Archive for ‘Economics’ Category
I do not purport to be an economist nor would I ever want to be. Theirs is a world of implicit assumptions and pseudoscience that only a brave few have challenged from within. However, theirs is also a discipline that in theory and practice can shape the fate of millions, which is why I pay more than casual attention to them. Thus it is that I came to ponder the financial situation in Greece, a place that I lived in in 2010 at the start of its downward slope towards the current moment (my wife has researched and written on matters of Greek political economy and I have an interest in Greek civil-military relations, so our stay was mutually beneficial). Here is my non-expert view of things.
When lenders charge interest on principal loaned, they prefer to have the interest paid rather than the principal. This loan repayment rationale, which is true for states, firms and individuals, keeps the debtor beholden to the lender so long as the principal remains unpaid. Over time, the interest accrued can well exceed the amount lent, which is perfectly fine from the lenders point of view but keeps the debtor permanently saddled in a cycle of interest payment unless the debtor earns additional income (revenue) that can be directed towards paying down the principal. Short of a lottery win, a pay raise or new sources of revenue, debtors on relatively fixed incomes are locked into the cycle of debt.
Greece is in that situation. Until 2008 it was servicing the interest payments on its debt to international lenders (mostly the European Central Bank, various national banks and private investors). Then the international financial crisis of 2008-09 hit, which had nothing to do with Greece per se but which drove up interest rates. With a stagnant economy and flat tax revenues, Greece quickly found itself unable to make interest payments and, in a dramatic revelation, announced in 2010 that it had been systematically underestimating its fiscal deficit in order to maintain interest payments on its debt at a sustainable rate. At that point many private investors dumped their Greek debt holdings and the IMF assumed a significant portion of them as well as some of that accrued by European public banks.
The Greeks were subsequently offered two “bailout” loans that allowed them to continue to pay the interest on their debt, which together with the principal now amounts to nearly 250 billion Euros. With interest set at approximately 4 percent annually, the figure is set to reach the half trillion euro mark in a few years. Even if interest rates were capped at zero, it is estimated that it would take Greece 81 years to repay the amount currently owed.
There are several questions arising from the Greek debt. Why, since the interest paid is now more than the principal borrowed, does not the ECB and IMF put a cap on the debt? Why did investors continue to offer loans to Greece when it turned out that the Greeks were fiddling the books, and that neither the principal or the repayment loans ever trickled down to the general public in terms of public goods and services? Why does it expect the Greek population to pay via austerity for the risky borrowing of Greek elites and the even riskier lending of European banks?
Asking the Greek people to shoulder the burden of austerity–in a country with 30 percent general unemployment and 50 percent unemployment for those under 30, with a massive brain drain of educated professionals, porous borders and deep cuts to public sector salaries, pensions and basic services–is akin to forcing the children of crack addicts to starve and swab floors in order to pay for the rehab treatment of their parents. And the outcome is just as uncertain.
Let’s look at it this way. Capitalism is about assuming risk for higher reward. In the financial world, the riskier the investment the higher the interest paid on it. And just like quick finance and pawn shops are located in poor rather than rich neighbourhoods, high interest bonds are issued on “risky” countries with poor credit ratings and histories of financial instability. For “courageous” investors riding the line between high interest and junk bonds, the rewards for so-called bailouts are great. But the downside of a default is that they will have to wear losses, just as many ill-advised investors have to.
Greece is one such high risk place and those who lent to it knew this from the beginning.
With that in mind is is easy to see that the behaviour of the “troika” (the European Commission, European Central Bank and IMF) can be (and has been) likened to loansharking and needs to be treated as such. When people seek debt relief from loansharks, banks or credit card providers, they arrange to repay a capped sum and a payment schedule is established. The alternative is bankruptcy, which leaves the creditor with nothing. Although suboptimal from the lender’s point of view, the capped payment alternative is better than nothing.
When it comes to states, the decision to cap debt is a political decision, not a financial one. That is because the stability of states is more important than the returns on risky investment, especially when ample returns have already been received, many creditors are no longer at risk and demands for future returns put state stability at peril. In the case of Greece there is a twist, in that the referendum on whether to accept austerity was the first political iteration in a multi-step process. Now that the Greeks have refused more austerity, it is the turn of the EC to make a political decision of its own.
Let’s be clear: this is not a Greek crisis; it is a crisis of European finance capital. The demand for more Greek austerity is not about servicing the debt but about humiliation, punishment and deterrence of others who might dare to do the same.
The people who should seek answers are those who invested in the agencies that undertook the high risk lending strategies that have brought us to this moment. The people who are responsible for the crisis are not average Greeks but suits sitting in fancy offices in Athens, Brussels, Frankfurt and London. They are the ones who took the risk on Greece and they are the ones who need to be held to account.
