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Austerity – But Who Really Pays?

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We are hearing it every day, in the papers, in the media: austerity. We are told that most, if not all, of the European economies have national debts that are so high, that the economies need "structural adjustments" and "radical reforms" in order to "restore confidence". But we should all think quite carefully about what this means.

Just a couple of years ago, the financial sector showed itself to be based on ludicrous, almost insane, overconfidence as banks lent far in excess of any sensible level, boosting credit and the sale of financial products without the necessary underpinning of real capital. Such speculative exploitation of the market in confidence led to the biggest financial crisis in decades, some say since 1929.

Because the financial sector is so crucial to maintaining the flow of capital, all those businesses that oil their production and investment with doses of credit need the financial system working smoothly, making available cash at low interest rates to encourage investments, and of course, growth. That magic word trips off the tongues of politicians as if just the mere mantra suffices to allay any fears that they might have other interests at heart, such as the public good. As long as everything is subservient to growth, all will be well, or at least that's what we are told. And in order to get back confidence, that essential quality of a functioning market so easily squandered by the financial sector, investors have to regain confidence that the economies are business machines that are working for their benefit.

So each economy across Europe is being turned into a debt-repayment vehicle, a combination of a state-backed restoration of the flow of credit, together with the opportunity to invest the newly available capital into profitable ventures. But where are these investment opportunities to be found? As Chris Harman ably demonstrated in Zombie Capitalism, one of the problems that periodically besets capitalism is a surplus of production and the lack of profitable investment opportunities for the surplus capital.

Unless new outlets are found for the investment, and markets found for the surplus product, the flow of capital grinds to a halt.  There aren't many new areas on the globe ripe for new investment so the attention has been turning towards state assets, which brings us back to the structural adjustments and radical reforms.

For many decades, states have subsidized the provision of services which industry has found to be essential: education, health, roads, social services, and so on. Because these services were paid for by taxation, private capital was freed of the cost of providing such necessities to its workforce. But now the needs of capital for new areas of investment bring a focus onto these internal markets. Liberalization, as it is euphemistically called, now demands that states open up these services to private capital investment.

In the international version of these structural adjustments, there are typically financial strings to tie up the national government: you can have some measure of economic aid if you agree to spend the cash in our companies, and also open up your state assets to foreign takeover. We again euphemistically call it globalization.

Whilst on the surface it looks as though aid is being given, we have to watch where the benefits go. If the capital is actually flowing out of the country back to the investors, then regardless of how much infrastructure is being created, that country is still being improverished. In many cases, the cash never actually gets to the target economy at all but is simply moved between bank accounts in the investor country.  Any infrastructure created is work for foreign corporations who reap the profits, and is owned by the business elites in the target country.

When such adjustments form part of "austerity" plans, the situation is very similar. The cost of restoring confidence in the markets is a systematic attack on the standard of living of working people. In Spain, we see a 5% cut in public sector wages and a freezing of pensions, while in the UK, a comprehensive reduction of public services is imposed. The pattern is repeated across Europe. So who benefits from trying to restore confidence to these markets? Certainly not working people, who are just as much held to ransom by the owners of the companies as before. Those people still hold the power to cause another crash, another catastrophic drop in confidence as their financial gambling undermines the industries on which we all depend.  At best, working people will see the same people, the same institutions, in control. The same people whose instinct for quick profit and lack of concern for the public good led to the crisis in the first place.

The banking sector resists the idea of a tax to provide an insurance fund to manage the failure of unsuccessful banks on the rather facetious grounds that it would encourage risky behaviour. We've all seen how successful self-regulation and self-control has been recently in the international financial markets. This sector is demanding austerity measures to try to restore the confidence it clearly doesn't deserve.

States have paid vast sums for insulating the financial sector from the consequences of years of irresponsible profit-grabbing, inflating the national debt of each economy now in the spotlight. How will such debt be repaid when the cost of servicing such massive borrowing cannot be sustained unless the economies are growing? And how will they grow unless capital flows?

There are two clear consequences which are expected from the austerity measures. One is to reduce the confidence of working people, to discourage them from fighting back against the drop in their living standards. Such a demoralization will enable company bosses to increase the rate of exploitation, to impose temporary and short-term contracts, to increase working hours and unpaid overtime, all of which will contribute to increasing profits. The second is to move the cost of funding the present crisis directly onto working people themselves to protect the profits of the investors. Social service cuts, tax increases, benefit cuts and increased privatisation of essential welfare provision are all costs for working people.

Social-democratic politicians are trying to sell this to working people on the grounds of the TINA principles, commonly quoted under Margaret Thatcher, There Is No Alternative. Recovering growth is seen as the number one priority and to do that, investors have to recover their confidence, which means structural adjustments, radical reforms, and although they don't say this plainly, pay cuts, longer hours and increased unemployment to force working people to accept worsening conditions. This represents a significant shift of wealth from working people to just those responsible for the financial crisis. And the social-democratic politicians are united against opposing anything the markets want.

These politicians want to be seen as responsible managers of capitalism and have cast off any pretensions of defending working people.  Nevertheless, they obtain their electoral mandates by claiming to represent the interests of their citizens.  So, like Zapatero in Spain, they are now squirming, pretending that there is no alternative.  It is clearly not in the interests of working people simply to accept this transfer of wealth away from them. The fight-back going on in Greece is clear evidence that in at least one country, the TINA principle is being challenged. The claim by social-democratic politicians that growth and increased market confidence is in everyone's interests just doesn't ring true because a vital ingredient is missing: any measures to prevent the situation occurring again.

