Tag Archives: budget

The Shadow Right

11 Oct

A familiar progressive narrative in the United States goes something like the following: “we could have achieved so much if it weren’t for the Southern racists, the religious reactionaries, the corrupt billionaires and the undemocratic procedures.” There is no question that many American institutions are deeply undemocratic, and purposefully so; it is equally evident that some of those driving the shutdown are, at best, uninterested in the normal democratic practices of convincing others of their views, and, at worst, looking for any means necessary to protect their unjust and unequal privileges.  But the recent flurry of effort to decipher just who this right-wing is reproduces a persistent error in the progressive narrative: a failure to address the conservatism of Democrats and the chaos and passivity of the American Left.

For instance, one prevailing question has been why the Republican Party would be willing to engage in apparent ‘anti-business’ brinksmanship that threatens the stability of global financial markets and draws us closer to another credit crunch? One explanation is that business does not control the Republicans (also here), which is why it can engage in seemingly irrational, ideological political games. Another explanation is that a “small group of radicals” are acting rationally with respect to their own interests, even if those interests are not the same as the national interest. Michael Lind has made the most persuasive version of this argument, claiming that this is a movement of regional elites or “local notables,” who find their power threatened by global financial markets and nationalization of social policy. Joe Lowndes reasonably argues this somewhat overlooks the national basis of the movement, and the tacit support of it among the Republican Party as a whole. And Doug Henwood has added the important point that a background class condition for these kinds of political games with American credit-worthiness and the stability of global finance is the increasingly fragmented and short-termist orientation of the capitalist class.

The emphasis of all these analyses is on the relative power and rationality of a right-wing movement. In this environment it is easy to forget some things about the Democrats and whatever stands to their left. The initial phases of this battle have essentially featured Obama going to the mats to defend the Republicans of the 1990s from the Republicans of today. Recall, for instance, that the basic principles of ‘Obamacare’ including the individual mandate come from Republican thinking circa 1994. As the negotiation now seems to be transitioning from the health care law to spending and entitlements, it is again worth recalling the Democratic embrace of the conservative position. Obama and the Democrats’ wider approach to the budget process is to affirm the need for balanced budgets (in contrast to at least some right-wing Keynesianism).  Presenting themselves as the party of responsible government and budget moderation is their only idea, even at a time when the cost of government borrowing is at historic lows. This is pretty thin gruel, especially for a public laid low by persistent high rates of unemployment, stagnating wages, and crappy jobs. All in all, the Democrats don’t have much on offer as an alternative. All they have is their much vaunted moderation. A moderation that can’t even make sense of the occasional political necessity of disruption.

But what is most striking about the present is not the virtues of moderation but of the potential power of conviction. One detects, behind all the anxiety about ‘extremists,’ ‘radicals,’ and ‘militant minorities ‘ a degree of envy. On the right there is a group with enough commitment to a shared project that is willing and able to disrupt the ordinary functioning of government. If only the Left had such wherewithal. We might, at the very least, get something more than than the economically stagnant, politically oppressive Mugwumpery of the Democratic Party.

Fiscal rules and election campaigns

24 Sep

As the UK Labour Party’s annual conference kicks off this week, ideas are beginning to emerge about what Labour will offer in the run up to the 2015 general election. One of these ideas is to have the country’s independent budgetary body, the Office for Budget Responsibility (OBR), to audit all of the pledges made by Labour in its election manifesto. Assuming that Labour’s tax and spend plans are found to be consistent with budgetary discipline and pledges on meeting deficit and public debt targets, the OBR would thus bolster Labour’s claims to responsibility and sound fiscal management.

This idea is nothing new for the Labour party. When Tony Blair carried his party to victory in 1997, he had promised to match Tory party spending commitments. This pledge had been intended to bury the long-standing image of the Labour party as a motley crew of profligate leftwingers. Over time, we have seen fiscal policy steadily depoliticized through the creation of fiscal councils and various fiscal rules, a development supported by the Left and the Right. The IMF estimated in 2009 that 80 countries in the world have adopted a fiscal rule of one kind of another. Debt brakes have been inscribed into constitutions in Germany and in Switzerland. In the UK, the OBR was created in order that government be made accountable to an independent body for its public spending. Elsewhere, fiscal councils with varying powers have become a common feature of the macro-economic policymaking landscape, as the table below highlights.

