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.

Greece Versus The Troika

The Greek drama continues to play out.  Greece is supposed to make a 1.6 billion euro loan payment to the IMF by June 30.  The Syriza-led government says unless the Troika—The European Commission, European Central Bank, and International Monetary Fund (IMF)—releases the 7.2 billion euros authorized as part of the 2012 Greek bailout agreement it won’t have enough money to pay the IMF.  And it also won’t be able to make a July loan payment to the European Central Bank.

The Troika is adamant that the money will only be transferred to the Greek government if Syriza agrees to abide by the terms set by the past bailout, which was itself an extension of a 2010 bailout.  Those terms include further rounds of austerity, privatization, and labor market liberalization.  But that is the problem.  As the Levy Institute explains, these bailout terms are largely responsible for years of economic crisis (see Figures 1 and 2):

Estimates of real output for the Greek economy, published by the Hellenic Statistical Authority (ElStat), showed some signs of recovery up to 2014Q3, after six long years of uninterrupted fall in output, even though the fourth quarter of 2014 and preliminary estimates for the first quarter of this year show a reversal that, if it continues in the second quarter, will indicate the economy has slipped back into recession. Real output, at the end of 2014, was below its 2000 level, marking a more than 26 percent drop from its peak in 2007, while an even larger fall—30 percent—in employment has been recorded. More than one million workers have lost their jobs relative to the previous peak in 2008, with an increase of 800,000 unemployed—the total now stands above 1.2 million—while the active population is shrinking, as workers leave the country in search of better opportunities abroad.

Capture (1)

The Los Angeles Times provides a more ground level view of the devastation:

Estimates vary, but some experts peg the number of new homeless as high as 20,000. Moreover, nearly 20% of Greeks no longer have enough money to cover daily food expenses, according to a recent study by the Organization for Economic Cooperation and Development. The nation’s unemployment rate is 26%, the highest among 28 European Union members.

At Athens’ many apartment buildings, stories are rampant of people delinquent on so many months of rent that they simply leave behind keys and furniture, sneaking out in the middle of the night.

Until five years ago, it was hard to imagine masses of people living on the streets here; homelessness was so negligible that almost no one even bothered to measure. At the time, this was a strong welfare state with a rich tradition of family bonds. But austerity has eroded the former, and economic recession has frayed the latter.

The crisis has played out in a kind of domino effect. What might begin as a hard-luck case or two soon cascades through families and social groups. At some point there are too few roofs for too many relatives or friends.

The Greek people elected Syriza precisely because the austerity policies promoted by the Troika have left their country devastated.  See the video below for a five minute history of the forces propelling Syriza’s January 2015 election victory.  To this point, Syriza has offered several proposals involving compromises of its initial position.  However, these have all been rejected.  Syriza, for its part, continues to reject the Troika’s “take it or leave it” demand.

Experts claim that if Greece defaults on its loan to the IMF the government will be unable to sustain the country’s economic activity; Greece no longer prints its own currency so the government would not have the funds to pay salaries or support services.  It will be forced to put capital controls into place, nationalize the banking system, leave the euro area, and reintroduce its own currency.

Everyone agrees that the Greek economy and people will suffer in the short run regardless of whether it leaves the Euro Area or accepts Troika dictates and gets the money.  However, it is the long run view of future events that is up for debate.

The Troika argues that without a deal the Greek economy will enter a downward spiral leading to total collapse.  In contrast, some in Syriza argue that the above policy steps are precisely what the country needs to lay the ground work for a sustained recovery.  They point to Iceland’s use of similar policies to rapidly overcome its own devastating collapse after the great financial crisis of 2008.   

One thing is clear, euro membership has not produced the benefits promised for Greece and the other weaker euro area countries.  In fact, these countries actually did better before they adopted the euro, during the period when they had their own respective currencies which gave them some control over their interest rates and exchange rates.

MW-DO175_euro_c_20150616121435_ZH

As Brett Arends points out:

There’s a secret fear gripping the powerful across Europe.

It has policy honchos lying awake at nights in Brussels. It has bankers in Berlin tossing feverishly on their silken sheets. It has eurocrats muttering into their claret.

The fear?

It isn’t that if Greece leaves the euro, the Greeks will then suffer a terrible economic meltdown.

The fear is that if Greece leaves the euro, the country will return to prosperity — and then other countries might follow suit.

Take a look at the chart, above.

As you can see, Greece with the bad old drachma had double the economic growth of Greece under the euro. Double. And it wasn’t alone.

Italy, Spain and Portugal tell similar stories. Their economic growth back in the 1980s and 1990s, when they were “struggling” with the lira, the peseta, and the escudo, makes a mockery of their performance under the German-dominated euro.

