Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Housing

We Need To Once Again Take “The Working Class” Seriously

The great majority of working people in the US have experienced tough times over the last few decades.  And all signs point to the fact that those in power are committed to policies that will mean a further deterioration in majority living and working conditions.

One obvious response to this situation is organizing; working people need strong organizations that are capable of building the broad alliances and advancing the new visions necessary to challenge and transform existing political-economic relationships and institutions. Building such organizations requires, as a first step, both acknowledging the existence of the working class and taking the concerns of its members seriously.

Unfortunately, as Reeve Vanneman shows in a Sociological Images blog post, writers appear to have largely abandoned use of the term “working class.”  One indicator is the trend illustrated in the chart below, which is derived from Google Books’ Ngram Viewer.  The Ngram Viewer is able to display a graph showing how often a particular word or phrase appears in a category of books over selected years.  In this case, the chart below shows how often the two-word phrase “working class” (a bigram) appears as a percentage of all two word phrases used in all books written in American English.

google

As Vanneman explains:

a Google ngram count of the phrase “working class” in American books shows a spike in the Depression Thirties and an even stronger growth from the mid-1950s to the mid-1970s. But after the mid-1970s, there is a steady decline, implying a lack of discussion just as their problems were growing.

A similar overall trend emerges from “a count of the frequencies of ‘working class’ in the titles or abstracts of articles in the American Journal of Sociology and the American Sociological Review.”  As we see in the chart below, there was a rapid growth in the use of the phrase from the late 1950s through most of the 1960s, followed by a slow but steady decline until the mid-1980s, and then, after a brief resurgence, a dramatic fall off in its use.

sociology

As Vanneman comments: “These articles on the working class were not insignificant; even through the 21st century, the authors include a number of ASA presidents. But overall, working-class issues seem to have lost their salience, as if even American sociology was also telling them that they didn’t matter.”

While there is no simple relationship between working class activism and scholarship on the working class, the synergy is important.  Now is the time to take working class issues seriously.  Given current trends, we desperately need a revival of labor activism and the development of labor-community alliances around issues such as housing, health care, discrimination, and the environment.  And we also need new scholarship that shines a light on as well as engages the challenges of our time from a working class standpoint.

The Trump Victory

The election of Donald Trump as president of the United States is the latest example of the rise in support for right-wing racist and jingoistic political forces in advanced capitalist countries.  Strikingly this rise has come after a sustained period of corporate driven globalization and profitability.

As highlighted in the McKinsey Global Institute report titled Playing to Win: The New Global Competition For Corporate Profits:

The past three decades have been uncertain times but also the best of times for global corporations–and especially so for large Western multinationals. Vast markets have opened up around the world even as corporate tax rates, borrowing costs, and the price of labor, equipment, and technology have fallen. Our analysis shows that corporate earnings before interest and taxes more than tripled from 1980 to 2013, rising from 7.6 percent of world GDP to almost 10 percent.  Corporate net incomes after taxes and interest payments rose even more sharply over this period, increasing as a share of global GDP by some 70 percent.

global-profit-pool

As we see below, it has been corporations headquartered in the advanced capitalist countries that have been the biggest beneficiaries of the globalization process, capturing more than two-thirds of 2013 global profits.

advanced-economies-dominate

More specifically:

On average, publicly listed North American corporations . . . increased their profit margins from 5.6 percent of sales in 1980 to 9 percent in 2013. In fact, the after-tax profits of US firms are at their highest level as a share of national income since 1929. European firms have been on a similar trajectory since the 1980s, though their performance has been dampened since 2008. Companies from China, India, and Southeast Asia have also experienced a remarkable rise in fortunes, though with a greater focus on growing revenue than on profit margins.

And, consistent with globalizing tendencies, it has been the largest corporations that have captured most of the profit generated.  As the McKinsey report explains:

The world’s largest companies (those topping $1 billion in annual sales) have been the biggest beneficiaries of the profit boom. They account for roughly 60 percent of revenue, 65 percent of market capitalization, and 75 percent of profits. And the share of the profit pool captured by the largest firms has continued to grow. Among North American public companies, for instance, firms with $10 billion or more in annual sales (adjusted for inflation) accounted for 55 percent of profits in 1990 and 70 percent in 2013. Moreover, relatively few firms drive the majority of value creation. Among the world’s publicly listed companies, just 10 percent of firms account for 80 percent of corporate profits, and the top quintile earns 90 percent.

bigger-the-better

Significantly, most large corporations have chosen not to use their profits for productive investments in new plant and equipment.  Rather, they built up their cash balances.  For example, “Since 1980 corporate cash holdings have ballooned to 10 percent of GDP in the United States, 22 percent in Western Europe, 34 percent in South Korea, and 47 percent in Japan.”  Corporations have often used these funds to drive up share prices by stock repurchase, boost dividends, or strengthen their market power through mergers and acquisitions.

In short, it has been a good time for the owners of capital, especially in core countries.  However, the same is not true for most core country workers.  That is because the rise in corporate profits has been largely underpinned by a globalization process that has shifted industrial production to lower wage third world countries, especially China; undermined wages and working conditions by pitting workers from different communities and countries against each other; and pressured core country governments to dramatically lower corporate taxes, reduce business regulations, privatize public assets and services, and slash public spending on social programs.

The decline in labor’s share of national income, illustrated below, is just one indicator of the downward pressure this process has exerted on majority living and working conditions in advanced capitalist countries.labor-share

Tragically, thanks to corporate, state, and media obfuscation of the destructive logic of contemporary capitalist accumulation dynamics, worker anger in the United States has been slow to build and largely unfocused.  Things changed this election season.  For example, Bernie Sanders gained strong support for his challenge to mainstream policies, especially those that promoted globalization, and his call for social transformation.  Unfortunately, his presidential candidacy was eventually sidelined by the Democratic Party establishment that continues, with few exceptions, to embrace the status-quo.

However, another “politics” was also gaining strength, one fueled by a racist, xenophobic, misogynistic right-wing movement that enjoyed the financial backing of the most reactionary wing of the capitalist class.  That movement, speaking directly to white (and especially male) workers, offered a simplistic and in its own way anti-establishment explanation for worker suffering: although corporate excesses were highlighted, the core message was that white majority decline was caused by the growing demands of “others”—immigrants, workers in third world countries, people of color, women, the LGBTQ community, Muslims, and Jews—which in aggregate worked to drive down wages, slow growth, and misuse and bankrupt governments at all levels.  Donald Trump was its political representative, and Donald Trump is now the president of the United States.

His administration will no doubt launch new attacks on unions, laws protecting human and civil rights, and social programs, leaving working people worse off.  Political tensions are bound to grow, and because capitalism is itself now facing its own challenges of profitability, the new government will find it has little room for compromise.

According to McKinsey,

After weighing various scenarios affecting future profitability, we project that while global revenue could reach $185 trillion by 2025, the after-tax profit pool could amount to $8.6 trillion. Corporate profits, currently almost 10 percent of world GDP, could shrink to less than 8 percent–undoing in a single decade nearly all the corporate gains achieved relative to world GDP over the past three decades. Real growth in corporate net income could fall from 5 percent to 1 percent per year. Profit growth could decelerate even more sharply if China experiences a more pronounced slowdown that reverberates through capital-intensive sectors.

future

History has shown that we cannot simply count on “hard times” to build a powerful working class movement committed to serious structural change.  Much depends on the degree of working class organization, solidarity with all struggles against exploitation and oppression, and clarity about the actual workings of contemporary capitalism.  Therefore we need to redouble our efforts to organize, build bridges, and educate. Our starting point must be resistance to the Trump agenda, but it has to be a resistance that builds unity and is not bounded in terms of vision by the limits of a simple anti-Trump alliance.   We face great challenges in the United States.

Capitalist Globalization: Running Out Of Steam?

The 2016 edition of the Trade and Development Report (TDR 2016), an annual publication of the United Nations Conference on Trade and Development, is an important study of the changing nature of capitalist globalization and its failure to promote third world development.

The post-1980 period was marked by an explosion of transnational corporate activity, with investment increasingly taking place in the third world, especially Asia.  The resulting investment created a system of cross border production networks in which workers in third world countries produced and assembled parts and components of increasingly advanced manufactures under transnational capital direction for sale in developed country markets.

Mainstream economists supported this process, arguing that it would promote rapid industrialization and upgrading of third world economies and the eventual convergence of third world and advanced capitalist living standards.  However, the TDR 2016 makes the case that the globalization process appears to have run its course and that mainstream predictions were not realized.

Capitalist globalization under pressure

The TDR 2016 shows that the post-2008 slowdown in developed capitalist country growth has led to a significant downturn in third world exports and economic activity.  The following charts show that while international trade has long grown faster than global output, the ratio grew dramatically bigger over the first decade of the 2000s.  This was in large part the result of the expansion of cross border production networks.  This explosion of trade also brought ever expanding trade imbalances.

trade-trends

But, as the above charts also show, globalization dynamics appear to have lost momentum.  According to the TDR 2016:

International trade slowed down further in 2015. This poor performance was primarily due to the lackluster development of merchandise trade, which increased by only around 1.5 per cent in real terms. After the roller-coaster episode of 2009–2011, in the aftermath of the global financial and economic crisis, the growth of international merchandise trade was more or less in line with global output growth for about three years. In 2015, merchandise trade grew at a rate below that of global output, a situation that may worsen in 2016, as the first quarter of the year showed a further deceleration vis-à-vis 2015.

