France’s heterodox economists

Back in June, The Current Moment blogged about a manifesto written by a group of “dismayed economists” in France whose critique of free market orthodoxies was beginning to gain ground. This past weekend, a long interview with one of the original signatories of this manifesto, the French economist André Orléan, was published in Le Monde. Focusing on the role of financial markets in macro-economic policymaking, Orléan makes a number of excellent points.

He notes that historically, the role of specific economic interests, such as those of finance or of specific sectors of the real economy (export industries, domestic farming interests etc.) have been contained by the wider concerns of governments. The universality of the general interests holds sway against the particularities of individual groups. He makes the good point that this battle has often been fought through national central banks. They have been the main tool used by the executive power to pursue the interests of wider society. This gives us a rather different perspective on what is often assumed to be the narrow partisanship of politically-controlled central banks. In the mainstream economic literature, independent central banks are the guardians of the public interest; central banks directed by national executives are prisoners of political short-termism. This may be the conventional view today but Orléan reminds us that the historical record supports the opposite view: politically-controlled central banks were the vehicles for the articulation of the public interest. The primacy of politics over economics, as Orléan puts it, has had as one of its main tools the power of the central bank. This might shed a different light on the Orban government in Hungary: attacked for its anti-democratic ambitions, one of Orban’s proposed reforms was to curtail the independence of the Hungarian central bank. Rather than welcome this as an attempt to regain political control over macro-economic policy, Orban was criticized for his nascent authoritarianism. In fact, the more powerful assault on the democratic control of macro-economic policy has been waged over the years by the European Court of Justice, particularly its attack on the notion that national public sectors should be shielded from the competitive pressures of the private sector.

Orléan also has an interesting reflexion on the nature of finance. Contrasting it with the market for goods or services, he notes that finance has a “directly collective dimension”: it is concerned not just with individual sectors but with the economy as a whole. He gives the example of the infamous downgrading of France’s triple A rating by the agency, Standard & Poor’s. In its report, S&P referred to the EU’s new fiscal compact agreed upon in December 2011 (which the UK and the Czech Republic are today refusing to ratify), which it judged inadequate to meet the demands of the Eurozone debt crisis. Orléan notes that it is exactly this kind of very general judgement that is typical of the financial sector; and yet such generality does not pass through – as with democratic decision-making – a system by which a variety of different views are confronted via the freedom of the ballot box. This curious combination of its very narrow representative claim along with its interest in the economy as a whole can go some way of explaining the rise of technocratic governments in Europe today: they express the same peculiar combination, with individual technocratic leaders such as Italy’s Mario Monti having a history of very close relations to the world of finance.

Orléan’s views on the way out of the current crisis are based around a reassessment of the idea of value in the economy and of value creation. He argues for a much greater focus on the creation of value within the real economy, as this is ultimately where jobs and growth are created. He suggests that a new law should be introduced that firmly separates savings banks from investment banks, an argument included in the French Socialist Party’s programme. There is nothing radically new in Orléan’s arguments but his attack on conventional assumptions in economics is both powerful and welcome.

The Occupy Effect

In an earlier post, we commented on the difficulty movements such as Occupy Wall Street or Indignados were having in influencing the course of electoral politics. In Spain, in spite of all the protests in Madrid and other parts of the country, elections late last year saw the return of the Right to power after a campaign where its leader, Mariano Rajoy, pointedly avoided setting out anything like a detailed economic plan. In Italy and Greece, protests coincided with the replacement of elected governments by technocratic administrations rather than with any lurch to the left or any real change in austerity-based politics.

This may now be changing. Recent campaign speeches suggest that these popular mobilisations have begun to shift the terrain of representative politics. In France last weekend the Socialist Party candidate, François Hollande, in a keynote speech, made a point of targeting the world of finance. Two moments of his speech took on a confessional, intimate tone. I shall let you into a secret of mine, he said, clearly trying to differentiate himself from the current incumbent of the Elysée palace: “it is people that interest me, not money”. And a little later, with the same confessional tone: “let me share with you who my real enemy is… It is an enemy without a face or a name; it governs without being elected… It is the world of finance”. Hollande’s proposed policies to disable this “enemy” were in line with what has been suggested elsewhere: to isolate the speculative activities of banks from their commercial lending; to introduce a comprehensive financial transaction tax, not just a tax on the trading of stocks; to set up a public ratings agency at the European level and to renegotiate the EU fiscal pact so as to make explicit its growth model. Hollande called this a pact for responsibility, governance and growth.

