triggering compensation, inuriating investors who had been counting, in the event o a deault, on receiving their cds insurance. The upshot was to cast doubt on the wider sovereign cds market: It is unclear how ar eurozone banks have used cds to hedge their exposures to eurozone debt. However, the published level o outstanding sovereign cds or Italy and France is more than $40bn, and the Bank or International Settlements recently suggested that us banks have now extended over $500bn worth o protection to eurozone counter-parties on Italian, French, Irish, Greek and Portuguese sovereign and corporate debt. 10
Institutional investors need a proportion o ‘risk-ree’ assets to balance their portolios: could they now honestly rate Italian, Spanish or even French bonds as ‘risk-ree’? Many pointed out that only a proper ‘lender o last resort’ backed by a strong economy and tax system could supply the risk-ree core which a nancial system requires. 11 By the close o 2011, the German government seemed ready at last to back such an approach, but only at the dire cost o establishing a scal autocracy with an iron grip over the entire eurozone.
Pension woes In the Crisis 2.0 maelstrom, pensioners are being hit rom every side. In 2008, global retirement unds dropped by 20 per cent in one week. In the us, a recent survey ound that 67 per cent o adults aged 45–54 had less than $50,000 o savings, sucient to buy an annuity o just $300 a month; this was up rom 55 per cent in 2007. 12 Ater more than hal a century o lavishing tax incentives on private pension schemes—401(k)s, iras, occupational schemes and the like—it is still Social Security entitlement, averaging $1,100 a month, which saves nearly hal the us elderly 10
Gillian Tett, ‘Greek bond losses put role o sovereign cds in doubt’, ft , 18 November 2011. 11 As another ft commentator put it: ‘The presence o a risk-ree asset can hardly be overstated in a modern nancial system. Each insurance company, each pension und needs to invest part o its income in such assets. Through a combination o short-sightedness and nancial illiteracy, illiteracy, the European Council has now put itsel in a position where it desperately needs Euro-bonds, i only to assure the existence o a unctioning nancial sector.’ See Wolgang Münchau, ‘The only way to save the eurozone rom collapse’, ft , 14 November 2011. 12 Employee Benets Retirement Institute, 2011 Retirement Confdence Survey, and or 2007 George Magnus, The Age o Aging , London 2009, p. 87. The $50,000 gure excludes the house they lived in and membership o the ast-disappearing Dened Benet pension schemes.
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population rom destitution. Even in the best o times, dened contribution (dc) schemes were eroded by the ‘cost disease’ disease’ o heavy marketing, admin and customization charges. (The Social Security Administration caters to over 150 million employees and 50 million beneciaries, with a sta o 68,000—about the size o a single large investment bank.) Meanwhile the dened benets ( db) pension unds experienced an extraordinary roller-coaster ride across the ups and downs o qe-induced stock-market run-ups and collapses, even beore the sovereign bond crisis. By the end o Septembe Septemberr 2011 Mercer, Mercer, a leading pension pensi on consultancy consulta ncy,, estimated the decit in private, corporate us db schemes at $512 billion, close to the level noted in early 2009, when stock markets were still reeling. For its part the uk’s Pension Protection Fund ( pp) estimated the decit in the corporate schemes it insured at a t £196 billion. An Economist report citing these gures also estimated that the decit in us public schemes had grown by $1.3 trillion in the previous two years. The report also pointed out that qe was aggravating the problems aced by these unds, as any lowering o bond yields raises the accounting estimate o the cost o ullling uture u ture obligations to beneciaries. 13 In addition, the operational principles o db pension unding have an unortunate ‘pro-cyclical’ impact: aced with a recession-induced decit, the corporate sponsors o the und are required to put more money into the scheme, so at a time o weak demand the corporations are being encouraged to save, not invest. This can only urther depress demand. As share values once again tumbled rom August 2011, some schemes grew so mired in decits that they menaced the very existence o the sponsors, with urther dire consequences or members and beneciaries. The us Pension Benet Guaranty Corporation ( pbgc) and the uk pp monitor scheme perormance and urnish insurance to the members o schemes whose corporate sponsors go bust. However, the insurance supplied usually amounts to about 70 per cent o what has been promised. In the us the leading corporations in a whole series o industries—airlines, steel, automobiles, auto components—have been taken through Chapter 11 bankruptcy protection, enabling corporate rescuers (otherwise known as ‘vulture capitalists’) like Wilbur Ross to shed pension liabilities, handing them to the pbgc.14 The weak and 13
‘A trillion here, $500 billion there’, The Economist, 15 October 2011. 14 I discuss this in ‘The Subprime Crisis’, nlr 50, March–April 2008.