Fiscal Councils

Austria

Government Debt Committee (1997)

Belgium

High Council of Finance (1989)

Canada

Parliamentary Budget Office (2008)

Denmark

Economic Council (1962)

Germany

Council of Economic Experts (1962)

Hungary

Fiscal Council (2008)*

Netherlands

Central Planning Bureau (1947)

Slovenia

Fiscal Council (2010)

Sweden

Fiscal Policy Council (2007)

United Kingdom

Office for Budget Responsibility (2010)

United States

Congressional Budget Office (1975)

* Hungary’s fiscal council was dismantled in 2010

The European Union as a whole is organized around a set of budgetary rules that are policed and monitored by the European Commission, the so-called Fiscal Compact of 2012.  Monetary and fiscal policy are slowly starting to look alike as both policy areas come under the oversight of independent bodies of experts.

The idea of the British Labour party to submit manifesto promises to an independent audit takes this idea one step further. The message is clear: a promise made about spending by politicians is only credible if it has been overseen by a body of experts. Credibility and responsibility lies with apolitical bodies. Politics, itself, is the terrain of half-truths and misleading creative accounting.

One problem with this is the idea that once a policy has been given the stamp of approval by a body of experts, it becomes incontestable. Especially in the realm of fiscal policy, this is nonsense. Spending plans are notoriously subject to revision and change because they rest upon assumptions about the wider economy. Small changes in growth projections throw even the most carefully prepared and audited spending plans into disarray. That a party’s manifesto commitments are given the all clear by the OBR tells us little about what a party will do once in government. The OBR itself operates according to a set of assumptions about the maco-economy that are constantly subject to revision and change.

Another problem is that parties and governments that rely on monetary and fiscal rules set by independent bodies are in effect out-sourcing responsibility to these agencies. At the same time, these agencies – fiscal councils, central banks – only operate according to strict mandates set by politicians. The result is that neither the politicians nor the agencies accept the responsibility of making choices that are not right or wrong in any objective sense, but are based rather on what one believes is the right thing to do. This leaves us with a vacuum at the heart of politics. Ed Balls’ idea of auditing his campaign pledges brings that vacuum into the election campaign itself. Far from being a moment where rules are challenged and redrawn, the 2015 campaign risks becoming subject to the same rules and constraints that govern everyday politics today.

A word of advice to Ed Balls? It’s not because the OBR has given your policies the all-clear that voters will trust you. That will only come from building a direct relationship with them and engaging with them as citzens.

Austerity Left and Right: Paul Ryan Redux

20 Aug

When Mitt Romney chose Paul Ryan as his running-mate the collective effervescence among various liberals was difficult not to notice. ‘Collective effervescence’ is the concept that the sociologist Emile Durkheim invented to describe those moments of ritualistic fervor that create feelings of group solidarity. Without these special moments, members of the group have no experience of their social being, solidarity weakens, and the group disintegrates. Durkheim had in his politically incorrect mind a bunch of Australian ‘primitives’ wearing masks dancing around a fire, but instapundits pounding out missives on the keyboard trying to whip up the listless liberal masses are just the same. For Durkheim, it’s not the flame that creates the fire, but the totem. And in this case, the Sacred totem of Obama now has its Profane counterpart in Ryan. Finally, the in-group knows its other! Ezra Klein, always ready to lead the dance, summed up the mood nicely: “Everyone always says they want an election focused on the issues. For better or worse, we’ve got one.”

There is just one problem with this, everybody is dancing around the same fire. The ‘issues,’ whatever exactly that means, are a narrow set of disagreements over one resounding consensus: how to reduce the deficit. As Michael Lind recently put it, “Obama will almost certainly run as the candidate of authentic deficit reduction, as Bill Clinton and Walter Mondale did before him.” After all, who pushed for the Supercommittee on deficit reduction? Who bragged about being tough on welfare and having “helped lead the welfare-to-work effort in the Illinois Senate in 1997″? Who proudly proclaims “I signed $2 trillion of spending cuts into law”?

Nor is this just a point about the presidential race between Obama v. Romney/Ryan. As we noted during last summer’s ‘debate’ over the debt-ceiling, the Democratic Party has been the party of balanced budgets for decades. In fact, for the Keynesians out there, one is far more likely to get deficit-spending out of Republicans than Democrats these days. In a way, Obama does not lie when he says Republicans “run up these wild debts” and says “I’m running to pay down our debt in a way that’s balanced and responsible.” It’s just that Republicans go for the most regressive and destructive deficit spending one can think of – war and tax cuts. Not all debts are wild, but those are. But of course, at the level of public debate, Republicans still beat the drums of austerity because they want to cut social services and public employment. A cause to which the Democratic Party has been increasingly willing to give its name.

