The Greek Left

Attention has turned back to Greece. The results of the May 6^th elections have made it difficult for any party to form a coalition. The pro-EU/IMF bail-out parties lack a majority, as do the anti-austerity parties. After attempts by the first three parties in last Sunday’s poll to form a coalition, new elections look most likely. And as polls give the radical left party, Syriza, around 27% of the vote, making a Syriza-led coalition possible, many have begun to look in detail at the modalities of a Greek exit from the Eurozone. The Financial Times is running a series of articles this week on the topic of “If Greece goes…”.

In a thoughtful piece, Paul Mason recounts the emergence of Syriza from the fragmentation of the traditional Greek left. After a definitive split between Stalinists and Eurocommunists in the early 1990s, Syriza has emerged from the combination of the latter wing with a bundle of other groups and interests. Benefiting from the radicalisation of young people during the anti-globalisation heyday of the late 1990s and early 2000s, Syriza has managed to sustain its momentum. It mobilized around anti-government protests in Athens in 2008 but its main gain has come from the crisis itself. The mainstream centre-left party in Greece, PASOK, committed itself to the EU bail-out in a way that opened up space on the left for Syriza. Something in between PASOK and Syriza was formed two years ago: the Democratic Left, a small parliamentary group that had been supported by some PASOK members and which won 19 seats in the recent elections. However, as the split between pro and anti-bailout positions deepens, Syriza is picking up the most votes.

Given this history, Syriza’s position on the current crisis is a curious one. It seems that Syriza leader, Alexis Tsipras, is not advocating a Eurozone exit for Greece. Rather, he claims that what is being demanded of Greece by its creditors is unacceptable and should be replaced with far more lenient terms. His criticism is of the austerity measures and his position does not extend to a wider criticism of the Eurozone as such. As Mason notes, many Syriza supporters are in fact strongly attached to the idea of a “social Europe”; what they are unhappy about are the measures being implemented in Greece today. Tsipras’s strategy is in essence one of calling Merkel’s bluff: rather than letting Greece leave the Eurozone, he thinks the Eurozone’s main creditors would rather soften their austerity demands and cut Greece some slack.

As a political position, there is a lot to criticize. For a start, it seems curious to be vehemently against the EU/IMF bail-out agreements and yet to support Greece’s membership of the Eurozone. The bail-out agreements are after all consistent with the underlying philosophy of the Eurozone: balance budgets, maintain competiveness through internal devaluations when necessary, and achieve long-term harmonization of the Eurozone economies through structural reform. The bail-out for Greece is thus a concentrated and speeded up version of the Eurozone’s basic principles. Secondly, there is something spineless about Tsirpas’s position. It seems that if Syriza were to come to power and form a coalition, and if it were then to fail to renegotiate the bail-out terms with the EU and the IMF, it would eventually oversee an exit from the Eurozone. But this would appear – from Syriza’s point of view – as evidence of their hand being forced. They didn’t want to leave the Eurozone but their hand was forced by evil creditors. Equally, from the side of the remaining Eurozone member states, the story would be one of Greece being given all the chances of remaining within the single currency zone but choosing in the end to jump. The Greeks would say they were pushed; the Eurozone members would say they jumped. Greek exit would thus happen rather in the manner of the Czech-Slovak divorce of the early 1990s: accidentally, with no one claiming responsibility for what happened. Or as the FT puts it, “In a game of brinkmanship, neither Athens nor the rest of the Eurozone would want to take responsibility for a Greek exit from the single currency. Recriminations would fly”.

A more consistent position for Syriza would be for it to assume fully its criticism of austerity policies. This means arguing for a Greek exit from the Eurozone and proposing a clear growth plan after the exit. At the moment, Tsirpas is playing a dangerous game of assuming that Greek membership of the Eurozone is important enough to the country’s creditors to force a revision of the bail-out terms. There is little in that position beyond opportunism and Tspirpas may find himself presiding over the consequences of his own miscalculation.

End of austerity Europe ?

The victory of François Hollande in the second round of the French presidential election, combined with a very strong showing for the leftwing anti-EU bailout Syriza party in Greece, has led some to believe that austerity Europe is coming to an end. In France, some believe that Hollande’s victory has “strong echoes of 1981”: the year François Mitterrand was elected. The elections on the 6^th May were preceded by a series of reports suggesting that the austerity policies enshrined in the EU’s fiscal compact were increasingly seen as inadequate by those who had promoted them so vigorously only a year earlier. The head of the European Central Bank, Mario Draghi, made a speech to the European Parliament where he explicitly called for a growth component to be added to the fiscal agreement – a proposal that was already at the heart of Hollande’s electoral programme.