In Obama’s 2012 State of the Union address, given yesterday to Congress, the same themes were apparent. Invoking much of the Occupy rhetoric about the 99% versus 1%, Obama argued for a fairer, less unequal US society. He endorsed the Warren Buffet idea of raising taxes on the most wealthy and dismissed any claims that he was engaging in class warfare, calling these policies common sensical rather than partisan (see here for the Guardian’s write-up). The Republican primaries have similarly been taken up with the same themes. One of the problems faced by Mitt Romney is that he not an industrial magnate or oil man but gained his wealth through finance, making him the target of people’s anger at Wall Street and at bankers. The battle with Gingrich has been focused on tax with Romney forced to disclose his tax returns. Romney’s fight-back after his defeat in the South Carolina primary has been to highlight, under the banner ‘Newt Gingrich cashed in’, the payments received by Gingrich from the mortgage brokerage company, Freddie Mac.

If recent political mobilisations have indeed given this current economic crisis its political narrative, it is worth asking what this narrative is. So far, it is mainly an ethical critique of contemporary capitalism. Critics of finance take issue with the unscrupulous actions of bankers and hedge fund managers, their conspicuous wealth, the brazenness of new inequalities. In its place, Obama, Hollande and others call for a return to more traditional values where money matters less than people and the common good. There are obvious limits to such a critique. A defining feature of capitalism is its systemic nature: it is based upon a set of social relations that are more than merely the accumulation of individual intentions. Without uncovering the specific set of social relations that are the basis of today’s financialized capitalism, invocations towards a better, fairer society will only breed disappointment as changes fail to appear.

Towards a European Tobin tax?

Reports in the press this week suggested that German Chancellor, Angela Merkel, had been won over to the idea of introducing a tax on financial transactions at the European level.  This has been primarily a French idea so far, with Nicolas Sarkozy a convert to a policy he had previously dismissed as ridiculous. The Tobin tax idea had been taken up by the French anti-globalization movement at the end of the 1990s and early 2000s and was virulently opposed by most of France’s political class. Today, in a very different political climate, the idea has been given a new lease of life.

Whether or not a financial transaction tax is finally introduced remains uncertain. This week’s press also reported that Sarkozy – who faces an election in the coming months and has committed himself to this tax as a demonstration of his activism in regulating financial markets – might settle for a tax on share trading as a first step. This already exists in the UK in the form of stamp duty on stock exchange transactions. Keeping the UK on board with any new European regulations would be welcomed by other European leaders as lasting rifts and real isolation are anathema to the EU. Bringing Cameron back in from the cold would be attractive to all involved in last year’s falling-out between the UK and the EU. Such a tax would, however, leave unregulated all other kinds of financial trading like derivatives and high-frequency trades. These have been identified as the real targets but an initial tax on share trading might solve Sarkozy’s problem of having committed to introducing a financial transaction tax before the election.

Is a financial transaction tax really the solution to the current crisis? The main rationale for it today is that it would serve as an alternative source of revenue for bail-outs and other expensive public actions that have up until now been funded by the taxpayer. That such a tax could improve government balance sheets to the point of reducing the need for austerity seems rather fanciful. What it would challenge, however, is the idea that governments defer unconditionally to their financial sectors. Whilst governments routinely stand by and watch as industries relocate to the Far East and shed thousands of jobs, they seem unable to accept that any such “creative destruction” should operate in finance. To many, this smacks of double standards and a tax on financial transactions would demonstrate – at the very least – the exercise of some political muscle vis-a-vis banks and financial services.

This argument about the symbolic nature of such a tax is not a bad one. But it tends to miss the bigger picture. The reason why a Tobin-style tax has become a popular idea amongst European governments is that it is like the famous phrase of Tomasi di Lampudesa’s The Leopard: things must change so that they remain the same. There is nothing in a financial transaction tax that really challenges the relationships and interests that together have given us this debt-finance growth model of the last 40 years. Nor would the tax really reverse the striking rise in inequality that has come to characterise our societies. The theory of the present crisis of capitalism contained within the Tobin Tax idea is that responsibility lies in the financial sector and that whilst the economy is generally sound, a few bad financial apples are bringing us all down. By taxing them and redistributing the revenue according to priorities set by elected representatives, we can return to the status quo ante.

