Archive for category Political Economy
Posted by Scott Erb in Economics, Markets, Political Economy, Political Science on April 28, 2014
French economist Thomas Piketty has put growing income and wealth inequality center stage, publishing a well researched book full of data that pretty conclusively shows what many of us have been arguing for sometime: there is a growing gap between the rich and poor and this could be dangerous to democracy and modern society.
I plan to read the book and will blog more on the details/arguments. For now, I offer only a general reflection about the subject matter and the importance of taking inequality seriously.
His book isn’t a radical appeal to the masses. It is a lengthy academic tome with a target audience that includes economists, political scientists, and other scholars. Among this audience his argument is neither new nor earth shattering – economists and political scientists have been pointing out how the centralization of wealth has been increasing, creating a real threat to democracy and capitalism itself. However, perhaps because the public is waking up to this fact, his work has suddenly became a best seller and is perhaps one of the most important books of our era.
Pointing out the dangers of out of control capitalism is not an argument for socialism; quite the contrary, thoughtful supporters of market capitalism should take it seriously and ask themselves: is the growing power and influence of the very rich a result of hard work and initiative, or are they able to rig the game in their favor? If the very wealthy are rigging the game, then they are undermining capitalism and democracy.
Libertarian thinkers sometimes have an understanding of economics that is skin deep. They have learned the basics of how the market works, and thus have an understanding that, all things being equal, the market does better than anything else at communicating demand and using price to allocate goods and services. Government policy simply distorts that mechanism and thus creates inefficiencies. So, they conclude, government is the problem, less government is better.
But that’s only if reality operates as pure market theory says it should, and if you take economics beyond the first year you know that is not the case. Markets are distorted by a myriad of factors: imperfect information, misinformation, inside deals, connections, the capacity to use wealth to influence others, and the utter lack of knowledge many have about the way the system operates.
A good example is in Michael Lewis’ new book, Flash Boys. The rigging of the game there is rather minor – big banks can use lags in time to make trades to figure out what trade is coming and make an offer that will earn them a few extra pennies on every trade. No big deal; no 401K investor notices the slight variations. Yet a few pennies off of hundreds of millions of trades and it adds up! That’s just an example of what you can do if you are on the inside. Of course, the way the big banks took investors to the cleaners over derivative bonds during the housing bubble (and in fact caused the housing bubble) is a more dramatic example – described in Lewis’ earlier book The Big Short.
Now one might say that this is nothing new. Throughout history the wealthy, elite class has always assumed they deserved privilege while the poor were looked down upon as being lower in character or worth. In the 19th century the British tried to make any form of social welfare painful and difficult so as to avoid anyone wanting to stay on it. Yet workers have defied that notion of the poor as lazy for centuries. After all, when in Britain millions of factory workers endured horrific conditions during the industrial revolution, they still worked. They put up with sustenance wages, filth, squalor, child labor 80 hour work weeks, and numerous work related deaths and injuries to keep earning.
Compared to then, workers have it pretty good now. So does that mean inequality doesn’t matter?
It does matter. Consider the two charts here. Above, the share of wealth that the top 0.1% have is shown, and it has doubled in the last thirty years to the point that they control a over a fifth of the country’s capital. Below, the graph shows the income of the top 10%. Again, the share going to the very wealthy has increased dramatically over the last 30 years, to levels from the early 20th Century.
This matters for a number of reasons. First, such a distribution of wealth and income makes bubbles more likely. In theory, the very wealthy should be investing their money to create jobs for the poor, allowing that wealth to “trickle down.” In practice, when too much capital is centralized to the very few, bubbles become more likely as they are looking for “easy money” rather than investing in jobs. And when they do invest, overseas investment is common. That money does not go into improving our economy. It would be more efficient to tax it and use it to build infrastructure and support the economy.
The key to long term growth is demand from the middle class. Money earned by the middle class does not usually flow into bubbles; rather, it creates demand for goods and services that require domestic jobs. When a higher proportion of the wealth flows to average folk, the economy grows. Moreover, social mobility in the US as become very low – where you were born has become the best predictor of where you will end up.
That is contrary to the American dream – and the value that individual initiative and effort matter. The best way to assure that people can achieve all they are capable of is to assure access to education, health care, and the things needed to overcome obstacles caused by poverty or lack of status. That means government programs to promote equal opportunity are good for capitalism and freedom; by expanding the capacity of people to achieve all they can we avoid becoming an oligarchy.
If this trend is not reversed, the economy will stagnate and America’s best days will be behind us. The good news is that it appears the anti-tax anti-government sentiment that has been the norm for the last 35 years is starting to fade. Despite the fights over Obamacare, it was passed and implemented; public opinion is shifting. For now it’s important that the conversation about inequality continue – the future of market capitalism depends upon avoiding or reversing today’s inertia to oligarchy.
“Stop Treating Mama Africa Like a Vagina”
Posted by Scott Erb in Africa, Children and war, Development, Human Rights, Political Economy, World Affairs on September 8, 2013
One of my projects this year is a series of lectures as part of the “World in Your Library” series sponsored by the Maine Humanities Council. Saturday I traveled to beautiful Southwest Harbor, Maine, a delightful community on Mt. Desert Island. The island, home to Acadia National Park and the tourist destination Bar Harbor, is stunningly gorgeous and I never knew what a gem Southwest Harbor was. In the next two months I have talks in Bangor and two in Kennebunk.
The topic of today’s talk was “Children and War.” The topic is important to me thanks to a course I co-teach with Dr. Mellisa Clawson, a professor of Early Childhood Education. She and I started teaching that course in 2004, and over the years thinking about how war affects children world wide has changed my view on how we in political science think about conflict. “Children and War” is a subject that elicits emotion and pain. One woman said after the talk that her stomach hurt, and she had a hard time taking in the information, even though she was glad she came. She gave me a hug and thanked me. After the talk the Q and A ran almost an hour, perhaps the most flattering response one can receive!
I ended the talk with the video above – “Vagina” by Emmanual Jal. Jal is a former child soldier from the Sudan, whose musical ability and creativity helped him escape and recover from the trauma of being a child soldier witness to and participant in atrocities and horrors. The video is crude in some ways – “stop treating Mama Africa like a vagina, she’s not your whore, not any more….” One woman, a feminist, was at first put off by what she saw as the derogatory use of the term “vagina.” But others pointed out that the video was saying the beauty of Africa – and the vagina – was being misplaced by violence and rape; in this case, rape of Africa’s natural resources, leaving the people poor and subject to horrific violence.