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worsening data on us savings and retirement prospects showed, once again, the hollowness o Washington’s Washington’s ‘success’ ‘success’ in tackling the crisis. Meanwhile the shit by many governments rom public pension schemes to mandatory private provision has proved a comprehensive disaster or the countries concerned. The rocky state o stock markets has meant that the promised accumulation accumula tion targets have been missed by a mile. Up to the eve o the crisis, the im and World Bank had aggressively promoted the commercialization o pension provision, as Mitchell Orenstein has shown in his Privatizing Pensions.15 Between 1994 and 2008, thirty countries in Latin America and Eastern Europe were pressured to abandon their public pension systems and to replace them with personal pension unds managed by commercial nance houses. The international agencies resorted to shameless bullying, and to what Orenstein calls ‘resource leverage’—countries in the midst o a dicult transition to democracy were denied all nancial assistance unless they agreed to pension privatization. In addition unds were made available by the World Bank to carry through campaigns o public persuasion, while key individuals were oered inducements and attractive employment i they went along with the process. In 2008 newly established pension unds in Poland lost 17 per cent o their value, in Bulgaria 26 per cent, in Slovakia 12 per cent and in Estonia, value ell by 32 per cent in one und, 24 per cent in another and 8 per cent in another. 16 The nancial crisis let governments shortchanging both pensioners and employees, with the ormer receiving devalued pensions while the latter were let dismayed by the insecurity o their savings. Pension privatization had been costly or the states involved because o the ‘transition problem’—somehow governments had to pay some sort o pension to all those who had been in the public system while making sure that contributions rom today’s employees were invested in the new pension unds. The only easible way to do this 15
Mitchell Orenstein, Privatizing Pensions: The Transnational Campaign or Social Security Reorm, Princeton 2008. See also Camila Arza, ‘The Limits o Pension Privatization: Lessons rom Argentine Experience’, Experience’, World Development, vol. 36, no. 12, 2008. Several countries that had adopted private pensions subsequently revised their retirement systems to give greater importance to the ‘public pillar’ o state pensions—Chile, Hungary Hungary and Argentina among them. 16 Dariusz Stanko, Stank o, ‘Pension Fund Returns: The Case o Central and Eastern Europe’, in fap, Investments and Payouts in Funded Pension Systems, Santiago de Chile 2009.
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was to foat a loan, yet doing so ratcheted up public debt and Eurostat rules did not allow this to be oset by positive balances in private pension pots. While Brussels had ailed to spot the danger in Greek bonds it was vigilant in insisting on ull disclosure o the ‘transition loans’ required by pension privatization. As successive waves o crisis suggested, the method o coordinating an economy by means o a stock exchange is plagued by instability and systemic risk. Finance o any sort must expect uncertain outcomes, but the ‘ree market’ exacerbates what is an inevitable problem and a nd allows banks to blackmail the political authorities. Mega-banks are known to be dangerous, yet Western governments continue to indulge them and shelter them rom losses. Matters are even worse where nancial entities are not only ‘too big to ail’ but also ‘too big to save’, as may be the case with several European banks. The nancial industry lobbies still permeate government, und the dominant political actions and sustain key ‘think tanks’. Applying urther doses o the very medicine that weakened the patient in the rst place perpetuates its attendant problems.
ii. diagnosis and remedies
Mainstream policy responses appear to be based on the assumption that recovery requires little more than deleveraging ater a burst housing bubble and boosting growth ater a business-cycle decline. But as I have suggested above, the current travails o the core economies are the result o deeper imbalances within the global system. Underlying the massive growth o the us nancial sector over the past decades has been an epochal loss o American manuacturing competitiveness. In 1998 Robert Brenner argued argu ed in ‘The Economics o Global Turbulence’ Turbulence’ that rising global over-capacity in manuacturing meant that oecd economies aced a major contraction. 17 Throughout the neoliberal era, Western governments did their utmost to restore protability rates and sustain an illusion o unending growth. Loose credit conditions encouraged households, enterprises and local government institutions to take on large amounts o debt. us households resorted to credit—including nearly $1 trillion o ‘home equity loans’ (second mortgages). The at dollar system instituted ater 1973 permitted a vastly expanded dose o credit creation. 17
Robert Brenner, ‘The Economics o Global Turbulence’, nlr i/229, May–June 1998, subsequently published in book orm with an aterword in 2006.
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As the French economist Jacques Rue once warned, the dollar regime creates an international balance o payments system that unctions like a game o marbles in which, ater each round, ‘the winners return their marbles to the losers’, as Washington’s creditors invest the dollars they receive or goods sold to the us in dollar-denominated instruments in order to keep their own currencies competitive, while whil e the us could simply print more dollars to pay its bills. 18 In successive decades the Germans, Japanese and Chinese learned this lesson. Its eect was to boost credit creation and mask the weakening o the us economy. The epochal rise o China and other Asian producers produce rs ater 1992 brought a huge increase in productive capacity and sent foods o dollars to swell the us nancial-account surplus, but proportionately it added much less to global aggregate demand. The rise o the Asian producers could have been good news or everyone i their worker-consumers had been better paid. But wages were driven below their value in emerging and developing states, leaving a consequent shortall in demand. Prabhat Patnaik has dened this as a classic ‘realization crisis’, on a global scale.19 During the boom years o the late 1990s, China helped to maintain the gigantic credit expansion by investing its surplus in us Treasury bonds. 20 Deciencies in demand resulting rom stagnating wages in the West, and ar lower pay in the East, could be held o or a time by nding new ways to increase us household debt, via easier mortgages, credit-card acilities and automobile loans. European consumers joined the party in the new century and their governments were grateul or cheap loans. Institutional investors—not least pension unds and insurance companies—helped to produce an opaque nancial system, one which was a prey to asset bubbles, unregulated ‘shadow banks’ and a prolierating ‘nancialization’. 21 Between 2000 and 2007 many pension unds turned to hedge unds to boost their rates o return, allowing themselves the risk involved because they had stowed away tens o billions in ‘risk-ree ‘risk-ree’’ eurozone bonds. 18
Quoted in Richard Duncan, The Dollar Crisis, Chichester 2003, p. 43. 19 Prabhat Patnaik, Re-Envisioning Socialism, New Delhi 2011. Patnaik stresses the role o global poverty in precipitating and shaping the crisis: pp. 148–64, 259–71. 20 Andrew Glyn, ‘Imbalances in the World Economy’, nlr 34, July–August 2005. See also Maurice Obsteld and Kenneth Rogo, ‘Global Imbalances and the Financial Crisis: Products o Common Causes’, paper presented at Federal Reserve Bank o San Francisco conerence, Santa Barbara, 18–20 October 2009. 21 A theme I developed in Age Shock: How Finance is Failing Us, London and New York 2006. A revised, paperback edition will appear in 2012.