One argument we’ve been pushing at The Current Moment is that financialisation is as much about a change in the real economy as it is about the financial sector itself. Isolating finance from its place in the wider economy, as the idea of a financial transaction tax does, misses the nature of the problem. This idea is also naive in that it imagines that relationships between real people can be transformed via a state-levied tax. Societies, today as in the past, are based around relationships that can only be changed by real political struggle. There is no short-cut or easy way around the problem of either redistribution or of making European societies more productive. The financial transaction tax is a coward’s way out of tackling today’s economic and social crisis and will only entrench, rather than transform, existing inequalities.

Interview with Peter Hall

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.

Interview with Kees Van Der Pijl

As part of our investigation into contemporary political economy, The Current Moment will be publishing interviews with different individuals on the subject of today’s economic and financial crisis. Based on the same set of questions, these interviews are aimed at opening up a debate about the causes and consequences of the current crisis and at advancing our understanding of political economy.

Today’s interview is with Kees Van Der Pijl, professor of international relations at the University of Sussex, UK. One of the leading Marxist scholars of international relations and international political economy, Professor Van Der Pijl has published widely. His books include a three volume project on modes of foreign relations (vol. 1 and vol. 2), Global Rivalries: From the Cold War to Iraq (2006) and The Making of an Atlantic Ruling Class (1984). He has also published widely in the New Left Review and other journals and magazines.

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?

Generally speaking I have become more and more concerned with the War on Terror as a route to constraining civil liberties and freeing the forces of authoritarianism in the West. In combination with a stubborn adherence to neoliberal responses to the crisis, the by now almost routine resort to war as a means of regime change, the steady build-up by the West of military assets against Russia and China, and Israel’s preparation for war with Iran (in which NATO is complicit in many ways, for instance by allowing Israeli air force jets to practice on Sardinia for such an attack), this raises the frightening prospect of a larger conflict which in turn will further reduce the space for dissent.

Turning to the Eurozone debt problem, a 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?

Tax evasion and the size of a black economy are real problems. But if compared to what it costs in campaign contributions to be elected to the presidency of the US, or the non-payment of taxes by big corporations in the US and the larger EU economies (just think of how the hedge fund LCTM, based in the Cayman Island, was bailed out in 1998 by the Fed with public money, or what German banks were able to avoid paying by a simple change in capital gains tax so that they could divest themselves of their stakes in other corporations), what happens in southern Europe is small fry.

What is at stake everywhere is that bank capital is able to avoid the negative consequences of low interest rates by raising the call for debt reduction, which means debt rescheduling and mark-ups in bond rates for the most affected countries. All of which works to keep the banks in a position where they can dictate to governments which economic policy to follow.

Deeper down of course is the issue that ‘growth’, that is, capital accumulation, is stalling because society is reaching the limits (which are ‘culturally’ specific in each country) of what it can absorb in goods and services, what it can perform work-wise, and the like.

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?

This is a recipe for disaster and will aggravate what I said above. Shrinking the economy will make any debt relatively larger and the ability to service it more difficult.

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 union or does it require a fundamental change or dismantling of that union?

EMU was set up prematurely to allow the strongest capitals to expand from a larger economic zone without having unnecessary transaction costs. More importantly, it served to generalize their desire to have a strong currency to diversify internationally through direct foreign investment. For German capital in particular this solution does not harm its remaining export prospects because the sectors in which production remains in Germany are not price-sensitive. A power plant or a giant turbine for hydroelectric dam is not bought at competitive prices, even a Mercedes or BMW is not subject to the same price pressures as an Alfa Romeo or a Renault.

Hence EMU was bound to reinforce the strongest German capitals, Dutch, some French, at the expense of the peripheral economies which no longer can adjust lower productivity and greater exposure to competitive pressures by devaluation. Liberal capitalism always produces inequalities; uneven development is at the heart of it.

Within a capitalist economy, Eurobonds would have a stabilizing effect. However, that is precisely where the financial fraction of US capital and politicians associated with it (Volcker, Summers, Geithner…) don’t want the Euro: it would create a real alternative to US Treasury bonds which are currently the mainstay of the global credit economy and keep the US afloat. The current Eurozone troubles work in various ways to keep the Euro embattled and prevent the Eurobond solution. Inequality is translated by the Murdoch and Springer media and the like into chauvinist sentiment (‘Greeks are lazy’, the ‘PIGS’ etc.), with the result that German or Dutch ‘public opinion’ resists shouldering a heavier interest rate burden on public debt which Eurobonds would entail. The way Strauss-Kahn, a philanderer but also an advocate of building a more complete financial infrastructure around the Euro, was removed, or the ‘mistake’ of downgrading France’s credit-rating, is a reminder of the conspiratorial dimension that is inevitably involved in keeping the Euro off-balance. Of course, the process is systemic but it evolves through concrete actions.

