Rob Johnson on fiscal austerity: 'If it wasn’t so tragic I would say it was humorous'

Jun 28, 2010

As the world waits for the decisions to roll out from the G20 summit, Rob Johnson discussed fiscal austerity with the Real News Network. "If it wasn't so tragic I would say it was humorous," he started out. But tragic it is. A lot of it all comes back to banks: why are deficit numbers so high? The financial crisis, caused by big banks. Who does fiscal austerity benefit, when it risks killing economic recovery? Those who hold treasury bonds at 0% interest -- big banks. "Finance is supposed to be a servant to commerce, [the] economy, [and] social goals. Well the servant's servant has become the master's master. And it's time to reinvert that," Rob says. Watch the full interview:

As the world waits for the decisions to roll out from the G20 summit, Rob Johnson discussed fiscal austerity with the Real News Network. "If it wasn't so tragic I would say it was humorous," he started out. But tragic it is. A lot of it all comes back to banks: why are deficit numbers so high? The financial crisis, caused by big banks. Who does fiscal austerity benefit, when it risks killing economic recovery? Those who hold treasury bonds at 0% interest -- big banks. "Finance is supposed to be a servant to commerce, [the] economy, [and] social goals. Well the servant's servant has become the master's master. And it's time to reinvert that," Rob says. Watch the full interview:


ND20 ALERT: Join us in NY for fresh ideas, July 16-18! Guild Hall, in collaboration with the Roosevelt Institute, will gather thought leaders in the arts, the economy, and the media in East Hampton for a can’t-miss symposium featuring George Soros, Van Jones, plus ND20 contributors Elizabeth Warren, Rob Johnson, Jeff Madrick, Editor Lynn Parramore, and more. RSVP today - seats are limited.

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Mr. President: Don't Alienate Turkey

Jun 15, 2010Chuck Spinney

turkey-flag-150Turkey can be a strong ally if we recognize what it's trying to achieve.

turkey-flag-150Turkey can be a strong ally if we recognize what it's trying to achieve.

The American sources in a recent report of the New York Times blast Turkey, essentially because it refuses to be a US lackey. Even the report's title conveys contempt and reflects a myopia that is typical of the American foreign policy establishment, including the mainstream media. The report's wishy-washy "on the one hand this, on the other hand that" style feeds this overall impression.

Any rational observer of Turkey knows that big things are happening in that country and its part of the world.

Turkey has a large growing economy and is populated by more than 70 million hard working, industrious, increasingly well- educated people. It sits on an ocean of fresh water in a parched area of the world -- Israel, Iraq, and Syria, especially, want access to water Turkey controls. Turkey does not even use all its arable land, yet it is a major food exporter in a region of food importers, producing local meats, vegetables, grains, and fruits are of the highest quality. The country is metamorphosing into an energy pipeline crossroads; the Bosporus is the most heavily traveled waterway in the world.

Turkey is a secular democracy, and although many, no doubt a majority, of its people are religious, there is very little religious fundamentalism, certainly less proportionally than is evident in either Israel, Iran, or even the United States. By and large, Turkey's historic traditions of religious tolerance seem intact. For example, I was recently surprised to learn that there is still a substantial Jewish community in Istanbul that speaks a dialect of 15th Century Spanish at home and Turkish in professional life (a relic from the time when the Ottoman Empire gave sanctuary the Jews in Spain who were persecuted by the Inquisition). I met a member of this community, a prosperous businessman with a magnificent yacht, and he impressed as being Turkish through and through.

Regardless of whether Turkey eventually enters the EU, it is a country that is moving and being sucked into a regional vacuum left by the collapse of the Soviet Union. Part of this movement is caused by policy, but part of it is caused by the impulse of unpredictable events.

The Turks, to their credit, are trying to make the best of this by forging a regional good neighbor policy with all their neighbors, and until recently, this included Israel. To this end, the Turks have, among other things, opened the border for visa free movement between Turkey and Syria, tried to broker a peace deal with the Syrians and Israelis (which the actions of the Israelis scuppered), made overtures of friendship to Armenia, been active in the Black Sea Initiative (basically an effort to protect the environment and delineate the rights and responsibilities of the states bordering on the Black Sea), made commercial overtures toward Iraq and Iran. Most recently, in partnership with Brazil, Turkey has launched an innovative initiative to defuse the Iranian nuclear problem (an initiative the Obama Administration is petulantly trying to derail). Meanwhile, the Turkish government has been trying to reduce tensions with its own Kurdish minority in eastern Anatolia. While this is a serious problem (and I don't pretend to understand it), Kurdish separatism and outside agitation by Kurdish insurgents based in Iraq (with some indirect Israeli and American support) and Iran, as well as a history of heavy-handed policies to limit the Kurdish autonomy, all contribute to it. On the other hand, it is also important to acknowledge the fact that Kurds have every right to participate in the Turkish economy and culture as individuals, should they choose to exercise it. And many have done so. One finds Kurds living throughout Turkey, in harmony with their neighbors, working and living prosperously.