Though the election results are significant, it would be wrong to suggest that this signals any definitive shifting of political tides. Firstly, what the French and Greek elections demonstrate more than anything is the strength of anti-incumbency feeling in Europe. Sarkozy was the 11^th leader in Europe to lose his place at the head of government since the beginning of the economic and financial crisis of 2008. Anti-incumbency, however, is ideologically indeterminate. In Spain, it brought a rightwing party to power. In the UK it threw up an unhappy liberal-conservative coalition. In Greece, the election results point to a collapse in the basic contours of Greek political life but in a way that has swelled support for both the radical left and the radical right.

The dynamic is thus one of disintegration, with diverse ideological effects depending on the national circumstances. Current elections in Europe express frustration with existing governments more than the dawning of a new political moment. This was most evident in France: anti-Sarkozy feeling was the motif of the campaign. It was the building bloc for Hollande, who in many respects embodies the adage about “being in the right place at the right time”. And it galvanized an otherwise fissiparious left. The far left party, Front de Gauche, led by the charismatic Jean-Luc Mélenchon, told its supporters all to vote against Sarkozy in the second round. Mélenchon pointedly avoided mentioning the Socialist Party candidate by name. Much of the forward momentum for Hollande is thus really the flipside of a movement against Sarkozy. This suggests that Hollande may struggle to maintain momentum once he takes over the presidency and it makes the upcoming legislative elections much less of a shoe-in for the Socialists than we had come to expect.

A second reason is that there is no real intellectual alternative to austerity being pushed by these new leaders and parties. What might otherwise have been a great opportunity for genuine political renewal has in fact contributed little by way of new ideas. The socialist campaign in France was focused on Sarkozy’s record as president. Its own economic programme was far weaker. The main thrust was to halt reform at the domestic level, bringing things back to the status quo ante, and to kickstart growth at the European level by using the credit worthiness of Germany to fund a new round of government borrowing. Hollande himself did not contest the need for cuts in government spending, he merely disagreed on the timetable according to which the cuts should be made. What was left unaddressed was perhaps the major question of our time. Since the collapse of the postwar Keynesian consensus in the 1970s, European societies have relied on either public sector borrowing or on borrowing by private individuals in order to maintain their basic social contract. The crisis since 2008 has fundamentally challenged this model and yet no real alternative to it has emerged. New governments in Europe, including the French Socialists, are relying on yet more borrowing to promote growth. This is not the end of austerity Europe so much as a continuation of the underlying trends that brought about the crisis in the first place.

Yesterday’s elections continue the theme of anti-incumbency sentiment in Europe. They do not signal a fundamental ideological shift as ideas do not emerge, readymade, out of frustration or dissatisfaction with existing governments. Judging the new arrivals by this standard, rather than just celebrating the exit of chastened leaders, there is little reason to celebrate.

A European approach to the crisis

Largely because of electoral reasons, French President Nicolas Sarkozy has suggested recently that Europe is “turning the page” in its financial crisis. At a European summit at the beginning of March, he declared that it was the first summit since August 2011 not to have been a “crisis summit”. A few days ago, he declared the financial crisis over.

There is certainly a sense that the urgency and the gloom of 2011 has lifted in early 2012. The risk premium demanded by investors to hold the government bonds of countries like Italy and Spain has fallen considerably and stories of bank runs and Eurozone atrophy have fallen away. It is worth asking then what has been Europe’s approach to its crisis and whether we right to think it has been an adequate response.

Two features stand out. The first is the emphasis – policed by European institutions and formalized in the EU fiscal pact – on budgetary austerity and labour market reforms. Cutting government spending has become the prime goal of national governments across Europe, closely followed by reforms of national labour markets. Budgetary austerity runs across all the Eurozone: from the Netherlands where pressure to cut budgets looks like it will bring down Mark Rutte’s coalition government, to the UK, France and elsewhere, not least in Greece where it has been the basis for a fundamental assault on the country’s social fabric. National labour market reforms have been pushed mostly in the southern European countries: Greece, Italy, Spain, Portugal. There has been some change in Northern Europe: in France the retirement age was raised and the Sarkozy government has argued for shifting the burden of social security contributions from employers onto taxpayers in the form of a “social VAT”. Elsewhere, labour market reform is deep and painful and may yet lead to an unravelling of the alliance between national technocrats and EU-backed reform. But the sense in Italy, where Monti is fighting the unions, and in Spain where Rajoy faced down a general strike yesterday, is that changes will go through.