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. It seems odd to have such agreement around austerity in the midst of a potential double dip recession. Why is there such agreement on this point and what do you think of the demand for austerity?

This is about the continued hegemony of neoclassical economics, the failure of Keynesians to adjust to a globalised economy and the even more disturbing failure of Marxist-inspired or Institutionalist political economists to challenge neoclassical principles, in the way of the 1970s capital debate and so on. Only this can explain why completely corrupt mainstream economics (just look at the part on the economists’ role in the film ‘Inside Job’) can remain as the dominant intellectual force. Mario Monti is called ‘a respected economist’ and nobody asks in what sort of economics did he gain his credentials.

In the US, an influential view is to argue for continued expansionary monetary policy but with 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?

Dollar inflation by printing more money keeps the mass consumption economy going although it is losing steam as accumulation stalls. And as long as China, Japan, Kuwait and the like continue to buy up US Treasuries, the value of the dollar is hardly affected either. As purchases of precious metals by China and other countries outside the Atlantic heartland increase, we may be in for a surprise at some point in terms of global monetary relations. However, how the holders of US Treasuries would square a loss of value of their 2 or 3 trillion worth of holdings, with a new role for e.g. the Yuan backed by gold or silver, I cannot predict.

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

In the English-speaking West, the debt problem is much more acute because the lowering of wages was accompanied by a credit-card culture that kept consumption going in spite of it. Also their mortgage debt is higher than elsewhere and the attempts by banks to move into new zones to create mortgage markets are more recent or even just beginning. Only some sort of socialization of debt, separating economically and ecologically justifiable repayments (that is, to institutions useful in these respects) from speculative titles, can be a way out here. The continued payment of interest to big players who are not, say, pension funds or otherwise institutions of public interest, should be suspended.

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 might it mean to say the economy has become “financialized”?

This has been explained by noting on the one hand the accumulation crisis which diverts investment funds to speculative circulation, quasi-liquidity, all to make commercial profit by raiding and asset-stripping. On the other hand, financialization serves as a socialization of risk, hence ‘hedge’ funds etc. of course also operating for profit but simultaneously performing a role that we later may come to see as a route to some sort of socialization of the economy as a whole.

Related to that question, what 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.com bubble in the late 90s, and the East Asian financial crisis in the same decade, 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?

What we’re experiencing now is that speculation, hedging etc. is coming home from having raided various peripheral locations. It is now the turn of the ‘central’ bubble which contains all others. This raises profound questions about the role of the shadow economy and how it is related to shadow politics.

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?

I am not optimistic about the ability of the established parliamentary governing classes to come up with any solution of their own because they are morally corrupt and hostage to a defunct understanding of the economy and society. The governments imposed on Greece and Italy are instances of ‘soft regime change’ by the EU and the IMF and will fail as their elected predecessors have.

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 small lasting impact?

The Occupy movements are the most important event in thirty years and are having an impact already on mainstream political discourse. They go beyond anti-globalization because they demand from governments (irrespective of their stripe) to restore a basic decency to social life and to disempower global finance. This conforms, unintentionally of course, to Marx’s insight in Capital Volume III that a transition to what he called the ‘Associated Mode of Production’ would come about through precisely such a movement demanding from governments that they rein in financial flows destabilizing economies, after which an economy based on cooperation of polytechnic workers would replace the capitalist one based on direction by owners. Today we would add the ecological dimension, the most urgent issue of our epoch.

What, finally, do you think the appropriate political response is to both these crises and their aftermath?

Some form of ecological socialism, within the specific context of each particular national or regional culture and attuned to the expectations of its citizens. In such a society, education should be at the heart of social reproduction and guide people to living culturally rich lives that are less dependant on continually buying new consumer goods.

Why recapitalization is wrong

Recapitalization is the issue of the moment in Europe. It is almost taken for granted that it is the sensible next step. The question is less ‘if’ than ‘how’. Keen to avoid being seen as bailing out bankers, European governments are planning to impose upon Europe’s core banks a deadline of six to nine months after which these banks must have raised their core tier one capital ratio to 9%. In effect, banks are being asked to boost their reserves in order to be better placed to face down whatever losses will come about as part of the resolution to the Eurozone crisis. Predictably, as Patrick Jenkins recounts in his FT column, banks are resisting this move towards higher capital ratios: higher reserves means less lending and less lending means lower profits for the banks. In response, European governments are threatening to undertake recapitalization by force. The banks are upping the ante by saying that if they are forced to recapitalize, they will do so neither via shareholders nor via the state but by shrinking their balance sheets. This will mean a drying up of credit at a time when governments are trying to boost credit within the economy. Faced with this stand off, European governments may call in the banks’ bluff and force them to take state money.