It is a fair question to ask why working people should bail out financial speculators whose actions have affected millions of people, losing homes and jobs, savings and investments. Why should they be called on to make such drastic sacrifices just to get investment back and capital flowing? If those who have such enormous financial and economic power are unwilling to support the public good, then surely it is time to think about some fundamental questions, such as how and when to clip their wings.

There is an alternative and it involves working people refusing to accept the cost of bailing out the banks and financial institutions.  If their mismanagement produced such catastrophic results, they should not be left in the hands of private capital.  But such a position would mean that the social-democratic politicians would have to confront the power of capital, and that's something none of them have stomach for.

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About Bob Lloyd

  • Doug Hunter

    Really? Retirement at 55 and an overabundance of inefficient government paper pushers has nothing to do with the crisis? Perhaps you believe the government can simply pay a person to learn at school and live with their parents (the government will subsidize you much more if you’re a single parent hence the increase in that stat) until they’re 30 when they can take over a government paper shuffling and approval job with sub-fulltime hours and full benefits, throw in a couple of years of unemployment or sabbatical then retire with full social benefits at 55. Maybe if it weren’t for the evil capitalists no one would have to work at all, right? Goods and services could just magically appear from some foreign land where brown or slanty eyed folks are pulling the 14 hour shifts and we can just sit on our duffs.

    You’re right that our corporate bosses have become irresponsible and greedy, but our ‘working’ classes have become lazy and entitled at the same time. We have an unsustainable system, but if you burn all the wealthy at the stake and confiscate their assets for the good of the commune, we still have an unsustainable system, one that ‘exploits’ (i.e. gives a better job than they previously had) third world workers to make our welfare state possible.

    Capitalism improves everyone’s standard of living it touches, from the ‘exploited’ subsistience farmer who earns a relatively nice income at the sweatshop, to the ‘poor’ in the US living in 1000sqft houses with cable, 2 TV’s, 2 cars, and plenty of time for makin babies. The problem is, it also creates opportunity for some to rise above… creating inequality.

    Some people are so jealous and petty and pathetic that they’d rather shackle those that seek to rise above and force everone to suffer in equal misery than exist in a world where someone might earn more than them. Not I.

    On a sidenote, I’d actually like to see the workers in Greece succeed with bouncing the austerity package, not taking the capitalists bailout money (with strings attached), and defaulting on their debts. It’d be a grand experiment, unfortunately wiser men than you or I would rather avoid that human suffering and prefer measured cuts to calamitous collapse. I say bring on the dear leader and workers paradise (until the checks start bouncing) in Greece.

  • http://www.leavingthelandofwoo.com Bob Lloyd

    [Retirement at 55 and an overabundance of inefficient government paper pushers has nothing to do with the crisis?]

    Is this a plausible explanation of the depth of the largest financial crisis in over 70 years? No it isn’t. Even inefficiency on a massive scale wouldn’t be enough to explain it. So firing at the usual targets (single parents, unemployed, people on benefits, etc) isn’t anything like an answer. In fact, one major reason for the historical growth of government institutions is to maintain the environment for the profitable use of capital and that includes welfare and benefits provision at home, and intervention (often military) abroad.

    [our ‘working’ classes have become lazy and entitled at the same time]

    Another haphazardly targetted snipe. Just check out the changes in overall working hours and the amount of unpaid overtime over the last thirty years. People are having to work harder and harder just to retain their jobs and that’s not because of laziness but because of the fierce competitive pressures in the job market. Employers have never been so powerful. The rise in unemployment is not caused by an increase in laziness but all manner of related economic reasons such as structural changes, a fall-off in investment, the credit squeeze, overproduction, and so on.

    [Capitalism improves everyone’s standard of living it touches, from the ‘exploited’ subsistience farmer who earns a relatively nice income at the sweatshop, to the ‘poor’ in the US living in 1000sqft houses with cable, 2 TV’s, 2 cars, and plenty of time for makin babies.]

    It seems amazingly idealistic to believe that. Capitalism is an excellent system for shifting wealth from the many to the few, from those who have to work to those who don’t. Simply owning capital is a means of becoming wealthier without having to work and it is blatantly untrue to suggest that everyone benefits. Even where some people do benefit, the benefits are very unevenly distributed, loaded in favour of the owners of capital.

    Just take one simple example, Haiti. Capitalism provided Haiti with development funds which led in turn to the total impoverishment of the economy, the destruction of the small farmer economy, and the creation of foreign-owned sweatshops. People who were able previously to work the land, feed their families, and live reasonably, were transformed into sweatshop workers unable to buy the expensive imported food. The dumping of rice from the US into the Haiti economy destroyed the local small-scale farming economy. That worked to the benefit of some US firms but seriously damaged the Haitian economy and impoverished millions. Globalisation is full of such examples.

    It’s very easy to condemn working people for resisting attempts to make them pay for the crisis they didn’t create – and there’s little debate about who was responsible. The old notion that workers should be grateful that someone gave them a job assumes that the capitalist is some kind of samaritan. In fact, capitalists have no choice but to compete and to try to increase the rate of exploitation, or they either get taken over or go bust. They only take on labour if they can make a profit. But it’s not generosity or some dedication to social well-being – it’s profit that drives them.

    We shouldn’t be reluctant to question the rationality of a system that is inherently prone to disastrous crises and which so damages the public good.

