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Saturday, November 26, 2011

The 1%’s European Coup

The last thing the world needs at a time like this is democracy.  That is what got us into this mess in the first place.  People wanting stuff, and voting for people who said they’d give ‘em that stuff, without showing they’re working. 

            --Comedian Andy Zaltzman to John Oliver
            The Bugle, Ep. 173a

In yesterday’s Washington Post, Harold Meyerson wrote about “The Growing Tension Between Capitalism and Democracy.”  Meyerson pointed out that

Over the past year . . . capitalism has fairly rolled over democracy. Nowhere is this more apparent than in Europe, where financial institutions and large investors have gone to war under the banner of austerity, and governments of nations with not-very-productive or overextended economies have found that they could not satisfy those demands and still cling to power. The elected governments of Greece and Italy have been deposed; financial technocrats are now at the helm of both nations. . . .  It’s as though the markets throughout Europe have had enough with this democratic sovereignty nonsense.  (emphasis added)

Essentially, Meyerson is arguing that the entwined financial system of the Eurozone now gives “financial technocrats” more power to dictate any particular Eurozone country’s fiscal policies than that country’s own citizens have. 

But as much as Meyerson’s description should be enough already to give one pause, I think framing the situation in this way actually understates the significance of what we are witnessing:  a European political and economic coup by the global 1%.

By far, the greatest obfuscation in the way the handling of the European financial crisis is normally described comes from the use of the term “financial technocrat” to identify the people whose economic prescriptions are now being foisted on regular Greek and Italian and (to a less obvious extent) Spanish, Portuguese, and Irish citizens. 

The term itself is designed to give the impression that we are talking about objective, knowledgeable financial experts – economic scientists, if you will – who are being asked to step in and set aright national economies that have cratered as a result of previous mismanagement.  Labeling these people “technocrats” is intended to underline that they are simply there to solve a problem, and not to pursue any kind of ideological economic agenda.  But once one assumes that these individuals are simply imposing necessary, non-ideological economic reforms, then one pretty much also has to believe that these countries’ fiscal implosions must have resulted from incompetence, cupidity, or some combination of the two. 

In fact, the general narrative that has been shaping up for months now is that the “hard-working, thrifty” countries of northern Europe are being called upon to bail out the “lazy, profligate” countries of southern Europe (and Ireland!).  Never mind that the “profligate” Greek government’s spending was 49.5% of its GDP when the financial crisis began, and the UK’s new “austerity” government’s spending is 48.8% of GDP.  Despite the fact these two countries’ public expenditure levels are nearly identical, one is clearly “profligate” and the other is clearly “austere” – just look where they are on the map!  Geography doesn't lie.

This is important because while Greece really does have some serious problems, those problems don’t appear to have resulted from the country spending more than it could afford.  Given the size of the Greek economy there is no reason its government could not have sustained the level of spending in which it was engaged.  What appears to have screwed Greece up is not that they couldn’t afford these government services, but that they just didn’t want to pay for them.

Michael Lewis, author of the fantastic book about the U.S. financial implosion The Big Short, traveled to Greece to research Boomerang, his new book about the global financial crisis, and – according to Lewis, at least – the Greeks simply didn’t pay taxes:  “A Greek tax collector will tell you the way you get fired in the Greek tax collection service is by collecting taxes, that if you do it too well, they put you in a back office somewhere, and that you’re allowed to take bribes but not to collect taxes, but you can’t do your job well.”

But – as is very much the case in the United States – a failure to levy and collect sufficiently high taxes in order to pay for the government services that their citizens demanded does not form a substantial part of the narrative being crafted to explain the European crisis.  That narrative instead is dominated by the more facile – and fundamentally incorrect – idea that the greedy and shiftless hoi polloi simply voted themselves benefits that their countries could not afford.

Of course, it is no coincidence that this narrative is also the default description of democracy as explained by the Right.  As I’ve mentioned before, GOP Party Leader Rush Limbaugh has a predilection for quoting this passage from Heinlein’s To Sail Beyond the Sunset whenever he rails against ordinary people actually being allowed to vote:

Democracy often works beautifully at first.  But once a state extends the franchise to every warm body, be he producer or parasite, that day marks the beginning of the end of the state.  For when the plebs discovery that they can vote themselves bread and circuses without limit and that the productive members of the body politic cannot stop them, they will do so, until the state bleeds to death, or in its weakened conditions the state succumbs to an invader – the barbarians enter Rome.

And this really is how the Right views democracy:  as a dangerous experiment that must be kept in check to prevent regular people from using their power at the ballot box to demand that their governments provide the kind of services one expects to find in decently run countries.  This is considered dangerous because high disparities in the distribution of wealth mean that in order to pay for such services governments would have no choice but to tax the uber-wealthy 1%, or else end up like Greece – and the Right has sworn to protect the 1%’s financial interests at all costs.   

* * *

Of course, the question that naturally arises is:  Why would these “objective financial technocrats” want to inaccurately describe the problem to be solved as one involving profligate public spending?  And the answer appears to be:  So they can persuade the public that the “austerity policies” they want to impose anyway are the necessary correctives to the instant problem. 