There is something ironic about this round of bail-outs appearing as the victory of governments over the narrow interests of the banking industry. The reality is rather different. What is hidden by this debate about the modalities of recapitalization and the squirming of the banks over higher reserve requirements is the problem of recapitalization itself. We seem to have forgotten why Europe’s banks are in a weak position in the first place. The problem, as Mark Blyth explains very well, is the exposure of banks to the sovereign debt of peripheral Eurozone countries (Greece, Italy, Spain). This exposure is not the result of accident or misfortune. It comes from the determination of banks to make money out of the creation of the Euro. The peculiar features of the Eurozone meant that nations on the periphery were able to benefit from a credit rating identical to Germany’s. However, as Blyth points out, “while core/periphery yields narrowed there was still a spread, and if you were a core bank, you could dump all your boring low-yield German and Dutch debt, load up on periphery debt… and pocket the spread times a few billion exposures”. The banks’ current difficulties are thus the result of the risks they took previously in making profits off the uneven development of the Eurozone economy.

Instead of being recapitalized by governments, which will come with the bitter pill of higher reserve requirements, banks would rather the EU beef up its financial stability mechanism so as to avoid any sovereign defaults within the Eurozone. The alternative, namely recapitalization, still represents a dramatic subsidy from taxpayers to banks as it ensures that these banks are covered for the losses incurred as a result of their lending to peripheral Eurozone economies during the boom years.

These two alternatives – a bigger EFSF or recapitalization – are both significant wealth transfers from taxpayers to the financial sector and should be resisted for that reason. That these are the only two alternatives presently on the table shows how limited and narrow the debate on the current crisis has become.

Looking for growth

We have often argued at The Current Moment that what is missing in both the US and Europe is a real plan about how to make these economies grow. The political right points to the need for tax cuts; the left prefers state-funded jobs programmes. Neither addresses the problem of a languishing private sector, where firms are sitting on cash rather than reinvesting it. Central banks have tried to stimulate the economy by pushing down interest rates as way of stimulating private borrowing. As argued before (here), quantitative easing has not had the desired effect.

One response to the current problems is to point to the need to get consumers spending again. Firms are sitting on cash because they are gloomy about the future: without more buoyant demand, more investment will only mean the production of unsold goods. Critics of the austerity measures being pushed through across Europe often frame their opposition in terms of its effect on demand: how can European economies grow if the continent’s consumers are being hit with new taxes, cuts in welfare incomes and job losses?

This consumption-oriented view of growth is worth comparing with the growth experiences of the emerging markets. Growth does not just come from consumption. In fact, things look rather different if you look outside of the US and Western Europe. Take China. In its recent World Economy report, The Economist notes that the percentage of the gross national product that is consumed has fallen steadily in China since the 1970s.

If we were to map China’s annual growth figures on the graph, the relationship between consumption and growth would be an inverse one: a rise in the latter as the former has fallen. This makes sense if we look at how Chinese investment decisions are made. Capital is channelled via state-controlled banks into production. The percentage of the GDP that is reinvested is remarkably high in China: around 50% of GDP. It is on average half of that in OECD countries.

One way of looking at the contemporary slump in Western Europe and the US is through the lens of productive investment rather than that of consumption. The Chinese model has its own limitations, not least its reliance upon the demand for its exports in overseas markets. China is also at a different stage of its development, meaning that we are not comparing like with like. But it is nevertheless useful as a way of generating different sorts of questions. In what ways are investment decisions made? By whom and with what goals exactly? And crucially, how has the role of financial intermediaries changed over time and what impact have those changes had on investment? We don’t have answers to these questions yet but they are a good place to start when thinking about the growth problems in contemporary Europe and in the US.

Financialization, not debt, is the cause of Europe’s crisis

There are many across Europe, policymakers especially, who point the finger at debt-ridden governments in Greece, Ireland, Portugal and Spain, saying that the reason we are in such a mess is that these governments have spent beyond their means. We commented last week on an op-ed in the Financial Times by the Dutch prime minister and finance minister making just this point. “The main cause of the current problems”, they wrote sternly, “is that some countries played fast and loose with the very rules designed to guarantee budgetary discipline”. Austerity measures are thus the solution to the Eurozone crisis, to be enforced with the stick of a threatened exit from the Eurozone for those governments unable or unwilling to push through the painful measures.