  • Doug Hunter

    Bob, Yes it is a plausible explanation. In 1956 defense spending was 60% of the US budget and transfer payments only 20%, now this is almost exactly reversed and projecting forward the growth of the welfare state is only set to increase further. These things ARE unsustainable. You can call it austerity or call it raising the retirement age for medicare and social security or you can call it ‘cuts’ or you can just inflate your currency printing new money to pay your welfare benefits and avoid calling it such, but the end result is the same… we cannot afford the life we have become accustomed to living and ‘austerity’ will happen.

    You’re right about the workers, I should have primarily said entitled rather than lazy, but then you must admit that our own (US) migration policy is set by allowing in illegals to ‘do the jobs we won’t do’. Explain to me what that means. Is that not a sign of unsustainable entitlement?

    Our lifestyle is subsidized by the products of low wage labor yet we consider ourselves too good to take part in it. Sounds like entitlement to me.

    The other thing I’ve never been sold on is the idea that by confiscating (usually simply destroying) the wealth of the rich that someone poor necessarily benefits. It’s not like the wealthy have food, clothing, shelter, and health care bottled up and hidden in a warehouse. Their wealth is tied up in a business. If you sell their businesses to get their wealth, you’re hurting yourself in the long run as now you have no means of production or employment. You might consider state control and use the former profits for increased wages but that kills off any new outside investment and the lack of profits means the value of the business has simply evaporated (value being determined largely as a multiple of profit).

    Accumulation of capital is required for new ventures and investment in new businesses. Now that you have successfully shut that down where will it come from. Government is the only one left I suppose. Whose welfare check should they cut for that to happen? A capitalist might bring a factory and a job to the third world, when would a workers union vote to expend potential wages to open a new factory in the third world on their own?

    Inefficiency abounds.

    As I stated above, I’d like to give the radical leftist ideas a chance again though. Maybe the workers in Greece can start something and we’ll see how that goes. Let’s try it on a small scale first and watch what happens.

    ***I know we already have Venezuala, but not every country can load a small population welfare state onto the back of a top 10 oil reserve(which incidentally still requires rich capitalists to actually buy the oil, that’s why they still do business with the great satan and take our petrodollars).

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    You’re sounding more reasonable in this last post, Doug.

    A simple question: why weren’t we talking of entitlements in the good old days, say the sixties and the seventies? Pensions, vacations and healthcare were more or less the norm for most American workers. And these were the usual rewards to accrue to a person for having worked their entire life for a company.

    And yet, no one was raising any stink.

  • http://www.leavingthelandofwoo.com Bob Lloyd

    Interesting about the US economy. As you can see from here the corporate profits tax dropped 38% over the last thirty years, the contributions for social insurance stayed pretty static at around 40%, and the indirect business tax dropped from 6.5% to 4.8% of receipts. So the private sector benefitted greatly.

    During that time of course, Medicare went up. Many think it’s perfectly right that a civilised country should make sure that all of its citizens get adequate medical cover irrespective of their income.

    Incidentally, the arms spending was an essential element in stabilising growth in the post-war US as the government controlled both sides of the demand-supply equation for weapons and hence associated economic sectors. The spin off was controlled economic growth – Keynsianism through the barrel of a gun.

    And you’re right that capitalism is in near perpetual crisis. It regularly generates overproduction, regularly runs out of profitable places to invest, regularly sees a drop in profits, leading to slump, inflation and unemployment. Governments recently used the state assets to shore up these very large business because they now exert so much economic power that the social consequences of their actions cannot be accepted and absorbed by society without generating social upheaval and revolt. So the politicians try to keep the lid on it and won’t dare allow them to go bust.

    That’s why social democratic politicians in Europe, even when they call themselves socialist, are actually managers of capitalism carrying out conservative policies in defence of capitalist institutions.

    I think you misunderstand though my point about questioning the system and contemplating an alternative. There’s no reason to destroy the capital, although capitalism regularly does just that, through wars, slump, recession, and so on. The people who are creating the wealth are still there, and so are the businesses. But if the businesses will not act in a socially responsible way, then surely they should lose the right to act independently. States can take them off those who are acting irresponsibly but they have to be prepared for the conflict. Venezuela is a case in point and you make the important observation that the oil reserves provided the necessary financial insurance.

    As an example though, since European states now own significant proportions of the banking sector, why should they not retain that control, or better take the capital from the owners at knock-down prices reflecting the social damage their speculation has done. That would mean at least freezing the assets of those owners who had wreaked such damage internationally and ensuring the adequate and controlled flow of capital. The state is currently paying the piper but is reluctant to call the tune. There’s no good reason why it can’t do a better job than the present owners and put the banks into social ownership.

    You rightly pose the question of where the capital would come from but since it hasn’t been destroyed, it is still there. The real issue is who controls it. And that’s where there’s a political struggle. Of course many of the politicians who wring their hands at the moment, were involved in the abolition of financial regulations a few years ago when they thought they were stimulating the markets – they actually allowed the proliferation of imaginary financial products divorced from the real economy.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Very well-thought through, balanced post (if one holds out the hope the system will survive).

    Of course, social ownership, of banks first, and who knows of what later, puts a different wrinkle on the system and a whole set of questions as to the direction it is heading.

  • STM

    Austerity … who really pays?? Yep, ordinary people like you me and the rest of us.

    As for Doug’s comment: “Our lifestyle is subsidized by the products of low wage labor yet we consider ourselves too good to take part in it. Sounds like entitlement to me.”

    I reckon you’ve hit the nail on the head there; Americans didn’t get wealthy by shysters on Wall St moving money around or coming up with “investment” schemes that were so bizarre, even the people selling them didn’t understand them beyond the idea that higher-risk debt had been packaged up with blue-chip and lower risk debt and then sprinkled with AAA-rated golden fairy dust.