The Democrats and Republicans are disputatious members of the same tribe. The collective effervescence of the election is, above all, the reconstitution of elite consensus around a very limited set of differences on political economy.

Interview with Peter Hall

6 Dec

Continuing the series of The Current Moment interviews, today we are publishing an interview with Peter Hall, Krupp Foundation professor of European studies at Harvard University. Peter Hall has published widely in the field of European political economy and comparative politics. His published books can be viewed here. One of his recent papers explores the political origins of the current economic crisis.

 

What are the stories right now that you think people either aren’t paying enough attention to, or about which we have the wrong view?

On this side of the Atlantic, we are mesmerized by the fiscal dimensions of the global economic crisis and not nearly attentive enough to what will be required to ensure the U.S. remains competitive and capable of robust economic growth over the longer term.  Above all, that will require large investments in human capital and public infrastructure, since these are the resources on which all kinds of businesses depend for success.  Despite the efforts of some analysts, such as Michael Spence, and of President Obama himself to argue that, by focusing on these issues, we can address the immediate problem of unemployment and long-term growth together, these issues have not yet become central to public debate.  I wish Americans could see how rapidly China is moving on these fronts and how fruitful such strategies have been in parts of Europe, such as Finland.  We are so obsessed with the short-term, on both economic and electoral fronts, that we are moving far too slowly to lay the basis for renewed growth over the long term.

In Europe, discussion of the Euro crisis is dominated by many myths.  But the one yet to be questioned at all seriously is the myth that deregulating markets in labor and goods so as to intensify competition in them will regenerate growth in the southern European economies.  Such moves are typically described as ‘structural reform’ – a term that has become the mantra of the EU and IMF.  In the long run, structural reform may make some economies more competitive, but to pretend that it will revive economic growth in the short to medium term is an illusion.  Yet this illusion is at the center of most of the plans concocted to revive the southern European economies and resolve the Euro crisis.

For obvious reasons, this is a convenient myth, but it is an empty slogan, all the more pernicious because it diverts attention from the role that government has to play in the revival of economic growth.

Let’s turn to the Eurozone debt problem. The dominant view is that Greeks and Italians are corrupt, inefficient and lazy, and that is why they find themselves in this mess. What is your view of what is going on?

For the most part, this is a canard, encouraged far too quickly by many politicians in northern Europe who reacted to the sovereign debt crisis as if it were an issue of morality rather than a crisis with economic and political foundations that threaten the viability not only of the Euro but of the EU.  Those politicians now realize the full dimensions of the crisis, but their initial reactions has made the task of persuading their electorates to accept measures that might genuinely cope with it much more difficult.

The difficulties from which Greece and Italy are suffering have something to do with problems of political, as well as economic, development.  Both countries would be better off with public institutions less prone to corruption.  But to suggest that that their people are not working hard enough or retiring too early is to misrepresent the problem altogether.  Comparative data suggest that the de facto retirement age is not very different in most of southern Europe than in northern Europe and that the southern European countries have taken just as many steps as those in the north to make their markets more competitive over the past ten years.

The roots of the Euro crisis lie, at a much more basic level, in asymmetries in the organization of the political economies in the north and south of Europe.  In general, as David Soskice and I observed in Varieties of Capitalism (2001), the organization of the political economies of northern Europe gives their firms capacities for wage coordination, skill formation and continuous innovation that suit them well to operate strategies of export-led growth, and EMU provided them with guaranteed markets in the rest of Europe.  By contrast, history has left the southern political economies with fissiparous trade unions and limited capacities for concerted skill formation or continuous innovation.  In the past, they coped with that by operating growth strategies led by domestic demand and then devaluing their currencies to offset the inflationary effects of such strategies on their external competitiveness.  In EMU, they were unable to do that.  Instead, not unreasonably, they took advantage of the cheap credit flowing from northern Europe to promote economic growth.  But, unable to offset the inflationary effects through devaluation, they lost competitive advantage to the north.  The result can be seen in the gross imbalance of payments between the two parts of the Eurozone.

The standard recipe for the recovery from the Eurozone crisis is austerity and structural reforms in the peripheries, plus some recapitalization of banks. Do you think this is the right way to go?