Interpreting Turkey's actions negatively through the lens of America's imperial pretensions, together with our tendency to support outrages perpetrated by Israel, is implicit in the statements by the American sources in this report. This attitude is a prescription for making trouble with a proud and independent people whose most recent actions have been focused on a policy of promoting regional comity.

Oh, and one other point -- Turks are among the most gracious and welcoming people I have ever met, but push a Turk into a corner, where he perceives he is being treated unfairly and has no face saving exit, and you will have a real problem on your hands.

Chuck Spinney is an American former military analyst for the Pentagon and has been a fierce critic of wasteful defense spending.

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Memo to Deficit Hawks: Let's Get the Facts Right

Jun 9, 2010Henry Liu

hawk-150Think the deficit hawks have it all right about 'entitlements', spending cuts and the debt crisis? Think again.

A Panic Wave of Demand for Fiscal Austerity

hawk-150Think the deficit hawks have it all right about 'entitlements', spending cuts and the debt crisis? Think again.

A Panic Wave of Demand for Fiscal Austerity

The sovereign debt crisis in Greece has sparked a panic wave of radical policy demands for fiscal discipline throughout the European Union from a perverse coalition of neoliberal public finance ideologues and anti-government conservatives. Proponents of fiscal discipline argue that the EMU and its common currency, the euro, would not be sustainable without the drastic restructuring of public finance in all eurozone member states through a combination of tax increases and deficit reduction through fiscal austerity. But creditors, mostly transnational banks, will be protected from having to accept "haircuts" on their holdings of sovereign debt.

Yet such harsh approaches of tight fiscal austerity at a time when the global recession of 2008 is still waiting in vain for a recovery will risk increasing the danger of a double dip recession in 2011 in a secular bear market. The alarmist voices of these fiscal deficit hawks clamor for fiscal austerity programs that are essentially punitive for eurozone workers while continuing to tolerate abusive financial market manipulation that will benefit only the financial elite as the economic pain is passed on to the general public.

Bank Creditors against Wage Earners

Fiscal deficits across the eurozone are to be reduced by cutting public sector wages and social benefit and subsidy expenditures so that transnational bank creditors will be paid in full while turning a blind eye to blatant tax evasion and avoidance by the rich with non-wage income that contribute to loss of government revenue and fiscal deficits. The dysfunctional disparity of income and polarization of wealth between the wage-earning masses and the financial elite with income from profit and capital gain, are the main causes of overcapacity in the economy. In past decades, the neoliberal response to overcapacity was to shy away from the obvious solution of raising wages, turning instead to flooding the economy with huge mountains of consumer and corporate debt that eventually resulted in a tsunami of borrower defaults that turned into a global credit crisis. Yet repeating the same response to the current crisis will lead only to another global crisis down the road.

While the culprits of the global credit meltdown of 2008 have been bailed out with the public's future tax money, the sovereign debt crisis across the globe is blamed on innocent wage earners for receiving supposedly unsustainably high wages and excessive social benefits that allegedly threaten the competitiveness of economies in a globalized trade regime designed to push wages down everywhere.

Sovereign Debt Crisis not caused by the Welfare State

The rush by the rich and powerful to punish the trouble-causing working poor goes against strong evidence that the current sovereign debt crisis is not caused by high social welfare expenditure, but by a sudden drop in government revenue due to economic recession caused by credit market failure under fraudulent accounting allowed in structured finance for which the financial elite are directly and exclusively responsible.

Through devious "special purpose vehicles", the sole special purpose of which is to treat proceeds from debt issuance as revenue from sales to remove financial liability from government balance sheets to present a deceptively robust picture of public finance, phantom profits are siphoned off from the general economy into the pockets of greed-infested financiers while pushing the real economy out of balance, resulting in high real public debts that inadequate aggregate worker income cannot possibly sustain. As a portion of GDP, wages and benefits have been falling in past decades while the public debt has been rising. Transnational financial institutions routinely generate profits larger than government revenue of small economies.