As argued before, the Eurozone crisis cannot be understood as simply a debt crisis. Wendy Carlin, Professor of Economics at University College, London, gives us a very useful account of the crisis that puts the accent not on debt as such but on the role of the banks in the pre-crisis European and global economy and on government responses to the fragility of their banking sectors. “The unwillingness of policy-makers to recognize the on-going role of the banks in the crisis and the benefits of a pan-European solution worsens both the economics and the politics of the situation”, she argues.

Prior to 2008, there were great differences between countries in what is now the fragile periphery of the Eurozone: Ireland did not have high levels of government debt before the crisis, Greece and Italy did. The connection between the 2007-8 financial crisis that was sparked off in the sub-prime mortgage market in the US and today’s Eurozone sovereign debt crisis is through Europe’s banks. They were shaken by the first part of the crisis, with governments intervening – most visibly in Ireland and the UK – in order to stabilize their balance sheets. Carlin notes that one of the first banks to fail in 2007 was a German bank. In France, policymakers at the time – notably current IMF director, Christine Lagarde, who was French finance minister when the crisis first broke out – complimented their banks for what seemed to be limited exposure to US sub-prime mortgages. Today, we see that French banks are no different from their peers, only that the risk they took on was more heavily concentrated in Southern Eurozone economies – Spain, Italy and Greece. What is driving the Eurozone crisis at the moment is the fear of contagion: a Greek default alone would not topple big Northern European banks, but if Italy and Spain defaulted, the French government would be called upon to intervene in order to recapitalize its banking system. French government debt would soar and it would move from creditor to debtor in one swift move.

Enthused by the Brown-Darling school of macroeconomics, John Lancaster in the London Review of Books wonders why Eurozone governments are dithering about helping their own banks. Why, he writes, did the Europeans not listen to Gordon Brown and extend the European Financial Stability Facility to the tune of around 2 trillion Euros? That, he thinks, should probably have been enough to reassure the markets. When in doubt, it seems, the answer is to throw public money at the problem. Here we reach the limits of the analysis. The Eurozone crisis is not a debt crisis. The current sovereign debt concerns are symptoms of the problem, namely the fragility of the European banking system. And that fragility is the result of a transformation in the role of financial instititutions, what we can call financialization. To start understanding Europe’s current predicament, we need to go beyond the kneejerk belief that government bail-outs can make the problem go away and look more closely at the actual causes of the current crisis.

This time was different

In our long running attempt to sort out what ‘financialization’ is supposed to mean, we revisited the ‘Finance’ chapter in Doug Henwood‘s excellent After the New Economy. Published in 2003, Henwood’s book describes the collapse of the telecom/dot.com bubble in the light of wider trends in post-war political economy. A brief summary of Henwood’s account (or our reading of it) helps shed light on some features of our own post-crisis stagnation.

The hinge, on Henwood’s account, is the late 1970s, when inflation, full employment, and an uppity working class continued to press its demands, while firms had watched profit rates decline for twenty years. Carter appointed Volcker to the Fed in 1979, and the new chairman took the helm with the famous statement “the American standard of living must decline.” After jacking up interest rates first in 1979, and then, not satisfied, to a peak of 19% in 1981, Volcker eased a bit, before raising them again in 1983 and 1984. By 1981 the damage had already been done – unemployment was at 11%. And if workers hadn’t gotten the message, Reagan was happy to turn to the screw by firing the air traffic controllers. (See Henwood 207-211 for the full account.) As an aside, we can’t help noticing that austerity seems to have been in the Democrats’ back pocket for a long time now – Volcker being a Democratic appointee.

Of course, this story is well-known, but it sets up one important bit of context for thinking about the growing importance of financial operations since the late 1970s. As Henwood points out, the official ideology of the stock market is that it is a way of raising capital for investment. The problem is that “over the long haul, firms are overwhelmingly self-financing – that is, most of their investment expenditures are funded through profits (about 90%, on long-term averages), and surprisingly little by external sources, like banks and financial markets” (p.187). Most shares bought and sold in the market are not, in fact, bought from the issuer by an investor, but are essentially secondary trades. The money exchanging hands does not go to the firm issuing the shares. How, then, to think about the growth of the stock-market?