And Jal is, sadly, correct. Our lust for diamonds, oil and gold have lead us in the industrialized West to be complicit in horrific crimes in Africa. We provide the demand for demands, gold and of course oil, and big corporations in collusion with African governments (read: organized criminal gangs aka mafia) provide it. The people who live and work there are left poor, and wars to try to control the resources leave thousands dead and provide the fodder for the recruitment and use of child soldiers.
There are many organizations now that try to “rescue” and rehabilitate former child soldiers — children who have perpetrated atrocities that here would yield the death penalty. Former child soldiers recall how they would feel proud of the terror they’d instill going into a community and killing indiscriminately. Sometimes their leaders would scratch their skin open and rub cocaine into their blood to create a sense of power. They’d tell them they were invincible; the LRA in Uganda would have the children rub palm oil over their body, saying it would protect them, if they believed the Lord was true. If comrades died, they lacked belief.
Up to 40% of child soldiers were girls, all of whom were raped and used as sex slaves, home keepers, and soldiers. If they have children from the rapes, those children would be raised to fight. They often avoid rehabilitation in order to avoid the stigma of having been part of the militias – the stigma of having been raped and used, making them “undesirable” by men in that culture.
But as Jal’s video shows, we are complicit. Our big corporations work with their corrupt governments to cheaply mine diamonds, gold, oil and other minerals. We don’t know or care of the social impact. We pretend it’s just “the market,” and that any problems in Africa are endemic to those countries. We are blameless.
Yet we are not – we make those atrocities possible, and our forefathers through colonialism and greed destroyed the old functioning culture on the African continent to bring them “civilization” – Christianity, government and science. Thus they went from being self-sustaining and balanced to impoverished, unstable and dependent. Crudely, we (in the West overall) raped the continent saying “it’s good for them and they like it.” Yeah, Jal’s metaphor is discomforting, but accurate.
To solve these problems it’s not enough just to try to help former child soldiers. We need to work to build communities with a sense of purpose and identity. Military intervention can’t work without a lot of effort to help rebuild social structures, providing education, basic necessities, and stability to allow community building. But those efforts work against the desire of big corporations of the West – joined now by groups from China also wanting cheap resources – to maximize profit, while keeping Africans poor and divided.
If the people of Africa are kept down, treated as worthless as powerful states and corporations use “the market” to rationalize the plunder their wealth, the people may strike back. In an era of terrorism, new media and easy to obtain WMD, that anger could be given substance. The anger implicit in this video could magnify. It’s in our interests to work together now, rather than close our eyes and simply enjoy the lifestyle we receive by tolerating the violence and abuse by corporations and governments worried more about the bottom line than humanity.
Four Years In
Posted by Scott Erb in 2012 Election, Economic crisis, Economy, Energy, Environment, European Union, Political Economy on August 26, 2012
Although in retrospect the economic slowdown that continues across the globe to this day started sometime in 2007, the realization that we were entering a period of intense economic crisis became undeniable back in September 2008. The world stood at the brink of a collapse of credit and a spiral into severe depression. Various fiscal and monetary stimuli helped ward that off, but many of the core problems remain:
1. High debt levels in the advanced industrialized states from both government and private sector actors. US total debt is near 340% of GDP, about $50 trillion. In comparison total global government debt is just under $50 trillion. Total global debt is at $190 trillion, or about three times the global GDP. So this is a global problem, and it’s not primarily government debt that’s to blame.
2. Shifting demographics in the advanced industrialized states which will require a modification of retirement pension schemes and other reforms in order to stay solvent.
3. An imbalance between consumption and production, with the former focused on the advanced industrialized states of Europe, the US and Japan, and the latter in emerging markets such as China, Brazil, and India.
4. Environmental factors involving global warming, over population, chemical poisons and other results from over a century of unprecedented material economic growth. We don’t know how bad all this will be, but those who dismiss or minimize the danger are living in a fools’ paradise.
5. Potential problems with natural resources, particularly oil, water, and minerals needed in order to maintain economic growth. Energy shortages are the most visible (and have been experienced in small doses), but crises involving water and in the near future other valuable minerals may define the next century.
Political leaders are still trying to grapple with how to handle this transition. There are no easy solutions. Despite the election year rhetoric, no President would have fared any better than Obama on the economy – this is a global, structural crisis that defies quick policy fixes. The two favorite solutions are dubious. From the left you get the Krugman School that points to the need for a massive stimulus of trillions of dollars to retool the economy and get the country moving. On the right there is a call for less government regulation and less spending.
Less government spending will slow the economy, and in fact slows it faster than tax hikes would. Less regulation might be good in many sectors, but in some such as the financial sector it was the cause of allowing things to get so bad. The housing bubble (which helped fuel the growth of private debt) is directly attributable to lack of regulation of derivative markets and the collapse of effective financial regulation in general. Government regulations on small business may choke innovation, but lack of regulation of big corporate actors that buy government favors and transcend borders has been fatal.
Government stimulus would cause a short term spurt, but the evidence is strong that once you reach about a 100% debt to GDP ratio the increased debt does more harm than the good done by the stimulus. In Japan goverment debt soared to 200% of GDP without stimulating growth. Moreover, unless its directed in a manner that is assured to improve productive capacity and build the economy the money could end up going into consumption of foreign produced goods or risky financial speculation. In short, if not done right a stimulus would leave us no better off but with much more debt and a deeper structural crisis.
So four years in, here’s my assessment of where we are – an ambiguous assessment, I admit!
1. Gloom and doom has been overstated. This is a long term crisis, but not the collapse of western or global civilization. We have fiscal and monetary tools to avoid collapse or depression era numbers.
2. Debt levels in the private sector are down significantly (total US debt has gone from about 375% of GDP to 340%). That paying down of debt is a big deal — and is also one reason the stimulus from more government debt didn’t do more. In a best case scenario this will continue and level out and over time economic conditions will improve. However, the old “normal” of very low unemployment, easy credit and consumerism was built on sand – we won’t go back to 2006.
3. Big structural issues – especially demographics, energy, water and global warming — remain unknowns. Demographic change is less dangerous than global warming. Demographic problems can be solved through reform of pension systems and a growing economy with more reliance on technology. Ultimately too many people is more dangerous than too few. We are seeing a start of a transition from fossil fuels to alternatives, and relatively large natural gas supplies suggest this could be a stable rather than sudden transition. Global warming can make all these problems worse, however, and very little has been done on that front. That remains the gravest threat facing humanity.