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But the easy credit fooding the us and Europe had become detached rom economic undamentals. Growing inequality in China blocked the sort o balanced growth seen in postwar Europe. Chinese workers or armers could not earn enough to become good customers or overseas products, while in the us low-paid or poor borrowers were taking on too much debt—especially housing debt they soon ound ound impossible to service. The non-perormance o these ‘subprime’ mortgages not only helped to bring about the crisis in 2007 but has stubbornly remained central to it ever since.22 Ultimately Ultimately,, the best way to tackle the undamental undamental imbalances that produced the crisis will be to reduce global poverty. I low wages and poverty hold back consumption and perpetuate global recession, then ways must be ound to restore demand at the roots o the global economy.
‘The Way Forward’? With the us, uk and much o the eurozone now acing renewed recession compounded by the threat o urther banking and sovereign debt crises, dissident voices are beginning to be heard rom within the ranks o the economic establishment. In an October 2011 paper, ‘The Way Forward’, Daniel Alpert, Robert Hockett and Nouriel Roubini noted that successive rounds o monetary and scal interventions by the Federal Reserve and us Treasury had ailed to produce a sustainable recovery and urged that only more radical measures had a hope o success: ‘Current economic conditions call or a much dierent kind o recovery programme than those proposed or attempted thus ar—one that is more sustained, more substantial, more concentrated, and more strategically aimed at creating new sources o wealth.’ 23 Like Glyn and Brenner Brenner,, they identied the roots o the asset bubbles in long-term excess global capacity and huge trade 22
See Graham Turner, The Credit Crunch, London 2008. Buying a house is one o the largest nancial transactions that the citizen o a developed country will make in their lie (acquiring a pension is the only comparable investment) so it is easy to see why mortgages are big business. In 2007 us household debt was around 120 per cent o gdp, with mortgages, including second mortgages, comprising over our-ths o the total. While us households shed some debt in the years 2007 to 2011, a 15 per cent decline in house prices—and a rise in unemployment to 9 per cent—brings losses or investors and oreclosure to mortgagees (on which more below). On the role o poverty in generating the crisis see Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton 2010. 23 Daniel Alpert, Robert Hockett and Nouriel Roubini, ‘The Way Forward: Moving rom the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness’, New America Foundation, October 2011, p. 14.
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imbalances, and argued that poverty and inequality—within countries and between them—played a signicant part both in provoking the crisis and preventing recovery. Roubini and his co-authors estimated that the massive overhang o household and nancial debt in the us, ‘occasioned by our worst credituelled asset-bubble burst since the late 1920s’, could take between ve and seven years to wind down, during which time great damage would be done. More ormidably, the crisis was the upshot o epochal shits within the world economy. The entry o successive waves o new export-oriented economies, peaking with China in the early 2000s, had decisively shited the balance o global supply and demand: In consequence, the world economy now is beset by excess supplies o labour,, capital, and productive capacity relative to global demand. This prolabour oundly dims the prospects or business investment and greater net exports in the developed world—the only other two drivers o recovery when debtdefation slackens domestic consumer demand. It also puts the entire global economy at risk, owing to the central role that the us economy still is relied on to play as the world world’s ’s consumer and borrower o last resort.
In addition, the entry o China’s vast low-paid workorce had urther shited the balance o power between labour and capital in the developed world, resulting ‘not only in stagnant wages in the United States, but also in levels o income and wealth inequality not seen since the immediate pre-Great-Depression 1920s.’ 24 In response to this, ‘The Way Forward’’ proposes a three-part plan, comprising: Forward 1. A $1.2 trillion ve-year plan o us inrastructural investment, to take advantage o a ‘historically unique opportunity’ to put idle capital and labour to work at an ‘extremely low cost’. The size o the eort would be critical, since urther eeble ‘stimulus packages’, ages ’, tax cuts and ‘quantitative easing’ easing’ at a time o excess capacity would be ‘pushing on a string’, while vain attempts at decitcutting could actually increase overall decits. 2. ‘Debt overhang reduction reduction’, ’, oering relie to low-income low-income debtors and requiring nancial institutions to accept write-downs against non-perorming assets. 24
Alpert, Hockett and Roubini, ‘The Way Forward’, p. 3.
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3. ‘Global re-balancing’ re-balancing’ that would see wage rises and welare improvements in developing states; better social-security provision or old age in China would reduce excessive saving and encourage consumption, with the pledging o state assets to such a programme. The global ‘rebalancing’ rubric also covers a proposal or the setting up o a ‘W ‘World orld Economic Recovery Fund’, Fund’, to be nanced by surplus countries but with constitutional changes to give them air representation in the World World Bank and im. How should these proposals be assessed? The best way to boost wages in China would be to improve labour rights, not—as these authors see it—mainly through a revaluation o the Chinese currency. The renminbi has appreciated over the last two years but the main gains rom this go to compradors rather than producers. Better wages going direct to Chinese households would woul d have the most direct impact on consumption levels. Popular agitation or better pay and social protection is insistent and should be met. 25 Roubini and his ellow authors rightly argue that decent pension coverage or all Chinese workers would encourage them to save less and spend more. ‘The Way Forward’ calls or debt orgiveness and supplies some technical elaboration on how best to accomplish this, but its debt-orgiveness proposals are meaner than those o the tarp Inspector General. ‘The Way Forward’ does not really deliver on its promise to identiy ‘new sources o growth’, conning itsel largely to inrastructure programmes and the setting up o a ‘World ‘W orld Recovery Fund’. Nor does it address the need ne ed or state-sponsored state- sponsored re-capitalization o the banks.