    Americans should remember what they’re good at: making decent stuff and selling it. That’s how the place became wealthy in the first place.

    Taking advantage of cheap labour will eventually mean everything – including profit – moving offshore.

    Make something in the US and charhe an extra couple of bucks for it.

    And eat lunch at the local diner even … which is what I do down here in another lucky country, because when you pay a local for their work and their products – even a cup of coffee – it keeps all that money flowing around the local economy, keeps jobs at home and supports local businesses trying to keep their heads above water.

  • http://www.leavingthelandofwoo.com Bob Lloyd

    [Taking advantage of cheap labour will eventually mean everything – including profit – moving offshore.]

    Interestingly, that doesn’t follow. Globalisation contracts often use cheap indigenous labour but the profits accrue to the foreign companies. The workers get employment and the pay goes into the local economy, but overall there is capital flow out of the country and the creation of economic dependence since the foreign debts are almost always permanent. Couple that with the expensive imports that are almost always tied into the deals and you have a relative impoverishment.

    The same thing occurs when “liberalisation” takes place when state services and assets are privatised.

    Ironically, higher wages are a much better stimulus for a capitalist economy than depressed wages but businesses don’t see the larger picture.

  • Doug Hunter

    #4

    Interesting question but we can all play that game.

    Social security and government medical spending were only about 3% of GDP in 1960 rather than 12+% and growing today. How did they get by without the great welfare state and social spending then?

    I think the answers are complex and involve both cultural and governmental shifts. I don’t have the time or energy to analyze the macroeconomics of the US in the 60’s and 70’s and compare it to today, but what immediately jumps out is the shift from saving, producing, and exporting in 1960 to spending, consuming, and importing by the end of the 70’s.

    A system as large and complex doesn’t wither away or change course overnight. It’s hard to tell how far back and which exact policies effected our lives then and into the future. The only indicators we listen to are the short term ones, which I believe don’t always correlate with the long term effects of policy. If nothing else capitalism should have taught us that today’s boom could be tomorrow’s bust and vice versa. People have traditionally tried to exempt governments from that cycle, but I disagree. I think government goes through the same cycles, just slower since they control their own money supply and monetary policies. I believe yesterday’s boom of the welfare state is tomorrow’s bust.

    Either our welfare state goes or our standard of living does, we simply don’t have the money to continue both any longer. Either way I’d say we’re due for a little ‘austerity’.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Doug, I could provide you with a link to a video analyzing the situation historically. So let me know if you’re game. I don’t want to be repeating arguments which are better and more eloquently presented elsewhere.

    As an aside, however, the very term “entitlement” is a rather recent addition to our political lexicon. Wonder why? And why has it become a buzzword?

  • Doug Hunter

    #8

    I disagree and I think history has shown otherwise. Yesterday’s exploited cheap labour are largely today’s bustling economies. I don’t believe the US can simply rely on shuffling paperwork and acting as the worlds reserve currency forever, I still believe production matters.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Stan, a great majority has been reduced to buying cheaply made, inferior products.

    Try to get an appliance for home that’s made in the good ole US of A. No such luck.

    Hamilton Beach, Stanley Tools, Mr. Coffee, Sunbeam, almost any “American” firm you can think of, all of these products are made in China. And Walmart has become the nation’s greatest retail story, as well as an employer.

    This didn’t happen by coincidence. There were forces, economic and political forces, which brought this situation about.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    And BTW, Lloyd makes an excellent point when he says that lower wages, contrary to appearances, have a tendency to work against the system, causing relative impoverishment worldwide, especially in the home countries. Which is why the American working class has been reduced to Walmart consumers. But of course, Big Business doesn’t see the larger picture.

    But I am not saying what you don’t already know.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    “I don’t believe the US can simply rely on shuffling paperwork and acting as the worlds reserve currency forever, I still believe production matters.”

    I’m in perfect agreement with that. It would seem that manufacturing is no longer a serious option. We must look to technology and energy industries as potential sources of creating wealth and employment. Unfortunately, because of the highly computerized character of the operations, and efficiency, I don’t see these industries as offering anything near to mass employment.

  • Doug Hunter

    #10 Sure, I’m always open to new ideas.

    #14 Real industry has such a large multiplier effect, especially technologically complex ones. The industry creates needs for trained technicians and outside contractors and suppliers and yes, dare I say, even government oversight. In addition that new money flows in and the workers buy houses and go out and eat and buy cars and so on and so on. I’ve heard that one primary manufacturing job, say a Boeing or something, enable the employment of 4 to 5 people because of these secondary services and effects.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    OK, Doug, this is the shorter version. If and when I locate the full (almost two-hour presentation), I’ll provide the appropriate link. You may disagree of course with some of his ideas, but many IMO are sound – even though he is a Marxist.

    BTW, here’s a link to his website, offering many such lectures: Richard D. Wolff.

    Anyway, tell me what you think.

  • Doug Hunter

    He sounded reasonable, but like everyone he cherrypicks and fits the data to suit his agenda. This idea that corporate profits are through the roof is not supported by government data, in fact corporate profits percentagewise were higher in the 50’s and 60’s and were only reapproached under Bush in the mid 00’s. His theory was that profits were through the roof allowing debt, yada, yada in the 70’s 80’s and 90’s when that’s just not so. I think he hit the nail on the head when he talked about global competition, although he did not properly elaborate on this later. He also skimped on solutions and strangely tried to class small business innovation in silicon valley as ‘communist’.