Indeed, in a classic example of Naomi Klein’s “Shock Doctrine,” immediately after the financial crisis struck Europe the idea of economic “austerity” suddenly became all the rage.  The measures forced upon Greece, Italyand Ireland include raising taxes on ordinary citizens, selling off (privatizing) billions of dollars worth of state assets, cutting employee pay, benefits, and pensions, abrogating collective bargaining rights, and raising the retirement age. 

And, again, it is no coincidence that the Right has been pursuing exactly the same kind of policies here in the United States.  After the US government gave away trillions of dollars to the financial industry, very little time was lost before we started hearing about the need to “tighten our belts,” “live within our means,” and – above all – “do something about the deficit.” 

Just as in Europe we have seen an organized assault on collective bargaining rights, government workers’ pay and benefits have been frozen, proposals have been made to raise the Social Security age, and leading GOP politicians – including most if not all of the Republican presidential candidates – are talking about the need to raise taxes on the working poor and middle class because their income is so low they aren't liable for federal income taxes.  The GOP aims to change that . . . and not by raising those “lucky duckies’” wages.

All of these proposals are extremely unpopular, which is why we have seen rioting in the UK, rioting in Greece, an effort to recall Wisconsin Governor Scott Walker (elected only one year ago) and why many Occupiers have taken to the streets.  But of course the unpopularity of such measures is precisely the reason the Right only attempts to impose them during times of crisis.  These measures could never be passed democratically, too many people hate them, but during a time of crisis – and especially during a financial crisis in which it is suggested that democracy itself may have been irresponsibly extravagant – the Right is in a better position to dictate terms.

* * *

The easiest way to recognize the coup being staged by the 1% in Europe is to simply assume the good faith of the technocratic policymakers being installed.  Take Greece, for example.  Claiming that its current woes stem from profligate government spending and not from an unwillingness to tax the wealthy is to miscast the source of Greece’s problems, but let’s assume that this error was made in good faith.  (Who knows?  Maybe years of inbreeding have rendered Europe’s expert financiers incapable of understanding what “government spending as a percentage of GDP” means.  I don’t wish to speculate. )

So, okay, they don’t understand how the problem arose but they do understand that there is a problem:  Greece is in danger of defaulting on its sovereign debt.  How would one expect objective, bloodless, highly competent technocrats to solve such a problem? 

Economic Growth?
Well, what they should be doing is enacting policies designed to achieve rapid economic growth and full employment.  As a means of getting government budgets back in the black, this is far superior to simply slashing government spending.

For example, in his new book The End of Loser Liberalism: Making Markets Progressive (available here as a free PDF file, although donations are appreciated), Dean Baker points out that the budget surplus Bill Clinton achieved by the end of his term had nothing to do with fiscal restraint and everything to do with economic growth:

According to the CBO, the net effect of legislated [budget] changes over this period was to increase the fiscal year 2000 deficit by $10 billion.  Rather than higher taxes or spending cuts, the entire cause of the shift from deficit to surplus was better-than-expected growth and lower-than-expected unemployment. . . . (emphasis added)

Growing the economy by increasing aggregate demand results in higher tax revenue (assuming Greece bothers to collect its taxes), which brings the federal budget back into balance and makes it possible to pay back debt.  What’s more, it means full employment, which means a happy, productive, non-rioting populace.  By any objective measure, spending money to boost employment and put people back to work is exactly what the Eurozone’s Technocratic Overlords should be insisting upon.

But, in fact, it appears that the austerity policies and government spending cuts being prescribed by the Overlords are actually designed to accomplish the opposite of this.

To begin with, the first casualties of budget cuts are obviously the people otherwise employed by the government.  These people now go to swell the ranks of the unemployed and further drag down the economy.  (Of course, we are experiencing very much the same problem here in the US.  Last month America added only 80,000 new jobs – and we need to add 150,000 per month just to keep up with population growth.  Sadly, we could have done so much better if we had reality-based fiscal policies.  In fact, we actually added 104,000 private sector jobs last month, but government budget cuts resulted in that figure being offset by the 24,000 state and municipal employees who were laid off at the same time.)

More generally, it is textbook macroeconomics that pulling public sector money out of an economy when a slump in the private sector already has driven that economy into recession is pretty much the worst thing a government can do.  As less money is spent in an economy, less money is available to be spent and aggregate demand (consumption) is driven ever lower.

Perhaps because of the truly stupid, pernicious idea that the government is analogous to a family household, many people tend to think that if a government needs more money to pay its existing debt then the only way it can get that money is by re-allocating it from other government services – just as a family of four might forego its annual vacation if necessary to make the mortgage payments.

But the government isn’t a family of four.  It is, in fact, a substantial part of its own country’s economy.  When that economy’s private sector slows down, requiring the public sector (the government) to slow down too can only make matters worse.  So much worse, in fact, that the government’s efforts to save money by cutting government spending can actually leave it even deeper in debt than when it statted.