4. Inflation is coming. An odd aspect of this whole crisis is the way deflationary fears have overshadowed inflation fears despite weaknesses in major global currencies. On the plus side, the ability to pay down (private) debt despite low inflation rates is a very good sign that we don’t need to inflate our way out of this crisis. However, to keep the Euro viable loose monetary policy will be embraced by the ECB to handle Spanish, Italian and Greek debt. The Federal Reserve may engage in another bout of “quantitative easing” (akin to printing money). This shouldn’t yield a currency collapse or hyper-inflation, but robust inflation rates of 5 to 10% probably will occur and create new difficulties.
5. The weatlhy are not always job creators. The growth of debt in the last ten years have yielded a growth of wealth for the investor class. This has not been earned through job creation but easy money schemes built on debt – the very thing that threatens the global economy. It was built on bubble money that yielded no productive gains; this kind of easy money at low tax rates is part of the problem, not the solution.
All told, I’m more optimistic now than I’ve been any time in the last decade about the future of the economy. I think we’re still five years away from emerging into a new kind of global economy and there are still difficulties and pain to endure. We’re four years in, and at least four years from the conclusion. But there is some light at the end of the tunnel.
More Europe for the Euro
Posted by Scott Erb in Economic crisis, European Union, François Hollande, France, Germany, Greece, Merkel, Political Economy, World Affairs on June 6, 2012
The European Union has a history of turning crisis into opportunity. At many times during its existence people thought that the project went too far, and that sovereignty would trump interdependence. There was the ’empty chair’ crisis in 1966 when De Gaulle threatened to leave the EEC (then a group of six states) if they didn’t agree that all decisions have to be unanimous.
It was for many proof that sovereignty would always win. Yet while they did let DeGaulle have his way on the issue he was angry about, the Luxembourg compromise that brought France back did not embrace DeGaulle’s principle of sovereignty first. He accepted that because he was facing a revolt from below – the French people and French business thought DeGaulle was endangering France with his brinksmanship. Already the eight year old organization had altered national interest.
In the seventies it appeared that the loss of the Bretton Woods system fixed exchange rates doomed the EC (now 9 states) to having no coherent monetary cooperation. That could undermine the whole project, it was argued. However, right when so-called Eurosclerosis was at its worst two people turned the situation around completely. Former Finance Ministers and now leaders Helmut Schmidt of Germany and Valery Giscard d’Estaing of France developed the European Monetary System, the precursor to the common monetary policy. Then when the Cold War ended many people thought the EC had run its course, that Germany would look eastward, and the organization might perish.
Instead German Chancellor Helmut Kohl and French President Francois Mitterrand forged the treaties that created the European Union, introducing a common currency and ultimately embracing rather than fearing the states of eastern Europe. Now the EU has 27 members, 17 of them part of the Eurozone (states using the Euro as their currency).
In that backdrop the current crisis should be seen as a precursor to another step forward in bringing Europe together. However, commentators in the US and Great Britain seem eager to declare the Euro dead or something that should have never been tried. They are wrong.
The current crisis is serious, and shows some fundamental problems with Eurozone policy up until this point. When it was originally planned, leaders knew that states could only support a common currency if they had similar fiscal policies. That led to strict criteria demanding convergence on interest rates, inflation rates, budget deficits and total debt to GDP ratios. If those criteria had been strictly enforced, there would be no crisis today. Unfortunately, those criteria were loosened, often for political grounds. In order to speed the spread of the Euro, economic dangers were discarded.
The problems began when the cost of unifying Germany turned out to be immense, causing Germany to violate the original criteria. France also had an economic slowdown leading to a similar loosening of the rules. They were the ones who needed to enforce discipline, and once they broke the rules it was hard to keep others in line.
They might have tried, but the bubble economy of the first decade of the 20th Century created an illusion that all was well. Debt may be high, but the world economy was growing and investments were yielding considerable profit. In that deluded atmosphere countries like Greece, Italy, Ireland, Spain and Portugal ignored the warning signs — and their problems were ignored by those in the EU who should have known better.
The southern states bring to the EU a different ethos than the northern European states. Greece is a prime example. The level of corruption and public sector employment is immense while the actual productive economy is small. Getting into government is a way to make money and gain perks. As their public sector boomed, it was funded via debt and risky investment schemes. When the bubble burst in 2008, the problems were laid bare.
Yet its not just a problem for the south. Someone had to finance that massive debt, after all — and those someones were predominately northern European banks and investors. So a default on debt or economic collapse in the south would quickly spread all through the EU, bringing down German banks as quickly as Spanish ones. The economic contraction could yield a depression that might spread far beyond Europe. In short, the bubble delusion led northern Europeans to finance the southern European excesses, making them just as vulnerable.
The problem is that the creators of the Euro were right at the start: you can’t have monetary union without strict rules forcing fiscal policy coordination. They were wrong that just setting criteria would be enough — criteria can be ditched, after all.
The solution is clear: 1) Find ways to eliminate and/or pool the debt from the southern European states. While this is often correctly decried in countries like Germany as a bailout of states with incompetent economic policies, not doing so could also bring down the financial sector of the big, rich, northern states. Therefore, Germany and others have to bite the bullet and help pay for the corrupt folly from the south. However, that also leads to 2) there needs to be a tighter set of rules and institutions to force rational fiscal policies on the southern European states. Often decried as an ‘austerity’ that simply deepens the recession in the south, it’s a necessary step to a sustainable economy. Adding to debt and spending more without restructuring those economies will simply make the problem worse.
So if Germany and states in the north have to pay more, states in the south have to give up a kind of easy money life style that allowed them to live excessively beyond their means for so long. Tax evasion, early retirements, massively large public sectors and the like will have to give way to an economy built on productivity and work.
If it works, the restructuring will be good for everyone. Southern states will start to have real rather than faux prosperity and develop their productive capacity. Not only will this save banks in the north from massive loses due to defaults, but will also be an engine of eurozone growth.
The poor/corrupt/unproductive south is unsustainable in a 21st Century European Union. The difficult but necessary transition they’re going through will ultimately end the rich/poor dichotomy between northern and southern Europe. The Euro will emerge stronger, and a Europe with much better coordinated fiscal and banking policies (overseen by real institutions not just vague rules) would be a far better bet than leaving the national economies to follow their own idiosyncratic paths.