This loss of momentum has hit the third world, which has become ever more export-dependent, especially hard. As the following table shows, the growth rate of third world exports has dramatically slowed, and is now below that of the developed capitalist countries.  East Asian export growth actually turned negative in 2015.

table-1

This slowdown in trade has been accompanied by growing capital outflows from the third world, again especially Asia, as shown in the following chart.

capital-flows

The combination of developed country stagnation and dramatically slowing international trade has begun to stress the logistical infrastructure that has underpinned capitalist globalization dynamics.  This is well illustrated by Sergio Bologna’s description of the consequences of Hanjin’s bankruptcy:

The world’s seventh largest shipping company, the Korean company Hanjin, went bankrupt. Overburdened by $4.5-billion in debt, it has not been able to convince the banks to continue their support.

As a matter of fact, it did not convince the government of South Korea, because the main financier of Hanjin is the Korean Development Bank, a public institution, which is also struggling with the critical situation of the other major shipping company, Hyundai Merchant Marine (HMM), and the two Korean shipyards, STX Offshore & Shipbuilding and Daewoo. It may sound like a mundane administrative issue, but imagine what it means to have a fleet of about 90 ships, loaded with freight containers valued at $14-billion, roaming the seas because if they touch a port their loads are likely to be seized at the request of creditors.

In fact, the Daily Edition of the Lloyd’s List dated September 13th . . . reported that 13 vessels had been detained. Other ships are being held in different ports, waiting for judiciary sentences. Others are at anchor and maybe had to refuel. Not to mention the 1,200-1,300 crew members who are not able to find suppliers willing to sell them a can of tuna or a bottle of water. In a Canadian port, the crew had to be assisted by the mission Stella Maris.

The intertwining of the ramifications of this problem is impressive. Hanjin must face legal proceedings at courts in 43 countries. For starters: Most of the ships are not owned by Hanjin, and those it owns, to a large extent, are not worth much. Sixty per cent of the fleet is leased, and Hanjin has not been paying the leases for a long time. This threatens to bankrupt old-name companies like Hamburg’s Peter Dohle, the Greek Danaos, and the Canadian Seaspan; there are about 15 companies who leased their ships to Hanjin, but in terms of loading capacity, the first four add up to more than 50 per cent.

Then there are the ports and other infrastructure service providers. The ports are owed fees for services (towing, mooring); the terminals, for load/unload operations to Hanjin ships on credit; the Suez Canal has not been paid the passage tolls and today won’t let the Hanjin ships through; in addition, the onboard suppliers, recruiting agencies of the crews, the ship management firms. The list does not end here, it has just begun. Because the bulk of creditors are thousands of companies, freight forwarders and logistics operators who have entrusted their merchandise to Hanjin, around 400,000 containers (the total capacity of the Hanjin fleet is estimated at 600,000 TEUs), goods that are stuck on board.

Why did this happen? Why did it have to happen? . . .

Because for years, the shipping companies have been transporting goods at a loss. They have put too many ships into service and they continued to order increasingly larger ships at shipyards. The ships competed fiercely for the orders and built the ships at bargain prices, although they are technological jewels. With the increase in freight capacity, freight rates plummeted, volumes grew but the income per unit of freight transported decreased. Then, China slowed exports, creating the perfect storm. . . .

And now? How many of the 10 to 15 most important companies still active on the market are zombie carriers?

The false promise of capitalist globalization

Critically, the globalization process has been aided by labor repression.  The transnational corporate drive for market share encouraged state policies designed to hold down labor costs.  And the resulting decline in wage demand reinforced the pursuit of exports as the “natural” engine of growth.  As TDR 2016 explains:

those countries that did exhibit increases in their global share of manufacturing exports did not show similar increases in wage shares of national income relative to the global average. . . . This suggests that increased access to global markets has typically been associated with a relative deterioration of national wage income compared with the world level.

The following chart illustrates the global ramifications of the globalization process for worker earnings.wage-share

As for convergence, the TDR 2016 compared the performance of third world economies relative to that of the United States using several different criteria.  The chart below looks at the ratio of per capita GDP of select countries and country groups relative to that of the United States.  We see that Latin America and the Caribbean and Sub-Saharan Africa have actually lost ground since the 1980s.  This is especially striking since the US growth rate also slowed over the same period.  Only in Asia do we see some catch-up, and outside the so-called first-tier NIEs and China the gains have been small.

comparisons-with-us

In fact, as the TDR 2016 explains: “The chances of moving from lower to middle and from middle- to higher income groups during the recent period of globalization show no signs of improving and have, if anything, weakened.”

This conclusion is buttressed by the following table which shows “estimate chances of catching up over the periods 1950–1980 and 1981–2010.”  The United States is the target economy in both periods with countries “divided into three relative income groups: low (between 0 and 15 per cent of the hegemon’s income), middle (between 15 and 50 per cent) and high (above 50). The table reports transition probabilities for the two sub-periods and the three income levels.”

catch-up

The TDR 2016 drew two main conclusions from these calculations:

First, convergence from the low- and the middle-income groups has become less likely over the last 30 years (1981–2010) relative to the previous period (1950–1980). As reported in the table, the probability of moving from middle- to the high-income status decreased from 18 per cent recorded between 1950 and 1980 to 8 per cent for the following 30 years. Analogously, the probability of catching up from the low- to the middle-income group was reduced approximately by the same factor, from 15 per cent to 7 per cent.

Second, and perhaps more strikingly, the probability of falling behind has significantly increased during the last 30 years. Between 1950 and 1980 the chances of falling into a relatively lower income group amounted to 12 per cent for middle-income economies and only 6 per cent for high-income countries.  These numbers climbed to 21 per cent and 19 per cent respectively in the subsequent period.

Uncertain times lie ahead

In short, globalization dynamics have restructured national economies in ways that have enriched an ever smaller group of transnational corporations.  At the same time, they have set back national development efforts with few exceptions and generated serious contradictions that are largely responsible for the stagnation and downward pressures on working and living conditions experienced by the majority of workers in both advanced capitalist countries and the third world.

While globalization dynamics have lost momentum the economic restructuring it achieved remains in place.  And to this point, dominant political forces appear to believe that they can manage whatever economic challenges may appear and thus remain committed to existing international institutions and patterns of economic activity.  Whether they are correct in their belief remains to be seen.  As does the response of working people, especially in core countries, to their ever more precarious conditions of employment and living.

Support For Taxing The Rich Growing

For years now the wealthy and their media have hammered on the need for lower taxes on their income, arguing that this would encourage investment, job creation, and growth.  The tax burden on the wealthy has indeed been lowered in one way or the other, but only the wealthy have benefited.  In particular, our public sector and the activities it supports—public infrastructure, education, health care and human services, etc.—have suffered.

Apparently, people are starting to draw the right lesson from this experience.  As the Washington Post reports:

The results from the Public Religion Research Institute and the Brookings Institution [survey] show that 54 percent of Republicans support increasing taxes on those with incomes over $250,000 a year, an increase of 18 percentage points since the last presidential election in 2012. Among Americans as a whole, 69 percent support an increase.

While the change in opinion was greatest for Republicans, as the figure below shows the survey also found increased support for greater taxes on the rich among both Democrats and Independents.  The fact that this support began spiking early in the year suggests that the change is tied to the election process, although it is unclear whether the campaigns are driving the growing support for higher taxes on the wealthy or people are just taking advantage of the process to express their desire for change.

tax increase

Regardless of cause, this is a hopeful development for progressive movement building.

US Households Experience Growing Insecurity

People are angry about economic trends and are searching, as voting trends reveal, for ways to communicate their strong desire for change. A recent Pew Charitable Trusts issue brief on Household Expenditure and Income provides powerful insight into those trends.

The issue brief focuses on households in which survey respondents or their spouses are between the ages of 20 and 60.  The households are then divided into thirds based on income.  The key takeaway is the growing economic insecurity of US households.

Figure 1 shows that it took until 2014 for inflation-adjusted median and mean household expenditures to return to their pre-recession levels.

Fig_1_Expen

However, as Figure 2 shows, the median rise in household expenditure was not matched by a corresponding increase in median pre-tax household income.

Fig_2_Expen

As the authors of the issue brief explain:

By 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent. This change in the expenditure-to-income ratio in the years following the financial crisis is a clear indication of why and how households feel financially strained.

Figure 4 highlights the recent upswing in costs of housing, food and transportation.

Fig_4_Expen

The housing squeeze has become especially severe for low income renters.  As Figure 6 shows, in 2014, low income renter households spent almost half of their pre-tax income on housing.

Fig_6_Expen

More generally, as Figure 10 reveals, households in all three income groups are experiencing budget tightening; they have significantly less money left over after meeting their regular annual expenditures than they did in 2004.