Of course nothing is certain.  To this point a majority of Greeks want their country to remain in the Euro Area and Syriza is hoping that the Troika will modify their demands for austerity, accept Syriza’s program which includes a moderate increase in spending for social programs and employment creation, and release the funds.

In the meantime, Syriza has taken a number of steps in respond to popular demands.  One on-the-ground commentator, Quincey, offers the following summary of some of them:

What the hell has the SYRIZA-ANEL government been doing all this time, apart from negotiating with its creditors?

The answer may be found below, through a list I compiled from various sources. The list is not exhaustive, I focused on issues which I consider interesting for an international audience.

So, here it goes:

The SYRIZA-ANEL government initiatives’ list, as of today.
1. 
The government passed the humanitarian crisis bill, which will provide some 300,000 families with food stamps, free electricity, and a rent supplement.
2. It confirmed universal, free access to uninsured Greeks (not migrants) to the public health system.
3. Abolished the 5 euro public hospital entrance fee/ticket.
4. Abolished pension cuts (which were scheduled to take place automatically in February 2015).
5. Reopened the Public TV/radio broadcaster (ERT). ERT had been shut down 2 years ago, by the right-wing Samaras government.
6. Re-hired some 4,000 public officers who had been sacked by the previous government, among which the cleaning ladies of Finance Ministry (who achieved nation-wide fame thanks to their long and consistent struggle).
7. Canceled the “hood law”, under which dozens, perhaps hundreds of people arrested during protests, were risking up to 7 years imprisonment.
8. Theoretically speaking, the government abolished the new maximum security prison where political prisoners were held (not all prisoners have been transferred to normal facilities).
9. Non-regularized migrants held in detention camps are –supposedly- gradually released (the extent to which this process is actually taking place is debatable); police controls on migrants are significantly milder.
10. Generally speaking, police repression of protest is significantly milder (compared to the previous governments, one could say non-existent).
11. The Greek Parliament introduced an Odious Debt Committee to control for the legitimacy of the public debt (a mostly symbolic move).
12. The Greek Parliament founded the German War Reparations Committee (Greece has not been repaid the obligatory “loan” Nazi occupiers extracted during WWII, nor any war reparations).
13. The government introduced installments and discounts to help citizens and companies pay their debts to the state and pension funds.
14. A new bill will grant Greek citizenship to second generation migrants.
15. A bill is about to be voted, which will expand civil union to cover homosexual couples, granting them equal rights to the ones married couples enjoy.
16. An educational reform has been announced. The reform re-establishes academic asylum (abolished in 2011), reduces high-school students’ workload and allows for the so-called “perpetual students” (those who failed to get their degree on time) to retain their university student status.
17. The Minister of Labour, Panos Skourletis, has just announced that a (most-needed) labor reform, which would re-establish collective bargaining and collective agreements (practically abolished in 2012) will be introduced in the forthcoming days. The legislative proposal should – logically – include another major SYRIZA electoral promise, the gradual increase of the minimum monthly wage from approximately 550 euros (gross) to 750 euros (gross), during a period of 18 months. But we have to wait and see for that, as the reform has already been announced a couple of times, only to be blocked the day after by the country’s creditors.

So far, Syriza maintains majority support despite Troika efforts to discredit it as reckless and incompetent for rejecting the status quo.

More to follow in another post.

A Critical Look At Capitalist Globalization

My latest article, on capitalist globalization, appears in the current issue of the journal Critical Asian Studies.   For a limited time the journal is making it freely available.  Here is the abstract and below it a link to the article itself.

 

From the Claw to the Lion

A Critical Look at Capitalist Globalization

Abstract:

This article argues that capitalist globalization is largely responsible for creating or intensifying many of our most serious economic and social problems. It first describes the forces that drove core country transnational corporations to create a complex system of cross-border production networks. It then maps the resulting new international division of labor, in which Asian countries, especially China, import primary commodities from Latin American and sub-Saharan African countries to produce exports for core countries, especially the United States. In core countries, globalization has led to the destruction of higher paying jobs, financialization of economic activity, and stagnation. While the new international division of labor has boosted third world rates of growth, especially in Asia, it has also left the third world with unbalanced and inequitable economies. Moreover, contradictions in the globalization process point to the spread of core country stagnation to the third world. Capitalist globalization has increased third world dependence on core country consumption while simultaneously undermining core country purchasing power. The article ends by discussing a process and program of transformation that highlights the feasibility of an alternative to global capitalism as well as the organizational capacities and institutional arrangements that must be developed if we are to realize it.

The article can be read or downloaded for free here.

Victory in Greece

keep calm

Syriza won the Greek election and its leader, Alexis Tsipras, is now prime minister—the Greek people showed bravery and intelligence and we should be studying as well as supporting the efforts of Syriza and the Greek people to build a responsive, democratic, and solidaristic economy.