This is called the “paradox of austerity,” and Kossack Plutocracy Files provided a great introduction to the subject a few months ago in a diary titled “Krugman and the Paradox of Austerity.”  Essentially, it works as follows:  when government spending is cut during a time of economic recession, this has both a short-term and a long-term depressive effect on the economy.  These depressive effects reduce future tax revenue.  Under such circumstances, it is relatively easy for that reduction in future tax revenue to more than offset whatever initial savings the government realized by its original budget cutting. 

For governments, cutting the budget during an economic downturn simply drives up unemployment, depresses the economy, and can actually push the government deeper into debt.  And yet this is precisely what the Eurozone’s Technocratic Overlords are insisting its economically troubled members do.

But the real clue to the coup is the Eurozone Technocrats’ insistence so far that above all other concerns inflation must be kept under control.  This is in fact the European Central Bank’s (ECB) formal mandate, and from the very moment Mario Draghi was installed as the head of the ECB earlier this month he has reaffirmed his commitment to fighting inflation above all else.     

Given the current situation, this seems objectively insane.  To begin with, the yield on bonds issued by the more fragile members of the Eurozone are skyrocketing.  Italy’s 2-year bond yields pushed to 7.814%  yesterday – a cost of borrowing unsustainably expensive.  This is very bad, because unless Italy can refinance its existing debt at an affordable rate the possibility that Italy – the third largest Eurozone economy and the seventh largest economy in the world -- will default on its sovereign debt increases dramatically.  Such a default would almost certainly force Italy to abandon the Euro and probably destroy the entire European Monetary Union.

Of course, the European Financial Stability Facility (EFSF) could step in but – no – the Eurozone announced over Thanksgiving that its members are unwilling to print enough money to sufficiently fund the EFSF.  Undoubtedly they were worried about the possible inflationary effects of such funding.  Alternatively, the European Central Bank could step in and buy Italy’s bonds, but so far has refused to do so for fears of – you guessed it – sparking inflation.

For some time now, Paul Krugman has been trying to call attention to this obvious, blatant, and almost apocalyptic problem (he refers to the situation as “Eurogeddon”).  Just a few weeks ago he wrote that by fighting to keep inflation low the Eurozone Technocrats

have in fact systematically ignored both textbook macroeconomics and the lesson of history in favor of fantasies.  The European Central Bank has placed its faith in the confidence fairy, while imagining that it can run policy in a way that has never worked in several centuries of central bank experience.  Meanwhile, the European policy elite has simply wished away the clear evidence that the euro zone needs to make an adjustment that is virtually impossible unless inflation targets are raised.  (emphasis added)

But what Professor Krugman perhaps too generously sees as the implementation of misguided policy, I perhaps too suspiciously regard as something more sinister.  To me, this fetish about avoiding inflation – a fetish that may very well destroy the Euro itself – constitutes a very big tell as to what the Eurozone’s Technocrats are really after.

You see, inflation is great for debtors; as the value of a currency diminishes, the real value of the money debtors have to pay back diminishes as well.  This is one of the reasons many people (including Krugman) have been arguing the Eurozone should be trying to boost inflation right now – it is a simple way to ease some of the debt burden that countries like Italy and Greece labor under.

But, of course, creditors hate inflation because it diminishes the real rate of return they get on the money they already have lent out.  Wanna know why Germany and France have so far been unwilling to entertain the notion of letting inflation rise?  The very simple answer is that Germany and France’s banks are the Eurozone’s largest creditors, and if inflation rises then all of those banks get just a little bit poorer.  And we all know how much the 1% hates to lose money.

Besides, so long as inflation isn’t permitted to ease the pain of indebtedness, then even if creditors are forced to “take a haircut” on some of their loans – as supposedly happened with Greece’s debt – that still leaves them in a position to extort concessions from debtor nations they otherwise never could obtain. 

For example, Ireland, the first of the Eurozone countries to be bailed out, was forced under the terms of its bailout to “cut its unit labour cost [i.e., what workers get paid] by 17% over 2 years,” and was recently outraged to discover that Germany’s parliament was reviewing the Irish government’s proposed budget before that budget was even presented to Ireland’s own opposition party.  This more than anything signals who is really running the Republic of Ireland these days, and it’s not the Irish. 

Is there any real doubt that – supposing the Eurozone doesn’t collapse in the near future – neither Greece nor Italy (nor perhaps a few other cash-strapped countries) will be determining their own fate for very much longer?  Is there any real doubt that this kind of complete control is exactly what the Creditor Class – the 1% -- has always been after?

* * *

The plain truth is that those ostensibly dispassionate, objective, bloodless technocrats who are dictating policy to the Eurozone countries are, in fact, nothing of the sort.  They are instead ideologues of the highest caliber, and their job is to use their control of Europe’s financial levers to push through precisely the kind of policies the 1% has always sought:  low wages, low inflation, low taxes on the wealthy, low levels of government spending, and high interest rates being paid by everybody else for the credit they will be forced to incur simply to get by. 

Europe’s new Technocratic Overlords are pushing the policies of the 1%, by the 1%, and for the 1%, and they are trying to convince the rest of the world that they are acting virtuously by doing so.

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