Fig_10_ExpenIn the words of the study:

The amount of slack that families had in their budgets declined for all income groups between 2004 and 2014. . . . In 2004, the typical household in the lower third had a little less than $1,500 left over after accounting for annual outlays. Just 10 years later, this amount had fallen to negative $2,300, a $3,800 decline. These households may have had to use savings, get help from family and friends, or use credit to meet regular annual household expenditures. The typical household in the middle third saw its slack drop from $17,000 in 2004 to $6,000 in 2014. Of note, because income is measured before taxes, some families will have had even less slack in their budgets than this figure implies.

Sadly, there is no reason to believe that majority economic prospects will take a turn for the better.

Searching for the Global Middle Class

The latest hype, designed no doubt to take attention away from declining living and working conditions in core economies, is that a new global middle class is emerging.  The implication is that capitalist globalization continues to work its “magic,” although now it is happening in the so-called third world.  Reality doesn’t match the hype.  Search all you want—it is hard to find real evidence of the emerging new global middle class.

Steve Knauss highlights the talk:

Over half the world will be middle class by 2030, predicts the United Nations Development Program (UNDP) in its report on “the Rise of the South.” The Economist, not known to be shy, claims we’re already there, thanks to “today’s new bourgeoisie of some 2.5 billion people” across the global South that have become middle class since 1990. The OECD, perhaps the boldest of all, postulates that India – currently one of the poorest countries on earth – could find more than 90 percent of its population joining this “global middle class” within 30 years, from around 5 or 10 percent today.

It all sounds pretty impressive until you learn how membership in the new global middle class is determined.  It includes those whose real income (in purchasing power parity dollars) is at least $10 per day.  That means at least $3650 in annual earnings gets you membership in the new global middle class.

To appreciate how low that figure is one has to know what purchasing power parity means and how it is used to calculate income.  There are two main ways to make comparisons in earnings across countries, something needed for global claims.  One is to convert national earnings into dollars using the exchange rate.  However, this is not considered very reliable.  Exchange rates move all the time, making comparisons unreliable.  Even more problematic, many of the goods and services people consume are not internationally traded so changes in exchange rates do not affect their well-being.

The other method, the one most commonly used, relies on purchasing power parity calculations.  In brief, the World Bank constructs a basket of consumer goods and services and determines its dollar cost in the United States in a particular year; the most recent year was 2011.  Then, it determines the national cost of a similar basket in other countries.  Finally, it calculates a purchasing power parity exchange rate for the dollar and the currencies of these other countries using these relative costs.

An example: suppose that the constructed basket of goods costs $200 in the US.  And suppose that the “equivalent” basket of goods costs 800 Rupees in India.  We can then can construct a purchasing power exchange rate between the two currencies.  In my example, 1 Rupee equals $0.25.  Or said differently an Indian with 4 Rupees is said to be able to command the same value of goods and services as someone in the US who has $1.  Thus, an Indian earning 8000 Rupees would be said to earn the equivalent of $2000.

Of course this method has its own difficulties.  For example, imagine how hard it is to develop national indices that are equivalent.  How do we calculate the average price of a good or service in a country?  And are the goods and services in one country, say the US, really equivalent to the goods and services in another country, say India?

Regardless, putting doubts about the methodology aside, we can now return to our standard for reaching the global middle class.  Our international agencies seek to count individuals who earn the annual equivalent of $3650 in the US as middle class.  That certainly seems like a stretch!

The following chart highlights the distribution of global income in purchasing power dollars using development agency categories.

earnings

As Knauss explains:

Even taking the data at face value, 71 percent of humanity is poorer in real terms than the $10 PPP threshold. . . . This is compared to 79 percent in 2001, owing to a modest increase in families crossing the $10 PPP line but remaining concentrated very close to it . . . . There was consequently an expansion of those living on between $10 and $20 per day from 7 percent of humanity in 2001 to 13 percent today.

That’s it. That’s the whole basis for the “global middle class” hype. If one were to select even a slightly more reasonable standard – for example, $20 PPP, or the real living standard equivalent of a family of four in the United States with a total income above $29,200 – there is no global middle class to speak of whatsoever. Only 16 percent of humanity – 13 percent in 2001 – enjoys this standard of living, composed of the majority of the population across the West, where real substantial middle classes exist, and the elites in the South, very rarely more than 15 or 20 percent of the population, and much more often substantially less.

Still, a look at the chart does show a significant fall in the share of world population that made less than $3 a day.  This however appears largely due to “the historic wave of ‘depeasantization’ throughout the neoliberal era.”  In other words, as people are forced off the land and into urban areas they become part of the cash economy.  Whether their higher money wage compensates for their loss of access to land is another issue, one that should make us pause before declaring them better off.

More generally, the gains over the 2001 to 2011 period were driven by international processes that are now moving in reverse.  The global economy is clearly slowing.  Already declines in exports of manufactures and commodity prices are undoing past gains in poverty reduction in Asia, Africa, and Latin America.

Capitalist globalization does indeed appear to be working magic.  But, as Oxfam’s recent report shows, only for the benefit of those at the top of the income scale.

  • In 2015, just 62 individuals had the same wealth as 3.6 billion people – the bottom half of humanity. This figure is down from 388 individuals as recently as 2010.
  • The wealth of the richest 62 people has risen by 44% in the five years since 2010 – that’s an increase of more than half a trillion dollars ($542bn), to $1.76 trillion. Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the same period – a drop of 41%.
  • Since the turn of the century, the poorest half of the world’s population has received just 1% of the total increase in global wealth, while half of that increase has gone to the top 1%.
  • The average annual income of the poorest 10% of people in the world has risen by less than $3 each year in almost a quarter of a century. Their daily income has risen by less than a single cent every year.

inequality

 

World Poverty Rates Remain High

The World Bank has a new international poverty line and is celebrating the rapid decrease in the percentage of people living in poverty.  According to the World Bank, the world poverty rate will fall below 10% this year; we are on our way to ending world poverty. Unfortunately, this is a story based on misleading measurements, one that largely serves to buttress the status quo and blunt demands for real change in global economic processes.

The World Bank’s new international poverty line, announced in October 2015, is set at $1.90 per day in 2011 purchasing power parity dollars.  Before discussing the origins of that line, it is worth taking a moment to consider how low that level truly is.  As Jason Hickley explains:

How much is $1.90 per day, adjusted for purchasing power? Technically, it represents the international equivalent of what $1.90 could buy in the United States in 2011. But we know that this amount of money is inadequate to achieve even the most basic nutrition. The US Department of Agriculture calculates that in 2011 the very minimum necessary to buy sufficient food was $5.04 per day. And that’s not taking account of other requirements for survival, such as shelter and clothing.

If you multiply $1.90 times 365 you get the princely annual sum of $693.50.  Imagine living on that in the United States in 2011, and then imagine that according to the World Bank if you make more than that (or its equivalent in other countries) you are no longer to be classified as poor.

Calculating the global poverty line

Countries have their own poverty line calculated in their own respective currencies.  Having a global poverty line means (1) converting national poverty lines to a common standard and (2) finding a way to devise a single number that would have relevance for every country.

While it might be tempting to overcome the first challenge by converting every country’s national poverty line into a dollar value using the existing exchange rate between the country’s currency and the dollar, this would produce widely and rapidly fluctuating poverty lines.  Moreover many goods and services are not traded internationally and so their prices are not actually changed by exchange rate movements.

Therefore, the World Bank employs a different approach.  In broad brush, it constructs a so-called basket of consumer goods and services and determines its cost in the United States in a particular year.  Next, it attempts to determine the national costs of a similar basket in most third world countries.  Finally, it calculates a purchasing power parity exchange rate for the dollar and the currencies of these countries using these relative costs.  In theory, at least, one can then talk about a standardized purchasing power expressed in dollars.

The Bank sought to overcome the second challenge by first using purchasing power parity exchange rates to convert national poverty lines denominated in local currencies into dollars.  Bank researchers then selected, somewhat arbitrarily, the newly converted poverty lines of 15 of the lowest income countries, and determined a consensus poverty line.  It is this consensus poverty line that serves as the Bank’s international poverty line.  Finally, the Bank attempts to estimate the number of people in each country with earnings below that line.

Because the measurement process is expensive and time consuming, the Bank only makes periodic updates to its poverty line.  The 1993 purchasing power parity international poverty line was set at $1.08 a day.  The 2005 purchasing power parity international poverty line was set at $1.25 a day.  And the newly released 2011 purchasing power parity international poverty line was determined to be $1.90 a day.

The figure below, taken from a study by Rahul Lahoti and Sanjay Reddy, highlights the percentage of the world population living below the poverty line for a number of different poverty lines.  As one can see, the percentage of those living in poverty according to the Bank’s latest poverty line is rapidly falling.  In fact, the gains are even greater using the new poverty line than the previous one.

percent poverty


Problems with the Bank’s work

There are many problems with the Bank’s methodology, most importantly its framework is rather arbitrary.  Why should the Bank choose the poorest countries to set a poverty line?  As Hickley points out:

The World Bank picked the $1.90 line because it’s the average of the national poverty lines of the very poorest countries in the world, like Chad and Burundi. But it tells us very little about what poverty is like in most other countries. The bank itself admits that poverty in Latin America, for example, should be measured at about $6 a day. And yet for some reason it persists with the $1.90 line.