Henwood’s thought appears to be that the more important feature had to do with changes in ownership and class relations. Against the background of the late 1970s early 1980s upper class offensive, the growing power and influence of shareholders made itself felt in two ways. First, increasing compensation of managers in stocks bound these managers to the short-term fate of the company’s stocks, rather than its long-term economic health. (And recall that this increasing stock-based compensation is a major reason for growing inequality – more important even than changes in tax rates). Second, the emphasis on stock values put a much greater emphasis on increasing profit rates by whatever means necessary – most importantly suppressing wages and labor costs generally. The restructuring of ownership was thus part and parcel of the offensive against the wage and compensation demands of most Americans. It was more a class project of redistribution upwards than a dynamic growth model. Indeed, if Volcker had been more honest, he would have said “the American standard of living for American workers must decline.”

Of course, it’s true that, by the end of the 1990s, the highly mobile capital, sloshing around both in the stock market, and across the globe, did produce some innovation, but in the most inefficient way. All kinds of now forgotten telecommunications (WorldCom, Qwest, Global Crossing) and dot.com ventures  (Pets.com, TheGlobe.com) raised money through mammoth IPOs, and less so venture capital, and crashed hard, with bankers and favored investors making the lion’s share of the money on the up and downswing. Henwood quotes former investment banker Nomi Prins’s calculation that by 2003, over 96% of the telecom capacity lay dormant. Old news, but a painfully familiar story to us, especially given all the unused housing stock. When the stock market does serve as a conduit for investment, it tends to lead to massive over-speculation on asset values, and the promise of returns on stocks and other financial instruments becomes disconnected from the real values, or reasonable potentials, of the underlying assets. And the people who tend to benefit the most are the big and regular players, not the so-called investor class.

However, though familiar, there are at least three aspects of the boom and bust of the late 1990s and early 2000s that strike us as different from the credit-crunch and subsequent stagnation. First, most obviously, at least we got the internet out of the 1990s, whereas now we got a lot of unused houses, and a good portion of the population living in houses they can’t, and never could, afford. The underlying asset, in other words, was never believed to be able to create value. There were at least theories – though many of them wacky – about how the internet, and various websites, could make money, and thus pay returns. Second, the housing bubble was driven not just by speculation on stock values, but by extremely complex new financial instruments that were linked to debt, not equity. The ability to repay mortgages, not the ability to give a return on dividends, was, as far as we understand it, a decisive feature of the CDOs, CDO squareds, and in a way CDSs. No doubt there is an important story to tell there about the class relations and ownership structures involved in that kind of speculation, but it is not quite the same as the shareholders of the world uniting against the working class. Third, in retrospect, what is painfully evident is the role of debt – not just corporate and government, but household – as a response to the ‘decline of the American standard of living.’ The individualized, unspoken, and doomed-from-the-start response to Volcker’s commandment was the taking on of debt by households to sustain consumption they could no longer finance through earnings. This was debt in the form of mortgages, second mortgages, credit cards and student loans. What seems to make this time different is, in a way, the discovery of debt as a way of extracting value from workers that couldn’t be extracted via further wage-suppression. And the economic consequences of debt-financed consumption are even more dire than just a stock bubble, since it made its way into all areas of the economy – anywhere a consumer used borrowed dollars to buy things. Of course, the thing about debt, especially when there is systematic inability to pay, is that it can always be renegotiated. These renegotiations are usually mediated by the state, so it matters who controls the state. On that front, we know which side the balance of forces favors.

 

The Jobs Problem

In his wind-up for Thursday’s speech, Obama has made unemployment his theme. “Let’s put America back to work,” Obama said to union leaders. Ever the careful politician, Obama has not released details of what he will say, though it is hard to see how he can propose much given the budgetary concessions he has already made. It is tempting to prepare in advance a critique of the inevitable half-measures and technocratic manipulations that have been part-and-parcel of mainstream Democratic strategy for decades now.

However, there is a deeper problem. The problem is not with the inevitable inadequacy of what Obama will propose, but with how Obama wants to define the problem that needs to be addressed. The problem, as Obama wants to define it, is unemployment – ‘put America back to work.’ And of course, unemployment is a big problem. More specifically, persistently high levels of unemployment next to anemic job growth. (See Konczal at Rortybomb for a discussion of the recent unemployment numbers.) But so too is underemployment, crappy jobs, stagnating wages, and declining compensation figures. That is to say, what needs to be rejected is the attempt to present unemployment in isolation, as a distinct problem that can and should be addressed independent of these other economic problems.