This does not absolve Greeks from their own mistakes. Certainly the culture of entitlement and the pervasive corruption in Greek society needs to be addressed. But here again, this was well known to foreign creditors at the time they lent money to Greece, and for all the everyday petty corruption in Greece involving phantom war veterans and people faking disabilities, it is the Greek political-economic elite who elevated institutional corruption to an art form. Syriza proposes to confront them as well as the lower-level scams but in order to do so it must show that it can negotiate a debt payment agreement that puts the interests of average Greeks first.
There is a way out of the imbroglio that can leave Greece in the EU without undergoing more austerity punishment. In international law there is a concept known as “odious debt.” Odious debts are those that are incurred by governments that do not go to their stated purposes or are ill-gotten from the onset. Under international law, odious debts are the responsibility of the incurring parties and are not the responsibility of their successors. As such, they do not have to be serviced by others if the responsible parties cannot be made to pay.
One can argue that the debt incurred by pre-Syriza governments from 1999-2008 fall into the odious debt category and should be forgiven as such. If anything the political parties in government during the time the debts were incurred can be sued for repayment (these being the Panhellenic Socialist Party (PASOK) and New Democracy (ND)). Whatever happens, it is clear that Greece has not seen the purported benefits of the loans incurred by previous governments (to include the now abandoned or derelict Olympic facilities) but it has paid more than its fair share of interest on them. By any reasonable measure the remaining debt is now odious.
In the end this is a cautionary tale with minor and major sub-plots. The minor plot is about sustainable debt and the limits of debt relief. The major plot is about the perils of political union. The EU needs to understand that how it addresses the minor plot will determine the conclusion of the major one.
Bonus read: Although I do not agree with some of his observations, Brian Easton has a nice short piece on the Greek situation here.
Much has been made of the fact that since the entrance into effect of the bilateral Free Trade Agreement (FTA) with China in 2008, New Zealand exports to China totaled NZ$33.7 billion in the six years since then compared to NZ$9.9 billion in the period 2002-08. In 2007/08 before the FTA went into effect exports to China totaled NZ$2.5 billion, and in 2012/12 they were worth NZ$7.7 billion. That is more than 200 percent growth in six years, or more than 45 percent per year (Hat Tip: Kiwiblog)
Needless to say, pro-trade cheer leaders think that this is a great thing. And perhaps it is. But before we get too excited and proclaim the absolute benefits of this bilateral, a few questions need answering.
First, what is the volume and worth of imports from China during the same period? In other words, what is the state of the bilateral trade balance?
Second, has the FTA led to export commodity diversification or concentration?
Third, has the increase in bilateral exports led to an increase in employment in the export sectors affected?
Fourth, has there been a trickle down effect evident in the expansion of auxiliary industries and tax revenues derived from them and the export sectors involved?
Then there are subsidiary questions:
Has overall NZ GDP per capita and income distribution increased as a result?
Have occupational health and safety standards improved in the export sectors associated with the FTA?
These questions are important because they illuminate more precisely who has and has not benefitted from the FTA.
I invite readers to do a little research on these questions, using the government’s own sources as well as academic studies. The findings may come as a surprise, as oftentimes macro-statistics mask the meso- and micro-impacts underneath the “big picture.”
Not all is what it seems.
David Shearer says he won’t rule out buying back shares in state-owned power companies sold by the government. He won’t rule it in, either. Why? Does he need to consult his leader?
There’s so much wrong with this that I scarcely know where to start. This buyback agenda has been set by Winston Peters; it’s now two years since the 2011 election campaign kicked off with a pledge to sell these assets, and it’s like the boffins in Labour haven’t yet had an original idea about it. The problem with old generals is supposed to be that they fight today’s war with the strategies of yesterday’s war, but this is worse — it’s fighting yesterday’s war with the strategies that lost the one before that.
But enough about my thoughts on the referendum. This time the issue is what happens after the SOEs are sold. Chris Trotter has articulated strong political arguments for nationalisation, and I think these serve to demonstrate that nationalisation is not simply untenable for a left-wing political movement.
So while I’m not persuaded the opposition should do it, there’s definitely a right and a wrong way to go about nationalisation. The core principles are similar to those in play with the initial privatisation: that we should have good information about the intentions of the main political decision-makers; and that people should not have property expropriated without due process. This need not be perfect consent — an election result delivering under 50% was sufficient to grant a mandate to privatise half the value of these assets, for example.
Market and electorate signals
A clear “we will buy them back” or “we will not buy them back” would do that; it would tell the market and the electorate what to expect and they could act accordingly. Both groups would know we were dealing with politicians of at least some sort of conviction, and more to the point, someone willing to make some big calls, to put something on the line. Today we see before us a Labour leader who has neither the conviction to know what he wants to do, nor any will to do it.
As Chris says, a stance one way or the other would provide Labour with a mandate. If Labour considers nationalisation irresponsible, then as voters we ought to know that; but it is much more crucial to justify an actual nationalisation programme. Given that the current criticism of the government is that they lack a mandate to do something they campaigned for a whole election year on doing, I struggle to see how even the most one-eyed Labour partisan could honestly justify the massive expense of buying back SOE shares unless it was clearly signalled and voted on beforehand.