    I believe in free enterprise, if worker owned and ran businesses are the answer then that we should go for it. It doesn’t sound entirely that different from the right wing ownership society with everyone’s money in stock. I’m left to wonder exactly how that is going to make our products more competitive in the global marketplace, they can take the 10% profit margin and plow that back into wages, but then how will they expand if they are successful? They can cut prices by 10% and perhaps be back in the mix with the same issue as above (they’d also be ripe fodder for a real capitalist to buy out).

    Anyway, thanks for the link. We shall see what the future holds.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Glad you liked it, Doug. I don’t know much about cherrypicking the date. Not terribly well-versed, I’m afraid, in American economic history.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    “He also skimped on solutions and strangely tried to class small business innovation in silicon valley as ‘communist’.

    You’re right about that. Innovative entrepreneurship, definitely. Communist, questionable. But the idea of innovation as originating in a different, other than corporate setting, is a sound one. So perhaps he pushed the notion of communism to express what’s essentially a sound idea.

    We’re all more creative if left to our own devices and are free to associate, rather than when we’re constrained by a corporate environment, I would think.

  • Doug Hunter

    I’m not either, I’ve just learned how to be a skeptical listener. The corporate profit over time was the first graph I decided to double check and some of his ideas were already on shaky ground. Here is a link to another piece making the same point as he was, but showing relevant data Corporate Profits over time

    Note how the 50’s and 60’s are highest and 70’s through the 90’s are lower, exactly when he claimed workers were suffering and corporations raking it in. In fact, both were suffering stiff competition from overseas.

    To try and tell people that their stagnate living conditions are caused by sadistic businessmen who just enjoy screwing them rather than the fundamental challenges of competing in a world marketplace where foreign labor goes for $30 a week while US labor wants $30/hr is a very bad precedent. It’s OK to be honest about people’s motives but creating class hatred and warfare based on false assumptions crosses the line in my book.

    That being said, I’m sure he fully believes what he is saying and has only the best intent.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    I’ll check it out, Doug.

  • Doug Hunter

    #19

    As far as answers, I think we share an unusual amount of the same ideas. It’s strange how we take different paths there. I think the benefits of innovation, job creation, and growth potential of small businesses have been well established. Big corporations aren’t real fond of that sort of competition though, and they’ve pretty much bought and paid for the government so I’m not holding out much hope there.

    I’ve been batting around a couple of ideas for articles (finally), and had narrowed it down to two. Does either of these sound interesting to you? Obviously they’d be from a right wing perspective, but still a little more progressive than your caricature of us.

    1) Considering a wealth or value tax on corporations and individuals

    2) Getting and keeping the best and the brightest with smart immigration policy.

    ** Obviously those are working titles, but you get the idea.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    I would opt for the second. The first seems like a dead horse.

    We’ve got to create incentives and reward merit and innovation. And if it’s not going to happen here, then where else?

  • Doug Hunter

    Yeah, we’ve already got the AMT and the good old inflationary printing press I suppose. Maybe I’ll get my immigration ideas together and throw em into the ring, seems timely in light of the Arizona situation.

  • STM

    Bob #8. Sorry mate, you’r not quite right. I did say eventually. And yes, profit does EVENTUALLY move offshore. That has been proven to be the case over and over during the past two centuries. Globalisation won’t change that IMO but simply facilitate and expedite that process.

    China is the classic example of large chunks of so-called multinational and international profit and what might best be called {“profit spin-off” in the form of things such as higher living standards, moving offshore … and in this case, of course, they are moving to China.

    Do some research on the growing Chinese motor-vehicle manufacturing industry. Where do you think they learned the craft? It’s not what it used to be, either. I believe there are Chery 4WDs being imported soon into Australia (which means they have already set up right-hand-drive production lines and not just for my country) that have been given four-star (out of five) crash ratings for here, which is a good standard.

    Watch this space as China, Korea, India, even Thailand, continue to boom on the back of: North American, Japanese, European, Aussie and (their own clever) native know-how; a thirst for better lives; global money and stuff out of the ground (iron ore, coal and gas, probably even uranium in large quantities at some point) they are buying by the zillion-tonnes from this place (Oz).

    Why do you think the Aussie government is moving to discourage foreign ownership of what’s in our ground???

    So the profits stay here, silly, instead of moving (almost) entirely offshore. Not a bad idea – we keep it and create many thousands of jobs and sell it to them at a decent market price instead of them buying it all up before it’s dug out of the ground and making their own price.

    You guys simply need to act: bring much more production back to the US; charge a little bit more for it; lower the value of the greenback slightly so that export markets are more amenable to American goods. And keep buying local – even if it’s just your lunch.

    Anything’s do-able. But if you keep relying on shysters moving money about on computers, you are destined for the scrap heap at some point.

  • http://www.leavingthelandofwoo.com Bob Lloyd

    STM:
    I still disagree about the profit moving offshore. China, the case you cite, acquired vast amounts of capital from within its own country during the massive forced labour programmes of the great leap forward. That’s what stimulated the internal economy and provided the means of industrialisation.

    But you are right that international corporations don’t care about international boundaries. If a corporation sees a source of cheaper labour and more profitable investment, they will move the capital to where it will produce the most profits. Measuring the destination of that capital in terms of which national base of the corporation acquires it isn’t necessarily a useful thing to do. What is very clear though is that the capital flows into those corporations that invest in the developing economies.

    It has been the financialisation of capital markets that kept profitability afloat so that the US car industry makes more now from its loans and financial products than it does from the sale of cars. The profits accrue to the owners of the companies and one measure of the flow of wealth is the concentration at the top and the relative impoverishment at the base.