The second feature is the backdoor use of taxpayer Euros to prop up the continent’s financial system. Whilst the public assault on spending programs and on labour market regulation is an explicit policy of European governments, this latter feature is more hidden. It is nevertheless a key element in the European approach to resolving the Eurozone crisis. It has two elements to it. One is the commitment to European sovereigns in the form of the “bailout bazooka”. In an angry letter to the Financial Times last Wednesday, Klaus Regling, chief executive of the Luxembourg-based European Financial Stability Facility, took issue with the description of his Facility as a “toy gun”. He pointed out that in fact the sum of the bailout provisions provided by European governments is considerable: almost 1 trillion Euros in total has been disbursed since the start of the crisis. This includes the two bailout packages for Greece, the write-down of Greek debt (the so-called Greek private sector involvement operation), the Irish and Portuguese bail-outs, the European Central Bank’s secondary market purchases, 250 billion Euros of uncommitted EFSF resources and promise of 150 billion Euros to the IMF.

The second element is something Regling didn’t include in his list, namely the ECB’s longer-term refinancing operations (LTRO). These operations have been in two stages, first last December and again in February of this year. In essence, LTRO has involved the ECB in providing cheap three year loans to banks. This was intended as a way of injecting liquidity into the European banking system so as to avoid any bank collapsing altogether. Over time, the hope is that this liquidity will work its way into the real economy in the form of bank loans to business. The amount of liquidity provided by the ECB is huge: 1.019 trillion Euros in total.

Taken together, the European approach to the crisis has been to mix frontdoor assaults on government spending and labour laws with a backdoor taxpayer-funded bail-out of banks and of embattled sovereigns. There are two, deeply troubling elements contained within this approach. The first is the hypocrisy: a focus on austerity on the one hand and the provision of largesse on the other. The only way to understand this is as a massive wealth transfer away from taxpayers. It isn’t as simple as saying that cuts to social security provision are being used to fund the bail-out of banks since some the bail-out money has gone to pension funds who have faced serious losses on investments in southern European countries. But there is a wealth transfer at work that reflects a balance of forces within society and the transfer is not towards European labour.

The second is the doubt about whether throwing more money at the financial sector can really solve a more endemic problem. Debt-fuelled growth was a characteristic of the years leading up to the crisis: either government-debt in the case of southern European societies or private debt in places like the UK. The idea that issuing more debt can lift Europe out of the crisis seems ungrounded. More likely is what we are seeing: banks that have taken up the offer of the ECB’s loans have parked them back at the ECB rather than using them as a basis for a renewed round of lending to business. The economics of the European approach seem naïve, the politics are just plainly anti-labour.

Hoist with your own petard

Back in September 2011, we posted on an opinion piece published in the Financial Times by the Dutch prime minister, Mark Rutte, and his finance minister, Jan Kees de Jager. Entitled ‘Expulsion from the eurozone has to be the final penalty’, the article was a hard-line take on dealing with the Eurozone sovereign debt crisis. It urged the creation of a commissioner responsible for budgetary discipline and suggested that as a final penalty for non-compliance, profligate member states could be thrown-out of the Eurozone.

At the time, the Dutch were riding high in the league tables of Eurozone economies: unemployment was very low, the country enjoyed a trade surplus and it seemed free of some of the concerns weighing down troubled economies like Spain, Greece, Italy and even France. In debates about transforming the EU into a “transfer union” the Dutch took as hard a line as the Germans. Pushed by the far right party that was propping up its coalition, the government made clear that subsidies to work-shy Greeks were out of the question. Countries should not live beyond their means and the EU should ensure that those governments unable to control their spending should be made to pay.

Events have taken a turn for the worse in the Netherlands and the government risks being hoist with its own petard. Unexpectedly, the Dutch economy has fallen into recession and if growth continues to stall, it will overshoot the 3% of GDP budget deficit limit that is formally enshrined in the new fiscal pact agreed by the Netherlands and most of the EU’s other member states. As The Economist reported, a deficit of 4.5% is currently being forecast if no cuts are made to government spending. The government has to find 9 billion Euros of savings in 2013 in order to avoid incurring the very sanctions Rutte and de Jager were calling for back in September of last year. Given the weak position of the present government, there is a good chance that it won’t be able to push through the required cuts. Yesterday, one MP of the far right Freedom Party (PVV) resigned from his own party, claiming that the PVV is a one-man Geert Wilders show rather than a proper political party. Given that the government’s minority coalition relied on the PVV for a majority in parliament, this defection threatens to bring the whole fragile edifice tumbling down. The opposition is calling for new elections.

At the time of Rutte and de Jager’s original argument, we criticized it for assuming that that Eurozone crisis was purely the result of overspending by national governments. What gave their article its rhetorical force was the notion that fiscally conservative “Northern” governments, safe from the choppy waters of the Eurozone crisis, were well-positioned to lecture their profligate Southern partners on the merits of good housekeeping. These national stereotypes have given the Eurozone crisis its chauvinist edge. The troubles of the Dutch government today suggest that falling growth, rising deficits and the political costs of austerity measures, is a pan-European problem. Evidently, there is more to the Euro-crisis than just the misplaced largesse of Southern European governments. With a bit of luck, the Dutch difficulties will have the effect of pushing forward the debate around the Eurozone crisis.