This need not be unconditional. Graeme Edgeler has suggested a provisional pledge — Labour could say that if, say, two thirds of respondents in the referendum vote to not support the asset sales then an incoming Labour government would seek to nationalise them. David Shearer has many options that are better than “maybe”.
Economics of a sell-off/buyback
It might be reasonable for Labour to pledge to buy the shares back at cost, but only if the pledge is made credibly and early — certainly no later than the first round of sales. The pledge would be fair warning to investors: if they choose to disregard it, that’s on them.
Because it allows the markets to price in the risk of a Labour-led government coming in and making good on its promise, signalling nationalisation in this way would likely depress the initial sale value of shares. If the threat was sufficiently credible it could, in principle, depress demand for shares to the point that selling them would be uneconomical — thereby preventing the sale, or limiting it to just one or two SOEs. While this would look bad for the government there is also a downside risk that the opposition would be seen to be sabotaging the scheme — but given that Labour seems certain the scheme is unpopular, that should not concern them too much.
Because there is an ideological imperative behind the sale (that is to say, the market already knows the government has to sell in order to retain political credibility) it seems likely the shares will already yield less than what an equivalent float by a less-motivated seller might yield. There are other industry-specific factors which could also depress the price — the fact that hydro generation is not much good in the middle of a historic drought, for example. I have no knowledge of the value of the assets as they stand, but it doesn’t seem totally outrageous that it might not be all that high as it is, and a little more risk might just be enough to turn people away.
Conversely, a nationalisation conducted after the shares have been sold has the opposite effect. An ideological bulk-buyer in a fair market will bid the price up. Even worse is the middle-ground: if there exists sufficient uncertainty before the float the sale price could be depressed; followed by a Labour election win and nationalisation, causing the price to rise. The government would be selling low and buying high.
Venezuela of the South Pacific
The worst aspect of holding the “maybe” position Shearer has taken is that the risk of “Venezuela of the South Pacific” scaremongering exists as long as this scenario is not clearly and credibly ruled out. I don’t seriously believe this sort of expropriation would happen under a modern Labour government, but political narratives needn’t be based on reality.
If Labour commits to nationalisation then scaremongering will commence, but at least the party will be able to control the narrative around it, and articulate arguments in principle for it, as Chris has done. If the SOEs are that popular it shouldn’t be too big a risk. If Labour rules out nationalisation then such scaremongering may still eventuate, but will be weak. If they continue to sit on the fence, they get the scaremongering, but not the opportunity to rebut it. Lose-lose.
That Labour would even consider holding the “maybe” position is astonishing, but it is New Zealand First policy after all. It reflects an awareness that New Zealand First is here to stay, will probably hold the balance of power at the 2014 election, and could make nationalisation a condition of its being part of any Labour-led coalition. The deep problem is that Labour, lacking a political agenda of its own, is letting others define it. Until the party leader is prepared to lead, Labour will keep losing.
The political Right regularly accuses the Left of engaging in social engineering. Be it pushing such unnatural constructs as union and civil rights, health awareness and environmental concerns, the Right claims that the Left is out to control how people behave and even think. For freedom-loving individualists, this is anathema.
Consider my surprise, then, when I saw the Prime Minister saying that one of the reasons for the $2000 dollar “kiwi-first” purchase option with loyalty premium for Mighty River Power shares was to “change the investment psychology” of New Zealanders. It seems Kiwis put money into real estate and bonds, but not the stock market. Mr. Key thinks that his countrymen and women should diversify their portfolios into stocks, and the asset sales option is one way of promoting that. After all, it is not really prudent to have too many eggs in one basket.
I can see his logic. As a money trader and speculator, stock manipulation comes natural to Mr. Key. Sell short, hold, think long…he has the field covered. And truth be told, in a market environment such as NZ’s, it may not be unreasonable to urge people to spread their savings around. Higher rates of savings are traditionally linked to higher standards of living and growth, so by market logic such a move is both collectively and individually optimal.
What I find notable is the PM’s admission that the Mighty River Power stock purchase proposal is a deliberate attempt to alter the way Kiwis think about investment. In other words, it is a social engineering project that proposes to transform the psychological disposition of Kiwis when looking at their investment options.
But if that is the intention, how is that different from campaigns to get people to stop smoking, not drink and drive, use public transport, practice safe sex, license and desex their pets or stop littering? Are these not all examples of what the Right claims is undue interference by government on the rights of individuals to freely choose how to live their lives? Even if one admits that the share purchase option is not compulsory and still a matter of free choice (as are some of the examples just mentioned), is not the intention of the National government and Mr. Key to engage in exactly the type of social engineering–to include psychological indoctrination–that the Right accuses the Left of championing for its nefarious totalitarian purposes? Mr. Key has admitted that there is a social engineering intent to the proposal, so how is that good when other social engineering experiments are considered by the political Right to be bad? Or are some types of social engineering more acceptable to freedom-loving market individualists than others?