    A typical mechanism used by large corporations, especially engineering and construction such as Haliburton, is to use international loans to fund infrastructure projects. The corporations use economic advisers to produce reports showing inflated expectations of growth to convince developing country governments to take out massive loans, then award infrastructure projects to the leading US business. The country then finds that actual growth is substantially less, has difficulty servicing the loans and is reduced to a debtor nation. Further bail-out packages allow the purchase of the country’s core services at knock-down prices further increasing the movement of capital to the US corporations. The spin is that the developing countries get an investment of capital – the reality is that the country’s economy is financially raped.

    In a very real sense, production is less and less seen as the source of profit. Unfortunately, as Marx identified 150 years ago, labour is the only source of capital, so financialisation far from solving capitalism’s problems, actually exacerbates them. It may sound like a good idea to boost production of quality goods but the financial markets now exert such a strong influence on spending power, that along with the credit squeeze, there has been surplus production as well as surplus capital.

  • http://www.leavingthelandofwoo.com Bob Lloyd

    Doug:
    #11
    [Yesterday’s exploited cheap labour are largely today’s bustling economies.]

    It’s actually not the case. As a result of the financing of loans to developing nations, the economies have been mostly converted into debtor states. The exchange is an unequal one with economies receiving the development loans turned into dependent states in which the indigenous workers end up in sweatshops. Haiti is a good example, but so is Indonesia and various South American states. Some of them have even been forced into bankruptcy.

    #15
    [Real industry has such a large multiplier effect, especially technologically complex ones.]

    The multiplier effect is not clear cut because although in theory supply rises to meet demand, often that doesn’t and can’t happen, even when aggregate demand rises. The result then is inflation instead. Capital only leads to increased production when the circumstances are available for profitable investment. In any case, these things don’t happen instantly (a frequent wrong assumption in economic textbooks).

    #17
    [It doesn’t sound entirely that different from the right wing ownership society with everyone’s money in stock.]

    There is an enormous difference because the economics include a measure for social cost and social benefit, quantities that are completely missing from the standard demand-supply microeconomics. Once workers own and control the industry, the priorities of production change from simply looking for the most profit, to looking for the most social benefit.

    Such a reorganisation of production for social benefit is inconsistent with the maximisation of profit for private gain, and the point you raise is really important. Models of mixed economies in which the state owns/controls sectors of capital are necessarily subservient to the maintenance of capitalism and not at all aimed at fundamental change. Nationalisation is not in itself a socialist measure.

    What would make the difference is the widespread public ownership and worker control of production. Having said that, it would arguably produce a socially more equitable use of capital if the banking and finance sector were removed from private ownership and no longer subjected to the distortion of massive personal greed by speculators. It wouldn’t be a fundamental challenge to capitalism (though I think that is needed), but it would shift the balance of economic power slightly towards the social good.

    Incidentally there’s an excellent book by David Harvey “The Enigma of Capital” which I hope to get around to reviewing at some point. Amongst other things, it analyses capital flows which relates very much to the points you make.

  • Mark
  • Mark

    Doug, Wolff’s piece focuses on the last 30 years during which period GDP rose from 2.5 to 14.5 trillion, worker compensation remained stagnant (per your link), and the surplus controlled by capitalists after taxes increased dramatically.

    Here’s another presentation of his argument.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Thanks for posting the link to Harvey, Mark. A tremendous resource.

    I’m listening to all 13 videos; hope the lecture on enigma is included.

  • Doug Hunter

    #29 “worker compensation remained stagnant”

    Yes, AS A PERCENTAGE OF GDP (what this means is that if GDP went up, so did compensation). Worker compensation as a % has changed little during the entire period from the 40’s to the 00’s. Likewise, corporate profits have changed little, they were actually higher in the 50’s and 60’s. It still does not support your side’s contention that something has changed in regards to corporate profits/worker compensation… it hasn’t.

    Why does this not show up in household income figures? Because although compensation has continued it’s rise with GDP, the size and compositions of households have changed rapidly. Household size has went from 4 to 3 to 2.6, with single adult/parent households making up the bulk of the growth. Single parent households simply don’t make as much and drag the statistic down providing fodder to be twisted to suit an agenda.

    *For example, between 1960 and 2000, the number of non married households increased from 13 to 51 million while married went only from 40 to 54 million.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Doug, do you factor in the number of people per household who are employed?

    We do know, for example, that apart from the change in the composition of the household over the years, the first-mentioned statistic has definitely experienced a rise from, say, mid-sixties and on.

    The influx of women into the workforce, whether full- or part-time, is an undisputed phenomenon. John Kenneth Galbraith addressed this issue in many of his books, Economics and The Public Purpose, for one.

  • Doug Hunter

    #32 No, I haven’t looked that deep into it although I did see a chart with the information I just glanced at it. The fact that worker compensation as a % of GDP has changed little is enough to satisfy my mathematical mind that we haven’t had some major shift in worker profit extraction (as you might call it), I don’t need to know the details except to counter the ‘buts’ I get from you guys.

    Speaking of that, Mark’s other chart from #29 shows only wages and salaries, not total compensation (becuase it looks worse of course). Total compensation includes SS and medicare withholding, healthcare premiums, overtime, paid leave, workers compensation, retirement funds, etc., etc. that wages alone do not. Those things, especially healthcare as we all know, have been growing faster than inflation in many cases. On the other hand, I’d rather have today’s cancer treatment than 1960’s so maybe we’re getting something for our money.