What follows are some articles that I have found helpful in understanding current developments.

 

Social and economic conditions and popular responses to them in pre-election Greece:

Few in Greece, even five years ago, would have imagined their recession- and austerity-ravaged country as it is now: 1.3 million people – 26% of the workforce – without a job (and most of them without benefits); wages down by 38% on 2009, pensions by 45%, GDP by a quarter; 18% of the country’s population unable to meet their food needs; 32% below the poverty line.

And just under 3.1 million people, 33% of the population, without national health insurance. . . .

The Peristeri health centre is one of 40 that have sprung up around Greece since the end of mass anti-austerity protests in 2011. Using donated drugs – state medicine reimbursements have been slashed by half, so even patients with insurance are now paying 70% more for their drugs – and medical equipment (Peristeri’s ultrasound scanner came from a German aid group, its children’s vaccines from France), the 16 clinics in the Greater Athens area alone treat more than 30,000 patients a month.

The clinics in turn are part of a far larger and avowedly political movement of well over 400 citizen-run groups – food solidarity centres, social kitchens, cooperatives, “without middlemen” distribution networks for fresh produce, legal aid hubs, education classes – that has emerged in response to the near-collapse of Greece’s welfare state, and has more than doubled in size in the past three years.

Full text: http://www.theguardian.com/world/2015/jan/23/greece-solidarity-movement-cooperatives-syriza

 

Syriza’s platform:

  1. Audit of the public debt and renegotiation of interest due and suspension of payments until the economy has revived and growth and employment return.
  2. Demand the European Union to change the role of the European Central Bank so that it finances states and programs of public investment.
  3. Raise income tax to 75% for all incomes over 500,000 euros.
  4. Change the election laws to a proportional system.
  5. Increase taxes on big companies to that of the European average.
  6. Adoption of a tax on financial transactions and a special tax on luxury goods.
  7. Prohibition of speculative financial derivatives.
  8. Abolition of financial privileges for the Church and shipbuilding industry.
  9. Combat the banks’ secret [measures] and the flight of capital abroad.
  10. Cut drastically military expenditures.
  11. Raise minimum salary to the pre-cut level, 750 euros per month.
  12. Use buildings of the government, banks and the Church for the homeless.
  13. Open dining rooms in public schools to offer free breakfast and lunch to children.
  14. Free health benefits to the unemployed, homeless and those with low salaries.
  15. Subvention up to 30% of mortgage payments for poor families who cannot meet payments.
  16. Increase of subsidies for the unemployed. Increase social protection for one-parent families, the aged, disabled, and families with no income.
  17. Fiscal reductions for goods of primary necessity.
  18. Nationalisation of banks.
  19. Nationalisation of ex-public (service & utilities) companies in strategic sectors for the growth of the country (railroads, airports, mail, water).
  20. Preference for renewable energy and defence of the environment.
  21. Equal salaries for men and women.
  22. Limitation of precarious hiring and support for contracts for indeterminate time.
  23. Extension of the protection of labour and salaries of part-time workers.
  24. Recovery of collective (labour) contracts.
  25. Increase inspections of labour and requirements for companies making bids for public contracts.
  26. Constitutional reforms to guarantee separation of church and state and protection of the right to education, health care and the environment.
  27. Referendums on treaties and other accords with Europe.
  28. Abolition of privileges for parliamentary deputies. Removal of special juridical protection for ministers and permission for the courts to proceed against members of the government.
  29. Demilitarisation of the Coast Guard and anti-insurrectional special troops. Prohibition for police to wear masks or use fire arms during demonstrations. Change training courses for police so as to underline social themes such as immigration, drugs and social factors.
  30. Guarantee human rights in immigrant detention centres.
  31. Facilitate the reunion of immigrant families.
  32. Depenalisation of consumption of drugs in favor of battle against drug traffic. Increase funding for drug rehab centres.
  33. Regulate the right of conscientious objection in draft laws.
  34. Increase funding for public health up to the average European level.(The European average is 6% of GDP; in Greece 3%.)
  35. Elimination of payments by citizens for national health services.
  36. Nationalisation of private hospitals. Elimination of private participation in the national health system.
  37. Withdrawal of Greek troops from Afghanistan and the Balkans. No Greek soldiers beyond our own borders.
  38. Abolition of military cooperation with Israel. Support for creation of a Palestinian state within the 1967 borders.
  39. Negotiation of a stable accord with Turkey.
  40. Closure of all foreign bases in Greece and withdrawal from NATO.

Source: http://links.org.au/node/4265

 

The story behind Syriza’s victory:

Syriza’s victory has electrified the left in Europe – even moderate social democrats who have floundered in search of ideas and inspiration since the 2008 crisis. Now there is talk everywhere of “doing a Syriza” – and in Spain, where the leftist party Podemos is scoring 25% in the polls, more than talk.