Perhaps even more telling there is little reason to have confidence that national poverty lines accurately capture poverty status or that the basket of goods and services used to construct the purchasing power parity exchange rates truly measure basic needs.

And then there are all the difficulties of the computations.  Many of the poorest countries do not have poverty that clearly differentiate between rural and urban poverty or national consumer price indicies, all of which require the Bank to make a number of estimates and/or use adhoc measures to make its calculations.

Moreover, it is tricky to use international poverty lines calculated in one year to measure poverty rates in past or future years.  The international poverty lines are based on prices in a base year which are shaped by the structure of the world economy in that year, while prices in different countries shift yearly in response to changing local and international conditions.  For a more complete discussion of these and other points see the above cited study by Lahoti and Reddy.

Alternative measures and poverty trends

While Lahoti and Reddy call for the construction of an alternative measure of poverty, one that relies not on income but a concrete measure of the goods and services required to live a non-poverty life, they do offer, using U.S. Department of Agricultural data, an alternative estimate of international poverty to illustrate the problematic nature of the World Bank’s work.

As they explain:

The Thrifty Food Plan produced by the US Dept. of Agriculture Center of Nutrition Policy and Promotion established, with great care, the minimum cost of achieving “Recommended Dietary Allowances” in the United States. It does so for a model family of a specified size and composition by collecting “scanner” price data from markets around the US and calculating the mathematical least cost of achieving the allowances at these prices (using linear programming techniques) and by subsequently modestly adjusting the amount to make some allowance for prevailing tastes. It then verifies that the amount suffices for cooking model recipes in a test kitchen. The allowance is based entirely on the supposition of home cooking and makes no reference to the costs of the kitchen or the cooking pots. By definition, the Thrifty Food Plan allowance does not suffice for any non-food requirement (e.g. for shelter, clothing, transportation etc.). It can therefore be taken as a lower bound on real requirements in the US. However, to take note of the possible criticism that the Thrifty Food Plan allowances are overly generous, we consider expenditure levels corresponding both to those allowances (based on per person per day costs in a family of four with two children of intermediate ages) and to half their value. In 2011, these amounts were respectively $5.04 and $2.52. These can be thought of as food poverty lines to which non-food requirements must be added, but have not been. Further, we apply both general consumption PPPs (as does the Bank) and food PPPs more appropriate to food requirements in particular. Combining these possibilities leads to four alternative poverty lines and resulting poverty estimates.

Looking at poverty trends using the $5.04 2011 Food PPP and 2011 PPP we see in the figure above that declines in poverty are quite recent, dating to 2000.  These gains no doubt reflect the high country growth rates powered by soaring commodity prices.  Those prices are now in sharp decline as are growth rates.  Regardless, the percentage of the world population below the poverty line remains extremely high, well over 50%.

The figure below shows numbers of poor rather than percentages.  These two alternative measures show increases, not decreases, in the number of poor people relative to 1980 and 1990.

number poor

Hickley offers two other poverty estimates, both of which also show levels of world poverty far higher than that claimed by the World Bank:

One option is to count poverty country-by-country using each nation’s own poverty line, with $1.90 as an absolute floor. If we did that, we would see that about 1.7 billion people remain in poverty today, which is more than 70% higher than the World Bank would have us believe.

If we want to stick with a single international line, we might use the “ethical poverty line” devised by Peter Edward of Newcastle University. He calculates that in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line. In the past, that was $5 a day. Using the bank’s new calculations, it’s about $7.40 a day. As it happens, this number is close to the average of national poverty lines in the global south.

Challenges ahead

The UN and the World Bank are strongly committed to the World Bank’s results because it allows both organizations to declare the success of their efforts.  The UN, for example, recently declared its Millennium Development Goals successfully met, thanks in large part to World Bank poverty estimates.  Now, it has launched its Sustainable Development Goals, which includes the eradication of world poverty.

The bankruptcy, perhaps better said danger, in this concerted effort to legitimate business as usual is clearly expressed in the following public letter to the UN by Noam Chomsky and other leading scholar/activists:

As the UN and the world’s governments ratify the Sustainable Development Goals (SDGs) today (September 25), we must be clear that they do not represent the best interests of the world’s majority — those that are currently exploited and oppressed within the current economic and political order.

The SDGs claim they can eradicate poverty in all its forms by 2030. But they rely primarily on global economic growth to achieve this tremendous task. If such growth resembles that seen in recent decades, it will take 100 years for poverty to disappear, not the15 years the SDGs promise. And even if this were possible in a shorter timescale, we would need to increase the size of the global economy by a factor of 12, which, in addition to making our planet uninhabitable, will obliterate any gains against poverty.

Rather than paper over such obvious madness with false hopes, we must address two critical issues head on: income inequality and endless material growth.

If poverty is to be truly overcome by 2030, then much of the improvement in the position of the impoverished must come through reduction in the enormous inequality that has accumulated in the last 200 plus years. The richest 1 percent of humanity will very soon own over half of the world’s private wealth. It would take only modest reductions in inequality to deliver large increases in the socio-economic position of the poorer half of humanity.

The SDGs do talk about reducing inequality. However, their prescription is technocratic, obscure and wholly incommensurate to the task at hand. For example, Target 10.1 states that by 2030 they will “progressively achieve and sustain income growth of the bottom 40 per cent of the population at a rate higher than the national average.” It is hard to imagine a less robust or ambitious goal. This commitment allows inequality to grow without limit until 2029, so long as it then begins to be reduced. The SDGs thus fail to endorse the only means that can achieve their stated goal of ending poverty: substantial inequality reduction, starting now. In effect, they perpetuate severe poverty and leave this fundamental problem to future generations.

The other essential task is for the world’s nations to adopt a saner measure of human progress; one that gears us not towards endless GDP growth based on extraction and consumption, but towards the wellbeing of humanity and our planet as a whole. There are plenty of options to choose from, all of which have been ignored in the SDGs. Instead, Target 17.19 says only that they will, “by 2030, build on existing initiatives to develop measurements of progress on sustainable development that complement GDP”. Another urgent challenge passed down to the next generation.

It is possible to overcome poverty in a way that respects the Earth and helps tackle climate change. The planet is abundant in wealth and its people infinitely resourceful. In order to do so, however, we must be prepared to challenge the logic of endless growth, greed and destruction enshrined in neoliberal capitalism.

It is time to envision a new operating system, based on social justice and symbiosis with the natural world. As currently formulated, the SDGs merely distract us from addressing the challenges we face.

Signed by:

Noam Chomsky, MIT
Thomas Pogge, Yale University
Naomi Klein, Author and activist
Eve Ensler, Playwright and activist
Chris Hedges, Pullitzer-prize winning journalist and author
Helena Norberg-Hodge, International Society for Ecology and Culture
Anuradha Mittal, Oakland Institute
Tom Goldtooth, Indigenous Environmental Network
Maude Barlow, Author and human rights activist
David Graeber, London School of Economics
Medha Patkar, National Alliance of People’s Movments, India
Alnoor Ladha, The Rules

 

Victory: Greece Over The Troika

It seems certain that the political economy textbooks of the future will include a chapter on the experience of Greece in 2015.

July 5, 2015, the people of Greece overwhelmingly voted NO to the Troika’s austerity ultimatum.  According to the Greek government, “61.31% of the votes for the 5th of July Referendum voted “NO” whereas 38.69% voted “YES”.  There was also a 5.8% of invalid/blank votes.  Turnout was 62.5%.”

The Greek government, led by its prime minister, Alexis Tsipras, refused to accept Troika dictates.  Instead, recognizing how important the decision was, he put the Troika’s “take it or leave it” ultimatum up to referendum.  Win or lose, that was an inspiring vote of confidence in the Greek people.  And by the extent of their participation and choice in the vote the Greek people showed that his confidence was not misplaced.

Background To The Referendum

Greece has experienced six consecutive years of recession and the social costs have been enormous.  The following charts provide only the barest glimpse into the human suffering:

Infographics / Unemployment

Infographics / Unemployment

Infographics / Social Impact

Infographics / Social Impact

Infographics / Poverty

Infographics / Poverty

While the Troika has always been eager to blame this outcome on the bungling and dishonesty of successive Greek governments and even the Greek people, the fact is that it is Troika policies that are primarily responsible.  In broad brush, Greece grew rapidly over the 2000s in large part thanks to government borrowing, especially from French and German banks.  When the global financial crisis hit in late 2008, Greece was quickly thrown into recession and the Greek government found its revenue in steep decline and its ability to borrow sharply limited.  By 2010, without its own national currency, it faced bankruptcy.

Enter the Troika.  In 2010, the European Commission, European Central Bank, and the IMF penned the first bailout agreement with the Greek government.  The Greek government received new loans in exchange for its acceptance of austerity policies and monitoring by the IMF.  Most of the new money went back out of the country, largely to its bank creditors.  And the massive cuts in public spending deepened the country’s recession.   By 2011 it had become clear that the Troika’s policies were self-defeating.  The deeper recession further reduced tax revenues, making it harder for the Greek government to pay its debts.  Thus in 2012 the Troika again extended loans to the Greek government as part of a second bailout which included . . . wait for it . . . yet new austerity measures.