If the latter is true, than even the Right has to admit that social engineering projects embarked upon by governments are not always contrary to the small-governance/more market/individual choice principles that ideologically underpin Right thought. And if that is the case, then how can social engineering experiments be totalitarian, collectivist and fundamentally anti-democratic at their core?
Pardon me if I see a little contradiction here…
At the Dim-Post, a searing explanation of how class-size dogma works in the real world, by a teacher. He or she describes The Dumb Class of 15, who struggle with the assistance of their teachers to barely pass; and The Smart Class of 30, who are underresourced and consequently underperform, but pass because they’re, well, smart. And then Treasury looks at the data.
No word on what happens to The Average Class, who have neither the advantage of adequate teaching resources, nor “smarts”.
But clearly, it’s all the fault of the teachers. They’re messing with the Natural Order Of Things.
By wasting so much resource on The Dumb Kids who are never going to amount to anything anyway, they disadvantage The Smart Kids, preventing them from realising their potential. Those Smart Kids are essentially being forced to subsidise the underclass — in their childhood as it will inevitably be in their adulthood, supporting the unproductive bludgers all around them.
So no sympathy for teachers. If they would just let The Dumb Kids fail, as the laws of nature and the market intended, The Smart Kids would perform to their full ability, soon enough we’d have all the productivity growth we could possibly want, and the government would have plenty of money to afford tax cuts for The Smart Kids’ parents. Since the teachers have sabotaged the education system by trying to tilt the scale in favour of The Dumb Kids, the government really has no choice but to implement a system that reverses that tilt by rewarding excellence, to ensure that the education system performs to operating spec, where The Smart Kids succeed and The Dumb Kids fail.
Just as nature, and the market, intended.
Edit to add: Phil Sage has obliged us all by making pretty much this exact argument on the square, in comments on the original thread. Thanks, Phil!
Posted on 13:11, May 12th, 2012 by Pablo
This may sound mean but having bank economists talk about global macro-and political economics on major NZ news outlets is like having pedophiles talking about childcare. Having them speak authoritatively on the “news” skews public perceptions of economic matters towards the preferred constructs of finance capital. Leaving aside the matter of finance capital’s interest in deregulation of capital flows and currency manipulation, using bank economists may be fine when discussing banking take-overs or interest rates in local markets. But there are many other economic interests at play that deserve mention when it comes to issues of political and macro economy and bank economists are ill-suited for a robust discussion of them. To the contrary, their “expert”opinions masquerading as informed commentary in the news media are often poisonous to the integrity of public debate on economic matters.
Is there not a single non-banker economist in NZ who could be used instead? Are all the Economics, Business and Management departments in local universities full of useless PBRF worshippers devoid of real world experience? Are there no economists in research centers, institutes or government agencies who could present a dispassionate and non-vested perspective on the state of global economic play? I find it hard to believe that is the case.
That simple phrase “make the numbers work” catches John Key’s approach to the perennial tension between efficiency and transparency in a democracy. To simplify things, it can be said that the more democratic and transparent the policy process, the less efficient it becomes. That is because the more actors are involved in policy decisions, the more likely that additional decisional sites and veto points will be placed in front of policy choices. They key is to find an appropriate balance between efficient policy formulation and implementation and open participatory representation by all potential stakeholders. If forced to choose, democrats err on the side of representation. Authoritarians prefer efficiency.
The corporate world has no objective need for balance. What matters are balance sheets in the black. Firms are structured so that decision-making is hierarchical rathe than horizontal, with decisions flowing from the top rather than as a result of inputs from the bottom or from external parties. Managers rule, workers obey, and shareholders or owners reap profits. Given the sensitivity of any given project, public consultations might be invited and consideration might be given to mitigating factors that impinge on profitability, but the bottom line is that the numbers work in favor of owners, investors and share-holders.
John Key came from (and is likely to go back to) such a world. In fact, with a personal net worth of around $60 million he is a small time member of the “Masters of the Universe:” the network of financial elites (stock brokers, money managers, currency traders, hedge fund administrators and bankers) built up in the 1990s and headquartered in London, New York, Geneva, Hong Kong and Singapore who made the calls on how global liquid assets should be invested. Theirs is a world of numbers, not morality or ethics, and their worth to the network was and is their ability to make the numbers work when constructing investment deals. They answer to themselves and their clients without regard to the public interest because, quite frankly, they are interested in private gain rather than the public good.
With that in mind the self-styled CEO of NZ Inc., John Key, advised himself that changing gambling laws so that SkyCity can have another 500 slot machines in return for building a convention centre on adjacent land at no tax payer expense was a neat deal that was in both the private and public interest (the public presumably being interested in the tax revenues and ancillary benefits that will accrue from having the convention centre up and running, which is a whole different story). By that logic the numbers work.