To appreciate the Euro crisis, we have to realize that there are two sides to it.  On the one side, there is the longer term problem of how to devise a structural adjustment path that will restore prosperity to both the south and the north.  On the other side, this is a crisis of confidence, notably in the markets for sovereign debt but spreading over time to the European financial system as a whole.  The European Union has remarkable capacities for muddling through, and, given enough time, I believe it can resolve this long-term problem adequately if not perfectly.  But it is never going to get to the long term if it does not effectively address the immediate crisis of confidence and, as everyone now acknowledges, its efforts to do that over the past year have consistently offered too little, too late.

The immediate crisis is what worries me.  With respect it, there are two issues.  Is there a way for the members of the Eurozone to restore confidence in the markets?  And, if that can be identified, will the member states and the ECB be willing to take the requisite measures.  At this point, I think, as do many others, that the only way to restore confidence in the bond markets is for the ECB to guarantee the sovereign debt of its member states against default, except perhaps for Greece where the markets have already priced in a default.  Various schemes have been mooted whereby the ECB might do this, indirectly if not directly.

The problem is that it will not be easy for the ECB or the member governments to do this.  Mario Draghi and the German government currently oppose such a step.  It is forbidden by Article 123 of the Treaty establishing EMU, and the German Constitutional Court likes to take that Treaty seriously.  The only ray of light here is that the relevant resolution passed by the German CDU at its recent conference does not entirely rule out such a step, describing it as ‘a last resort’.  I think the time for last resorts has come, and I could imagine a deal in which the member governments agree to much stricter enforcement of fiscal targets and long-term support for the ECB in return for a measure of this sort.  However, it is an entirely open question whether the Eurozone governments have the political wherewithal to make this move.  If they do not, I think the crisis of confidence is likely to persist and strengthen until an Italian, Spanish or even Belgian default looms, and then it may be too late to save the Euro.  It takes a confidence trick to resolve a crisis of confidence and the sooner one acts, the less costly the resolution.

What do you think would address the trade and debt imbalances between Northern and Southern Europe? Do you think it can be done within the European monetary order?

This is a question about whether balanced structural adjustment is feasible over the long term within the confines of EMU.  Certainly, the current approach of imposing all the costs of adjustment on southern Europe (of which Ireland can be considered an honorary member) is likely to fail.  Except possibly in Ireland where growth is gradually picking up, there is no reason to expect that rapid enough growth can emerge from such austerity to render the debt load of these countries sustainable.  At a minimum, long-term stability depends on a more coordinated set of fiscal policies in which some reflation in northern Europe is married to a softer adjustment path in southern Europe.  However, this will not be easy to secure.  In particular, as Wendy Carlin and David Soskice have observed, reflation poses risks to the wage coordination on which the northern European economies depend for their competitiveness.

Even then, for reasons I have noted, there is some question about whether the southern European economies can prosper within EMU.  Portugal and Greece, in particular, do not have especially strong export sectors and are not likely to grow them overnight.  These countries have long depended on growth strategies that are accompanied by moderate levels of inflation and, because the ECB has to pursue a monetary policy of one-size for all of Europe, it cannot always dampen down that inflation effectively.  In the wake of the sovereign debt crisis, borrowing costs are likely to remain higher in the south, which will help.  But the danger is that, if the southern European governments cannot pursue growth led by domestic demand for fear of its inflationary consequences, they may experience only low levels of growth for the foreseeable future.  Structural reform will help in the long run but likely only a little.

It may well be that Europe can live with persistent imbalances of payments at some level, but the question is whether more effective coordination of fiscal policies will be enough to allow the southern European economies to grow at rates that are politically acceptable to their electorates.

The hegemony of the demand for austerity is striking. It is offered as the solution to the Eurozone crisis, as well as to the American situation – the US Congress even created a supercommittee to find savings. Yet it seems odd to have such agreement around austerity in the midst of a potential double dip recession. What is wrong with the demand for austerity? How do you account for the strength of this common sense?

The demand for austerity can be explained to some extent by the fact that we have just lived through a period in which financial innovation married to inadequate financial regulation made possible much higher levels of leveraging of assets, leading to higher levels of debt, whether in the public or private sectors of the U.S. and Europe.  To some extent, we are paying today for what we ate yesterday.

The best way to pay back these debts, of course, is from the fruits of more rapid economic growth and that is most likely to be secured, as John Maynard Keynes argued, by reflationary policy. Thus, in the context of global recession immediate austerity does not make good economic sense.