But Syriza’s route to becoming Europe’s first far-left government of modern times was neither easy nor inevitable. For the past 22 days, I have been part of a Greek documentary team following its activists and leaders on the campaign trail to watch how they did it. I have seen them offering new hope to farmers on the breadline, and drumming up supplies for their network of food banks. I have watched them win over old-school communists in the dockers’ union, smarting from seeing their workplace sold off to the Chinese, and present a modern, youthful alternative to a political establishment serving a corrupt elite. And I have seen their leader, Alexis Tsipras, in action in his private office at critical moments. . . .

In the weak January sun, the mountains along the Gulf of Corinth are topped with snow. Dotted along the hillsides are villages known as political “castles”, normally so wedded to one or other of the main parties – Pasok and New Democracy – that you could navigate at election time by following the posters. But this is a troubled land; two-thirds of the vineyards and lemon groves here are technically in foreclosure. The farmers have been forced to take morgtgages, the banks are clamouring to repossess and suicides in these quiet farming towns are on the up.

Giannis Tsogkas, a 56-year-old grape grower from Assos, tells us: “[The government] pushed us into the IMF deal and all they do is obey the rightwingers. The little man will die. We keep hearing about suicides. So we tried to find somebody on the left to protect us. And we found it in Syriza.”

As night falls, the taverna in nearby Psari is full of the old and children – most of the young adults are gone. The battered faces of farmers on the breadline stare cautiously as one Syriza man delivers a Bolshevik-style oration: “Why do the IMF want to destroy us? Is it because the sun shines here? Is it because we’re a hospitable people? Do they hate southern European life?”

But, says election candidate Theofanis Kourembes, it’s not rhetoric that has turned villages like this red. “We go out and help people. When they tell us something, we listen. When they ask for help, we are here. You never see Pasok or New Democracy.”

It’s small meetings like this, miles from the main towns, that have helped turn Syriza from a party polling 4% 10 years ago to, by the last week of campaigning, a party leading on 32%.

“You journalists have come all the way up here to interview us,” says one farmer. “Syriza is the only party that did the same. They came and talked to us. If we wanted to talk to the main parties, how would we find them?”

Full Text: http://www.theguardian.com/world/2015/jan/28/greek-people-wrote-history-how-syriza-rose-to-power

 

Syriza’s Cabinet:

Greece’s prime minister, Alexis Tsipras, has lined up a formidable coterie of academics, human rights advocates, mavericks and visionaries to participate in Europe’s first anti-austerity government.

Displaying few signs of backing down from pledges to dismantle punitive belt-tightening measures at the heart of the debt-choked country’s international rescue programme, the leftwing radical put together a 40-strong cabinet clearly aimed at challenging Athens’s creditors.

Full Text: http://www.theguardian.com/world/2015/jan/27/greece-alexis-tsipras-syriza-cabinet

 

Syriza appears serious—much to the surprise and dismay of the European elite:

In his first act as prime minister on Monday, Alexis Tsipras visited the war memorial in Kaisariani where 200 Greek resistance fighters were slaughtered by the Nazis in 1944.

The move did not go unnoticed in Berlin. Nor did Tsipras’s decision hours later to receive the Russian ambassador before meeting any other foreign official.

Then came the announcement that radical academic Yanis Varoufakis, who once likened German austerity policies to “fiscal waterboarding”, would be taking over as Greek finance minister. A short while later, Tsipras delivered another blow, criticising an EU statement that warned Moscow of new sanctions.

The assumption in German Chancellor Angela Merkel’s entourage before Sunday’s Greek election was that Tsipras, the charismatic leader of the far-left Syriza party, would eke out a narrow victory, struggle to form a coalition, and if he managed to do so, shift quickly from confrontation to compromise mode.

Instead, after cruising to victory and clinching a fast-track coalition deal with the right-wing Independent Greeks party, he has signalled in his first days in office that he has no intention of backing down, unsettling officials in Berlin, some of whom admit to shock at the 40-year-old’s fiery start.

“No doubt about it, we were surprised by the size of the Syriza victory and the speed with which Tsipras clinched a coalition,” said one senior German official, who requested anonymity because of the sensitivity of the issue. . . .

Even as Greek stocks plunged and bond yields soared on Wednesday, Tsipras continued to promise “radical” change.

Over the past 24 hours, his government has put two big privatisations, of Piraeus port and Greece’s biggest utility, on ice, and his ministers have pledged to raise pensions and rehire fired public sector workers.

Full Text: http://www.reuters.com/article/2015/01/28/us-greece-politics-germany-idUSKBN0L121R20150128

Now the euphoria in Greece has subsided, it is being matched by astonishment in Berlin and the European Union institutions.