Global minimum wage? A more radical set o proposals is urged by Richard Duncan in The Corruption o Capitalism. Duncan had already pinpointed the low-wage problem in his 2003 The Dollar Crisis, which oered a strikingly accurate prediction o the coming crash. He urged the case or a global minimum wage in the export sector, to be enorced both by international institutions and by the workers themselves. 26 He concedes that achieving a consensus on the need or modest but steady wage rises in the export zones would be hard. The large corporations have sub-contracted work to these areas, or built their own acilities there, because they see low 25
See Au Loong-Yu, ‘Alter-Globo in Hong Kong’, nlr 42, Nov–Dec 2006. 26 Duncan, Dollar Crisis, pp. 233–50.
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labour costs as essential to protability. protability. Yet Yet the global income gap is now so large that a minimum wage would only marginally raise prices to the nal consumer. I an hourly wage o $3 is raised to $4 this will boost local demand by about a third, but would lead to a price rise o only 2 or 3 per cent. The experience o ‘air trade’ projects shows the scope or winning support or minimum wages in the export sector. Building the audit and inspection regimes needed to enorce the global minimum wage would pose diculties, but Duncan argues that these would be ar rom insuperable, especially given the keen interest that wage-earners typically take in their pay. Duncan urges that wages in the Western corporations that dominate the export sector can be invigilated ar more readily than other wages or income; indeed the cross-border movement o goods and services is already subject to monitoring. The moral case against very low pay or hard work and long hours is easy to make. Unlike traditional commercial protectionism, the proposed new norms would not seek to exclude imports rom low-wage countries but only to set a foor beneath which export-sector wages should not all. It would be designed to raise aggregate demand in ways that would spread through the entire economy. Most oecd countries already have some type o minimum-wage legislation, but do not ocus on the wages and conditions in the export sector, as Duncan urges should be done. Raising wages in the export sector would have a signicant impact on aggregate demand in low-income countries, which would by itsel help generate growth. While there are points o agreement between Duncan’s analysis and proposals and those o Roubini and his colleagues in ‘The Way Forward’, Duncan is more specic regarding ‘new sources o wealth’. He urges that low interest rates and a glut o capital mean that public authorities could cheaply und large-scale programmes in renewable energy, nanotechnology nano technology and bio-technology. 27 In Duncan’s view each o these programmes, i properly unded, would require $1.2 trillion, or a grand total o $3.6 trillion. Duncan explains that the enterprises that would undertake these ambitious programmes would themselves not be government-run but would rather be public ‘trusts’. While Duncan’s approach has the needed scale and scope, he seems a little uncomortable with the act that he is advocating such sweeping measures o 27
Richard Duncan, The Corruption o Capita Capitalism lism, Singapore 2009, pp. 188–90.
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public entrepreneurship. He attacks the bank bailouts and the stimulus programmes as a corruption o the spirit o true capitalism, while the measures he proposes would nurse the accumulation process back to rude health. However, However, i public nance establishes these new trusts, they should surely remain in public hands. While his categories may be disputed, in the present conjuncture state capitalism may well be preerable to new doses o austerity and privatization, so long as this public entrepreneurialism is accompanied by measures to empower communities and working collectives. Duncan’s proposals chime in well with measures proposed by Diane Elson and other eminist economists who advocate new trade policies which would outlaw child labour, gender discrimination, ecological malpractice, denial o labour rights and very low wages. 28 These authors argue that trade imbalances have their roots in ‘absolute’ rather than ‘comparative’ advantage; the imbalances refect technology gaps and skill gaps rather than ‘perect competition’. 29 In many export zones the workorce is dominated by young women, as yet unburdened with amily responsibilities but possessed o ‘nimble ngers’, discipline and a capacity or sustained hard work. Trade rules could establish minimum wage rates—eventually, perhaps, a ‘living wage’ sans rontières —as well as saety standards, access to education and labour rights or these workers. A parallel paral lel case or trade rules that would discourage the super-exploitation o the poorest workers has been made by Jean-Luc Gréau, ormerly chie economist o mede, the French employers’ ederation. 30 The British debate on how to tackle the crisis has also produced radical proposals, i none as comprehensive as those just considered. Robert 28
See Irene van Staveren, Diane Elson, Caren Grown and Niluer Cagatay, The Feminist Economics o Trade, London 2007. 29 The ‘absolute advantage’ thesis has been developed by Will Milberg, whose approach ocuses on decient aggregate demand: see Will Milberg, ‘Is absolute advantage passé? Towards a Post-Keynesian/Marxian theory o international trade’, in Michael Glick, ed., Competition, Technology and Money, Cheltenham 1994; Anwar Shaikh demonstrates that the acquisition o competitive advantage is determinant, and not the result o a mythical ‘perect competition’, in ‘Globalization and the Myth o Free Trade’, in Anwar Shaikh, ed., Globalization and the Myth o Free Trade, London 2006. 30 See Jean-Luc Gréau, Le Capitalisme, malade de sa fnance, Paris 1998 and other works discussed by John Grahl, ‘Dissident Economics’, nlr 69, May–June 2011.