 

 

 

 

The problem with a Sarkozy-Hollande stand-off

By the end of this week, Nicolas Sarkozy will most probably have announced his decision to run for a second term as French president. The campaign itself has been running for number of weeks and some candidates, such as the Green’s Eva Joly, are already struggling to make themselves heard.

As already commented on this blog, the current crisis in Europe has pushed political life towards both technocracy and populism: more technocracy at the national and the European level, with large swathes of policymaking bound up with pan-European rules and regulations, and more populism at the national level as charismatic individuals rally against the loss of national sovereignty and the seeming capitulation of mainstream parties to the diktat of markets and private investors. National leaders in Europe tie their budget-setting powers to increasingly complex European deals: excessive spending becomes the concern of the European Court of Justice and governments expose their fiscal policies to a kind of pan-European naming and shaming exercise. Governments also inscribe into their constitutions rules about what they can and cannot do with the national purse and technocratic administrations rule in Italy and in Greece. At the same time, populist claims about challenging this hegemonic pan-European consensus proliferate at the national level. From the street violence and protests in Athens and Madrid to the anti-Euro rhetoric of the French National Front, the political fringe is growing in volume.

Greece is the extreme example of how the crisis is transforming national political life. The most recent vote on reforms intended to guarantee the next chunk of EU bail-out money has pushed political parties into freefall: around 40 MPs were thrown out of their parliamentary group because they refused to tow the party line on the vote. According to one report in Le Monde (15/02/12), the two main Greek parties – the rightwing New Democracy (ND) and the centre-left Pasok party – are splitting down two lines: support for the technocratic government on the one side, and a rejection of the whole bail-out/austerity package on the other. Legislative elections in April have been the focus of the ND leader, Antonis Samaras, whose criticisms of the EU package in the past have annoyed EU officials and other European governments. Samaras has moved from opposing the EU deal to supporting it in the most recent vote, his calculation being that this would be most likely to help him win the next elections. But it has cost him the support of many of his close collaborators and the party is deeply split.

A key question in France is to what extent any of these trends and pressures will reshape electoral politics. As already commented upon on this blog, the current economic crisis is having an uneven and erratic impact upon national politics and upon national electoral outcomes. Before the campaign kicked off in France, there was some suggestion that the real contest would be fought between Jean-Luc Mélenchon and Martine Le Pen: the populist of the Left versus the populist of the Right. With the main parties indistinguishable in their fight for the political centre-ground, attention would turn to more colourful figures. In 2002, the surprise result of the first round was the success of the far Right National Front and the marginalisation of the Socialist Party. In 2007, it was the success of the centrist candidate Françcois Bayrou, who with over 18% in the first round, promised a radical shake-up of traditional French party politics.

In the end, the surprises of the elections did not translate into any fundamental change in the nature of the party system: the eruption of new faces was short-lived. So far, in 2012, a striking feature of the campaign has been return of traditional bipartisanship. This, of course, is the wish of Hollande and Sarkozy: they both want the campaign to become a two-horse race where from the start voters have to choose between their different programmes. A more varied landscape only makes their job more difficult. But the dominance of the Socialists and Gaullists thus far owes itself to more than campaign strategy. A feature of the current crisis has been the way it has struggled to give rise to fundamentally new political ideas or movements. 2011 was a year of protest in Europe: demonstrators filled the streets of Athens, Madrid, London and Amsterdam. But the electoral results have empowered mainstream figures and parties.

This is unfortunate give that neither side will really engage with the key questions of our time. Neither Hollande nor Sarkozy challenge the dominant reading of the European crisis as a problem of deficit spending. The Socialists want more focus on growth and to combine austerity programmes with a measure of Keynesian pump priming. Their justification, however, is tied to deficit reduction: only growth can cut government deficits, not austerity. The Gaullists are using the crisis as an opportunity to reform France’s labour market and to shift the burden of social contributions from the employer to the general taxpayer (Sarkozy’s famous “social VAT” proposal). Their commitment to the pan-European deficit reduction deal is demonstrated by Chancellor Merkel’s support for Sarkozy’s re-election.

At The Current Moment, we’ve argued that the debt problems faced by Western European and North American governments are not just problems of government profligacy, to be solved either by imposing more stringent rules on elected representatives or by trying to stimulate the economy through some kind of neo-Keynesianism. These problems express a particular set of social relations that form the basis of contemporary society, one rooted in both public and private debt. Debt is a relationship between individuals and collectivities, not just an amount that can be measured and quantified in an impartial way. Focusing merely on debt reduction policies leaves us none the wiser about how and why debt has become such a fundamental feature of contemporary capitalist societies. A Hollande vs Sarkozy election is unlikely to shed much light on these issues.