To explain why so many are advocating it, then, we have to recognize that economic policy, whether at the national or international level, is rarely driven entirely by concerns about how to improve overall economic well-being.  It is made by actors, who may be political parties or governments, who are also seeking distributive benefits for their constituents, and, in many cases, these distributive demands are cloaked beneath calls for austerity.  Thus, the demand of several northern European governments, including the Finns and the Dutch as well as the Germans, for austerity in southern Europe is motivated, to a significant extent, by a concern to ensure that they do not pay the costs of adjustment in the wake of the Euro crisis.   I see the demands for austerity of many Republicans in the U.S. as an effort to cut public spending programs that they think serve Democratic rather than Republican constituencies.  If distributive concerns were not at the heart of those demands, those Republicans would be much less reluctant to raise taxes in order to balance the budget.

In the US, there is an influential view that we need to have continued expansionary monetary policy but contractionary fiscal policy. That seems to be the recipe of the moment, with the Fed even contemplating another round of quantitative easing. What do you think of this approach to inadequate demand and balance sheet problems?

As the French would say, I am willing to accept this for lack of something better.  Something better would be a coordinated reflation in which more expansionary fiscal policy was now playing a larger role.  We have arrived at this situation, I think, because central banks, including the Federal Reserve and the ECB, have been willing over the past three years to do what governments have been unwilling or unable to do.  For that, they deserve considerable credit.  One can reasonably ask whether the best way to respond to an era marked by a large expansion in lending is to pump even more money into the system, but, since inflation remains low in most of Europe and North America, partly because the trade unions have been so weakened and unemployment is high, this seems to be an appropriate strategy.  In the absence of a substantial fiscal stimulus to aggregate demand, however, it is unlikely to lower unemployment much.

Debt, especially mortgages and student loans, have become a major issue over the past few years. What if anything do you think should be done about it? How should we understand the growing debt of American households in the past decades?

As Ragurham Rajan and others have pointed out, in the United States, during the 1980s and 1990s, easy consumer credit and home equity loans became a substitute for social policy.  They have been the means ordinary people with little in the way of savings used to survive adverse life events and fluctuations in the economy.  Student loans can be seen, in similar terms, as a substitute for publicly-funded education.

They can also be seen as a key component of the growth model operated in the United States over that period.  Growth in this country was led by domestic demand and the only way to sustain demand in an era when disposable income for households at or below median incomes stagnated was to promote the kind of asset boom in housing that gave many the illusion that their wealth was increasing even if their income was stagnant.

In the past two years, as home prices declined and some forms of credit became harder to secure, American households increased their savings and that, in itself, is gradually reducing the debt burden of the private sector. I do not see any need to take steps to further reduce that debt.  Indeed, it is difficult to see how the American economy can continue to grow without the availability of such credit.

However, there are serious longer-term problems on the horizon.  More than half the American populace has no savings for retirement at a time when larger cohorts can be expected to retire and health-care costs continue to rise exponentially, eating into the disposable income of many families.  Part of the problem is that most of the fruits of economic growth over the past three decades have gone to people in the top 1 percent of the income distribution.  In the long run, the solution will have to entail engineering a more equitable distribution of wealth so that ordinary working families have the means to increase both their savings and their spending.

One thing that seems to tie the American and European situation together is the considerable growth of financial activity. Is there anything to the view that the last decades can be understood as a period of financialization? If so, what does it mean to say the economy has become financialized?

Seen from a long-term perspective, this does indeed look like an era of financialization.  The share of profits in the economy going to the financial sector expanded dramatically.  With the invention of new financial derivatives and the development of financial markets, many firms ostensibly devoted to manufacturing, such as General Motors, have made an increasing share of their profits from financial activities that leverage their capital.  That has contributed, in turn, to rising income inequality at the high end of the distribution, as those skilled at financial engineering generated profits large enough to allow them to demand astronomical levels of compensation.

In my view, it would be an exaggeration to say that the economy has become ‘financialized’.  There are still many productive components of the American economy that do not turn on finance.  However, it is apparent that we are all vulnerable to the systemic risks that a large financial sector, increasingly devoted to speculation, entails, and that is a serious cause for concern.  Although some of the financial innovation of recent decades has made some markets more liquid and borrowing easier for some productive firms, I doubt that this type of ‘casino capitalism’, to borrow a phrase from Susan Strange, ultimately contributes enough to economic prosperity to justify those risks.  We are currently paying serious costs for this and, unless financial regulation becomes more stringent than is currently anticipated, I think there will be more to pay.