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Skidelsky urges the need to go beyond monetary measures and commit large public resources to a very active National Investment Bank. 31 Gerald Holtham argues that such a public bank could raise growth and reduce decits by nancing investments that would earn uture u ture revenues, such as social housing or toll roads. 32 Holtham suggests that one o the already nationalized banks could be adapted to this unction and, i guaranteed by the government, could borrow money cheaply. Pension unds, because o their vast size—they account or approximately a quarter o total global nancial assets—move politicians and nanciers to visionary proposals that could channel these providential reserves o cash to x the decaying social abric. Since contributions to retirement schemes are tax-avoured, it seems only air to put them to work until they are needed to pay pensions. But what would be the risks and the rate o return? The British nancier Edmund Truell has argued that the uk’s public-sector pension schemes would become ar more aordable i members’ contributions were mobilized to boost investment in inrastructure. In this way the government could slay two dragons with one sword. It would nd the nance or a vast £1.3 trillion programme o public works, on the one hand, and on the other staunch looming decits in Britain’s public-sector pensions. The pension unds would enjoy special access to such government-supported construction projects, enabling them to borrow cheaply and earn a guaranteed return. 33 However, much would depend on exactly how the new public-sector pension arrangements were set up and run. I have already pointed out that private, commercial pension provision is costly and precarious. The public sector—both employees and the government itsel—have the needed personnel and expertise to set up a body which would run these schemes, so this is what they should do. But it would not be equitable to supply this government-sponsored second pension or public-sector workers and neglect to make similar provision or all citizens. The 31
See Robert Skidelsky and Felix Martin, ‘Osborne’s austerity gamble is ast being ound out’, ft , 1 August 2011. Skidelsky has also advocated this approach in articles or the New Statesman. 32 Gerald Holtham, ‘A national investment bank can raise our growth’, ft , 21 October 2010. 33 William Robins, ‘Radical Plan or Fund to Plug £1.3 trillion Black Hole’, City Wire, 1 November 2011, and Sunday Times, 6 November 2011. This scheme could be run entirely by public, not-or-prot unds but Truell, a director o the Pensions Corporation, seems to envisage commercial insurance running it.
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eminently justied deense o their members’ entitlements by Britain’s public sector unions could only be strengthened by a campaign or a universal second pension. 34 However, it would be necessary to have strong guarantees and clear guidelines. I retirement unds invest in public projects then their rate o return should be clearly protected. Some o the dangers may be gleaned rom a recent report: Four inrastructure und managers and uk pension unds representing more than £50 billion o unds under management signed an initial agreement with the Treasury to invest in schemes such as railways, roads and energy projects . . . The Treasury is hoping to set up a new model o investment in inrastructure to replace the now broadly discredited private nance initiative. A review began earlier this month in ways to raise private nance or such schemes which would provide ‘better value’ than pf, where the typical cost o capital was 8 per cent. The model will oer lower returns but is expected to be linked to rpi infation.35
The British government, having dedicated itsel to scal retrenchment, is desperate or an ‘o-balance-sheet’ mechanism to und badly needed investment in inrastructure. But pension unds will nd these investments too risky unless the government is prepared to guarantee both the principal and a minimum rate o return. The unds should shoul d not be expected to ace the risk o cost overruns. However i such guarantees are oered then some provision would have to be made in the public accounts and, ollowing the costly expedient o pf, it would be more dicult to oer certain prots to the Treasury’s Treasury’s projected commercial commercia l partners. While the th e British Chancellor embraced this project, its size was modest (only £3 billion a year) and its details are not yet agreed. Most uk pension und managers lack the skill or size to evaluate public inrastructure projects, but a public body would enable them to pool resources to this end. 36 Pension unds and schemes oer participants a nominal stake in the capitalist order while actually supplying only a very modest supplement 34
I explain how this might look in chapter 7 o Age Shock. 35 George Parker and Jim Pickard, ‘Fund managers back inrastructure plan’, ft , 26 November 2011. 36 In recent decades banks have deployed the techniques o nancialization to dominate inrastructure nance, oten with unortunate results. See Kate Burgess and Paul Davies, ‘Pension unds need convincing on inrastructure’, ft , 29 November 2011.
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to public schemes. Pension assets are held by nearly everyone in the Netherlands and a ew other states. The more common pattern is or about a hal o employees to be covered and or there to be great inequality in the value o that coverage. Thus in the uk and us hal o all tax relie accrues to the richest 10 per cent o employees. However the public bodies that have been set up to regulate pension unds—the pbgc in the us, and pp or National Employment Savings Trust ( nest) in the uk—could be endowed with more resources and more powers (on which more below). In the best o cases, proposals to invest in inrastructure take many months to have an impact on employment. The quickest way to boost demand would be to lower taxes on earnings and consumption. In both the United States and Europe, payroll taxes (social security contributions) could be overhauled to remove them completely rom low-paid workers and the under-30s while raising the ceiling above which such contributions are payable. Such a reconguration, i properly calibrated, cal ibrated, could with one blow boost demand, lower the cost o hiring new workers, and raise tax rom higher earners. The adoption o such a change by German governments over the last ew years has seen unemployment drop rom 9 per cent to 5 per cent, while the pay o ig Metall members rose by 13 per cent in the years 2005–09. 37
iii. audit o sovereign debts
Crisis 2.0 has seen debts incurred by the banks being taken on by pensioners, students, teachers, care workers and the unemployed, as governments capitulate to the bond traders and ratings agencies, bailing out some undeserving lenders at 100 cents to the dollar. Recognizing and writing o losses is an essential part o the recovery process, but a deliberate and selective process is preerable to an ad hoc crisis response. Strategies should include an audit o public debt, leading to selective debt repudiation, repu diation, with ‘odious debt’ wiped out ou t entirely. entirely. (Odious debts are usually dened as those contracted by a regime without the citizens’ consent and or objectives that are against their interests, with the creditors being aware o these conditions.) An audit allows the processes by which the debt has expanded to be documented and identies which creditors should legitimately be paid. In 2007 the Ecuadorean 37
On German trends, see Brooke Unger, ‘Europe’s Engine’, The Economist, 13 March 2010.