The exclusive emphasis on unemployment lets the financial crisis, and the background growth model that produced it, off the hook. Indeed, it is a way of trying to address unemployment while leaving the background structure of society relatively untouched. Obama’s strategy also misrepresents the groups of people that have an interest in a new way of organizing the economy. It is therefore not just analytically but politically problematic, as it carves up the unemployed, the underemployed, the working poor, and everyone else struggling to get by, into different interest groups. This might make problems appear manageable, but it undermines the formation of effective and powerful political coalitions that might actually be able to change things.

Consider, for instance, the way focusing on unemployment lets the financial crisis, and the background, highly financialized, growth model of the last four decades, off the hook. One effect of this economic model was to produce a series of asset-bubbles and debt-financed consumption that, when it all burst, produced persistent and deep unemployment at all levels of society. As an EPI briefing paper points out, unemployment has risen for every skills class, and the ratio of jobs to workers seeking jobs is about 4:1 – this isn’t just some structural unemployment, or mismatch between skills and available jobs, working itself out. The following chart is clear:

The jobs problem is deep and structural. It springs from the structure of ownership, the post-bubble indebtedness, the flight to T-bills instead of productive investment. A real jobs program would have to address these issues, not just send some surplus construction works out to fix schools and highways. But connecting the current jobs problem with the financial crisis, financialization, and the structure of ownership is unimaginable to current leadership.

Moreover, any serious thinking about the economic development preceding and following the crisis, would have to admit that persistent unemployment was not the only consequence. A lot of the jobs have been pretty crappy, and nearly all of the benefits of the past decades of growth have gone to small segments of society. The EPI briefing paper is a rich source of information on these familiar trends (h/t Art Goldhammer). Consider income first. In the last ten years, real median income has declined by about $5,000:

Wage growth has been slower in the past two years than the previous thirty, and, as we have pointed out before, the previous thirty years have been pretty stagnant. If one adds in other forms of compensation, things have not been dramatically better. According to EPI, since the crahs 38% of families have been directly affected by wage, benefit, or hours reduction and 24% by loss of health insurance.

As for wealth, the top 5% took home 81.8% of all the wealth gains between 1983 and 2009, and the bottom 60% saw net declines in wealth:

A -1.7% decline in wealth for the bottom 80% of all Americans. Clearly, the problem in the United States with the economic development of the past decades, and with the post-crisis ‘recovery,’ is not just persistently high levels of unemployment. It is with the broader structure of the jobs created, their associated levels of income, overall compensation, and wealth. The jobs problem is one amongst a series of problematic features with the way jobs are and are not created. But these are not even issues Obama has wanted to mention, let alone address, in any consistent way.

Focusing on what has happened to the employed, not just the unemployed, matters not just in ‘policy’ but also ‘political’ terms. As a matter of policy, it suggests that more expansive thinking is needed than just a works program that might mop up some of the worst excess of recent events. But as a matter of politics it matters because presents a decidedly different way of thinking about the interests at stake than Obama’s focus on the unemployed. At the moment, Obama seems to be reproducing the political failure of the health care debate – where he focused on the 20% uninsured rather than the majority of the population who could benefit from a different system altogether. The more Obama appealed to the worst off, the more the rest believed – not so illegitimately – that their interests were not seriously under consideration. One just cannot build adequately strong political support for significant economic policies that way. In one sense folding a jobs program into a broader argument for improving the conditions of the already working classes might seem more of stretch, because it is more radical as an appeal. On the other hand, it appeals to shared interests of a majority of citizens – indeed, by some measures, to roughly 80% who have seen stagnating incomes and declining wealth. In that sense, it is just as viable a political strategy.

Policy and politics, interest and action, go together. One kind of politics – the appeal to the interests of unemployed and employed alike – implies a different set of policies. It is a more transformative approach. Another kind of politics, the one Obama prefers, is the strategy of division, isolation and containment. Deal with the unemployed separately from the underemployed, the uninsured separately from the underinsured, the poor separate from the middle, and so on and so forth. This suits a technocratic mindset – one lacking both a program and political imagination. It should be resisted all the more for that. The problem, in other words, is not just the ways Obama’s jobs program won’t work, but also with the ways it very well might work. It might work to even more deeply divide an already fragmented and confused body of citizens – a body whose shared interests are usually sacrificed at the altar of moderation and technocracy.