Not surprisingly, the outcome was more of the same.  By then, French and German banks were off the hook.  It was now the European governments and the International Monetary Fund that worried about repayment.  And the Greek economy continued its downward ascent.

Significantly, in 2012, IMF staff eventually acknowledged that the institution’s support for austerity in 2010 was a mistake.  Simply put, if you ask a government to cut spending during a period of recession you will only worsen the recession.  And a country in recession will not be able to pay its debts.  It was a pretty clear and obvious conclusion.

But, significantly this acknowledgement did little to change Troika policy to Greece.

By the end of 2014, the Greek people were fed up.  Their government had done most of what was demanded of it and yet the economy continued to worsen and the country was deeper in debt than it had been at the start of the bailouts.  And, once again, the Greek government was unable to make its debt payments, now to Troika institutions, without access to new loans. So, they elected Syriza in January 2015 because of the party’s commitment to negotiate a new understanding with the Troika, one that would enable the country to return to growth, which meant an end to austerity and debt relief.

Syriza entered the negotiations hopeful that the lessons of the past had been learned.  But no, the Troika refused all additional financial support unless Syriza agreed to implement yet another round of austerity.  What started out as negotiations quickly turned into a one way scolding.  The Troika continued to demand significant cuts in public spending to boost Greek government revenue for debt repayment.  Syriza eventually won a compromise that limited the size of the primary surplus required, but when they proposed achieving it by tax increases on corporations and the wealthy rather than spending cuts, they were rebuffed, principally by the IMF.

The Troika demanded cuts in pensions, again to reduce government spending.  When Syriza countered with an offer to boost contributions rather than slash the benefits going to those at the bottom of the income distribution, they were again rebuffed.  On and on it went.  Even the previous head of the IMF penned an intervention warning that the IMF was in danger of repeating its past mistakes, but to no avail.

Finally on June 25, the Troika made its final offer.  It would provide additional funds to Greece, enough to enable it to make its debt payments over the next five months in exchange for more austerity.   However, as the Greek government recognized, this would just be “kicking the can down the road.”  In five months the country would again be forced to ask for more money and accept more austerity.  No wonder the Greek Prime Minister announced he was done, that he would take this offer to the Greek people with a recommendation of a no vote.

Here is the New York Times version of events:

ATHENS — Last Friday morning [June 26], the Greek prime minister, Alexis Tsipras, gathered his closest advisers in a Brussels hotel room for a meeting that was meant to be secret. All the participants had to leave their phones outside the door to prevent leaks.

A week of tense negotiations between Greece and its creditors was coming to an end. And it was becoming increasingly clear to the left-leaning prime minister that he could not accept the tough economic terms that his lenders were demanding in exchange for new loans.

As Mr. Tsipras paced and listened on the 25th floor of the hotel, his top aides argued that neither Germany nor the International Monetary Fund wanted an agreement and that they were instead pushing Greece into default and out of the euro.

The night before, at a meeting of eurozone leaders at the European Union’s headquarters, Mr. Tsipras had asked Chancellor Angela Merkel of Germany about including debt relief with a deal, only to be rebuffed again.

This is going nowhere, the 40-year-old Greek leader said in frustration, according to people who were in the room with him. The more we move toward them, the more they are moving away from us, Mr. Tsipras said.

After hours of arguing back and forth about possible responses, Mr. Tsipras made a decision to get on a plane and go home to call a referendum, according to the people who were in the room. . . .

But a close look at the events of the last week — based on interviews with some of the participants and others briefed on the discussions — reveals an accumulation of slights, insults and missed opportunities between Greece and its creditors that led the prime minister to conclude that a deal was not possible, regardless of any concessions he might make.

Greece’s creditors see it differently, of course. In their view, Mr. Tsipras, who swept into power on a wave of anti-austerity support, was only interested in a deal that would go light on austerity measures and deliver maximum debt relief. He could not and would not comply with any agreement that required more sacrifices from the Greek people.

Still, for a week that ended with so much enmity, its start was auspicious.

That Monday, June 22, Greece’s technical team in Brussels submitted an eight-page proposal to their counterparts. The paper was an effort to bridge a six-month divide on how Greece planned to sort out its future finances.

For political reasons, the Tsipras government had said it would not cut pensions or do away with tax breaks that favored businesses serving tourists on the Greek islands. Instead, the new Greek plan envisaged a series of tax increases and increases in pension contributions to be borne by corporations.

The initial response seemed positive. Both Pierre Moscovici, a senior finance official at the European Commission who is known to be sympathetic toward Greece, and Jeroen Dijsselbloem, the head of Europe’s working group of finance ministers who is one of Greece’s harshest critics, said on Tuesday that the plan was promising.

The Greek team was elated. For the first time, the Greek numbers were adding up.

The next morning, though, that optimism evaporated.

Greece’s creditors — the I.M.F., the other eurozone nations and the European Central Bank — sent the Greek paper back and marked it in red where there were disagreements.

The criticisms were everywhere: too many tax increases, unifying value-added taxes, not enough spending cuts and more cuts needed on pension reforms.

The Greek team couldn’t believe it. The creditors had seemed to dial everything back to where the talks were six months ago. . . .

Instead of bending as the deadline neared for Greece to make a payment of 1.5 billion euros to the I.M.F., Germany and the fund appeared to be hardening their positions.

On Wednesday night, Greece was presented with a counterproposal. At the behest of the I.M.F., the tax increases had been reduced and, crucially, the government was told that it needed to increase value-added taxes on hotels.

Moreover, several requests by the Greeks to discuss debt relief had been rejected — you need to agree to reforms first, they were told.

On Thursday, Mr. Varoufakis and Mr. Tsipras agreed that they could not present this latest proposal to their cabinet back in Athens. In recent weeks, radical factions within the ruling Syriza party in Greece had become more vocal in opposing any deal that crossed certain lines on pensions and taxes.

Moreover, some within Syriza were even pushing Mr. Tsipras to walk away from Europe altogether and return to the drachma, an approach that the prime minister and Mr. Varoufakis had promised never to consider. . . .

Mr. Schäuble began criticizing Mr. Moscovici, the senior European Commission official, over his positive comments regarding the Greek offer.

Even the latest proposal from the creditors was too lenient toward the Greeks, Mr. Schäuble argued, saying that he saw little chance that he could get it past the German Bundestag, the national parliament of the Federal Republic of Germany.

The only solution here is capital controls, he said, his voice rising.

But Mr. Varoufakis persisted on the issue of Greece’s staggering debt load, ignoring the admonitions of Mr. Dijsselbloem and others.

Then Mr. Varoufakis turned on Christine Lagarde, the French director of the I.M.F.

Five years ago, the fund had given its blessing to the first bailout, doling out loans alongside Europe despite internal misgivings that Greece would be in no position to repay them.

Now the I.M.F. was pushing Greece to sign up to yet another austerity program to access more loans even though the fund had now concluded that their initial misgivings were correct: Greece’s debt was unsustainable.

I have a question for Christine, Mr. Varoufakis said to the packed hall: Can the I.M.F. formally state in this meeting that this proposal we are being asked to sign will make the Greek debt sustainable?

Yanis has a point, Ms. Lagarde responded — the question of the debt needs to be addressed. (A spokesman for the fund later said that this was not an accurate description of the exchange.)

But before she could explain, she was interrupted by Mr. Dijsselbloem.

It’s a take it or leave it offer, Yanis, the Dutch official said, peering at him through rimless spectacles.

In the end, Greece would leave it.

The Referendum

Almost immediately after the Greek government announced its plans for a referendum, the leaders of the Troika intervened in the Greek debate.  For example, as the New York Times reported:

By long-established diplomatic tradition, leaders and international institutions do not meddle in the domestic politics of other countries. But under cover of a referendum in which the rest of Europe has a clear stake, European leaders who have found Mr. Tsipras difficult to deal with have been clear about the outcome they prefer.

Many are openly opposing him on the referendum, which could very possibly make way for a new government and a new approach to finding a compromise. The situation in Greece, analysts said, is not the first time that European politics have crossed borders, but it is the most open instance and the one with the greatest potential effect so far on European unity. . . .

Martin Schulz, a German who is president of the European Parliament, offered at one point to travel to Greece to campaign for the “yes” forces, those in favor of taking a deal along the lines offered by the
creditors.

On Thursday, Mr. Schulz was on television making clear that he had little regard for Mr. Tsipras and his government. “We will help the Greek people but most certainly not the government,” he said.

European leaders actually actively worked to distort the terms of the referendum.  Greeks were voting on whether to accept or reject Troika austerity policies yet the Troika leaders claimed the vote was on whether Greece should remain in the Eurozone.  In fact, there is no mechanism for kicking a country out of the Eurozone and Syriza was always clear that it was not seeking to leave the zone.   As the Guardian explained:

One day before Greece’s bailout ends and the country’s financial lifeline melts away, Europe’s big guns have lined up one after another to tell the Greeks unequivocally that voting no in Sunday’s referendum means saying goodbye to the euro.

There was no mistaking the gravity of the situation now facing both Greece and Europe on Monday. Leaders were by turns ashen-faced, resigned, desperate and pleading with Athens to think again and pull back from the abyss.