Democracy versus debt sustainability

Debt sustainability has emerged as one of the key issues of the day and one that brings the different poles of the rich world together: the United States, European economies and Japan are all struggling with the problem of how to cut public debt. There are few better accounts of current thinking on this matter than the recent report published by the International Centre for Money and Banking Studies (ICMB), run by Charles Wyplosz.

Written by some of the world’s leading economists (Wyplosz, Eichengreen etc.), the report gives a simple explanation for today’s problems: individuals prefer to free ride on goods rather than to pay the full cost for them. Given half a chance, even when from a collective perspective this is not rational, individuals will shirk from paying for something themselves. The result is that in the provision of public goods, governments have been forced to borrow in order to meet public expectations. The authors of the report call this the common pool problem.

In a telling graph (p49), the authors show that the problem has tended to be manageable in when GDP growth is strong. As both the US and Europe exited from the post-war Golden Age of national Keynesianism in the 1970s, governments turned to borrowing in order to make up the gap between transfer payments and tax revenues. The authors cite the cases of Germany and the Netherlands: in Germany, the ratio of spending on transfers and subsidies rose by 9.5% of GDP between 1970 and 1995 whilst total revenues rose by 6.1%; in the Netherlands, transfers and subsidies rose by 7.1% of GDP, total revenues only by 5.6%.

The report identifies four ways of reducing public debts: default, inflation, cutting spending/raising taxes and growth. It does not consider defaulting as a serious policy option and dismisses the chance of advanced economies experiencing a sudden spurt in GDP growth. This latter point is striking: only those economies catching up are likely to experience high growth levels, they claim. After that, when you are close to the technology frontier, it’s all low growth (pp56-59). That leaves only inflation and restrictive fiscal policy as serious policy options. Inflating away the debt they argue is unlikely in Europe’s case given the ECB’s stringent price stability mandate. The only option left is the one that hurts people most: cutting government spending or raising taxes.

The authors argue that the better option is to cut spending since raising taxes only lays the basis for more spending later on. The report then outlines the institutional fixes that are needed in order to undertake spending cuts. There are many different solutions proposed here, each tailored to fit with the national political system in question (presidential, parliamentary etc.). However, what the institutional reforms all have in common is that they seek to distance decision-making and implementation over government spending from political discretion. Politicians must either have their hands tied or be disinvested of responsibility for spending decisions. In the case of the Eurozone, the authors suggest that the European Commission should be given the powers to judge whether a country’s institutional framework is appropriate for the goal of reducing public debt. Countries that fail to win the Commission’s support would find that its debt is no longer accepted as collateral by the European Central Bank in money market operations.

It is difficult to know what is most chilling about the report: its skepticism regarding the growth prospects for advanced industrial economies or its willingness to curtail democratic procedures in the name of eliminating “deficit bias”. Either way, its recommendations fit well with the prevailing wisdom in national capitals. In Italy and Greece, national democracy has given way to technocratic administrations charged with implementing government spending cuts in the face of massive public opposition. In the Eurozone, the focus is on monitoring government spending and beefing up sanctions to be imposed on those members unwilling to curtail their debt. Outside of the Eurozone, in the UK and in the US, more inflationary policies are considered. There, however, the focus is still primarily on reducing spending.

What is most striking about the report is its starting point. In explaining the crisis, there is no reference to the international economy or to domestic politics as such. Today’s problems are not put in any historical context or tied to any particular decisions or set of interests. No mention of global imbalances. No mention of financialization. Instead, their explanation is one that holds across all time and all societies: the selfish irrationality of individuals and how that translates into dysfunctional representative institutions. Under those assumptions, capitalism can only be saved from itself if the running of it is given up to technocrats.

This gets the problem the wrong way round: since the 1970s, we have seen a steady accretion of political power away from majoritarian institutions. We have seen the birth of what some call “the regulatory state”. Political discretion has shrunk and yet advanced industrial economies today face severe public debt crises. To blame individual selfishness and the difficulty of properly pricing collective goods in a democracy is too easy. It shifts the blame away from capitalism and puts it squarely on the shoulders of ordinary people. Compelling reading for the ICMB’s audience perhaps; less so for the rest of us.

Debt and Coercion

Among the Solonic reforms that made Athens democratic was the abolition of debt-bondage. In his history of Rome, Livy wrote that the Lex Poetelia of 326 BC, abolishing debt-bondage was “the dawn, as it were, of a new era of liberty for the plebs.” It is probably no accident that Nietzsche, classical philologist that he was, took the connection between debt and subjection to its radical conclusion. Nietzsche thought the notion of moral agency underlying modern life was servile, and that this servility was revealed in the basic idea that morality is keeping one’s promises. For Nietzsche, this subjection of our future selves to promises we make today had its origins in the institution of debt. We don’t have to be Nietzscheans to think the the practice and institutions surrounding debt raises major questions regarding freedom and subjection, and these are issues that have arisen in a major way since the credit crunch of 2008.