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President Raael Correa appointed a Commission or the Full Audit o Public Credit, consisting consisting o international economists and legal experts— caic, in its Spanish acronym—to establish the legitimacy, legality and adequacy o Ecuador’s loan negotiations and renegotiations since 1976. The caic ound numerous irregularities and illegalities, some dating rom the renegotiation scheduled by the 1995 Brady Plan. Armed with the audit, the Correa government succeeded in bringing debts o $3.2bn to us banks down to under $1bn. I other countries undertook such an investigation they might well discover undue pressure, the suborning o public ocials and the corruption o legislators. (The above-mentioned ‘transition’ loans to countries privatizing pensions could be an example.) They might also uncover debts contracted under such onerous terms that even repaying them several times over did not discharge them. Just as the subprime crisis was greatly intensied by ‘shadow banking’ practices, so the sovereign-debt crises that ollowed have been exacerbated by hidden government liabilities, especially those enjoying ‘implicit’ government guarantees. In Les dettes illégitimes , the French economist François Chesnais extends the idea o ‘odious debt’, arguing that public debts should be repudiated as illegitimate i they are contracted in the course o making ‘gi ‘gits ts to capital’—or example, public investment in state-owned assets as a sweetener or privatization, or scal decits incurred as a result o low levels o direct taxation, where tax revenues are deliberately replaced by debt. 38 The venerable principle o Jubilee recommends the cancellation o debt. However, there is still scope or discrimination, since sometimes the rich owe money to the poor, and bear ull responsibility or having borrowed it. I Italy repudiated all its bonds it would hurt small savers, since millions o the latter together hold 14 per cent o the total. Those advocating radical solutions should be careul not, unwittingly, to drive the petty bourgeoisie into the hands o the ascists. (Repudiation could, o course, exclude such savers and genuine pension unds and charities.) It should be recalled that debt and credit are two sides o the same coin. Credit is a wonderul thing i used to nourish the real economy, 38
François Chesnais, Les dettes illégitimes: Quand les banques ont main basse sur les politiques publiques, Paris 2011, pp. 95–141. See also the recommendations by a group o attac economists in attac, Le piège de la dette publique, Paris 2011.
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producing ‘goods’ and avoiding ‘bads’. The bad side o easy credit was seen in successive speculative bubbles in third-world debt (1980s), dot. com shares (1999–2001), and property and mortgages (2004–07), each o which did little or nothing to boost the real economy. But since 2008 we have seen that recovery has been prevented by the chill shadow o a credit amine. A sovereign deault that imposes losses on large-scale nanciers, not poor savers, may be a worthwhile option in a case like that o Greece. Large tranches o Greek debt would certainly count as ‘odious’—or example the large loans taken out rom French banks by the Karamanlis government rom 2005–09 to und purchases o French ghter jets, or the vast sums spent in preparation prepa ration or the 2004 Olympic Games. Sovereign deault imposes a high price: countries that oreit the condence o the markets immediately nd borrowing expensive or impossible. Argentina’ss wholesale deault Argentina’ deaul t in 2001 paralysed paral ysed economic activity: many jobs were lost, businesses wrecked and savings wiped out. Attempts to use barter to resuscitate the economy proved cumbersome and oten ineective. However, the piquetero movement and a wave o actory a ctory occupations allowed some enterprises to survive until they could be saved by the Kirchner administration in 2003. Argentina was to show that there is lie ater deault—and negotiations too. Argentina repudiated debts totalling $81bn. Ater an interval, and anxious to regain normal trade acilities, the Argentine government oered its creditors 35 cents on the dollar. Aware o the weak state o the Argentine economy, most o the country’s creditors accepted, though compared with other deaults the write-down was a severe one. Ater a steep devaluation, the Argentine peso was stabilized at a competitive rate. Agricultural exports recovered and under presidents Kirchner and Cristina Fernández income and employment revived.
A Greek exit? In the case o Greece, devaluation would not be an option unless the country took the expensive step o reverting to the drachma. But in other respects, the country is already suering the catastrophe which established wisdom claims debt repudiation would bring. Attempts to stave o deault have already brought about economic collapse and the country has eectively been shut out o international capital markets since spring 2010. A repudiation would leave the remaining debt more
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sustainable, and Greece could continue to borrow internally, as it did beore 2001. One commentator has pointed out: I Greece had deaulted in early 2010, Greek debt could have become sustainable in the long run with a write-down imposed on bondholders o considerably below 50 per cent o total debt. The country would have had to borrow internally, perhaps issue ious (as it has done already), and impose a ew modest cuts. The eect o such a policy would have been mildly recessionary. What was done instead by the troika was to provide Greece with loans so as to cover its budget decit without deault, in exchange or increasingly draconian budget cuts, tax increases, and institutional changes o dubious value . . . The eect o this policy has been a ast downward spiral o the economy. Since debt keeps increasing and the country keeps getting poorer ast, debt is becoming ever less sustainable. The debt-to-gdp went rom 115 to 160 per cent in less than two years.39
iv. public utility
Tackling the problems o nance will centrally require the building o public-utility banks and credit systems, reaching out rom national centres and devolving resources to every locality, on the one hand, and cooperating with regional and global partners, on the other. 40 Strategic public ownership is a necessary but not sucient condition, since public authorities can be tempted into their own speculative excesses. A public-utility nance system would have at its core publicly owned and publicly accountable banks, regulatory agencies and social unds. The latter would inorm and empower individual citizens and regional or local networks. The neoliberal model, by contrast, hands over public assets and social programmes to private corporations and promotes a pervasive commodication o health, education, pensions and access to the natural environment. While social ownership and local nance should be encouraged, stringent saeguards are needed to insulate such unds rom commercial and speculative pressures. Community banks and building societies have shown that they can give good service, i prevented rom taking on 39
Stergios Skaperdas, ‘Seven Myths about the Greek Debt Crisis’, University o Caliornia, Caliorn ia, Irvine, orthcoming. 40 For the concept o the ‘public utility nance system’ see Gowan, ‘Crisis in the Heartland’, nlr 55, Jan–Feb 2009 and Chesnais, Les dettes illégitimes, pp. 17–24, 131–6.