There were also bitter attacks on Alexis Tsipras, the young Greek prime minister whose brinkmanship has gone further than anyone believed possible and left the eurozone’s leaders reeling.

One measure of the seriousness of the situation could be gleaned from the leaders’ schedules. In Berlin, Brussels, Paris and London, a chancellor, two presidents and a prime minister convened various meetings of cabinet, party leaders and top officials devoted solely to Greece.

The French president, François Hollande, was to the fore. “It’s the Greek people’s right to say what they want their future to be,” he said. “It’s about whether the Greeks want to stay in the eurozone or take the risk of leaving.”

Athens insists that this is not what is at stake in the highly complicated question the Greek government has drafted for the referendum, but Berlin, Paris and Brussels made plain that the 5 July vote will mean either staying in the euro on their tough terms or returning to the drachma.

In what was arguably the biggest speech of his career, the president of the European commission, Jean-Claude Juncker, appeared before a packed press hall in Brussels against a giant backdrop of the Greek and EU flags.

He was impassioned, bitter and disingenuous in appealing to the Greek people to vote yes to the euro and his bailout terms, arguing that he and the creditors – rather than the Syriza government – had the best interests of Greeks at heart.

Tsipras had lied to his people, deceived and betrayed Europe’s negotiators and distorted the bailout terms that were shredded when the negotiations collapsed and the referendum was called, he said.

“I feel betrayed. The Greek people are very close to my heart. I know their hardship … they have to know the truth,” he said.

“I’d like to ask the Greek people to vote yes … no would mean that Greece is saying no to Europe.”

In a country where the hardship wrought by austerity brought a sharp increase in suicides, Juncker offered unfortunate advice. “I say to the Greeks, don’t commit suicide because you’re afraid of dying,” he said.

Juncker’s extraordinary performance sounded and looked as if he were already mourning the passing of a Europe to which he has dedicated his long political career. His 45-minute speech was both proprietorial and poignant about his vision, which seems to be giving way to a rawer and rowdier place.

That was clear from the trenchant remarks of Sigmar Gabriel, Germany’s vice-chancellor and the head of the country’s Social Democratic party. He coupled the Greek situation with last week’s foul tempers over immigration and said that Europe faces its worst crisis since the EU’s founding treaty was signed in Rome in 1957.

Gabriel was the first leading European politician to voice what many think and say privately about Tsipras – that the Greek leader represents a threat to the European order, that his radicalism is directed at the politics of mainstream Europe and that he wants to force everyone else to rewrite the rules underpinning the single currency.

The unspoken message was that Tsipras is a dangerous man on a mission who has to be stopped.

Standing alongside his boss, Angela Merkel, as if to send a joint nonpartisan national signal from Germany, Gabriel said that if the Greek people vote no on Sunday, they would be voting “against remaining in the euro”.

Unlike Juncker and Hollande, who pleaded with the Greek people to reject Tsipras’s urging of a no vote, the German leaders sounded calmly resigned to the rupture.

For Merkel, it was clear that the single currency’s rulebook was much more important than Greece. In this colossal battle of wills, Tsipras could not be allowed to prevail.

Having whipped up popular fears of an end to the euro, some Greeks began talking their money out of the banks.  On June 28, the European Central Bank then took the aggressive step of limiting its support to the Greek financial system.

This was a very significant and highly political step.  Eurozone governments do not print their own money or control their own monetary systems.  The European Central Bank is in charge of regional monetary policy and is duty bound to support the stability of the region’s financial system.  By limiting its support for Greek banks it forced the Greek government to limit bank withdrawals which only worsened economic conditions and heightened fears about an economic collapse.  This was, as reported by the New York Times, a clear attempt to influence the vote, one might even say an act of economic terrorism:    

Some experts say the timing of the European Central Bank action in capping emergency funding to Greek banks this week appeared to be part of a campaign to influence voters.

“I don’t see how anybody can believe that the timing of this was coincidence,” said Mark Weisbrot, an economist and a co-director of the Center for Economic and Policy Research in Washington. “When you restrict the flow of cash enough to close the banks during the week of a referendum, this is a very deliberate move to scare people.”

Then on July 2, 3 days before the referendum, an IMF staff report on Greece was made public.  Echos of 2010, the report made clear that Troika austerity demands were counterproductive.  Greece needed massive new loans and debt forgiveness.  The Bruegel Institute, a European think tank, offered the following summary and analysis of the report:

On July 2, the IMF released its analysis of whether Greek debt was sustainable or not.  The report said that Greek debt was not sustainable and deep debt relief along with substantial new financing were needed to stabilize Greece. In reaching this new assessment, the IMF stated it had learned many lessons. Among them: Greeks would not take adequate structural reforms to spur growth, they would not sell enough of their assets to repay their debt, and they were unable to undertake sufficient fiscal austerity. That left no choice but to grant Greece greater debt relief and to provide new financing to tide Greece over till it could stand on its own feet. The relief, the IMF, says must be provided by European creditors while the IMF is repaid in whole.

The IMF’s report is important because it reveals that the creditors negotiated with Greece in bad faith.  For months, a haze was allowed to settle over the question of Greek debt sustainability. The timing of the report’s release—on the eve of a historic Greek referendum, well after the technical negotiations have broken down—suggests that there was no intention to allow a sober analysis of the Greek debt burden. Paul Taylor of Reuters tells us that the European authorities worked hard to suppress it and Landon Thomas of the New York Times reports that, until a few days ago, the IMF had played along.

As a result, the entire burden of adjustment was to fall on the Greeks before any debt reduction could even be contemplated. This conclusion was based on indefensible economic logic and the absence of the IMF’s debt sustainability analysis intentionally biased the negotiations. . . .

But, of course, as the IMF now makes clear, if a country has to repay about 4 percent of its income each year over the next 40 years and that country has poor growth prospects precisely because repaying that debt will lower growth, then debt is not sustainable. If this report had been made public earlier, the tone of the public debate and the media’s boorish stereotyping of Greeks and its government would have been balanced by greater clarity on the Greek position.

But the problem with the IMF report is much more serious. Its claims to having learned lessons from the past years are as self-serving as its call on other creditors to provide the debt relief. The report insistently points at the Greek failings but fails to ask if the creditors misdiagnosed the Greek patient and continued to damage Greek economic recovery. Protected by the authority and respect that the IMF commands, it is easy to lay the blame on the Greeks whose rebuttals are treated as more hysterical outbursts of an (ultra) “radical” government. . . .

This is why the IMF’s latest report is disingenuous. The report says that growth in Greece has failed to materialize because Greeks are incapable of undertaking sustained structural reforms. There is so much that is wrong with that statement. First, my colleague Zsolt Darvas of Bruegel argues persuasively that the Greeks have, in fact, undertaken significant structural reform. He notes that the “Doing Business” index has improved materially and labor markets are now more flexible than in Germany. Second, the IMF had set unrealistically high expectations of structural reforms: productivity was to jump from the lowest in the euro area to among the highest in a short period of time and labor participation rates were to jump to the German level. Again, the IMF’s own research department cautions that the dividends from structural reforms are weak and take time to work their way through (see box 3.5 in this link). The debt-deflation cycle works immediately. If it has taken decades for Greece to reach its low efficiency levels, it was irresponsible to assume that early reforms would turn it around in a few years. Finally, when an economy spirals down in a debt-deflation cycle, demand falls and that, in itself, will show up in the less productive use of resources. So, it is even possible that productivity has increased more but is being drowned by shrinking demand.

In other words, the leaders of the Troika were insisting on policies that the IMF’s own staff viewed as misguided.  Moreover, as noted above, European leaders desperately but unsuccessfully tried to kill the report.  Only one conclusion is possible: the negotiations were a sham.

The Troika’s goals were political: they wanted to destroy Syriza because it represented a threat to a status quo in which working people suffer to generate profits for the region’s leading corporations.  It apparently didn’t matter to them that what they were demanding was disastrous for the people of Greece.  In fact, quite the opposite was likely true: punishing Greece was part of their plan to ensure that voters would reject insurgent movements in other countries, especially Spain.

The Vote

And despite, or perhaps because of all of the interventions and threats highlighted above, the Greek people stood firm.  As the headlines of a Bloomberg news story proclaimed: “Varoufakis: Greeks Said ‘No’ to Five Years of Hypocrisy.”

The Greek vote was a huge victory for working people everywhere.

Now, we need to learn the lessons of this experience.  Among the most important are: those who speak for dominant capitalist interests are not to be trusted.  Our strength is in organization and collective action.  Our efforts can shape alternatives.

 

 

A Test Of Power In Brussels

There is a lot to learn from the standoff in Brussels between Syriza and the Troika (European Commission, European Central Bank, and the IMF) over whether the latter will release the last tranche of bailout funds to the former.  Perhaps the most important lesson is that “politics” triumphs “economics.”  Said differently, Troika leaders are determined to crush any movement, regardless of human cost, that threatens dominant capitalist interests.  In this case, the threat is a popular and successful Syriza and its demonstration effect on class awareness and movements in other European countries, especially Spain, Portugal, and Ireland.