Related to that question, what do you think accounts for the ‘bubbliness’ of the US and European economies, and especially the scale of these bubbles? We have seen a number of different bubbles and credit crises – housing bubbles in the US, UK, Ireland, and Spain; sovereign debt events in Greece, Portugal, and Italy, perhaps even France. While there was the dot come bubble in the late 90s, and the East Asian financial crisis, those don’t seem to have had the magnitude and systemic character as the latest period. What is, or isn’t, different about what we’re experiencing now?

I do not believe that any single set of factors can explain these diverse developments.  The housing bubbles can be explained, at least in basic terms, by a long period of easy credit, made possible, as I have noted by the expansion of the financial markets in various kinds of derivatives.  That was made possible, in turn, by what I consider lax financial regulation.  It is ironic that economists liked to describe this period as an era of ‘great moderation’.  In each case, however, some ancillary factors were at work.  In Spain, the cost of borrowing was greatly reduced by the confidence effect associated with entry into EMU.  In Ireland, it was encouraged by rapid rates of economic growth.

The sovereign debt crisis has more complex roots.  In Greece, which enjoyed the same easy access to credit as Spain, the fiscal fecklessness of the government is notable.  In Ireland, some of the problems can be attributed to the government’s mistaken decision to guarantee the bonds of its banks.  In different ways, Portugal, Spain and Italy remained creditworthy on the fundamentals but fell afoul of the spreading crisis of confidence in the markets, which has yet to take its last victims.  There are some parallels with the East Asian financial crisis.  The current crisis is worse partly because it has struck the major financial sectors of the western world and we now face the question of who will rescue those who normally do the rescuing.

How optimistic/pessimistic are you about the ability of national democratic procedures to provide solutions to the current economic crises in Europe and in the US? What do you think of the recent proliferation of technocratic governments in Greece and Italy? Does the current crisis expose some basic tensions between capitalism and democracy? If so, how exactly?

In this as in every other case, as Winston Churchill once said ‘democracy is the worst form of government except for all those other forms that have been tried from time to time’.  The notion that governments led by geriatric Eurocrats will resolve their countries economic problems more readily than elected governments is another of those illusions that bedevil the Eurozone.  They have legitimacy in Brussels but imposing austerity is ultimately a task that demands domestic political legitimacy.  I see this as a stop-gap solution that might, at best, persuade officials in Brussels and Berlin that everything has been tried and they must pay more heed to the pain and demands of national electorates.

It is obvious that the cumbersome decision-making procedures of the European Union are not up to the task of heading off a crisis in the financial markets.  But that is not a problem with democracy.  It is a problem of international negotiation.  Democracy enters the picture to the extent that the views of national electorates limit the willingness of their governments to share the costs of adjustment, and that is admittedly a problem for Europe.  A continent so proud of the ways in which its social policies reflect ‘social solidarity’ has been unable to summon up the sense of continental solidarity that would justify a more equitable and efficient solution to the crisis.  But social solidarity does not simply bubble up from below.  It is created by inventive political leadership and we are still waiting to see if the political leaders of Europe are capable of that.

On the larger question, my view is that the global financial crisis has thrown into stark relief the importance of the state in any democratic system.  The crisis itself is rooted in failures of financial regulation that can be linked to the unwillingness of governments to assert the authority of the state on behalf of the people against powerful financial interests.  And the inadequacy of the response to the crisis, especially in the U.S., can be attributed, in some measure, to the widespread reluctance on the part of many people to trust the state with their resources.  In many respects, that is the legacy of the neo-liberal era that followed the economic crisis of the 1970s, when many policy-makers and citizens became disillusioned with the capacity of governments to direct the economy.  Hence, the American government faces the current crisis hobbled by rising levels of distrust in government.  It is not acting more forcefully on the fiscal front partly because large segments of the American population are willing to vote for politicians who claim that government is the problem rather than the solution.

What are your views of the nascent protests (Occupy Wall Street, Indignados) developing in response to the introduction of austerity packages in Europe and the US? Are these movements a continuation of or a break with the anti-globalization movements of the past? Are they likely to fundamentally change public perceptions and government policy or will they have only a very small lasting impact?

There have been two notable political responses to the current economic crisis.  One is marked by a backlash against immigration, in both the U.S. and Europe, reflected in the growing popularity of radical right parties in Europe and the salience of immigration to national political debates in the United States.  This is a familiar feature of economic crises.  The U.S. has a long history of nativist movements.  The other is reflected in the Occupy Wall Street movement and its European analogues.  I can only hope that the former is contained and the latter encouraged.