Merkel and Hollande know the stakes. They know that they can join past Franco-German duos in turning a crisis that many thing will tear the EU apart to one that strengthens it and brings it together. The negotiations won’t be easy, but given the history of the EU and the recognition that the era of fully sovereign independent states is over in Europe, I’m confident they will be able to accomplish the task and make the EU a model of how political economy in the era of globalizationn can be structured.
Learning from Germany
Posted by Scott Erb in Economics, Economy, Environment, European Union, Germany, Political Economy, Research on January 29, 2012
Das Wirtschaftswunder, or economic miracle, is what Germans called the quick recovery of their economy after WWII. After a horrible winter in 1946, Germans went to work to rebuild their country, getting off rationing even before the victorious French and British. In the 1950’s Erhardt as Economics Minister presided over the regeneration of the German economy as he pushed for rapid free market reforms, even surpassing the pace suggested by the allies. Erhardt was Chancellor from 1963 to 1966 (replacing Adenauer, the first West German Chancellor who came to office in 1949), promoting both market economics and European economic unity.
Central was the concept of the Soziale Marktwirtschaft or social market economy. In terms of economic theory this relates to the Freiburg school or Ordoliberalism. Essentially the role of the state is to try to assure that the free market economy produces as close to possible the maximum amount it is capable of producing. Ordoliberalism rejects the idea that markets can function ‘magically’ or efficiently without the state – the state has a key role to play. This includes social welfare protections, collective bargaining, and state support of some industries. However, it is a liberal theory, rejecting socialist planning and socialist goals. The desired end result is not based on a theory of social justice or exploitation, but on having the market economy work as well as it possibly can.
(To American readers who haven’t studied political philosophy: liberalism here means a belief in limited government and a capitalist market economy — Ronald Reagan and George W. Bush were ideological liberals. The jargony use of liberal to mean leftist in the US is idiosyncratic to US politics!)
Even when the Social Democrats were in power from 1969 – 1983 and 1998 – 2005 they did not veer from the main components of Erhardt’s vision. The Christian Democrats never embraced a more radical form of liberalism like what Thatcher brought Great Britain or Reagan brought the US, also remaining true to the social market economy.
Right now Germany is out performing almost every major industrialized economy, except perhaps some of the Scandinavian states.
Think about what that means. Here in the US pundits want to tell us that higher taxes, social welfare spending, and more regulation are all “job killers” that would destroy our economic recovery. Yet the best performing states during this recession (and Germany’s record is solid for the entire post-war history) have far higher tax rates, more social welfare spending and more regulation than ours. Indeed, thanks to the power of Germany’s Green party the environmental regulations in Germany are among the most extensive in the world. Germany has met and gone beyond the Kyoto protocol goals. The first lesson from Germany is not to believe the ideological punditry!
That doesn’t mean we should emulate Germany; US culture is different, as are our strengths and weaknesses. Germany has also done some things Republicans would admire. The two major parties – Christian Democrats and Social Democrats – agreed on a balanced budget amendment designed to assure that German debt doesn’t increase. That sent a clear signal to bond markets and currency traders that the Euro’s anchor is secure. Regardless of what happens on the periphery, the underlying value of the Euro will remain strong because the German economy is stable.
A second thing we should learn from Germany is the strength of pragmatism. Pragmatism means avoiding ideological thinking in order to figure out the best way to solve a problem. Moreover, pragmatism for Germans is rooted in principle – the idea that the social market economy reflects support for a free market economy that operates as best as possible, with the public interest protected. That means all citizens should have a chance to succeed, and basics such as health care, education, pensions, job training and a decent standard of living are guaranteed. It’s not an effort to equalize out comes — there are many extremely wealthy Germans — but to assure equal opportunity and a minimum standard of living.
This pragmatism means that the two parties share a deep set of principles that unite them. As much as they disagree on various policies and programs, they know that its most important that Germany deal with problems through compromise and avoiding either an ideological lurch to the left (massive debt, redistribution and spending) or to the liberal right (deregulation, massive tax cuts, leaving the poor to their own devices). Moreover, the social market economy is based in part on understanding the power of incentives — all policies from the tax code to social welfare programs should be structured in a way that does not create incentives to cheat the system or avoid work. Germany’s balanced all this better than most advanced industrialized states.
It works. It’s not perfect. The budget contains inefficiencies, there have been recessions and economic problems, but looking at Germany’s economy today one can’t help but be impressed. If it weren’t for Germany, the situation in Europe would be far bleaker.
Those reading this blog over the past couple years recall that I’ve started rather bold research programs involving the media, consumerism, and the construction of values. These questions have intrigued me and helped guide my teaching. But ultimately I found myself unable to push the research along, it was too daunting to really shift my focus.
So I’m back to what I’ve published on, wrote my dissertation about, and remain keenly interested in: German politics, and by extension, the European Union. My focus is going to be to write a book that gives an accessible history of German economic policy and the keys to on going success, and then investigate what we can learn from Germany’s experience. Does Germany’s success mean we have to rethink the theoretical and ideological arguments so common from both the right and the left in the US? Does Germany have the capacity to help guide the EU into a much brighter future? Moreover, might this be a complete metamorphosis of Germany from a state that wanted to dominate Europe to one that embodies the best European values, building a European Union based on cooperation, markets, and values? I’ll keep you informed of my progress!
The American Myth?
Posted by Scott Erb in Economics, Occupy Wall Street, Political Economy, Poverty, Welfare on January 5, 2012
A lot of Americans believe that the US offers unique opportunities for people to rise to the top if they work hard and show innovation. It’s the American dream – the idea anyone can grow up to be rich, anyone can be President. After all, look where success stories like Barack Obama and Bill Clinton came from; neither were from the ranks of the rich and famous.
Yet as the New York Times reports, that dream is quickly becoming a myth. If you’re poor in America, you’re likely stay poor. It’s no longer the land of opportunity. Canada and most of Europe offer a better chance for the poor to succeed. The findings are sometimes stark. In Demark about 25% of men in born in the bottom fifth end up there, in the US it’s well over 40%. Even Great Britain’s level is 30%, much lower than that of the US. Two thirds of those born in the bottom 20% stay in the bottom 40%.
The top fifth is also “sticky” as the article notes. If you’re born in the top 20% of the population in terms of wealth, you’re very likely to stay there. It’s hard for those on lower levels to move into the top fifth.