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extraneous ‘leverage’. However, However, they soon run into trouble i ‘liberated’— i.e., deregulated or privatized—and permitted to act like commercial banks. Thus German manuacturing corporations have long beneted rom the country’s largely publicly owned Landesbanken; but during the last decade or so several o these banks were tempted to speculate with complex mortgage derivatives and ran up huge losses as a result. This phenomenon is yet another example o the perils o deregulating and semi-privatizing public-nance networks—other cases in point being the Fannie Mae, many British privatized us Savings and Loan associations, Fannie ormer mutuals (e.g. tsb) and the Spanish Cajas. Each o these worked well or decades as publicly owned and well-regulated institutions; all got into diculties once deregulated, privatized or demutualized. Public resources and enterprises need to be continually replenished i they are not to be overtaken by the momentum o private accumulation. Rudol Meidner, the Swedish labour economist, proposed an annual share levy on the major corporations, each o which was to issue new shares each year equivalent to 20 per cent o its prots, to be distributed to a regional network o social unds. The proposal has the advantage that it shaves a sliver o value rom all shares, even those held in tax havens. However the social und network would hold the shares it received or the long term, and use the dividend income they generate or specic purposes, such as pension provision. 41 A number o states—notably Norway, Australia and China—nurtured sovereign unds or ‘uture unds’ which acted as a buer during the crisis. Such unds might be invested in ways that promote productive capacity capa city,, social housing or environmental protection. Projects like these build long-term assets which can be drawn upon in case o events both unpredictable (natural disaster) and predictable (an ageing population). In some countries, publicly run provident and pension unds also play this role; the managers o such unds invest in development or social inrastructure but are increasingly aware that these should oster environmental sustainability. In the us and eu, though, ree-market principles and private lobbies have discouraged sustained public p ublic investment programmes. 41
Chapters 5 and 7 o Age Shock have inormation on this experience. The ‘wage earner unds’ plan was enacted in the 1980s in a much scaled back version and then wound up in 1992 by a Conservative government; the assets in the scheme were used to set up a string o research institutes which strengthened the Swedish economy economy..
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Twenty-rst-century advocates o public enterprise and social planning need to reshape them in ways that avoid their historic pitalls. Recent years have seen striking successes or publicly sponsored economic development, but with some serious accompanying problems. Thus it manuacturing in Taiwan’ aiwan’ss Science Parks and agricultural production in Brazil’s cerrado backlands have enabled these countries to become the world’s leading suppliers in several o the lines o production chosen or development by the public agencies concerned two or three decades ago. In the Brazilian case, a crucial role was played by the Embrapa, the Brazilian Agricultural Research Corporation, and its success in rehabilitating the soil o the cerrado, previously inhospitable scrubland. 42 Public subsidies were used strategically to set up viable entities rather than to cover ongoing operational decits. Yet the very success o the publicly sponsored programmes in Brazil and Taiwan has created unacceptable environmental problems. Though worrying, these problems should not be unmanageable i the public authorities and the productive new entities were answerable to local communities or their impacts. Unortunately, the success o these programmes also makes them juicy targets or privatization, with business interests stepping in to take charge. The demands o the knowledge economy put a premium on the socialization o research costs, an excellent example being the German Fraunhoer research network, with its 18,000 sta and budget o €1.65 billion. This public network has made a vital contribution to the successes o Germany’s Mittelstand, or medium-sized enterprises. 43 China has supplied both positive and negative examples o state entrepreneurialism.44 The sheer scale o Beijing’s intervention has been such as to have an impact on the global economy, something that could never be said o even the most powerul commercial organization. In most medium-sized or large states the public authorities also have the potential advantage o size. This is a critical consideration in any deep-seated crisis. 42
See ‘Brazil’s Agricultural Miracle’, The Economist, 28 August, 2010. For the wider Brazilian context see Emir Sader, The New Mole, London and New York 2011. The vicissitudes o public ownership in Latin America are explored by Carlos Aguiar de Madeiros, ‘Asset-Stripping the State’, nlr 55, Jan–Feb 2009. 43 The Economist, 5 February 2011. 44 For the innovative approach o the Chonqing authorities see Philip C. Huang, ‘Chonqing: Equitable Development Driven by a “Third Hand”’, Modern China, Spring 2011.
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The aims o any new development programme should be to stimulate investment-led growth, oster sustainability, encourage the ormation o human capital, and yield a growth in productivity. Such a package would seek to decommodiy major areas o social lie, giving everyone ree access to decent health care and education, and endowing everyone with a share and say in the control o economic resources. 45 A publicutility nance system, buttressed and sustaining networks o social unds, could reconnect nance to its social context and democratize its workings. The traditional socialist model o ‘nationalized’ and planned economy has had its successes—and in some areas may still have its uses. It makes sense or railways, electric power, power, water and other natural monopolies to be publicly owned and run. But the command-economy model has had its day d ay.. I markets are properly monitored, regulated and socialized they can play a useul, even valuable, valua ble, role. 46 The social owner owner-ship o pension unds—and their management alongside the pursuit o socially responsible criteria—can add an extra dimension to this. National and international regulators will nd it dicult to have the inormation they need to oversee a myriad o economic actors. Socially owned institutional investors would add another type o ‘regulation rom below’ to enhance ‘regulation rom above’. They could, or example, use their shareholding powers to oster a minimum wage in the export sector o countries with low gdp per capita. Public credit should be deployed to invest in a green economy as well as to reduce the scale o global poverty and to deray the costs o ageing. The anarchy and uncertainty o global exchanges and capital fows must be addressed and regulated in ways that empower and inorm the generality o citizens and the communities to which they belong. In many ways the approach I have sketched is the polar opposite o that associated with Hayek, Friedman and ree-market economics. But the latter school has accepted the need, in extreme conditions, or a nancial stimulus—using helicopters to drop great sacks o cash on all and sundry. Yet in practice the helicopters drop cash only on the banks. I printing money is in the public interest, why shouldn’t everyone be on the receiving end? Why shouldn’t the helicopters drop the cash on the poor, or on the whole population? In a very unequal society, putting 45
See Diane Elson, ‘Market Socialism or Socialization o the Market’, nlr i/172, Nov–Dec 1988; Robin Blackburn, ‘Economic Democracy: Meaningul, Desirable, Feasible?’, Daedalus, Summer 2007. 46 As classically argued by Karl Polany Polanyi, i, The Great Transormation, London 1944.