On its first day in government yesterday, Syriza cancelled a privatisation progamme of the ports and energy sector, pledged to re-employ around 15,000 workers, and announced minimum wage and pension rises costing around 12bn euros.

The astonishment in Europe cannot be expained by lack of foreknowledge. Numerous journalists who cover Greece, including me, reported in detail what Syriza planned to do: cancel the austerty and privatisations, run a balanced budget and massively hike the tax take from the so-called oligarchs and the black economy.

The astonishment comes because all the political centre’s contingency plans come apart. The centre-right did not win, the centre-left parties formed to create a moderation mechanism on Syriza in coalition did not get asked into the government (and in the case of Papandreou’s party, To Kinima, failed to get into parliament).

By tying up an immediate coalition with a far-right nationalist party, Tsipras was able to seize the apparatus of the Greek executive faster than anybody expected. That is what drove yesterday’s collapse of Greek bank shares, and the fall on the stock exchange.

Most market analysts thought before the election that Syriza would be forced into a U-turn. As someone who has grilled all of its economics team on camera, and Mr Tsipras himself, I can report they have no intention of backing down.

Full Text: http://blogs.channel4.com/paul-mason-blog/tsipras-reverse-shock-doctrine/3155#sthash.NNCqsjkx.dpuf

 

Might Spain be next with a Podemos election victory?

Something is happening in Spain. A party that did not exist one year ago, Podemos, with a clear left-wing program, would win a sufficient number of votes to gain a majority in Spanish Parliament if an election were held today. Meanwhile, the leaders of the group G-20 attending their annual meeting in Australia were congratulating the president of the Spanish conservative-neoliberal government, Mr. Mariano Rajoy, for the policies that his government had imposed. (I use the term “imposed” because none of these policies were written in its electoral program.) These included: (1) the largest cuts in public social expenditures(dismantling the underfunded Spanish welfare state) ever seen since democracy was established in Spain in 1978 and (2) the toughest labor reforms, which have substantially deteriorated labor market conditions. Salaries have declined by 10% since the Great Recession started in 2007, and unemployment has hit an all-time record of 26% (52% among the youth). The percentage of what the trade unions defined as “shit work” (temporary, precarious work) has increased, becoming the majority of new contracts in the labor market (more than 52% of all contracts), and 66% of unemployed people do not have any form of unemployment insurance or public assistance.

Full Text: http://www.counterpunch.org/2015/01/09/what-is-going-on-in-spain/

Declining Prospects For Growth

You know things are serious when leading mainstream economists and established international organizations continually revise downward their estimates for future growth.

The chart below shows successive Congressional Budget Committee estimates of the U.S. growth potential beginning in 2007 and the actual growth trend.  Every year the estimates have been reduced and actual growth remains far below the estimated potential.

US-Potential-GDP

The following chart comes from the IMF.  It shows a steady downward revision in predicted growth for so-called emerging market countries.

ems-chart-2

 As the IMF says: ” This feature of repeated downward revisions to future growth is unique to the current downturn. In the past, we expected growth to bounce back (and it did). This time seems different.”

The lack of serious policy discussions by leading political and business leaders about causes and responses is far from reassuring.

Tax Tricks And Globalization

Globalization offers companies many ways to boost profits at the public expense.  A case in point: they can use differences in national tax laws to slash their taxes.

Google, Apple, and Microsoft are among the most skilled at this, although they are far from alone.

For example, a recent report on Google’s tax strategy, which takes advantage of differences between U.S. and Irish tax regimes, highlights what is at stake:

The Financial Times reports that … Google Netherlands Holdings … received €8.6bn in royalties from Google Ireland Ltd and €232.8m in royalties from Google’s Singapore operation. All but €10.4m of this was paid out to Google Ireland Holdings, a company that is incorporated in Ireland but technically controlled in Bermuda, where there is no corporation tax.

The FT says that differences between the Irish and US tax codes mean that this dual-resident company is viewed as Irish for US tax purposes but Bermudan for Irish purposes. It acquired much of Google’s intellectual property in 2003, which it licensed to Google Ireland Ltd, a Dublin-based business that is at the heart of its global operation. The business, which employed 2,199 people last year, paid €17m in Irish corporation tax, having reported pre-tax profits of €153.9 on turnover of €15.5bn. . . .

Google’s provision of €17m in corporate tax in 2012 to Ireland on the foreign net income of $8.1bn it booked in Ireland, gave an effective tax rate of 0.21%.

Google’s foreign-paid tax rate in 2012 was 4.4%.

Pretty complex stuff—but that isn’t surprising.  A lot of money is at stake and the companies can afford to hire the best legal and financial help.