The good news is that in the middle things are more fluid. About 36% born in the middle fifth move up, while 41% move down. It’s the very rich and the very poor who appear stuck.
What do we make of this? First, you can’t deny the role of economic and social structure in creating opportunities and constraints. Being born into wealth assures you opportunities that others do not get — that’s why so many people stay there. Being born into poverty means a lack of opportunity and a series of constraints: poor health care, poor schooling, bad neighborhoods, etc.
This is not something that Republicans deny. The article points out that Rick Santorum and other conservative voices are pointing out the lack of mobility from the bottom.
Second, the US does not fare any better than other advanced industrialized states in any measure of mobility. The inability for the poorest to rise is stark, but at other levels countries fare similarly. The American dream and the ability to achieve it for those outside the bottom 20% is about the same as the Canadian dream, Danish dream, etc.
Why, though, do our poor have more difficulty than those in other states? The answer is obvious: social welfare programs. For all their faults, social welfare programs assuring health care, basic housing and nutrition to all citizens make a difference. That’s why a Dane born at the bottom finds more opportunity to rise up than an American born in similar circumstances. It simply is not true that social welfare programs only create a sense of entitlement and dependency; they actually get people motivated to pursue opportunities and move forward.
This also suggests that it does the top fifth little or no harm to increase taxes to create social welfare programs to help the bottom fifth. This isn’t unfair since the top fifth already has so many more opportunities and chances for success. They don’t earn these opportunities through their own choices and work, they achieve it by dint of where they are in the social structure. A major causal aspect of their success is from outside their individual efforts.
That doesn’t mean that individual choices don’t matter — people have to take the opportunity that they receive and not waste it. Still, somewhat higher taxes won’t change that fundamental social structure. Moreover, one could make a strong argument that it is a denial of liberty to those down the ladder by allowing so many individuals to be given such greater opportunity and fewer constraints because of position of birth. It’s not much different than the old aristocracy.
However, how such money is spent still is debatable. I don’t think a Danish social welfare system would necessarily work the same in the US because the social divisions, size of the country, and the impact of years of neglect will make it more difficult to get real opportunity to the poor. Also, while it’s clear that social welfare programs can work – they help people move up the ladder, they don’t necessarily create dependency – not every program is equal. Some programs do create dependencies, especially if like in the US the programs are meager transfers that don’t really create opportunity. If you’re not going to be able to move up, why bother? Just take what you can!
For the US to create opportunity we need to focus on helping people help themselves, providing education, health care, and the basics that children need to be in a position to let their effort and innovation actually determine what they achieve in life, not their position of birth. Perhaps the kind of welfare programs we have is part of the problem
To be sure, 8% of Americans (still the lowest compared to other countries) born in the bottom fifth make it to the top fifth. It’s not that there is no opportunity or that the constraints are insurmountable. But Americans tend to over estimate how likely it is for one to be able to do that, and under estimate the impact of social structure on opportunity.
This also vindicates at least one message from Occupy Wall Street. The 1% are almost certain to stay at the top, the game is structured in their favor. The poorest have real constraints, and even the middle class have limited means. That doesn’t mean that the radical solutions the protesters sometimes suggest are right — there is huge room for debate amongst conservatives, liberals, free marketeers and social democrats about the best ways to move forward. What we have to do, though, is accept the fact the class mobility in the US is low, especially for the top and bottom 20%.
Finally, the article points out that some skeptics note that 81% of Americans earn more in absolute terms than their parents. While that is a sign that as a society we’ve become more prosperous, the American dream is not simply about making more money, but real opportunity. A trash collector today earns more than a trash collector did 20 years ago. But the children of trash collectors should have the same opportunity to become doctors as the children of doctors.
Reports of the Euro’s Death are Premature
Posted by Scott Erb in Economic crisis, European Union, Germany, Merkel, Political Economy, World Affairs on November 12, 2011
I started serious study of the European Union when it was the ten nation European Community back in 1982. At that time, the EC was deep in crisis. Britain was threatening to leave over how much it paid in compared to what it got back, divergent monetary policies were stalling efforts to create a stable exchange rate system, and even Ernst Haas whose ‘neo-functionalism’ was the driving theory behind European integration had labeled integration theory ‘obsolescent.’
At the time I took a course in Bologna, Italy, taught by Gianni Bonvicini on the politics of the West European integration. Bonvincini was strong proponent of integration, and told us that it was all but inevitable that Europe would develop a common currency. He said European integration always moved in fits and starts, with existential crises causing critics to (sometimes gleefully) claim its demise. For every two steps forward there was often a step back, but that success was far more likely than failure.
The EC survived that bout of “eurosclerosis” and by the early nineties goods and people could flow more freely than ever as borders became irrelevant — you could cross from Germany to France like one might from Maine to New Hampshire. When the Cold War ended and barriers to international capital flows dramatically decreased, countries were compelled to adopt tighter monetary policies, thereby making the idea of a common currency feasible. In December 1991 EC leaders signed the Maastricht treaty to create a common currency and rename the Community “the European Union.” Although there were many times in the 90s people were certain that the Euro would never actually get off the ground, it was born in 1999 when the European currencies became permanently fixed.
By that time the EU had 15 states, but only 11 were in the Eurozone. France, Germany, Austria, Belgium, Finland, Luxembourg, the Netherlands and Ireland were clearly ready. Spain and Portugal were questionable but overall had a good enough track record of economic improvement. Italy really didn’t fulfill the criteria, but Prime Minister Romano Prodi’s economic austerity programs of the late 90s were seen as putting Italy on the right track, so it was accepted.
Three states opted out of the Eurozone: the UK, Sweden and Denmark. A fourth was seen as not being ready: Greece. As the EU moved towards the issuance of actual coins and bills on January 1, 2002, the Greeks pressured the EU to bring them into the core group as well. With only 10 million people their economy was small; any crisis in Greece could be handled. On the other hand, Euro-imposed discipline might help improve the Greek economy and keep it open to outside investors who prefered Euros to Drachmas. Ultimately, much to the chagrin of many economists and central bankers, the EU gave in — Greece was able to join in 2001.
Since then the Euro has expanded to many other countries: Malta, Estonia, Slovenia, Cyprus and Slovakia. These countries have low debt and have done well in recovering from Communist rule.
