Saturday, July 9, 2011

The Origin of the [crisis in the] European Union – 1: When Tendency Becomes Actuality

A comprehensive analysis of what is taking place in the EU requires a book-length treatise; a blog is not a suitable venue for it. What is more, in Vol. 4, I discuss the subject in some detail. That is why except for a few relatively short posts here and there, I have not written about the events in Europe. Then, last night I read Serge Halimi’s editorial in the July issue of Le Monde Diplomatique.

Halimi is a journalist in the best sense of the word and a competent writer, as befitting the editor of LMD. Let me quote excerpts from the editorial, but I urge you to read the piece in its entirety here:
The economic, and democratic, crisis in Europe raises questions. Why were policies that were bound to fail adopted and applied with exceptional ferocity in Ireland, Spain, Portugal and Greece? Are those responsible for pursuing these policies mad, doubling the dose every time their medicine predictably fails to work? How is it that in a democratic system, the people are forced to accept cuts and austerity simply replace one failed government with another just as dedicated to the same shock treatment? Is there any alternative?

The answer to the first two questions is clear, once we forget the propaganda about the “public interest”, Europe’s “shared values” and being “all in this together”. The policies are rational and on the whole are achieving their objective. But that objective is not to end the economic and financial crisis but to reap its rich rewards.
Halimi correctly observes that what we face is not a “technical and financial debate but a political and social battle”. (Dialectics of finance is dialectics of politics, and vice versa.) He then goes on to explain the reason for the policies that seem to be at once insane and rational, because “indignation is powerless without some understanding of the mechanisms that caused it.”

But he does not go to the heart of the matter, which is the intellectual equivalent of asking for the moon. That is a problem, because some understanding would not do. It could not answer, for example, why draconian policies were applied with “exceptional ferocity” in “Ireland, Spain, Portugal and Greece”?

In fairness, the heart of the matter is technical and can hardly be discussed in an editorial. But it must at least be laid down, because it alone can answer the questions, resolve the contradictions and show the way. That is the power and the empowering effect of theory that I have written about in several place – here and here, for example, which delivers us from the submissive acceptance of events just because they occur. Without it, the powerlessness that Halimi mentions is bound to reign. The “market place” of ideas in democracies sees to that.

In democracies, you see, what often stands in the way of people’s grasp of the issues and renders them powerless is not the death of information but its stupefying plenty. The Greek pensioners, French union organizers, British “Open Europers”, the World Bank bureaucrats, the IMF experts, traders, politicians, college professors, think tankers and ordinary citizens have all opined about the crisis in EU. The opinions are often contradictory; how could traders and union organizers not disagree? That creates the “messiness” of the democracy that Rumsfeld himself cautioned us about.

Messiness muddies the waters. Who is one to believe, especially as everyone seems to be at least partially right? Since everybody is partially right – and thus, partially wrong – maybe what afflicts us transcends the individuals and touches upon something more fundamental like human nature. Yessir, that must be it. Surely it is man who is wicked, as the Good Book says. Just look at the Greeks. They do not work hard, do not pay taxes and retire early. No wonder they are broke. As for the larger crisis in the EU? It is the fault of the European “elites” who came up with the idea.

In this way, the degradation of the life styles of 500 million people in the EU is blamed on themselves.

Examples abound.

Here is one Hans-Joachim Voth, Professor of Economics, Universitat Pompeu Fabra, Barcelona, Spain, writing to the editor of the Financial Times on June 24 to opine about Greece:
A European country without a land registry, without proper tax enforcement and without a responsible political process to control spending and borrowing needs all the outside pressure it can get to increase state capacity. The economic evidence is unambiguous – the larger and more effective a country’s state apparatus, the higher output per capita. Pressure to improve state capacity and become a grown-up country is what Germany and European Union are currently providing, free of charge.
And here is Gideon Rachman, an FT commentator, explaining the cause of the EU crisis in his June 21 column:
It is important to understand that the origins of the current crisis lie precisely in the dream of political union in Europe. For the true believers, currency union was always just a means to that greater end ... Helmut Kohl, the chancellor of Germany in the early 1990s, was so convinced of the need to bind a united Germany into the European Union that he was prepared to press ahead with the euro, in the face of 80 per cent opposition from the German public.

At a seminar in London last week, Joschka Fischer, a former German foreign minister ... was unrepentant in defending this elitist model of politics. He insisted that most important foreign policy decisions in postwar Germany had been made in the teeth of public opposition. “It’s called leadership,” he explained.
Yet, does any of this make sense?

If the economic evidence were “unambiguous” that the larger a country’s state apparatus, the higher its output per capita, would the Republicans in the U.S. and the Tories in the UK consistently, insistently and vehemently push for shrinking the government?

More fundamentally, who are the European elites? What is their common interest? Why would they be interested in uniting a country without a land registry or tax enforcement or a “responsible political process” [sic] with an industrial country like Germany? How could they influence the government to carry out unpopular decision, even in the face of 80% opposition?