What is critical to understand is that governments are well aware of these corporate maneuvers and have done nothing to end them while simultaneously demanding cuts in public services because of a lack of tax revenue.

These maneuvers are so widely employed that the IMF decided to provide the following explanation of one of the most popular–the “Double Irish Dutch Sandwich” tax avoidance strategy–in its October 2013 Fiscal Monitor:

tax tricks

  • Here’s how it works (Figure 5.1 above): Multinational Firm X, headquartered in the United States, has an opportunity to make profit in (say) the United Kingdom from a product that it can for the most part deliver remotely. But the tax rate in the United Kingdom is fairly high. So . . .
  • It sells the product directly from Ireland through Firm B, with a United Kingdom firm Y providing services to customers and being reimbursed on a cost basis by B. This leaves little taxable profit in the United Kingdom.

Now the multinational’s problem is to get taxable profit out of Ireland and into a still-lower-tax jurisdiction.

  • For this, the first step is to transfer the patent from which the value of the service is derived to Firm H in (say) Bermuda, where the tax rate is zero. This transfer of intellectual property is made at an early stage in development, when its value is very low (so that no taxable gain arises in the United States).
  • Two problems must be overcome in getting the money from B to H. First, the United States might use its CFC rules to bring H immediately into tax*.
  • To avoid this, another company, A, is created in Ireland, managed by H, and headquarters “checks the box” on A and B for U.S. tax purposes. This means that, if properly arranged, the United States will treat A and B as a single Irish company, not subject to CFC (controlled foreign corporation) rules, while Ireland will treat A as resident in Bermuda, so that it will pay no corporation tax. The next problem is to get the money from B to H, while avoiding paying cross-border withholding taxes. This is fixed by setting up a conduit company S in the Netherlands: payments from B to S and from S to A benefit from the absence of withholding on nonportfolio payments between EU companies, and those from A to H benefit from the absence of withholding under domestic Dutch law.

This clever arrangement combines several of the tricks of the trade: direct sales, contract production, treaty shopping, hybrid mismatch, and transfer pricing rules.

*The United States will charge tax when the money is paid as dividends to the parent—but that can be delayed by simply not paying any such dividends. At present, one estimate (cited in Kleinbard, 2013) is that nearly US$2tn is left overseas by US companies.

In considering the financial significance of these types of tax maneuvers, Finfacts Ireland notes:

The IMF says that assessing how much revenue is at stake is hard. For the United States (where the issue has been most closely studied), an upper estimate of the loss from tax planning by multinationals is about US$60 billion each year – – about one-quarter of all revenue from the corporate income tax (Gravelle, 2013). In some cases, the revenue at stake is very substantial: IMF technical assistance has come across cases in developing countries in which revenue lost through such devices is about 20% of all tax revenue.

In short, globalization dynamics tend to boost profits at the public expense.  We need to be resisting rather than strengthening them.

The Art Of Research

There is serious research and then there is obfuscation that poses as serious research.

I am spending time in Dublin, Ireland, learning about developments here.  One thing that is obvious is that the Irish government remains committed to a growth strategy based on using low taxes and low wages to attract foreign investment.

Other European governments are not pleased with Ireland’s low tax strategy.  They accuse the Irish government of promoting a tax race to the bottom.  Interestingly, no one seems to object to the low wage part of the country’s policy.

During a recent visit to Paris, the Irish prime minister, in the words of the Irish Times:

faced repeated questions over the decision of US internet giant Yahoo to transfer its finance operations from France to Ireland.

Mr Kenny [the Irish Prime Minister] quoted a report by consultants PwC [PricewaterhouseCoopers] and the World Bank Group which found Ireland’s effective corporate tax rate was about 11.9 per cent, higher than France’s effective rate of 8.2 per cent.

This is all well and good, except it appears that the report is based on some strange assumptions.  As the Irish Times article goes on to note:

A research paper by Prof James Stewart, professor in finance at Trinity College Dublin, . . . challenges Government claims that effective corporate tax rates in Ireland are just below the headline rate of  12.5 percent.

Instead, [Stewart’s] study suggests Ireland’s effective tax rate for American firms is similar to jurisdictions regarded as tax havens such as Bermuda, based on latest US Bureau of Economic Analysis statistics.

Stewart found that the PwC/World Bank study based its analysis of Irish tax policy on a “hypothetical Irish company that sells ceramic flower pots and has no imports or exports.”  Such a company is hardly the best starting point for an investigation of Ireland’s tax treatment of multinational corporations.

Another Irish Times article discusses Stewart’s research results in more detail:

“It is surprising that this [PwC/World Bank] study is frequently cited by Irish Government sources to the effect that effective tax rates in Ireland are not that different or even higher than in other EU countries,” Prof Stewart’s research paper states.