  • Mark

    Doug, I understand your concern to make comparisons based on percentages of GDP:

    1980 GDP = 2.77 tril. Workers’ share at 60% (from you NYT reference) = 1.66 tril. Capitalists’ after tax share at 3.8% (from the Northern Trust Co’s work) = 105.2 bil.

    2004 GDP = 11.6 tril. Workers’ share at 57% = 6.6 tril. Capitalists’ after tax share at 7.9% = 916.4 bil. (Same references as above.)

    Compare the rates of increase.

    The trend has continued since ’04 but I don’t have the figures at hand.

    (One problem with these calculations is that what I’m calling the workers’ share includes compensation to all employees including those at supervisory level and above who are not strictly speaking productive workers. Compensation to those groups could be added to the Capitalists’ share for a more accurate picture.)

    —–

    Speaking of that, Mark’s other chart from #29 shows only wages and salaries, not total compensation (becuase it looks worse of course).

    First, it’s not my chart. You can credit the Northern Trust Company with the spin if any exists. Second, I thought that it was clear that I was referencing their Chart 2 in comment #29; I should have been more specific.

  • Mark

    (Hmmm, on closer examination…the problem with my use of NTC’s figures is that they aren’t specific to the US. Never mind until I can come up with US numbers — which no doubt will show the same trend.)

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Any available breakdown in terms of the percentages of workers, on the one hand, and the capitalists on the other?

    I’m really surprised that the workers’ share of the GDP is as high as 57%, compared to the rather measly 8% for the capitalists.

  • Doug Hunter

    #34 I don’t want to argue minutiae here, I’m arguing there hasn’t been a fundamental shift in this area. I’m not falling for the traditional Marxist class warfare line or at least you’re going to have to sell it to me in a different way. Capitalists may be greedy, but no more so than they were a century ago. The numbers we’ve examined so far have all been up and down less than 5-10% points basically since recordkeeping began.

    Now, you want to know some things that have change more than 10% that I think may be showing up in the numbers (we’ve already discussed some of them).

    – Members in household, down 50%. Some of this is fewer kids, a big chunk is single adult/parent households.

    – Avg size of home in 1970 – 1400sqft, avg size in 2004 – 2330sqft.

    So let’s take those two together. Let’s see households have less people (hence the number has been growing faster than the population), yet each household requires a 67% larger home for those fewer people. Add into this rampant consumerism, the Ipod, the internet and cellphone bills, etc, etc. and you see why people are struggling and savings are down even as discretionary income has grown 20% during the time period. Selling all that extraneous bullshit is where the 14 trillion economy comes from.

    Now, what was my point with all this? Simply this. Our current condition is not the fault of some evil businessman or even an evil Marxist or bureacrat, it is our own. We make the decision to support the system everytime we go buy some $25 piece of plastic garbage for our second nephew’s kindergarten graduation. Ronald McDonald doesn’t hold a gun to our head and make us eat there, we as a people choose to.

    This is not a problem that requires the government to confiscate our money, set our priorities, and give it back as a bureacrat sees fit. It’s not a problem that requires government intervention at all, it simply requires a change of heart. It’s not impossible, lots of us see it. We can change our ways, our spouses and kids and families and friends can be influenced. I do it every chance I get and you can to.

    I don’t believe in domination. When there is an issue with free will and it appears people are making the ‘wrong’ decision, then it should be your goal to educate and assist people into making better choices, not force people by law to do what you consider right. Some people value free time or family time above all, some value money at the top, others comfort and security, some would even rather trade the joy of eating meat or smoking or drinking or doing drugs for a few years at the end of their life. I don’t believe I can tell anyone they’re wrong on any of those decisions.

  • Doug Hunter

    #36 Part of the answer may lie in viewing wealth and income as two seperate things. Almost all of a workers income will be turned around and handed back to a corporation with very little going to wealth. A capitalist is the reverse, his wealth will grow at a multiple of his income and only a small percentage will go to someone else as consumption.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    “Now, what was my point with all this? Simply this. Our current condition is not the fault of some evil businessman or even an evil Marxist or bureacrat, it is our own. We make the decision to support the system everytime we go buy some $25 piece of plastic garbage for our second nephew’s kindergarten graduation.”

    Kind of jumping to conclusions here, Doug, whatever the statistics prove or do not prove.

    The fundamental thesis is that we have become a consumption society, because of the unprecedented increase in the standard of living of the American working class; I’m certain that you won’t disagree with the latter proposition.

    So to argue against consumerism is like to argue that fish can do without water. The entire economic system is based on commodities and on consumption. It’s in our blood. So the question you ought to be asking is: why do we buy junk nowadays?
    Have we been doing so all along, because we believe in junk? And if not, perhaps, just perhaps, the reason may be that we can’t afford quality goods anymore, especially after we’ve mortgages our houses to the hilt and maxed out our credit – all in hope of being able to support our spending habits to which we haven’t only been accustomed but which, all along, we used to consider our God-given right – because we’re Americans.

    Do you really want to argue that the standard of living of the average worker has improved over the last thirty years, when you allow for inflation in terms of rent and other goods while the wages have pretty much been on an even keel?

    It’s not a coincidence that the working class shops at Walmart, that Walmart became the largest retailer store in America and the largest employer, and that the products are made in China. (As Wolff argues, it was a sweetheart deal.)

    But it surely wasn’t always so. And it goes beyond bargain-hunting but speaks more likely to an economic necessity.

    It’s a mass phenomenon, Doug, not to be explained away by the general stupidity of the American consumer. Real forces were and are at work.

  • Mark

    Rog, consider the size of the US working class; it’s not surprising that it takes a considerable amount of GDP to reproduce it.