It is difficult to see how these sporadic protests can be translated into any immediate changes in policy, not least because they have yet to articulate clear political demands.  However, I think they are having an impact.  They have struck a chord in popular opinion.  They bring issues of unemployment and inequality to the fore.  In the short term, I think that may influence voters in American elections next year, and, over the medium term, I believe that even these limited protests will help to shift political discourse in directions that favor those seeking to address issues of inequality and unemployment.

The EU’s six-pack

3 Oct

Tomorrow, finance ministers from all EU member states will meet to formally vote on a new set of proposals drafted by the European Commission. Entitled the ‘new economic governance package’, these proposals have been in preparation for many long months. They have been worked on by an army of national experts in the Council and civil servants within the Commission. Government representatives in Brussels have been making sure that any disagreements are ironed out before ministers meet tomorrow to stamp the package with their approval. The package was already all but finalized at the last meeting of EU finance ministers in Poland (see relevant statement by the Polish Presidency of the EU here).

The economic governance package contains six new legal instruments (see here for a summary), hence it’s nickname, the ‘six-pack’. Its main goal is to tighten supervision over national government budgets. The philosophy underpinning the package seems to be that the current European crisis is the result of excess spending by governments (for why this is only a partial account of the crisis, see here). The proposals are thus designed to “lock-in” prudent fiscal policy through an array of rules and a tightened sanctions regime. Governments running excessive deficits, for instance, will only be able to avoid a sanction from the European Commission if the Council musters in return a qualified majority of votes against the sanction (the so-called “reverse voting mechanism”). The Commission’s supervision of government spending will be expanded to include overall government debt in addition to its existing role in supervising deficits. The package also includes a new ‘excessive imbalance procedure’: an in-depth review of a country’s economic situation undertaken by the European Commission at the demand of the Council. Based on the results of this procedure, the country concerned would have to present to the Council a plan for how to resolve these ‘excessive imbalances’.

As a measure of what will be the consequences of the Eurozone crisis, this is a good start. More dramatic developments may ensue as governments struggle to contain the consequences of a likely Greek default. But as far as the day-to-day running of the Eurozone goes, the measures proposed by the Commission are likely to form the horizon for macro-economic policy in the EU for the years to come. Looking at the proposals, we see that nothing fundamentally different is being proposed. The modifications point to a tougher regime of regulation of national economic policy, particularly as regards government spending. The connection between national finance and economic ministries and pan-European institutions of control and supervision will become tighter. And the scope for pressuring countries with budgetary difficulties will increase. Being a member of the EU won’t change dramatically, but it will become a meaner and harder-edged place. And the presumption of the package is simple and is consistent with the philosophy of the EU as a whole: bad behaviour by national governments is to blame; greater supervision by external, non-partisan authorities is the solution.

The Dutch solution

12 Sep

Usually more Catholic than the Pope in matters of macroeconomic policy, at least when the Pope resides in Berlin, the Dutch prime minister and finance minister published last week their answer to the Eurozone crisis.

According to Mark Rutte and Jan Kees de Jager, the European Union should create a new post, that of a commissioner for budgetary discipline. This commissioner would have the power to tell countries with deficits what their spending targets should be and to ensure compliance with these targets. Rutte and de Jager suggest that the commissioner would have the power to force national governments to levy new taxes in case of shortfalls, and also to slap fines onto deficit-ridden economies. National budgets should – in the interests of prevention – be presented to the commissioner first, before they are presented to national parliaments for approval. In extremis, the Eurozone should be able to expel repeated budgetary offenders.

It is difficult to know where to start with this proposal. Everything is wrong about it. Rutte and de Jager’s account of the crisis is almost facile in its simplicity. Today’s problems in European economies all stem from the fact that some countries didn’t follow the budgetary rules. Ergo, if everyone is made to follow the rules in the future, we will have no crisis. As well as being a post hoc explanation – where were the Dutch truthsayers when Germany ignored the rules of the Stability and Growth Pact under Gerhard Schroder? – it also presents macroeconomics as merely a matter of rules. As argued in previous posts, macroeconomics is also about institutions, interests and social structures. The Eurozone crisis brings together all of these factors: it is a mixture of national histories, national politics and European integration. To present it as only a problem of debt is already a sign of where the Dutch stand in the struggle between debtors and creditors in Europe.