In order to come to this conclusion, however, NZ’s self-styled CEO had to ignore the counsel of the Auckland City Council, local iwi, problem gambling-related mental health organizations, the Police, traffic authorities, tourism operators and a host of other potential stakeholders (I mention these because the proposed site of the convention centre involves a myriad of urban planning considerations and is only handy to the Casino and not to the Viaduct, Cloud, Winyard Quarter, Ponsoby, Newmarket or other entertainment districts that depend on tourists). When I say “ignore” I mean that he chose not to solicit advice from any of these parties rather than turn his back on advice already given. Mr. Key’s self-advice also told him to order an end to all other tenders once SkyCity got involved, some of which might have contained the input from non-investor interested parties such as those mentioned above. But as a minor Master of the Universe why should he bother with pretenders and outsiders when he could seal the deal with SkyCity for a small change in an industry-specific law? The Hobbit saga taught him that allowing non-investors to have a say could well kill the deal, so this time around he made sure that negotiations were kept quiet.
Clearly Mr. Key is a man who understands numbers and efficiency. But perhaps he spent a bit too much time in Singapore, where public input into policy decision-making is inconsequential to the point that it is not even considered even when it comes to large public works projects (such as the expansion of the MRT train lines currently underway, which have displaced thousands without any input from them and with compensation determined not by market value but by government fiat). In Mr. Key’s world he does not have to waste time and money listening to the blather of a host of obstructionists and self-interested losers (because, after all, he only deals with winners). He is there to crunch the numbers and do the deals. In the pokies-for-convention-centre trade he has done so, efficiently.
No wonder it is rumored that he is tiring of the job. Here he is, cutting deals and helping commercial players make serious money just like in his good old days in the private sector. But now he has to put up with ex-post whingers and other plebians who all want a voice without a full command of the power of numbers. Plus, he is surrounded by career politicians who for the most part could not make a buck even if they won lotto, and the opposition is nothing more than a bunch of special interest namby-pambies who would not get past the lobby of his former corporate headquarters. Why should he stick around and have to listen to their nonsense about addiction, traffic and other social costs?
You have to feel for Mr. Key. Once he was in the stratosphere, unaccountable to anyone but his corporate masters and the private interests that they served. He made money off of money without having to add value or increase production anywhere, and he got rich doing so in part because he made his name in an authoritarian country in which numbers, not people, matter most. Now he has to smile and wave to a bunch of provincial hicks self-absorbed in some weird Antipodean PC navel-gazing where everyone has a say and little gets done.
Then of course there is John Banks, and how he reads the numbers. For Mr. Banks the deal is not about making public and private numbers work. It is about private interests showing him the money in order to advance his political fortunes. Whereas Mr. Key was looking for a way to balance a specific private actor’s desire with a vague public interest (again, assuming that a convention centre adjacent to SkyCity is in the public interest), Mr. Banks was looking for campaign contributions. Presumably there was a quid pro quo involved with at least two known private parties, SkyCity and Kim Dotcom (there are plenty of others who donated “anonymously” to Mr. Banks but let’s focus just on these since they are in the news). What the expectations were for deliverables from Mr. Banks is as of yet unknown, although whatever they were it appears that Mr. Dotcom now feels that he was stiffed on the deal and is exacting his revenge by releasing details of his donations to Mr. Banks’ mayoral 2010 campaign. Whatever it was it was not in the public interest unless one thinks that granting Mr. Dotcom special favors is a collective good.
In the end, what Mr. Key did was not very democratic but it was legal and efficient as far as the tightly defined numbers behind the deal are concerned. Mr. Banks, on the other hand, had no public interest in mind when he solicited funds from Mr. Dotcom and accepted those from SkyCity, even if the latter’s donation was the same as the amount donated to Len Brown at the time (to his credit Mr. Brown reported the donation from SkyCity to his campaign, which mirrored that given to Mr. Banks “anonymously”). SkyCity was just papering both sides of the mayoral aisle with its symmetrical donations to the two leading candidates, and whatever favor was purchased was bound to be equally small given the amounts involved no matter who won the election. But Mr. Dotcom was an individual who papered only one candidate as far as we know, and he did so in excess of the corporate entity known as SkyCity. He was, in other words, trying to purchase individual favor by backing one candidate over another.
That is why there is a difference between the two men. Mr. Key is an authoritarian-minded money man who thinks he knows what is best for the country without regard to the naysayers and whiners, and who makes the numbers work in favor of his preferred vision. Mr. Banks is an egotistical “show me the money” weasel. With the possibility of more revelations about Mr. Banks forthcoming, it could well be the case that the weasel brings down the money man, or at least accelerates his departure from office.
As I watched various labour conflicts over the past few months, then took in accounts of greed-mongering of various types (the wheel-clamping rort being the latest), I set to wondering if things have turned mean in NZ. I tend to think so, and believe a lot of it has to do with National’s presence in government as well as the increasing stratification of NZ society–something National’s policies tend to exacerbate. Some of this collusion is obvious, such as changes to labour laws that strip worker’s of collective rights while enhancing employer prerogatives when hiring and firing (under the banner of so-called “flexibility”). Some is less so, such as in the “look the other way” approach to the conditions that led to the Pike River and Rena disasters and the hands-off government reaction to them. But the trend towards meanness began well before National returned to government in 2008 even if it has gotten worse under it.