Alex Tsipras, the Greek Prime Minister, understands this.  The following is from a Guardian story:

Greece’s prime minister has said the International Monetary Fund has “criminal responsibility” for the country’s debt crisis as it emerged Athens could miss a €1.6bn (£1.15bn) payment to the lender this month.

Speaking in the Greek parliament Alexis Tsipras called on creditors to reassess the IMF’s insistence on tough cuts as part of the country’s bailout.

“The time has come for the IMF’s proposals to be judged not just by us but especially by Europe,” he said. “Right now, what dominates is the IMF’s harsh views on tough measures, and Europe’s on denying any discussion over debt viability.”

He added: “The fixation on cuts … is most likely part of a political plan … to humiliate an entire people that has suffered in the past five years through no fault of its own.”

The Greek government is running big national budget and trade deficits and is deeply in debt to Troika institutions.  Making these problems worse is the fact that Greece no longer prints its own money, having adopted the euro as its currency in 2001.  Quite simply, as things stand, without a new infusion of funds the government will find it impossible to pay its international debts and support the country’s economic activity. It is this position of weakness that allows the Troika leadership to present Syriza with a “take it or leave it” ultimatum of more austerity, privatizations, and labor market liberalization in exchange for a new loan.

A Little History

Greece didn’t get into this mess overnight or on its own.  The country joined the euro area in 2001, after finally convincing the European Commission that it met the eurozone’s requirements of a budget deficit below 3% of GDP and a national debt below 60% of GDP.  In 2004, Greece finally admitted that it had fudged the figures and had continuously run a greater budget deficit than was allowed.  It was later revealed that Goldman Sachs was a key player in the chicanery.

The European Commission responded to this admission by placing Greece under monitoring and requiring the Greek government to slash public spending.  Greece, it is important to add, was not the only country to have busted these deficit limits—Germany and France, for example, also recorded deficits over the 3% limit–but it was, as far as we know, the only one to manipulate its data.

By 2006 Greece was growing again and in compliance with European Commission deficit rules.  However, the Greek economy remained fragile despite relatively high rates of growth over much of the decade.  Greek growth depended upon debt fueled housing construction and public sector spending.  Its industrial base remained weak as the country experienced an ever growing trade deficit, in large part a consequence of a German export offensive built on a common eurozone currency and wage suppression. In turn, a growing share of the borrowed funds supporting Greek growth came from German and French banks who recycled export earnings back to Greece.

When the global financial crisis exploded in 2008, the Greek economy quickly collapsed.  A sharp recession in 2009 pushed the country’s deficit to over 12.5% of GDP. Greek national debt also soared, leaving the country with the highest debt ratio in the eurozone, over 120% of GDP.

Greece was again put under EU supervision and its government pressed to again slash spending to reduce the public sector deficit and, by extension, its reliance on borrowed funds.  However, the rapidly expanding global economic crisis froze international financial markets, and by early 2010 it was clear that the Greek government would not be able to borrow enough to meet its debt obligations.  In April, after considerable delay due to German resistance, the European Commission finally agreed to establish a bailout fund for Greece with the participation of the IMF.  Eurozone countries agreed to provide 30 billion euros and the IMF an additional 15 billion if Greece accepted monitoring and a tough IMF crafted austerity plan.

This was too little too late.  In May, the European Commission, European Central Bank, and the IMF were forced to put together a much larger bailout package.  Here is the Guardian report of the deal:

European countries stepped into uncharted territory tonight, deciding on the first bailout of a single currency member state by agreeing a three-year package worth 110bn euros (£95bn) to rescue Greece from financial meltdown in return for pledges on the most drastic overhaul of a European economy ever attempted.

Finance ministers from the 16 countries using the single currency met yesterday in Brussels to seal the pact following months of sitting on the fence and two weeks of tough negotiations in Athens involving the International Monetary Fund, the European commission, and the European central bank . . . .

With Greece’s debt relegated to junk status and the country staring at Europe’s first sovereign debt default without the bailout, European leaders sought to put the months of foot-dragging and squabbling behind them to try to shore up the euro and prevent the debt crisis rippling across to Portugal, Spain and Italy.

Of the €110bn over three years, the other 15 euro countries are to supply €80bn in bilateral loans, while the IMF puts up the remaining €30bn. Rehn said that the “systematic, specific, and rigorous” bailout plan came with strings attached tightly, including quarterly monitoring of Greek austerity measures. He revealed the deal required Greece to slash its soaring budget deficit by 6.5% this year alone, a staggering feat if it can be achieved.

The deficit is currently 14% and is to be under 3% by 2014. Several countries need to take the rescue package through parliaments. This is to be done swiftly over the next week, said Jean-Claude Juncker, the Luxembourg leader and chair of the eurogroup, so that the first funds can be released before 19 May when Greece needs to redeem debt of €8.5bn.

It is uncharted territory. The euro rulebook proscribes bailouts of profligate member states and many leaders, foremost Angela Merkel of Germany, are queasy about coming to Athens’ rescue.

In return for the lifeline, Papandreou has committed to the most ambitious and draconian reshaping of Greece’s welfare state ever attempted. Spending cuts amounting to more than €36bn or 11% of national GDP are to be made over the next three years. Wages, pensions, and benefits in Greece’s bloated public sector will be cut, and large VAT and other tax rises will be imposed. The retirement age is to be raised. The savage program will inevitably deepen Greece’s recession.

The Greek government dutifully slashed spending in response to Troika mandates but the result was self-defeating.  Cutting spending in the midst of a recession only deepened the country’s decline, reducing government revenue and therefore doing little to narrow the budget deficit.  Greece’s economy contracted by -0.4% in 2008, -4.4% in 2009, -5.4% in 2010, -8.9% in 2011, and -6.6% in 2012.  Its budget deficit as a percent of GDP was -10.4% in 2010, -9.9% in 2011, and -9.4 in 2012.

In March 2012, the Troika was forced to extend its first bailout.  As the New York Times explains:

After months of tortuous and tense negotiations, a second bailout for Greece finally became a reality  . . . when euro zone nations formally approved the plan and authorized the release of the first multibillion-euro loan installment.

In a statement, Jean-Claude Juncker, who, as the president of the Eurogroup, leads the finance ministers of the 17 European Union members that use the euro, said the national governments had formally approved Greece’s second rescue, which is valued at 130 billion euros ($170 billion). “All required national and parliamentary procedures have been finalized,” he said. . . .

A first installment of 39.4 billion euros ($51.4 billion) in loans will be disbursed from the euro zone’s temporary bailout fund, the European Financial Stability Facility.

The board of the International Monetary Fund is scheduled to meet on Thursday and is expected to agree to contribute 28 billion euros ($37 billion) to the package.

Greece will not be handed a blank check. The bailout loans will be paid in installments, and each tranche of aid will be conditional on the government in Athens hitting goals and completing structural changes to its economy, including the privatization of state-owned assets.

If the reform program is successful, Greece’s debt level by 2020 could be slightly lower than once expected, according to the latest projections, though it would still equal 116.5 percent of gross domestic product.

In all, Greece is expected to receive almost 173 billion euros ($226 billion) from international lenders, taking into account the new bailout and loans from its first rescue package, granted in 2010.

This program was supposed to run through the end of 2014 but was extended again after the election of Syriza in January 2015.  It is the last payment from the 2012 bailout that is at the center of current talks between the Troika and Syriza.  The Troika is withholding this payment until Syriza agrees to abide by the same policies approved by the previous Greek government, which means that Syriza must agree to more budget cuts, privatizations, and labor market liberalization.  Without the money, Syriza will be unable to make its June payment to the IMF and July payment to the European Commission, an outcome that would likely force the country out of the eurozone and into uncharted waters.

Syriza, for its part, having been elected to office on its anti-austerity platform, has refused these terms, proposing instead a different plan of action, one which includes permission to increase both its public spending and taxes on the wealthy, strengthen labor rights, and support re-industrialization.  It also seeks an actual debt reduction to lighten the load that the sizeable debt payments place on the country’s recovery.  It argues that agreeing to continue with the same Troika policies that have been in place since 2010 will only produce the same result: economic decline and unsustainable budget and debt loads, necessitating yet more borrowing.

Trokia Politics

Germany and the IMF have taken leadership in demanding that Syriza toe the line. Angela Merkel and Christine Lagarde argue that their demand for austerity is based on sound economics, but history has shown the folly of their position.  In fact, even IMF staff acknowledge that Troika demands are counterproductive. As the economic journalist Ambrose Evans-Pritchard explains:

The IMF knows that Greece cannot possibly pay [down its debts] by draconian austerity – the policy already implemented for five years with such self-defeating effects – and the longer it pretends otherwise, the more its authority drains away. . . .

The IMF enforced brute liquidation without compensating stimulus or relief. It claimed that its policies would lead to a 2.6pc contraction of GDP in 2010 followed by brisk recovery.

What in fact happened was six years of depression, a deflationary spiral, a 26pc fall in GDP, 60pc youth unemployment, mass exodus of the young and the brightest, chronic hysteresis that will blight Greece’s prospects for a decade to come, and to cap it all the debt ratio exploded because of the mathematical – and predictable – denominator effect of shrinking nominal GDP.