As all the issues and controversies pertaining to the crisis in the EU stem from the crisis, they reflect the heart of it and, to that extent, contain an element of truth, no matter how contradictory and even nonsensical. If we reach the heart of the crisis, the contradictions will disappear. Newtonian mechanics offers a good analogy. It shows that the same force that makes an apple fall from a tree is the same force that keeps the moon in orbit. There is no contradiction. It also explains the apparent movement of the heavenly bodies as seen from the earth.

At the heart of the EU crisis is the fall in the rate of profit of capital in Western Europe and the U.S.

Why and how does the rate of profit fall is beyond the subject of this post. You could research it yourself or await the publication of Vol. 4. There, I delve into the subject in some depth.

The point to emphasize is that the fall is real – what philosophers call objective reality. And as the rate of profit is the source of the newly created wealth, its fall means that the amount of the total wealth created in the “developed world” is reduced.

This fall and reduction is the result of a process that originally exists as a mere tendency. In the mid 1970s, after the breakdown of the Bretton Woods regime of fixed exchange rates, the tendency exerted itself forcefully and gradually became a real phenomenon. The process continues to date and is behind all the stories about the U.S. losing its preeminence and economic might that you have been hearing for some time.

The “total wealth” is defined expansively, what is crudely and inaccurately captured in GDP. I will return to this subject later. Here I merely note that total wealth is an altogether different concept from the profit of an individual firm, or even a group of firms, say the ones comprising Fortune 500. Likewise, it has nothing to do with the distribution of wealth. The total wealth created in a country could decrease, but the absolute size of the share of that wealth that goes to a particular segment of society could rise. It is a simple matter of ratios. The overall size of a pizza pie could shrink but the amount of pizza you eat could actually increase if you raid others’ shares.

So, there is no inconsistency in saying that the rate of profit and, with that, the absolute value of the total wealth in the U.S., has fallen and yet, at the same time, the number of the billionaires in the country and their total wealth has increased. This state of affairs can come about if billionaires, when they were mere millionaires, could appropriate proportionately more share of the country’s newly created wealth.

There are many ways that an economic class could appropriate proportionally larger share of the newly created wealth. But they all boil down to paying less and thus, keeping more. In the U.S., this was done at both the public and private level, by pushing for tax cuts and reducing wages.

If you live in the U.S., both are familiar stories. The push for tax cuts led the Proposition 13 in California, which limited property taxes and set the stage for subsequent crises, from the 1994 bankruptcy of Orange County to the current, ongoing one. It also created Ronald Reagan and his “philosophy” which was adopted by both Republican and Democratic parties: constant tax cuts, tax breaks and tax loopholes for businesses and the wealthy, “small government” and “starving the beast”, the latter being code for destroying government agencies by cutting their budget on the grounds of lack of funds because the government revenues were reduced due to tax cuts.

In the U.K., Margaret Thatcher played a similar role.

In the private arena, the wages were reduced – either directly or by not keeping up with inflation. Wage reduction is a twofer. First, you pay less for labor. That is one saving/appropriation. Second, because of low wages, the labors’ productivity rises which further increases your profit. The follows from the definition of productivity, which is the value of output (wealth) created by unit labor (measured by the wages).

Here is not so much the proof – as proof only belittles the obvious – but everything you need to know on the subject, from the Financial Times of April 21, 2010, under the heading Biden urges actions on stagnant wages:
Mr Biden, who is in charge of Barack Obama’s “middle class task force” said the last US economic cycle, which began in 2001 and ended in 2007, was the first in history that left median incomes where they were at the start.

Yet, over the same period, the growth in productivity, which had traditionally fed through into wage growth, hit record levels … Mr Biden admitted that the administration did not yet have clear answers on how to address what many economists believe is a long-term structural problem in the US economy.
Note the “long-term structural problems in the US economy” which economists concede and for which Vice President Biden admits he has no clear answer. It is the diminished rate of profit and thus, wealth. It could only be remedied at the expense of sacrificing efficiency, which is another way of saying that it would not happen.

Also, Biden’s reference to 2001-07 period is strictly contextual; he happened to be talking about that specific period. The wage stagnation goes back to the mid 1970s. Financial Times, June 28, 2011:
Fork-lift truck drivers in Britain could expect to earn £19,068 in 2010, about 5 per cent lower than in 1978, after adjusting for inflation. Median male real US earnings have not risen since 1975.
The wage cuts in the U.S. were especially savage. They could not be replicated in Europe with its tradition of strong labor unions. What would you do if you were “European” capital and wanted to increase your share of wealth in the face of falling rate of profit?

What would you do if you had to build a riverfront property and there was no more land?

Why, you would “claim” land from the river. You would dig the mud and sand from the river bed and add to the river bank to create new riverfront land. Ask any major New York developer.

Similarly, if you wanted to bring wages down in Germany, for example, you would bring in cheap labor, non-union labor, Turkish labor.

But there was always a limit to that importation. Not all Germans could be replaced by Turks in German factories.

Could something more fundamental be done, then?

Yes, one could create the European Union. Its main purpose? To inject cheap labor from less developed countries into the Union so that the wealth of the more developed ones could somewhat be maintained.

That’s the EU in a nutshell.