Recently, we suggested at least one way in which the use of debt imposes an undesirable discipline on people. When debt becomes the way to gain access to basic goods it forces downwards the expectations and narrows the horizons of debtors. Our main example was the the discipline that student debt places on their subsequent educational and professional choices – they will be less willing to take risks on interesting classes, career choices with riskier or longer-term chances of having a payoff, or that are simply lower-paying. We should have added that having to take debt adds discipline on top of already existing compulsion. Since most people are forced to sell their labor in order to learn their living, it is an added, unjust imposition to say they must finance their consumption with debt burdens they have little chance of being able fully to payoff.

Over at Rortybomb, Mike Konczal reminded us of a number of other ways in which debt is connected to coercion, using what we might initially think is an odd source: corporate finance. Konczal’s post has a bunch of insights, but there was one that caught our eye in particular. Quoting another scholar, Konczal observes that

“Under financial distress, but in the absence of liquidation, the nonrepayment of debt puts the creditors in the driver’s seat. Roughly speaking, creditors acquire control rights over the firm.  They need not formally acquire such rights.  But they hold another crucial right: that of forcing the firm into bankruptcy.  This threat indirectly gives them some control over the firm’s policies…”

Where we had discussed the disciplining effects of debt on individual’s choices, Mike reminds us of the obvious, background threat of coercion. The threat is not just of coercive enforcement of debt contracts by the state, but of handing to creditors coercive control over debtors themselves when they fail to pay up. In the case of the firm this all sounds somewhat benign because a corporate person is not a real person. In fact, in some sense, corporations can be made slaves of their creditors in ways that real persons cannot (which is incidentally another implication of corporate personhood.) Now the disanalogy between corporations and persons here regarding who can be made slaves is less relevant than the analogy. The relevant analogy here is the way the law is structured to permit or limit the kinds of coercion that can and cannot be applied. In other words, underlying all of this is a question of who controls the state (or whatever apparatus it is that enforces debt contracts). That is in fact the lesson of ancient history – when the people acquired political power, they limited the kinds of power that creditors could legitimately exercise over individual debtors. It is also a lesson of the present, as the struggle over whose claims will win out continues apace.

On the flip side, creditors are always angling for the ability to increase their control rights over debtors in the case of default. After all, what they want is a risk-free rate of return. Having a right to control the debtor in the absence of the debtor’s ability to pay is a way of grabbing hold of the value stream from the other end – not the debtor’s earnings, but his or her labor power itself. While formal debt-slavery is obviously illegal, and debtors prisons are (with creeping exceptions) banned, the recourse powers of creditors like suspending time limits on debt or ability to garnish wages and seize other assets are all similar raise similar questions about the kinds of coercion we are or are not willing to allow creditors to have over debtors. For example, when it comes to student loans, the state has made it possible to garnish funds from Social Security checks, and there is time period after which unpaid student loans are discharged, these loans stay with you for life. That means a person with student debt can be placed in a kind of debt-bondage – a life of permanently paying off a debtor.

To be clear, the issue is not the ex post one of whether debts should be forgiven or modified in certain conditions – that is a separate though related question. Rather, it is about the ex ante legally enforceable powers granted to creditors that are part of the contract itself. And the thought is that there are some kinds of coercion that might be incompatible with a democratic society – that is in some sense the point with which the demos and plebs were concerned with. No free society allows that kind of servitude to exist, no matter the promises they made.

Importantly, reducing the kinds of coercive control rights of creditors over debtors would not be any kind of threat to contracts. It would simply be risk-shifting. As mentioned, creditors always want what they can’t have – risk-free investments with high rates of return. The risk-free part is secured by increasing the kinds of control that can be exercised over debtors who miss payments. Taking away that kind of control defends some freedoms of debtors by forcing creditors to accept more risk.

Debt is not always a source of unfreedom. It is, or can be, enabling too. Economics textbooks like to point out that debt helps smooth out consumption. We borrow against future earnings to consume more now. As the FT recently had it “debt is thus a hugely efficient wealth distribution mechanism.” Of course, it isn’t that if what we are doing is substituting for lack of earnings (our point about the debt-based social model) rather than borrowing against future earnings. But even so, it isn’t just consumption choices that debt opens up. Taking a bet on the future is what makes possible innovations and long-term collective economic projects. The human potential that is set in motion when a company decides to make a new airplane is immense – from scientific research to basic manufacturing to industrial design. But we would not be free to engage in these enterprises if we could not take a bet on the future. Companies have to take out major debts to engage in the decade(s) long development of such products. The problem is not so much the taking out of these debts, but the way the laws are structured regarding access to credit, control of companies, who benefits from success, and who suffers from failure. That is true of corporate debt just as it is true of household debt. Yet the general point is still valid – even in a very different, more egalitarian and free society, making bets on our future productivity would open up present possibilities and make possible collective economic action that would otherwise be impossible.