It is a public policy scandal of the first order. One part of the IMF has issued a mea culpa admitting that its own analysts misjudged the fiscal multiplier badly. Plaudits to them.

Another part of the Fund continues to push new variants of the same indefensible policies, demanding a combined fiscal squeeze from pension cuts and VAT rises equal to 1pc of GDP this year and 2pc next year even as the economy lurches back into recession.

Ashoka Mody, former chief of the IMF’s bail-out in Ireland, refuses to criticize his former colleagues on the European desk, but the meaning of [his] words are clear enough.

“Everything that we have learned over the last five years is that it is stunningly bad economics to enforce austerity on a country when it is in a deflationary cycle. Trauma patients have to heal their wounds before they can train for the 10K.”

“I am frankly shocked that we are even having a discussion about raising VAT at all in these circumstances. We have just seen a premature rise in VAT knock the wind out of a country as strong as Japan.”

“Syriza should recruit the IMF’s research department to be their spokesman because they are saying almost exactly the same thing as Syriza on the economics of this. The entire strategy of the creditors is wrong and the longer this goes on, the more is its going to cost them.”

The IMF’s Original Sin in Greece was to allow the urbane Parisian Dominique Strauss-Kahn to hijack the institution to prop up Europe’s monetary union and the European banking system when the crisis erupted in 2010.

The Fund’s mission is to save countries, not currencies or banks, and it certainly should not be doing dirty work for a rich currency union that is fully capable of sorting out its own affairs, but refuses to do so for political reasons.

It was of course a difficult moment in May 2010. The eurozone was spinning out of control. There were no backstop defences – due to the criminal negligence of Europe’s leaders and banking regulators – and fears of a euro-Lehman were all too real.

Yet leaked minutes from the IMF board meetings showed that all the emerging market members (and Switzerland) opposed the terms of the first loan package for Greece. They protested that it was intended to save the euro, not Greece.

It loaded yet more debt onto the crushed shoulders of an already bankrupt country, and further complicated the picture by allowing one large French bank and one German bank – no names please – to offload much of their €25bn combined exposure onto EMU taxpayers.

“Debt restructuring should have been on the table,” said Brazil’s member. The loans “may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions”.

Arvind Virmani, India’s member, was prophetic. “The scale of the fiscal reduction without any monetary policy offset is unprecedented. It is a mammoth burden that the economy could hardly bear,” he said.

“Even if, arguably, the program is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment and falling fiscal revenues that could eventually undermine the program itself.” This is exactly what has happened.

Pensions

The Troika have taken direct aim at Greek pensions, well-aware that Syriza has said that it will not accept any agreement that requires them to further reduce payouts, especially to those at the bottom of the income distribution.   The situation is well described by the economist Michael Roberts:

The callous disregard of the poverty of Greeks, particularly the old, is shown in the statement of IMF chief economist Olivier Blanchard in a blog post.  Blanchard blithely pontificates “we believe that even the lower new [deficit] target cannot be credibly achieved without a comprehensive reform of the value-added tax (VAT) – involving a widening of its base – and a further adjustment of pensions.  Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners”.

But Blanchard’s demand will not protect the ‘poorest’ pensioners as it involves a cut in EKAS, the pension fund for those on lower incomes. A recent poll revealed that 52% of Greek households claimed their main source of income is pensions. This is not because so many people are ‘gaming’ the system and drawing on pensions; it is more because so many Greeks are unemployed without qualifying for benefits or employed but not being paid. If pensions are cut further, a lot of Greek households will really suffer at a time when the economy will likely continue to shrink.  10,000 Greeks have taken their own lives over the past five years of crisis, according to Theodoros Giannaros, a public hospital governor, whose own son committed suicide after losing his job.

The myth that Greeks are all living off the state and sunning themselves on the beaches with their early retirement pensions – something peddled by the Troika and politicians in northern Europe to their electorates – is just that, a Greek myth.  Yes, pensions amount to 16% of GDP, making Greece appear to have the most expensive pension system in Europe.  But this is partly because Greek GDP has dropped so much in the last five years.  Moreover, Greece’s high spending is largely the result of bad demographics: 20% of Greeks are over age 65, one of the highest percentages in the Eurozone.  If you adjust for this by looking at pension spending per person over 65, then Greek pension outlays are below the Euro average.

But the facts don’t matter.  The Troika continues to reject a series of compromises offered by Syriza, pushing the Greek government to the wall on pensions, taxes, privatization, labor policy and more.

A Test Of Power

Alexis Tsipras, the Greek Prime Minister, voiced his frustration with the talks and determination to keep his party’s election promises in a recent Le Monde article.  The main points of the piece are summarized by the economic journalist Paul Mason:

The key passage is Mr Tsipras’ claim that the tax and spending changes Syriza wants “will increase revenues, and will do so without having recessionary effects since they do not further reduce active demand or place more burdens on the low and middle social strata”. –

Basically the Greek government believes there can be non-austerity fiscal discipline and the lenders do not. And that is why Greece remains, for all the emollience in Tsipras article, on a collision course with its lenders.

And here is where Tsipras’ article gets interesting. He accuses that faction among the lenders that is blocking progress – implicitly the German finance ministry and its hardline allies on the ECB – of wanting to create a “two-speed Europe”:  “where the ‘core’ will set tough rules regarding austerity and adaptation and will appoint a ‘super’ Finance Minister of the EZ with unlimited power, and with the ability to even reject budgets of sovereign states that are not aligned with the doctrines of extreme neoliberalism. For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency”.

In other words, what is taking place in Brussels is not about economics, it is about politics, or better said domination.  The Troika want a different regime in power in Greece, one subservient to their interests. Its leaders hope that the economic pressure they are applying during a period of renewed recession will cause the Greek people to abandon Syriza, or as a second best, that Syriza will break and discredit itself by agreeing to Troika demands.

How this ends isn’t clear.  If Syriza holds firm the Troika have to weigh the gains and losses from having its bluff called. A bankrupt Greece cut free from the euro could cause international investors to become fearful about the stability of Spain or Italy, leading to capital flight from those countries and the eventual unraveling of the entire eurozone project.  The survival of Syriza and the revitalization of the Greek economy will depend heavily on how well its supporters understand what is at stake.

Taxes and Militarism

Tax day has come and gone.  And there is indeed a lot to complain about: our corporations and the wealthy have successfully minimized their own tax responsibilities, leaving us to support a powerful and profitable military-national-security-industrial complex at the expense of needed public services and social programs.

Let’s start with who pays taxes.  Individuals and corporations both pay income taxes to the federal government.  However, as the chart below shows, corporations have been able to take advantage of increasingly lenient income tax laws and a corporate friendly globalization process to significantly lower their tax obligations.  If we add payroll taxes which are paid by individuals to support specific programs like Social Security and Medicare, the overall individual contribution is approximately 80% and the corporate share about 11%.

ind_and_corp_tax_line_chart_large

Lower corporate taxes were supposed to unleash the power of the market and make us all better off.  Unfortunately, but not surprisingly, all they have done is boost corporate profits at the public expense.

Of course, income tax burdens are not equally divided among individuals.  In fact, our federal income tax code has become increasingly favorable to higher income earners.  As the next chart shows, the top marginal income tax rate has been dramatically reduced.  The top marginal tax rate was 50 percent in the mid-1980s and even higher in the 1950s.  Currently, the top rate is 39.6 percent; it is paid by individuals making more than $406,750 and couples making more than $457,600.  And then there are tax breaks that disproportionately benefit top income earners.

11economist--folbre2-blog480

The combination of more income going to top earners, lower top marginal tax rates, and specially crafted tax breaks cannot help but reduce federal tax revenues and drive up our federal deficits.

The payment of income taxes is one thing—how the federal government uses the money it receives is another.  As we see next, military related activities absorb a heavy share of federal spending.

tax_dollor,_labels_edited_large

Direct spending on the military accounted for 27 cents of every dollar spent.  Including spending for veterans benefits and approximately two-thirds of the interest on the federal debt adds another 16.05 cents, which brings the overall military total to 43.05 cents out of every dollar spent.  This is a conservative estimate because it does not include spending on activities that fall under the broader heading of national security such as homeland security and certain “foreign aid” expenditures.  No wonder our infrastructure and social programs are starved for funds.

Federal spending can be divided into non-discretionary and discretionary items.  In the case of the former, spending is mandated by law, such as payment of the national debt.  In the case of the latter, the federal government has discretion in how it spends our tax money.  Looking just at discretionary spending reveals even more clearly the dominant position of the military in our budget priorities.

discretionary-desk

Moreover, political pressure keeps working to push the military share higher.  Both House and Senate budget proposals call for spending some $530 billion on defense in Fiscal Year (FY) 2016.  That is the most that can be spent without triggering automatic spending cuts due to sequestration.  But – happily for the military – there is an exception to the sequestration process.

The exception allows Congress to authorize unlimited spending for current military operations or what is officially known as Overseas Contingency Operations.  House and Senate proposals include more than $90 billion under this heading.  Significantly, there is no similar exception when it comes to spending on non-military, discretionary items.  Apparently our non-military needs don’t rise to the same level of urgency as our military ones.

A few key changes in the tax code and federal spending priorities and a better 2016 tax day is not hard to imagine.