    (btw, in addition to the problem with the definition of ‘worker’ that I pointed to in #34, I don’t know whether the NYT figures for compensation are before or after taxes.)

    Doug, it’s the growth of worker productivity, the associated growth of GDP, and the flat-lined compensation that are at issue here. Do you think that any of those factors is counter factual?

    I can’t say that I find anything in #37 after the first paragraph to disagree with, myself.

  • Doug Hunter

    “It’s a mass phenomenon, Doug, not to be explained away by the general stupidity of the American consumer.”

    I certainly wouldn’t underestimate that. It’s a matter of priority, Americans have prioritized material stuff over retirement, healthcare, safety net, etc. You can call it stupidity if you want, I call it personal choice and yes I believe 100% that consumerism is the root of the issue. Now, some want the government to reprioritize by force and take away some of that discretionary income through taxation and set it aside for the ‘necessities’ that a few can’t afford. All I’m saying is that you can reprioritize without government intervention, lots of people already do.

    I believe in free choice not government intervention, perhaps you don’t

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Well, statistic aside, there is a conceptual point. Doug tends to lay the blame at the feet of the consumers, even to the point of calling it pathological. But if it is pathological, it is more on the order of mass phenomenon, a natural by-product of the economic system, rather than to be thought of strictly in terms of the consumers irresponsibility. Besides, it is much easier to identify a pathology once a disease has progressed, not in the early stages.

    To cut to the chase, Doug is failing in not willing to allow there were real economic and social forces to bring the situation about, pathology included (if we wants to go that route).

    It’s a category mistake to try to explain social phenomena as though a simple aggregate or sum total of individual decisions and actions. Social and individual are distinct categories, and “social” doesn’t reduce to an aggregation of individual.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    “I believe in free choice not government intervention, perhaps you don’t.”

    WTF has this got to do with anything? Did I bring it up at any one point? Seems you’re reacting against some ghost.

  • Mark

    Rog, by Doug’s reasoning, if we’re anti-capitalist, it must mean that we’re pro government domination…true of most who argue the pro-capitalist position.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    I was merely trying to analyze and understand our present situation. I keep my thoughts about post-capitalist societies to myself, inner circle excluded.

    What I see is resistance to new ideas and inability to think on one’s feet. So yes, Doug is very skillful in marshaling evidence in support of his pet positions and beliefs. But when it comes to appropriating fresh concept so as to expand one’s conceptual machinery . . . well, I’m hoping.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Don’t mean it as an insult, Doug; just my observation.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Food for thought, Doug. Would you think that the response of the German people to the National Socialist Party and Hitler, over time, of course, a sum total of individual decisions and actions or rather, as something on the order of mass phenomenon (perhaps even mass hysteria)?

    Is the concept of “mass phenomenon” totally absent from your lexicon?

  • http://www.leavingthelandofwoo.com Bob Lloyd

    The argument about consumerism is an important one as Wolff points out. There is no doubt that workers’ real wage level has remained flat in the US since the mid-70s but worker productivity has continued to climb. The problem that produces, as Wolff points out, is that there is insufficient effective demand to sustain the markets in the newly produced goods and little opportunity to export them. With all of us trained and conditioned to accumulate posessions as a measure of personal success, the habit is engrained and resistant to common sense. Given the chance, workers will spend, but they just don’t have the cash.

    So a search is made for new markets, which pretty soon runs out of steam because of international competition. The other alternative is to promote debt-financed domestic spending. Working people borrow the money they were not given in wage rises, so again as Wolff points out, they get the privilege of paying the interest back on the income they should have had in pay rises to reflect increased productivity.

    The banks collect the interest, the workers collect the accumulated debt, debt incidentally secured on their homes. So when the home construction business falls down, so does the basis of the collateral backing up all that debt-based spending. This is a systemic crisis, and really isn’t explained simply by consumer choice, or individual consumer decisions.

    Workers’ real incomes (i.e. taking into account taxes, pensions, assorted benefits, etc) have not kept pace with increased productivity and that produces the dual effect of depressed aggregate demand, and a surplus of capital looking for investment. It was debt-financing the demand that gave the financiers the impression that they’d found the magic bullet. Unfortunately, such demand is self-limiting as the security in real estate runs out.

    The real problem now is what capitalist can do about it. They can try to find profitable investment globally, and that’s what globalisation is all about – massive construction and development projects in developing countries based on those states taking out huge international loans and feeding the interest into the major US corporations, along with becoming permanent international debtors. But that too has limited potential and massive geopolitical tensions and problems, frequently becoming military conflicts.

    The other is to directly expropriate more capital from working people and directly transfer it to the capitalists. There are two problems with this. The first is that the rate of exploitation has been increasing for a considerable time, longer hours, unpaid overtime, temporary contracts, lousy working conditions, reduced benefits, etc, and won’t bear further increases without major revolt. The second is that even with the extra working, workers can’t earn enough to generate the required increased in aggregate demand.

    So what happens is that the state plays the role of managing the transfer, subsidising the financial institutions with massive handouts, then clawing back domestic spending by cutting social services, health care, etc. So because they can’t directly take more cash from paypackets (though they will effectively do this with purchases taxes), they cut the services which taxes should be spent on.

    This seems to indicate a continued period of stagnation in which the state increasinly intervenes on the side of the capitalists to increase the regimented extraction of more capital from workers and the widespread dismantling of much of the welfare state (it will be done through privatisation). Without the destruction of large amounts of capital (war of course does that very well as do slumps), it seems difficult to see where the potential for economic growth will come from. Perhaps that’s why the pundits have so little to say.