It strikes me that the syllogism involved goes something like this: increased employment precariousness born of economic recession in climates of market austerity premised on cost-cutting in both the public and private sectors leads to increased anxiety, then desperation amongst the salaried classes as their life opportunities narrow. In the measure that collective means of defense and redress are also pared down and stripped of legal cover, agency takes precedence over principal to the point that individual rank and file interests are sacrificed in favor of continued union bureaucratic presence (however diminished) in those economic sectors that remain at least partially organized. In the measure that workers realize that their agents have adopted the “iron law of oligarchy” where bureaucratic self-interest and survival becomes the primary objective to which rank and file interests must be subordinated, notions of collective solidarity are abandoned in favor of individual self-interest. Since this is the dominant ethos at play in unorganized sectors of the economy and amongst the managerial and financial elites, the move to survivalist alienation becomes endemic (and indeed pandemic, if we include the fact that immigrants are socialized into the culture of meanness, thereby propagating the “disease” beyond its original culture). The original agents of transmission, in any case, would appear to be the market ideologues who have metastasized into the managerial elites of the present day.
When survivalist alienation becomes endemic, cultural, ethnic, religious and other forms of ascriptive categorization are used to justify the “me first” approach to social intercourse. Until then people may just be bitter. But this is the point when things turn mean.
I could be wrong and this has always been the case in NZ. My impressions are formed since 1997, so perhaps what existed before was indeed a land of milk and honey. But it seems to me, beyond the inter-generational inevitability of the trend towards hyper-individualism there lay a number of accelerants that have made things worse in the last ten years.
The bottom line of any political economy resolves around the question of accumulation versus distribution. Productive activity that generates surpluses (profits) can be accumulated by those who control the means of production (workers or capitalists), or can be distributed throughout the larger community in which production is located. In capitalist system decisions about accumulation and distribution are done by capitalists. Workers organizations fight or bargain for better distribution of profits. Capitalists would prefer to accumulate for their own consumption. Because production is essential for the material standards of everyone, in democracies capitalists and workers negotiate the proper ratio of profits saved to profits distributed. Once distribution has occurred (via wages, benefits and the like) the saved part of profit is re-invested or “taken” by capitalists (owners) for personal use. Both sides adopt minimax negotiating strategies by making maximum claims on the preferred ratio, then settling for a mutually acceptable minimum. By doing so neither wages or profit-taking rise too recklessly or out of proportion to productive gains or inflation, as that would lead to inefficiencies and potential social unrest.
Or so the system is supposed to work. Depending on relative political balances and the specific location of a given productive sector in the capitalist world cycle at any specific moment, workers or capitalists may have structural and political advantages to play in their favor. Workers will attempt to maximize distribution in the form of job security and wage and benefit gains; capitalists will attempt to maximize accumulation by rolling back worker’s redistributive gains.
For the last twenty-five years logics of accumulation and profit-taking have dominated macroeconomic thought. Workers have steadily seen their distributive gains eliminated. As the process has deepened capitalists have pushed not only to reduce the material aspects of the distributive process. Sensing a favorable economic and political environment in places like New Zealand, they are launching attacks on the rights to collectively organize in defense of distributive stakes or goals. Capitalists well understand that for people to have economic rights they must have political rights. The right to organize collectively is a political right. Reduce that right and previously held economic rights are more easily curtailed or eliminated. The more the concept of economic rights based on distribution is pushed towards a minimalist definition (encapsulated in the saying “you are lucky to have a job”), the more workers will limit their distributive demands in the quest for basic subsistence. The more that they do so the more working class internal competition will further push down the overall wage bill and increase job insecurity. The process of “casualisation” is the result of that trend, with “labor flexibilisation” being the managerial jargon used to describe employment precariousness.
Today in New Zealand the scales are tipped in favor of accumulation over distribution. The political and economic elite (including many in the Labour Party leadership) overtly side with the logics of accumulation argued by capitalists. They accept the reasoning that in the current global economic moment distribution to workers is contrary to future growth. Thus they accept that not only worker’s distributive demands but their political rights must be curtailed in order for economic benefit to occur. Of course, that benefit accrues to capitalists rather than workers, and if the low rates of re-investment in many productive sectors is anything to go by, profit-taking out of accumulated surpluses have been very good for capitalists indeed.
None of this is particularly new or surprising, even if recent labor conflicts had led to commentary about an impending class war in New Zealand, among other places. What is happening today is just the logical conclusion of a process of market-driven accumulation that began in the 1980s and which is reaching deep into the foundations of modern political economies today. The purpose is to forever privilege accumulation over distribution, and to ensure the political conditions in which workers can no longer challenge that logic or have a say in fixing the “equilibrium” ratio of accumulation to distribution.