The problem as we see it is that the structure of our economic life maximizes the coercive aspects of indebtedness relative to its emancipating aspects. And most of that has to do with the actual laws surrounding debt, as well as the radically unequal economic power of different market participants. In other words, it is a political question of who controls the state.

A Failed Social Model

Last week we talked about the difference between debt-based v. rights-based provision of basic social goods. This week, we wrote a more extended piece for New Deal 2.0 working through more of the ideas. Please check it out and let us know what you think!

The crisis of privatized Keynesianism

A guest contributor to The Current Moment, Wolfgang Streeck has published a powerful account of the current global economic crisis in the New Left Review. Streeck’s analysis is worth outlining in detail as it provides a very useful overview of current events as manifestations of a deeper set of contradictions within contemporary capitalist political economy.

Streeck’s basic idea is that we live in an age of what he calls “democratic capitalism”. Largely a product of the post-1945 compromise between capital and labour, democratic capitalism represents an unstable attempt at combining public expectations with private interests. Public expectations are mediated through democratic procedures (elections, party platforms) and are implemented through the instrument of majority rule. Private interests are focused on the maximization of returns on capital and are agnostic about political institutions. What they are concerned about, however, is minimizing the extent to which private accumulation is forced to accommodate itself with the demands of social justice.

Streeck argues that from the 1970s onwards, with the high growth rates of the post-war Golden Age a thing of the past, crises in this model of democratic capitalism have taken four different forms. The first, which prevailed in the 1970s, was inflation. With collective bargaining still strongly rooted in industrialized countries, governments were able to hold onto their political commitment to full employment only by running a lax monetary policy. As Streeck notes, inflation targets those who hold financial assets and creditors. That the reaction of governments in the 1970s was to manage the global economic downturn through inflation reflects the power of organized labour in governmental decision-making at that time.

Subsequent attempts at resolving the same conflict have reflected different patterns of power in advanced industrialized societies, the general trajectory being the decline in the power of organized labour. After having pursued inflationary policies, governments began in the 1980s to meet public expectations through borrowing. Inflation rates fell but governments accumulated high levels of debt. This goes some way to explaining one of the paradoxes of Thatcherism: the vicious attack on labour unions that never led to any marked reduction in government spending. Streeck observes that into the 1990s, this accumulation of public debt became unsustainable. As a way out, the debt burden was transferred from governments to individuals – what Colin Crouch has called “privatized Keynesianism”. As we have already noted on The Current Moment, this shift from public to private debt was made possible by a fundamental revising of the social contract of advanced industrialized countries. What had been considered an integral part of national citizenship became something to be accessed only through private borrowing.

These successive crises are well-illustrated in one of Streeck’s graphs. We see below, for the United States, a fall in inflation followed by a rising in public debt, leading in turn to a rise in private debt. For Streeck, these are different movements in the unstable co-existence of social democratic expectations and the imperatives of market society.

As an historical overview of current events, Streeck’s analysis is excellent. He identifies developments as inherently subjective: a product of changing expectations and outlooks. There is no inevitable resolution of a particular crisis: what matters is how expectations are changed over time. The liberalization of financial markets and their centrality in today’s political economy can therefore be read as a consequence rather than a cause of our present difficulties. As the social contract of advanced industrialized economies narrowed, so did financial services become central to our everyday life. With certain basic rights removed from the right of citizenship and considered instead as a privilege accorded to those daring enough to invest in themselves, so our dependence on financial services has grown exponentially.

What are the political implications of Streeck’s account? That at the heart of the present crisis is a fundamental rewriting of our social contract. Specific institutional and regulatory developments in international financial have played a role but only as consequences of this prior change. Solutions to the present crisis thus lie not in the technicalities of international capital markets but in the elaboration of a new social model based more on rights than on debt-funded privileges.

Debt, Rights and Social Goods

We have been living in a society where debts, rather than rights, have been the major means for accessing basic social goods. There is now, to a degree, some resistance to this social model. Debt burdens have been a major theme of the Occupations; various state Attorneys-General have grown spines and started investigating foreclosure fraud; and Yves Smith posted a class-action filing by shareholders in Lender Processing Services, one of the worst. When coupled with the work of anti-foreclosure organizations, this amounts to a growing awareness of the problems with debt-financed access to basic social goods like housing and education. And it may lead to alternative ways of thinking about how we win access to these goods.