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money in the hands o those who need it most is the best way to raise demand. In addition to the introduction o a minimum wage in the export sectors, the granting o debt relie to struggling households in the advanced-capitalist countries would not only be worthwhile in itsel but would also help to generate higher aggregate global demand and a prospect o overall growth. The current overhang o household debt induces stagnation. The Australian economist Steve Keen proposes a radical debt-destroying strategy: ‘governments should give the public a dollop o cash. Those that had debts would be obliged to pay them down, those that didn’t would be ree to spend the money however they wished. The result would be lower debt levels and greater spending power.’47 An even more radical strategy would simply cancel all debts, or all debts up to a threshold amount (say £35,000), but the rugal might object and the banks would take a hit. Keen’s even-handed civic premium could be welcomed by all as a positive way to cut debt that is an obstacle to recovery. As the tarp ‘inspector general’ Barosky explained, a bailout ‘rom below’, reducing the burdens on the poor and low paid, would have been more eective—and more conducive to public utility—than the bankerriendly bailouts ‘rom above’. Debt-relie programmes also need to be extended to those burdened by student loans. In Britain student debt is orecast to treble to £70 billion by 2015. Student debt is particularly heavy in the United States where it is expected soon to reach the $1 trillion mark, only just short o total credit-card debt. 48 True to the spirit o nancialization, indebted students and graduates are invited to manage their debt in a complex variety o ways. Those who make unlucky choices can nd themselves subjected to nancial suocation—by 2009, nearly 9 per cent o holders o student debt were in deault, with dire consequences or their credit rating. The need to service such debt distorts the options students ace and has a dampening eect on demand. We ace the need to reconstruct a concept o the public, one that has room or, but is not wholly dened by, public ownership, national 47
As summarized by Larry Elliot, ‘Time we wean ourselves o high debt’, Guardian, 20 November 2011; see also Steve Keen’s website, Debtwatch. The inherent deects o stock exchange nance are identied in Keen’s prescient book: Debunking Economics, Annandale, nsw 2001, pp. 251–7. 48 ‘Student Loans in America: The Next Big Credit Bubble?’, The Economist, 29 October 2011.
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regulation, income redistribution and decent social services. It should correspond to the 21st century and the epoch o globalized capitalism and the knowledge economy. From the standpoint o humanity as a whole, a ‘nationalized industry’ represents a partial interest. When such a concern invests overseas, the balance o public interest would have to be struck between at least two ‘publics’ and oten many more, just as within any state there will have to be a balance between the interests o employees o a state enterprise on the one hand and citizens on the other. The ‘public interest’ is best determined by a multiplicity o institutions and practices, oering broad access to inormation, debate and decision. So long as states enjoy sovereignty they will play a key role in acilitating—or denying—such democratic accountability and in meeting the challenge o the crisis. I the rescues demand vast amounts o public money, as is already clear, then any positive outcomes should accrue to public bodies, just ju st as Norway’s massive state pension und is a legacy o the government rescue o the country’s banks in 1988. Even within the constraints o a capitalist society there are institutions to be ound which manage to contribute to a maniest public interest or concern. The us Social Security programme or the British National Health Service could still be improved, but nevertheless or over hal a century they have embodied the principle o universal coverage. Both programmes were saved rom repeated threats to their integrity by the mobilization o public opinion and continue to ace such threats today. But they show that the notion o public service can be successully deended even in the most inhospitable o contexts.
High road to development I have placed the crisis in the context o epochal imbalances and inequality,, and have proposed a development path based on a living wage, good ity working conditions, education or all, decent levels o care, gender equalequ ality and high skills. The needed boost to demand would have to stem not solely rom higher wages but also rom investment in inrastructure and green technologies, as well as unding decent pensions, healthcare, eduedu cation and welare systems. So ar as governments and enterprises are concerned the objective should be to pursue the ‘high road’ o competitive advantage, based on improving existing levels o education, skills and care, and shunning the ‘low road’ which bases competitive advantage on sweated labour, gender gaps and the dumping o social costs.
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This approach seeks to humanize the global chain o commodity transactions using international agreements, national legislation, multi-actor mul ti-actor ‘codes o conduct’, labour rights and collective bargaining, community representation, transparency rules and ethics commitments rom corporate and nancial agents. The production and sale o commodities presumes reproduction o the work orce, and waged labour is combined with unpaid care work. Support or unpaid care workers dovetails with ensuring decent working conditions. Finally, economic arrangements should be such as to ensure something close to ull employment and that economic growth is not based on the squandering or ruin o the earth’ss resources. earth’ Such a strategy is, clearly, very ar rom the agendas o the states and political classes now running the world. But their measures have so ar only succeeded in deepening and perpetuating the crisis. Should it now take a turn or the worse, with a urther nancial meltdown in the Atlantic economies and a slowdown in China, all bets will be o. In that eventuality—and indeed, in any longer-term perspective—it is vital that constructive proposals or a genuine way out o the crisis, to the let, should be worked out now. now.