Overall, the Euro has been a success, maintaining high value and becoming a true alternative to the dollar (even today the Euro trades at $1.37 per Euro, much higher than their original goal of a 1:1 valuation). Alas, the crises in Greece and now Italy have led many to say “bye bye Euro,” believing that the experiment in monetary union is failing.
Don’t believe it. The Europessimists of today sound much like those of the early 80s, yet I think Dr. Bonvicini’s claim that success is far more likely than failure still rings true. The Euro will survive and eventually thrive again, just as the EU will continue to deepen regional integration, redefining the concept of sovereignty.
This doesn’t mean that there won’t be some dramatic moves. There are rumors throughout Europe that German Chancellor Merkel and French President Sarkozy are talking about a smaller Eurozone, with a number of countries potentially being “kicked out.” This is possible and while it would be called a “collapse of the Euro,” it actually might be necessary to save the Euro.
The reality is that the Euro itself has functioned and still functions very well as a common currency for most Eurozone members. They would find it extremely expensive for the currency to somehow go away. Businesses and banks would recoil at losing the Euro as they’d have to deal with a confusing world of diverse monetary policies and currency exchanges. With the most powerful economic actors in Europe working to assure the Euro survives, it will. Moreover, Merkel may not be as dedicated to Europe as Kohl was — but she’s pretty dedicated!
The problem is less the Euro than high debt rates in Italy and Greece. That’s dragging down the Euro and also threatens the solvency of European banks. The banks need to be recapitalized in order to protect the European financial system — that’s the case no matter what the currency. It’s easier to do that with the Euro than with a set of local currencies. States leaving the Eurozone (Greece, maybe Italy, Spain and Portugal as well) would face a very difficult economic reality. It would be hard to get investors to commit to a state where currency values would be likely to plummet. Even if they did default on their debt, the shock to their domestic economies would be immense.
Still, it would be the equivalent of a bankruptcy which would give the states the same chance to start over that bankruptcy gives an individual. Overtime if they built a stronger more sustainable political and economic structure they could rejoin the Eurozone. That might actually work better than trying to pursue expensive bailouts of deeply indebted economies. The taxpayers would rescue their own banks rather than countries swimming in debt — but that might be an easier political sell.
Most people assume that if forced to leave the Eurozone states would simply go back to their domestic currencies. But it’s possible to imagine a second Eurozone currency for countries “on probation.” The benefit of this would be that the ECB could also set monetary policy for that currency, recognizing that inflation is perhaps an inevitable short term condition. The goal would be to ‘rejoin’ the Eurozone at some point, and fiscal plans could be developed to reconstruct these sick and in some ways unsustainable economies into ones that could function within the Eurozone.
I’m not sure how feasible a “Euro light” would be — what it would be called, or even if it truly could work as a common currency across the ‘problem states.’ In essence this would be a resurgence of a theory popular in the 90s for a “two speed Europe.” The wealthier countries would increase integration and become more closely linked then they can now. The problem states could be put on a strict leash, forced to follow strict guidelines if they want to rejoin the core. In theory this could actually push integration forward and deepen it. That would make this like past existential crises — what doesn’t kill the EU only makes it stronger!
There would be immense opposition to such a Franco-German plan, and the short term costs in those two core countries could be large (especially as trade would decline as ‘core country’ goods would become much more expensive in inflation riddled problem countries.) Rather than this being the death of the Euro, this could be the crisis that the Euro inevitably must face if it is to emerge as a true long term global reserve currency. And to those who predict that this will destroy the project of European integration, well, people have been predicting that about various crises for over fifty years. So far they’ve been wrong every time.
Economy Turning Around?
Posted by Scott Erb in 2012 Election, Barack Obama, Economic crisis, Economy, Political Economy on October 28, 2011
The stock market broke 12,000 for the first time in a long time on news that Europe had reached a deal on the Greek debt crisis, the US economy grew by 2.5% last quarter, and first time unemployment claims fell slightly. It’s possible the economy may be turning around and we’ll avoid the dreaded “double dip” recession.
If true, this is the best news President Obama could receive. If next year there is a palpable sense that things have turned around, Obama’s chances of re-election grow considerably. Still, The recession currently is in its fourth year. Yes, there has been growth so it’s not technically a recession, but in terms of high unemployment and a tough economy things have been in the dumps since 2007, even before the September 2008 crisis.
President Bush and Obama get little credit for how they mitigated the worst of the crisis. President Bush’s “bailout” of Wall Street was necessary in order to prevent a further credit squeeze, perhaps pushing us into the Great Depression. The banks also paid it back, meaning it turned out to be “cost free.” President Obama’s stimulus package also turned around the bleeding of jobs and prevented states from becoming insolvent in 2009. Since we never experienced the reality that would have happened without the stimulus it’s easy to dismiss it since it didn’t “fix” the economy and make everything better. But in 2009 nothing was going to do that.
There is a good chance this spurt of growth will cause economic tailwinds to push the economy forward in 2012. But while this may save the President’s job, it doesn’t mean the economy is “returning to normal” or that the problems are solved. It does suggest that we may be able to handle the crisis without total collapse.
Here’s the deal. Global debt is still way to high, and that’s going to hinder economic growth. Moreover, states like the US have been consuming more than we’ve been producing, thinking this is OK because we lured in outside investment (the capital account surplus balanced our current account deficit).
At a national level, the US needs to expand its productive capacity and reduce consumption to the point that it more or less balances production. The trade deficit needs to drop, either through currency devaluation (inflation) or less consumption. At a global level the issue gets murkier. Total debt (public and private — one can’t blame governments alone for this) is over 300% of GDP for the industrialized West. High debt levels have funded a sustained period of living beyond our means.
The good news is that the year to year deficits (how much we’re living beyond our means) have not been dramatically high. But if you earn $50,000 a year and spend $52,000 a year, in 20 years your debt is probably near $30,000 (thanks to interest). Small deficits repeated yields high debt, both for governments and for the private sector. Because yearly deficits were relatively small, and the economy seemed to be growing thanks to the bubbles, people had the illusion that growth would solve the debt problem. In the US a brief surplus in the federal budget at end of the 90s made it seem like a solution was easy. The high federal budget deficits in the last decade got rationalized by the aftermath of 9-11.
The brief budget surpluses were thanks to the bubble economy, and did not extend to the private sector — private debt kept growing, in part because no one identified it as a problem. High debt and cheap credit created this crisis. It’s different than the classic Great Depression crisis of over production. Yes, easy credit was a factor there (margin calls, etc.), but the level of pervasive debt was nowhere near what it is now. That makes this crisis unique and difficult to solve with traditional means.