Publicly available data which shows corporate tax payments and profits on a consistent basis across countries is not widely available, according to the paper. However, one such data source is the US Bureau of Economic Analysis which, Prof Stewart maintains, provides a more accurate estimate of effective tax rates for US subsidiaries.

This indicates that effective tax rates for US subsidiaries in Ireland fell from 5.5 per cent in 2006 to 2.2 per cent in 2011.

This reduction is likely to be linked to wider use of tax write-offs – such as tax credits for research and development activity – and profit-shifting measures such as the “double Irish”.

Google is one of the most high-profile beneficiaries. Latest figures indicate that its Irish operation had revenues of €15.5 billion during 2012. However, it ended up paying Irish corporation taxes of just €17 million.

That’s because it charged “administrative expenses” of almost €11 billion to other Google entities abroad, some of which are ultimately controlled from tax havens such as Bermuda. . . .

By contrast, effective rates were many times higher for US firms in the UK (18.5 per cent), Germany (20 per cent) and France (35.9 per cent).

I guess one cannot blame the Irish government for trying to have it both ways—offer low rates while denying it.  But what is one to make of the research done by PwC/World Bank?  The study’s core deceptive assumption brings to mind all the World Bank and U.S. government studies of free trade agreements which find that free trade benefits all.  They obtain this result in large part because their researchers begin their work assuming full employment, balanced trade, and no capital mobility both before and after the agreements.

 

The Objectivity Of The Economics Profession

Economists are fond of presenting themselves as above the fray.  They theorize that people are self-interested maximizers.  Well, all people but economists.  Economists don’t have any vested interest in policy outcomes.  They just study economic dynamics and argue for policies that are in the public interest. 

Well, that is the story they tell.  Perhaps they believe it, perhaps not. 

What is true, is that many of our leading economists have significant financial ties to powerful economic interests who are not above the fray and have a real material stake in promoting continued liberalization and deregulation regardless of its effect on the overall economy.

Here are some examples drawn from an article by Charles Ferguson (who is also director of the documentary “Inside Job” which highlights the growing conflict of interest that appears to affect many prominent economists):

Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6 million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.

Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy.

Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks’ Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6 million to $17 million.

Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year.

Larry Summers, who recently resigned from his position as Obama’s leading economic advisor, is probably the poster economist for this problem.

Consider: As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance. Later, as deputy secretary of the treasury and then treasury secretary in the Clinton administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector. He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading Commission in the Clinton administration, to regulate the financial derivatives that would cause so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws.

After Summers left the Clinton administration, his candidacy for president of Harvard was championed by his mentor Robert Rubin, a former CEO of Goldman Sachs, who was his boss and predecessor as treasury secretary. Rubin, after leaving the Treasury Department—where he championed the law that made Citigroup’s creation legal—became both vice chairman of Citigroup and a powerful member of Harvard’s governing board.

Over the past decade, Summers continued to advocate financial deregulation, both as president of Harvard and as a University Professor after being forced out of the presidency. During this time, Summers became wealthy through consulting and speaking engagements with financial firms. Between 2001 and his entry into the Obama administration, he made more than $20-million from the financial-services industry. (His 2009 federal financial-disclosure form listed his net worth as $17-million to $39-million.)

Summers remained close to Rubin and to Alan Greenspan, a former chairman of the Federal Reserve. When other economists began warning of abuses and systemic risk in the financial system deriving from the environment that Summers, Greenspan, and Rubin had created, Summers mocked and dismissed those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the world’s leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people’s money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a “full-blown financial crisis” and a “catastrophic meltdown.”

When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a “Luddite,” dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)

Soon after that, Summers lost his job as president of Harvard after suggesting that women might be innately inferior to men at scientific work. In another part of the same speech, he had used laissez-faire economic theory to argue that discrimination was unlikely to be a major cause of women’s underrepresentation in either science or business. After all, he argued, if discrimination existed, then others, seeking a competitive advantage, would have access to a superior work force, causing those who discriminate to fail in the marketplace. It appeared that Summers had denied even the possibility of decades, indeed centuries, of racial, gender, and other discrimination in America and other societies. After the resulting outcry forced him to resign, Summers remained at Harvard as a faculty member, and he accelerated his financial-sector activities, receiving $135,000 for one speech at Goldman Sachs.

Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him. Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations—quite a feat. Never once has Summers publicly apologized or admitted any responsibility for causing the crisis. And now Harvard is welcoming him back.

Summers is unique but not alone. By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government. What few Americans realize is that the revolving door is now a three-way intersection. Summers’s career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.

So—tell me—how much trust do you have in our leading economists and the advice they give? 

Sometimes a picture is worth a thousand words.  Here is a two minute video clip from the film Inside Job that showcases the above mentioned Professor Frederic Mishkin and his “objective” research on Iceland.