Such a system has long been noticed and understood by the materialist school of class conflict. It is called the Asiatic Mode of Production, which relies on super-exploitation of human labor for accumulation gains. Given that New Zealand’s original market ideologues borrowed some of their policy prescriptions from the Chicago School of monetarist economics (later conceptually distorted in the word neoliberalism) as widely applied by capitalist authoritarians in the 1970s and 1980s, it seems that their heirs have borrowed from the Chinese or Singaporean models, which are also heavily reliant on authoritarian political and social controls. This shift in preferred macroeconomic models makes perfect sense when we consider the move, shared by both major parties, to focus NZ’s diplomatic and trade relations on Asia and the Middle East, where democratic “niceties” are in short supply and where capitalists are largely unencumbered by human rights, much less labor rights or worker’s substantive rights to a share of the benefits of production.
The modern Asiatic model is as ruthlessly efficient as its predecessors, but is also based on a downwards redefinition of the concepts of economic and political rights that is generally considered anathema to democratic values (which in the labor market are enshrined in International Labor Organization conventions, now under siege in NZ and elsewhere). It would seem that in this particular market-driven moment, authoritarian capitalist reasoning prevails, accumulation is the sine qua non of macroeconomic policy, and the notion of egalitarianism as the basis for stable social order reflected in a fair ratio of accumulation to distribution has been abandoned in favor of the all-mightly profit-taking “bottom line.”
That is the state of play in New Zealand today.
Market responses to the US debt crisis and financial downgrade have been like king tides as of late, and inevitably speculation centers on the possibility of a “double dip” global recession (this speculation is more than rhetorical. Gold and other precious metal prices have spiked overt the last three weeks as investors flee the stock, bond, commodity and currency markets). There is much talk, some fearful and some hopeful, of a global meltdown of epic proportions. The argument goes that downgrading the US credit rating devalues US Treasury bonds and the dollar, which slows US private investment at home and abroad, decreases domestic consumption, increases unemployment and generally prolongs the recession begun in 2008. This ripples negatively across the globe given the interconnectivity of commodity chains and the central role of the US in them. Be it on the Left or the Right, the belief in state bankruptcy is taken as an article of faith.
The reality is different. What is happening is a fiscal crisis of the Western State rooted in a cyclic crisis of capitalism. Arguments about the blown-out US public debt obscure the fact that it is the result of the same conditions that produced the 2008 recession and which are at root the cause of the next one. For the last thirty years the ‘bubble” of private debt was replicated by the US Government, in the last decade under the strain of simultaneously fighting two prolonged low intensity conflicts. In Europe public debt was in part procured in order to compensate for private debt (via the provision of subsidized entitlements). Capital was lent on looser and looser terms as interest payment calculations came to rival returns on productive investment as the dominant macroeconomic logic. The market in financial derivatives boomed, then busted, bringing with it a crisis in small scale property ownership at the same time that major manufacturers were being bailed out by the US government.
There is a difference, however, between the private sector and the State when it comes to fiscal crises. The analogy between States and firms is overdrawn. Firms go bankrupt; States do not. States may default on loans and suffer the indignities of downgrading by financial institutions, but they do not go out of business. The reason is simple. States with a presence in the global economy may fail but they do not cease to exist.
Modern states are political entities with other measures of power beyond economic resources, are rooted in historical and cultural ties within more or less fixed borders, have distinct political systems and political regimes that govern them, and are therefore sheltered from the hard realities that beset wayward market agents in a globalised system of production, service and exchange. More importantly with regard to the social and political relations of production, the modern nation-state supercedes the market at any specific moment even while being generally subject to its rhythms and dictates. It is, after all, a capitalist type of state that is not reducible to the productive apparatus.
Imagine even if the US defaulted on its current obligations. Its credit rating would fall further in parallel with the value of its currency, but how long will that last? Even if the US fails its financial obligations, it would be the markets that push for a debt restructuring favourable to it. As the core of the global economy, the US is simply too big to fail because its financial collapse would reverberate widely and deeply through the world. In fact, with the exception of undeveloped failed states and microstates with minimal economic resources to promote, virtually all modern states can survive a fiscal crisis and default.
Take Argentina, which in 2000 defaulted on its foreign loans, uncoupled its currency from the US dollar and then renegotiated the terms of its obligations. Since most of the outstanding balance was interest rather than principal, foreign creditors were eventually forced to settle on terms favourable to the Argentines (about 60 cents on the dollar lent). The weakened Argentine peso stimulated commodity exports and attracted foreign investment in resources and primary goods. In spite of endemic corruption, political interference and a multitude of market inefficiencies, over the last five years Argentina has averaged growth rates in excess of six percent and attracted the highest levels of foreign investment ever even while maintaining a large public deficit.
Greece, the poster child of all that is supposedly wrong with governments and societies that do not couple entitlements with production, is another such case. What would happen if Greece defaulted on its recently rescheduled loans? Will it cease to be? what it could do is drop out of the Eurozone, replace the Euro with the much less expensive drachma, and print money to fund its domestic obligations. Somee foreign investors may flee, but local capitalists will continue to engage the domestic market, people will continue to consume, albeit at lower rates with regards to imported goods, tourists will still flock to see the historical sites and visit the islands, and the country will continue to exist. In fact, should it be successful at restructuring its economy on more internally-focused terms out from under the straitjacket of Eurozone obligations (say, by making its tax collection system more rational and efficient), it could serve as a model for the other “PIGS” nations—Portugal, Ireland and Spain—as well as Italy.