The dogmatic attachment to rules is also oddly naïve. Rules are there in order to protect outcomes or goals; the validity of the rules depends upon what they are intended to achieve. Rutte and de Jager seem to believe that budgetary discipline can solve the Eurozone crisis. This flies in the face of the current debate, namely about whether a recession-inducing austerity budget is the best path to growth. Even the IMF is not arguing this. Rutte and de Jager also buy into the technocratic mindset of European public policy. This mindset rests upon the presumption that policies are independent of each other, and can be dealt with in the manner of separate and discrete filières (streams). Thus, a budget discipline commissioner would only deal with budgets. But this would involve making decisions that touch upon all aspects of national public life. Budget cuts affect jobs, welfare, industrial policy, foreign policy. Who would be responsible for connecting decisions about cuts with decisions about consequences? The result would be national governments implementing painful programs over which they claim no responsibility; with a European commissioner for budgetary discipline denying any role in determining how budgetary decisions are implemented. That, he or she would say politely, is “national competence”.

The Dutch solution fails to grasp the causes of the present crisis. Its blind adherence to rules ignores the extent to which rules are only as good as the purposes which they serve. In this case, the purpose is little more than to shift onto deficit-ridden states all the responsibility for the woes of the Eurozone. And in a way that further diffuses responsibility for difficult decisions across a hotchpotch of national and European level officials. Let’s hope Rutte and de Jager’s proposal goes no further than the pages of the Financial Times.

Trouble in Greece

5 Sep

A “troika” of officials left Greece in the evening of Friday 2nd of September after what seems to have been a falling out with the Greek government. Representatives of the European Commission, the European Central Bank and the IMF were in Athens as part of a mission aimed at ensuring that Greece was fully complying with the terms of its first loan, agreed over a year ago. The details of the disagreement are as yet unclear, with speculation mounting over how far Greece will overshoot the targets it had agreed to under the terms of the bail-out. The goal for the budget deficit in 2011 was 7.5% of GDP; as it stands, it looks like it will remain above 8%. The main point of contention seems to be that the “troika” insists the overshooting is the result of poor implementation and foot-dragging by the Greek government; Greece’s finance minister, Evangelos Venizelos, believes the real culprit is the bleaker than expected growth figures. Greece’s austerity measures were based on a calculation of a 3.5% fall in GDP in 2010. The actual contraction for 2010 has been 4.5%. As a result, tax receipts in Greece for the first 7 months of 2011 are 6.4% behind those of the first 7 months of 2010.

Opinions are divided about whether these poor figures are the result of government failings. There is no lack of anecdotes concerning the frequency with which Greek businesses, such as hotels and bars, function only on the basis of cash as a way of escaping the clutches of the tax inspector. Le Monde (4-5/09/11) notes that publicity drives by the government such as the one that highlighted the use of Google Earth as a way of reducing tax evasion on the ownership of swimming pools has failed to generate much by way of results. But much of the resistance within Greece is both reasonable and rational. The “troika” has upbraided Athens for not finalizing its list of companies to be privatized. The reason for this is that the share prices for those companies, listed on the Athens stock exchange and due to be sold off in the next couple of months, have fallen to five-year lows. At this moment, selling them off to international investors would mean offering up Greek assets at bargain prices – a little like what happened in Russia after the collapse of the Soviet Union where state enterprises were sold-off at cut-down prices transforming a lucky few into overnight billionaires. It would seem to make sense to hold off privatizing Greek companies until their share prices see better days.

The broader point is that the Greek government is not an administrative arm of the European Commission. It is a standalone constellation of interests, ideas and of people. The difficulties around the introduction of the austerity measures points to the complex political dynamics within which the Greek crisis is situated. The current PASOK government is itself only a creation of its supporters. The difficulty with the austerity package is that it demands that the government bite the hand that has fed it in the past: it attacks its own constituencies directly. Two different conclusions can be drawn from this: one is that instead of these implementation delays, the austerity measures should be administered directly from Brussels. Many are thinking this, few are arguing for it aloud though this may soon change. The other is that current difficulties are only an illustration of what really lies behind all the talk of austerity, rigueur and cuts: a fundamental change in European societies. The PASOK government is in difficulties because this change is being demanded of its supporters without any vision or plan. Yet the government survives because those out in the street don’t have an alternative vision themselves. Marked by this lack of direction, Greece is stuck between the diktat of the Eurocrats and the anger on its streets.

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