The IMF and Hungary

Understandably, our media has focused its economic reporting on the US and secondarily other advanced capitalist countries, like Germany and France.  Developments in the rest of the world have largely been ignored.  As a consequence we are missing a lot.

Studying the third world means confronting the International Monetary Fund (IMF).  The IMF has long been criticized for its heavy handed attempts to promote neoliberal restructuring.  Starting in the early 2000s, third world countries, flush with foreign exchange from rising commodity prices, began paying off their debts to the IMF.  Faced with a loss of leverage and also interest income, the IMF had little choice but to start cutting its own staff.

The global economic crisis changed everything.  Many third world countries are again desperate for funds, and the IMF is happy to supply them—although as always with conditions.

The IMF claims to have learned its lessons.  Its own internal review of past practices highlighted a number of past loan conditions that the IMF now agrees were counterproductive.  Thus, it claims that it is now willing to support capital controls, at least for a limited period.  It also claims that it now supports counter-cyclical policies—which means that it will no longer force governments to implement austerity policies during a period of deepening economic crisis.

Unfortunately, despite its claims, the IMF appears back to its old tricks.  Most importantly, at the same time that it supports counter-cyclical policies in the developed world—for example, encouraging the US and EU to fight the Great Recession with deficit spending and low interest rates—it continues to oppose them in the third world.   A Center for Economic and Policy Research study of 41 countries that had agreements with the IMF in 2009 found that “31 of these agreements involved tightening either fiscal or monetary policy, or both, during a downturn.”

For example, according to Mark Weisbrot, one of the authors of the study:

The Fund is currently squeezing Ukraine . . . to reduce its spending, and suspended its disbursement of funds to the government in order to force budget tightening. This despite the fact that Ukraine’s economy shrank by about 15 percent last year [2009], and its public debt was only 10.6 percent of GDP. A country in this situation should be able to borrow as needed to stimulate the economy, and reduce its deficit after it has accomplished a robust recovery. In nearby Latvia, the IMF and European Commission are lending with conditions that have already resulted in the worst cyclical downturn on record, and it is not clear when or how fast the economy will eventually recover.

The case of Hungry is perhaps the clearest example of the class-bias underlying IMF policies, a bias shared by European elites.  As Jayati Ghosh reported:

In November 2008, Hungary signed a Stand-By Arrangement with the IMF for SDR 10.5 billion, as part of a joint rescue package worked out with the European Union. Various IMF reviews found that Hungary complied with all the very severely procyclical conditions imposed, including a massive reduction of the fiscal deficit from more than 9 per cent of GDP in the last quarter of 2008 to around 3.8 per cent thereafter. At least partly as a result of this, real GDP declined by 6.2 per cent in 2009.

The collapse of the Hungarian economy produced incredible social pain—and not surprisingly, the social democratic party that implemented the IMF mandated policies was defeated in June elections by a center-right party that had campaigned on a promise of less austerity.  However, once in power, the new government found that the economic collapse had made the budget deficit worse and that more severe fiscal measures were required to meet IMF budget deficit targets.

The government proposed new cuts in public sector wages and pensions as well as tax cuts for the wealthy, and asked the IMF for more support.  One might think that this would be enough for the IMF.  But it wasn’t.  The IMF asked for additional privatization of state owned enterprises and further reductions in state spending.  Perhaps most surprising, the IMF also demanded that the Hungarian government cancel an action that would have actually help to cut the deficit—a proposed tax on the banking sector expected to raise nearly $1 billion.  The IMF determined that this tax was too “high” and likely to “adversely affect lending and growth.”

Faced with a popular revolt, the Hungarian government rejected IMF demands for further cuts in spending and also refused to cancel its planned tax increase on the banks.  The IMF responded by breaking off talks.

The government is now seeking to reverse course and promote expansion.  Among other things, it is trying to force the (largely independent) central bank to lower interest rates; the bank (in tune with the IMF) had kept rates high despite the economic collapse.   As a first step, the government has cut the salary of the head of the central bank by 75 percent.

What does all of this mean?  Mark Weisbrot explains as follows:

As the New York Times reported on [August 2], the fight in Hungary “reflects a larger struggle that is expected to play out over the next year or so as most European politicians . . . seek to impose fiscal discipline on their increasingly unruly citizens.”

We can only hope that they get more unruly. The governments of Spain and Greece, for example, have a lot more bargaining power and a lot more alternatives than they have been willing to use. It is ironic that a center-right government in Hungary has taken the lead here; but if the socialist governments of Spain and Greece were to stand up to the European authorities and the IMF, they could also rally popular support. And then we would see a new playing field in Europe that would allow for a more rapid recovery, and possibly end the current assault on the living standards of the majority.