Obviously it’s important to de-leverage — to pay down debt. That’s been happening, especially in the private sector. Governments have not paid down a lot of debt yet, in part because of macroeconomic pressure to stimulate recession weary economies.
Another lesson is the need to reform and re-regulate the financial sector. The bubble and the extent of the collapse in 2008 was completely avoidable. If over the counter derivatives had been subject to regulations of reporting and transparency, the big financial institutions could have never packaged dubious mortgages into bonds that confused ratings agencies stamped “triple A”. That in and of itself would have done a lot to prevent the crisis since it was demand for mortgages to be packaged as bonds that created the intense increase in real estate prices.
Beyond that, incentives matter. In the past lenders had incentive to be careful about who they lent money to. If someone can’t pay their mortgage the bank stood to lose a chunk of money. But when the demand for mortgages was high and brokers did not bear any of the risk, then there was an incentive to just provide the mortgage no matter what — even if it meant lying and arranging absurd loans to people who had no means to pay it back. That also was engineered by the big banks, who then did all they could to try to decrease their risk (thereby creating systemic risk).
So three things need to be done: pay back debt (de-leveraging), increase production, and create a functioning regulatory regime for the financial sector to prevent future credit orgies. Increasing productive capacity usually involves investment, which works against paying back debt. However, at a global level if the economies of export led growth countries like China start switching towards more internal consumption and less reliance on trade (something the recession is forcing them to do — bankruptcies are growing in China), then rebalancing is possible. Things won’t be as cheap in the US so consumption will decline, but domestic production will grow, as will jobs.
Regulating Wall Street is a tougher nut to crack, thanks to the intense lobbying power of the big financial institutions. Public pressure like “Occupy Wall Street” helps, and President Obama’s new found populism could give him support to push effective reform in a second term. One can understand his coziness with Wall Street in the depths of a recession — you don’t want to scare the big economic actors. But if the economy starts growing so too does the governments independence from big money.
So far my worst fears about this recession/depression have not been realized. It’s not been the quick recession many predicted back in 2008. It’s not just another business cycle recession. There still is a long way to go. But perhaps we’re turning a corner and it’s possible to see a way out of this that avoids catastrophe, even if there will be no return to the heady consumerism of 2006. And just maybe we’re relearning the importance of virtue — focusing on the importance of work, family and values rather than material consumption.
Occupy Wall Street and Globalization
Posted by Scott Erb in Democracy, Economic crisis, Globalization, International Relations, Occupy Wall Street, Political Economy, Protest, Values on October 24, 2011
There is immense confusion over the “Occupy Wall Street” movement. The left embraces it, though they’re not sure where it came from or what it means. The right ridicules it, though efforts to say it’s a bunch of “lazy losers” who “envy the rich” are laughable. Those involved don’t make things easier because they tell multiple stories, ranging from professional anti-globalization demonstrators along for the ride and Ron Paul supporting libertarians who want to break the big money big government nexus.
37% have positive reactions to the movement in the US, only 18% actually oppose them. People are frustrated and the taste of corporate bailouts and shady financial instruments leaves Wall Street one of the least popular set of institutions in the US. The fragility of the global financial system which over leveraged itself and seemed oblivious to the danger it was creating for the entire system has shocked people from Frankfurt to Beijing. There is a sense that something has gone wrong and leaders are clueless on how to respond.
Given the surprising rise of this movement and its capacity for quick expansion, I believe that we are not seeing a moment of rage that will pass when the weather gets cold in winter, but the start of a global movement to critique the power of big money and the lack of voice so many people have in an era of globalization. It will not be a movement of socialism, but of democracy. It will not have a clear ideological focus but an evolving agenda. It will persist even after Zuccotti park empties and Manhattan returns to normal.
Globalization is the name that was given to “complex interdepedence” in the late eighties as it became clear that the growing links between economies noted by scholars of international relations in the seventies (most notably Keohane and Nye in their 1976 work Power and Interdependence) were expanding beyond what anyone had anticipated. The two most important aspects of this was: a) the technology/information revolution; and b) the internationalization of capital.
Up until the 80s most investors were national. To invest outside ones’ own borders was risky and difficult, and often faced legal obstacles at home. Between 1980 and 1990 that changed completely. In 1980 foreign direct investment in the developed world totaled $390 billion, while $302 billion went to the third world. By 2008 developed world FDI was over $10 trillion, while in the developing world it topped $4 trillion. Portfolio investment also grew rapidly.
Investors no longer had any reason to be loyal to their home state, corporations expanded to use whatever advantage they could to minimize cost and maximize profit. In many ways these are good developments, naturally reflecting the way in which the instantaneous exchange of information can allow greater flexibility. Toyotas now can be made in the US rather than having to be shipped from Japan, consumers can enjoy the fruits of inexpensive goods from countries with low labor costs, and with linkages between states growing, the chance for major war declines.
Yet there is a clear loser: the state. States no longer have as much control over their economies, have less capacity to create strong social welfare systems and find it harder to create regulations they believe necessary to protect their publics or the environment. Whether or not one agrees with those policies, the fact of the matter is the state is not as powerful as it used to be. And, as political leaders become both dependent on financial and business institutions and vulnerable, they listen very closely to what Wall Street or Frankfurt or Tokyo insiders say. Whether in the World Trade Organization, IMF or US Congress, the influence of big business and big finance has never been greater.
This also means that democracy is weaker in states with democratic traditions. Law makers no longer have the power to give people what they want if what they want flies in the face of economic realities of the new globalized political economy. We can’t save the paper mills in rural Maine if foreign competition leads those investors elsewhere; to try we have to make wages low and avoid even almost all regulations. That’s economic reality.
Beyond that, if politicians listen more to big money in a world where political campaigns are often just marketing campaigns with slogans and focus group tested themes, elections become almost meaningless. No matter what the candidate says, once in Washington (or Berlin, Paris, etc.) the candidate is limited to a rather constrained set of options. Thus emotional rhetoric painting the other side as horrid and ignorant hides the real problem. There isn’t a lot the politicians can do.