It was Northern European, mostly German capital, directly and channeled through the European Central Bank, which sought to recycle in the European periphery the super-profits accrued during the last two decades of derivative market expansion. These are the creditors who took the risk in the PIGS and who now demand debt repayment schedules rooted in austerity measures and privatization programs. They are also the beneficiaries of a strong Euro, unlike the weaker Southern European economies now under siege. Should debtor countries in Europe decide to reconfigure their economies around a devalued national currency a la Argentina, the European Union will be finished as a currency regulator. Here the sub-regional ripple or contagion effect makes each of the PIGS too big to fail, something that is magnified in the case of the US. Loss of credit rating and a high debt to GDP ratio, in others words, does not translate into State bankruptcy.
The larger point is that states can default but they cannot be bankrupted because they are not solely economic agents but instead sovereign political actors with interests that transcend a financial bottom line. They can be upgraded and downgraded as financial risks, but even if investment falls and inflation rises, they will not disappear. Think of Brazil and Argentina in the late 1980s when inflation ran at over 1000 percent per year. Did they disappear? Did all foreign investment dry up? Did local markets crash?
Truth be told, capitalism, led by finance capital, was on overheated overdrive for the two decades before 2008, only slowing down briefly after events such as 9/11, even when objective conditions advised against the maintenance of the macroeconomic policies private agents used to calculate the speed of their returns. Western States emulated private agent logics, whereas Asian banks and sovereign wealth funds were less keen to adopt derivatives-led financial approaches backed by increasingly unsecured loans (although some of that did creep into Asian markets as regional economies attracted Western investment).
Here is where global networks come in. Rather than wage war on States with economies in default, other States that are debt free or less indebted work to cover their investments, and those of their private agents, in the debtor States. This means that even if private agents in the debtor States fail as a result of their market excesses or miscalculation, and State treasuries do n not have enough reserves to cover their debts, States remain open for business, perhaps even on more favourable terms depending on the nature of sovereign debt restructuring agreements (public debt for equity swaps are one measure that can improve State efficiencies as a result of restructuring). Inefficient producers are expelled from the market; inefficient States muddle along.
The entire Western capitalist combine was due for a retrenchment given the downward slope it has been on since spending, both public and private, exceeded productive output in material goods and services. So long as money could be made off of lending money and risks were passed on to increasingly lower-level actors, early 21st century capitalism saw States tax and spend without coherent productive purpose (which mirrored the approach of the financial markets). This was a good political calculation but not a sound economic grounding for future productive growth within current capitalist parameters. Thus the turn towards private sector retrenchment in 2008, with public sector retrenchment now following.
We hear about the demise of various States because they can no longer afford to repay what they have borrowed in order to maintain whatever it is that is considered precious to national identity and political stability–public goods and entitlements in Europe, a war machine in the US. Retrenching Western States may not be able to provide these services in the measure they used to, but thy remain (however diminished) as linchpins of an international system that has its origins in the Treaty of Westphalia rather than Bretton Woods or the Washington Consensus. States are the ties that bind that global system of exchange, and Western States continue to have a central role in it even as the system moves towards increased multipolarity.
Markets and politicians alike need to be cognizant of this fact, because as Keynes pointed out, it is political conditions, not economic conditions, that are the best guarantors of long-term investment. Rather than the economic particularities of a given investment climate at a specific moment in time, political stability offers better conditions for secure future private return. A stable national polity is the best guarantee of profit even if the public books are not balanced. That is the political cost for the social peace that is the basis for economic stability.
Ironically, it was the short-term focus of the macroeconomic logics that propelled the “bubble” that led first to the financial crisis of 2008 and now to the current conditions of political impasse and social instability in many liberal democracies. That is where the convergence of the fiscal crisis of the Western State and the cyclic crisis of capitalism can lead to liberal democratic State failure: when it produces a crisis of legitimacy of the political elite, often confused with regime crisis, that once rooted in and superimposed on the economic downturn and social unrest constitutes an organic crisis of the State. The UK evidences these type of pre-conditions.
Rather than demand zero-sum tax cuts and a diminished State role in guaranteeing the social relations of production, the priority of the market during a State fiscal crisis should be to to express confidence in the State because delegitimisation of the latter is an absolute guarantee of disasterous market consequences for the private actors involved with them in the event that they are overthrown or fragment. That is where market ideologues have failed in their basic obligation: to help foster the political and socio-economic conditions in which stable rates of private return are generated. Instead, they are exacerbating the crisis with their jitters, demands and panic trading. This will not lead to an organic crisis in most liberal democratic states (which will muddle along), but it could produce legitimacy crises in newly democratic states or those with significant social cleavages. Even then the prospect of State, as opposed to regime or private sector failure, is unlikely.
All of which is to say that when it comes to the fiscal crises of modern Western States, this too shall pass.