After all, while the previous decade has been represented as a debt-financed spending binge, when consumers lived well-beyond their means, this turns a complex story into a morality play. A major part of the credit binge was about how people get access to housing and education. Sub-prime mortgages (especially with the decline of affordable housing) were the only way for many to gain access to a home. Student loans were the only for many to gain access to higher education, and thus participate as equals in the radically unequal distribution of opportunity in theUnited States. Mike Konczal posted the following graph at Rortybomb showing the dramatic rise of student debt. In a decade, student loans have gone from a third the number of home loans to nearly equal.

If there is a reasonable expectation that debtors can meet their interest payments then in theory debt is not a particularly bad way to finance access to certain goods. It is on the individual borrower to make a judgement about reasonable debt burdens to take on.

There are, however, two problems with this. First, there might be very good social reasons to not want to yoke access to certain social goods to debt. Education is a prime example. Taking on debt means taking on a kind of discipline. One must make all future calculations about, say, educational and career choices, with the need to meet future interest payments in mind. In conscious and unconscious ways, this narrows horizons and produces a more instrumental relationship to education. We saw many of our college classmates make more conservative professional choices (corporate law, consulting, finance, medical specialist) than they might otherwise have made (public service, teaching, science, labor and public interest law) in order to ensure their ability to pay back loans.

Many have talked about how the growth of finance sucked the math and physics geniuses, who might have contributed something lasting to society, into hedge funds and investment banks. But the alteration of professional choices was much wider than that. The number crunchers at the top were, one suspects, simply lured by lucrative pay. The much more widespread, and difficult to measure, shift in career choices due to the discipline of debt burdens is probably the more important, and still ongoing, effect. If, on the other hand, access to higher education were on the other order of something like a right – a publicly financed good, provided at little or no cost, on the grounds of real equality of opportunity – then one can imagine a much different set of results. While conservatives like to talk about ‘freedom,’ this is a place where the Left ought to have the upper hand in connecting economic practices to real freedoms. Providing necessary social goods, especially education, as a right rather than through debt-financing not only reduces the disciplinary effects of the latter, it also is a way of publicly recognizing and democratically defending the real freedoms of all citizens. To be clear, this is not a moralistic criticism of debt as evil or irresponsible. It is that there might be very good reasons why society would not want to impose certain kinds of discipline on (most of) its citizens, not just because there is good reason to want them to have real equality of opportunity, but also because, simply from a social point of view, its members talents might be much more productively used in some other area than those that promise the most immediate monetary returns.

A second reason why providing social goods like housing and education through debt is a bad idea is that practice does not resemble theory. Again, the theory is that so long as each individual makes a reasonable calculation about ability to meet debt payments, there is nothing wrong with financing access to basic social goods through credit. Putting systematic fraud to one side (but remembering it is unlikely that credit can sink that far into housing and educational markets without it), there is a deep historical reason for thinking that practice was the opposite of theory. The rise of debt-financed household consumption generally was the product of stagnating wages. Consider, for instance, the rise in consumer debt-payments relative to savings.

And compare that with the fate of median real earnings during that same period:

Debt-financed consumption, was, in other words, a response to the declining ability of most households to afford consumption levels, not an increasing ability to or trust in future ability to finance debt-payments.

The entire social model, then, of offering homes, education, cars not to mention ‘non-necessities’ was built on a lie. The separation of consumption (financed by future promises to pay) from production (based on limiting present ability to earn) was a mirage. In a different kind of society, it is conceivable that one might separate a worker’s contribution in terms of effort from the amount of consuming he or she might do. But not in this one. The problem is, in this one, the underlying right to maintain a certain standard of living, or more minimally, to maintain access to certain basic social goods like housing and education, was just that: implicit. Every so often, of course, it was made somewhat public, for instance when Clinton or Bush would say something about providing housing to the poor and minorities who could not otherwise afford it (mainly by changing market incentives, and promoting sub-prime borrowing, as it turned out). But this promise was always implicit, and had to stay that way, because it was mediated through the credit system. It was never a public claim each individual had against society, in virtue of his or her needs and freedoms. Instead, access to these social goods was a matter of a complex series of private, individualized claims against other private persons and institutions like banks and employers. That is the difference between debt and right, and it is clear that the debt-based social model has failed.

To be clear, this is not some moralistic rejection of debt, or a claim that society needs to learn to live within its means. There are some situations where debt-financing is a perfectly good option – the calls for more austerity at present, for instance, is ideological claptrap. Moreover, any economy always has to take a bet on the future if it is going to innovate, and take the risk that innovations will fail. But there are certain kinds of goods that are better provided as a matter of right, both for the sake of the freedom of the persons who need those goods, and as a matter of fairness in how they are provided.