As long as the economy was growing, people didn’t care. They had jobs and their retirement accounts were healthy. Even those middle class who had to have two incomes rather than one and whose high paying factory job was replaced by low wage work at a call center at least had cheaper than ever goods from Walmart. As wealth inequity grew rapidly to its peak since the 1800s, the rush of new technology and economic bubbles hid the reality: both the public and even the politicians were not really in control of where this ride was heading.
Meanwhile the financial sector, over leveraged and under regulated, set up the perfect storm that hit in 2008, turning what should have been a normal recession into near economic collapse and a long term slow down as de-leveraging spread. This crisis came from the same folk who brought us cheap clothes and global connection – the global financial and business elite.
It’s not that they are bad people. They are doing what they are supposed to do, trying to maximize profit, innovate, and make money. It’s just that markets are not magic, and without regulation from the state, insiders are able to rig the game and hide the risks, altering what capitalist theory says markets should do. Moreover, public values that may be different from raw market outcomes become irrelevant – democracy becomes weak and impotent.
That’s the motivation for OWS. It’s a public effort to stand up and say there has to be a counter balance to big money and its ability to shape the system. Except for a few on the fringe it’s not an attempt to demonize or destroy big money; for all the faults of the system, globalization is both a good and an inevitable thing. Rather, it’s a demand that democracy not be sacrificed, since if it is, the only voice that matters will be those with the resources to shape the market. And while there are market romantics who believe that somehow markets magically gives us what is best, such faith does not stand up to historical scrutiny.
Don’t expect OWS or the core demand for more transparency and democracy to go away. Now that we’ve seen the damage big finance can do to the economy and the need for regulation, as well as concern for human rights and a sense of justice, these efforts will persist and grow as part of the global civil society. They may push governments to reach agreements allowing for more political control, they may create local responses to the standardizing influence of globalization. We don’t yet know where this will lead, or how the emerging global order will function. We’re living at the dawn of a new era, and OWS reflects a logical response to the weakening of traditional state-centric democracy.
One can’t understand OWS or the changing global order through the lens of twentieth Century perspectives.
A Greek Tragedy
Posted by Scott Erb in Economic crisis, European Union, Greece, Political Economy, Protest on October 19, 2011
All eyes are on Greece as the fate of Europe’s economy and the European common currency is on the line. The IMF and G20 states have pledged to prevent an economic collapse in Europe which would, undoubtedly, have severe ramifications for the US. As one German friend of mine joked “Greece, the cradle and the grave of western civilization.”
The plan looks good on paper. Greece borrowed an unsustainable amount of money and now must cut spending and raise its taxes to balance the budget. Meanwhile the EU and IMF will intervene to both help stabilize Greek’s finances and recapitalize banks that may be vulnerable to Greek default. It should work, in theory.
In practice, though, things are messy. One problem is Greek domestic politics. Angered by the corruption and political incompetence that brought them to this point, the Greeks are engaged in a two day general strike that has essentially shut down the country. 125,000 protesters in Athens, Thessaloniki, Patras and Heraklion showed anger at the government and its austerity plan. People’s incomes are declining in real terms, and the mix of spending cuts and tax increases make the recession even worse. Calling the cuts “unfair, anti-social and inefficient” they demand the country reject the austerity proposals. 3000 police classed with 70,000 protesters in Athens, mostly peacefully but not always.
The Greek government is in bind. They need to cut debt; their debt load is unsustainable. The bond markets still show a 24% interest rate on Greek bonds, meaning that any more debt would be extremely costly, and would drive up bond yields further. Greece cannot simply go along as it has been. Moreover, austerity is the price the EU is demanding to help them avoid default and stay in the Eurozone.
The Greek government is thus implementing the austerity measures out of necessity. However, they could decide not to, and simply accept default. If Greece defaulted, the pain would shift to the banks of Europe which could fail unless recapitalized with government funds. The danger would be that the Greek default could lead to a dumping of Spanish, Italian, Portugese and Irish bonds, creating a crisis far greater than the Greek default. As I noted awhile back, contagion is the real danger.
To be sure, a Greek default would make it a bit easier for the country to dig itself out of its hole. There would still need to be spending cuts and tax increases to get a balanced budget, but they wouldn’t have the burden of so much debt to repay on top of that. That is the path favored by many protesters in Greece; bankruptcy is welcome if debt is weighing you down. Any default, however, almost ensures contagion. It might help the Greeks, but ignite a global crisis.
To try to minimize the risk of contagion, a Greek default would probably be coupled with a removal of Greece from the Eurozone. Letting a country default while maintaining the Euro as its currency is something that the Europeans cannot allow. If Greece leaves the Eurozone, the result would be inflation and devaluation of the Drachma. Since new Greek bonds would have very high interest rates (especially given the certainty of inflation), Greece would find borrowing money nearly impossible, and still would have to institute austerity programs. That would push Greece back into crisis, and serve as an example to others the potential cost of leaving the Eurozone.
The EU could then try to prevent contagion by making it clear that defaults by other states are not likely given the cost it would entail to have them leave the zone. Seeing what happens when set adrift from the Euro, governments in countries at risk would be more motivated than ever to engage in austerity politics. After all, those in power listen to the moneyed elite more than the people on the street.
For Greece the devalued drachma would lead to increased trade competitiveness and lure in tourism. Over years they’d stabilize the economy and potentially be able to rejoin the Eurozone in a decade or two. No doubt the EU would by that time enforce the criteria strictly — Greece never should have been allowed to join in 2001. Greece could not leave the Eurozone without defaulting. Otherwise the depreciating drachma would mean that Euro denominated debt would grow dramatically simply do to changing exchange rates. So leaving the Eurozone must be coupled with default.
For the EU the dilemma now is whether they should continue trying to save Greece, or focus instead on recapitalizing the banks and defending against contagion. They have already spent so much money to stabilize Greece that switching tactics would be seen as an admission they got it wrong on the tax payers dime. That money would have simply been thrown into a pit, bringing nothing of value.
That leads them to want to see this through to the end. Yet it’s like getting your car repaired over and over — at some point you have to eat the loses and just buy a new one, realizing you should have done so at the time of the first repair. If Greek protests grow and the government becomes unstable, default may be inevitable. In that case it would again need to be coupled with leaving the Eurozone to avoid contagion.
Watching this play itself out is fascinating, even though I think most people are oblivious to the implications this drama has for the rest of the world. Where once the fate of Europe was decided in war rooms by generals with maps spread out tracking troop movements and supply lines, now it’s in board rooms with business and political leaders looking at spread sheets and bond yields.