Despite propagandist distortion, the sovereign debt problem has not been caused by the high cost of a welfare state; it has been caused by deregulated financial markets that allowed governments to borrow huge sums against future revenue from public sector enterprises without showing the liabilities on government balance sheets. Structured finance was providing participating governments with up-front cash while hiding the sovereign debts that had to be paid back in the future. But the bulk of the borrowed money went to the pockets of dealmakers of public sector privatization while the debts were left with society at large. A large amount of the national wealth is transferred from the local economy to international speculators through legalized manipulation made possible by deregulated financial market globalization. It is a new form of synthetic financial imperialism against weak economies through a scheme of naked shorts against the currencies and equities of vulnerable nations.

Fiscal Austerity will endanger the EU

Further, such punitive fiscal austerity solutions will render the EU unsustainable as a political superstructure due to violent popular opposition in the constituent nations. Third Way centrist synthesis of free market capitalism with the social democratic welfare state has provided the enabling conditions for the current sovereign debt crisis. Market fundamentalism has been exposed by unhappy but predictable events it helped create as an exorbitant and spectacular failure. And the exorbitant cost of this spectacular failure of market fundamentalism will be put on the back of the innocent working poor.

There are strong signs that voters in countries with multiparty democratic political systems have been brainwashed into believing that free market capitalism with minimum government intervention is the only road to prosperity. Voters have been conditioned unwittingly to buy into an anti-government ideology that diametrically contradicts the public's other demand for generous safety nets of socioeconomic security that only government can provide.

When the gullible weak is convinced by the devious strong in society that government is the problem, not the solution, the weak are inadvertently trapped into a political climate that permits the destruction of their only institutional protector, since the existential function of government, regardless of political and economic color, is to protect the weak from the strong.

Government non-interference through deregulation and privatization of the public sector leads to the law of the jungle in free markets under which the economic function of the financially weak is to serve as the food supply for the financially strong. Historically, government evolves in civilization so that the weak masses can collectively resist the oppression of the strong elite. This is the reason why the strong in society always bash popular government.

Price of Saving the Euro may be EU Dissolution

Thus the attempt to save the euro from collapsing in exchange value under the weight of aggregate eurozone member state sovereign debts through coordinated fiscal austerity in all member states of differing socio-economic legacy and conditions will incur the price of political divergence of the member states from the European Union. Member state governments are pulled apart from the union by centrifugal nationalist forces generated by separate and divergent domestic politics. Popular sentiment against local fiscal austerity for the sake of preserving the European Union is spreading like wild fire in this sovereign debt crisis of the European Union.

But a weakening of convergence toward full integration of European nation states will prolong the euro's structural vulnerability as a common currency without a unified political structure and condemn it to remain a multi-state currency with high political risk. This internal contradiction is the Achilles' heel of the euro, which is the legal tender of a monetary union without a political union.

Stormy Political Weather for Incumbents

Stormy political weather has recently battered incumbent centrist political leaders in several countries by holding each of them separately responsible for the austerity measures they are now forced to implement to get their different economies out of unsustainable sovereign debt.

In order to meet a 2013 deadline for compliance with EMU's euro convergence criteria as spelled out in its Stability and Growth Pact (SGP), at the end of the preceding fiscal year, the ratio of the annual government fiscal deficit to GDP must not exceed 3% and the ratio of gross government debt to GDP must not exceed 60%. This means the eurozone governments need to slash their individual budget deficits to add up to a total of €400 billion. This huge sum will be taken primarily from the pockets of public service employees, pensioners, the unemployed and the indigent in the EU for decades to come.

Greece was forced to adopt on May 11, 2010 an austerity plan to reduce its budget deficit by €30 billion over the next three years through wage, benefit, subsidy and pension cuts, slashing social programs and an increase in VAT (value added tax).

On May 26, Spain announced cuts of €80 billion from its fiscal budget, shedding 13,000 public service jobs, reducing salaries of state employees by 5% and freezing pensions. The allowance of €2,500 for parents of a new birth to reverse declining population trends will be suspended.

Portugal has imposed a hiring and salary freeze in the public sectors and passed an increase in VAT in order to cut €20 billion from its budget deficit.

The Italian government launched measures that will result in cuts of €24 billion by 2012. They include a reduction in civil service jobs, salary cuts, raising the retirement age and cuts in the health care system.

France plans to reduce its budget deficit from 8% to 3% of GDP by 2013. This will be achieved by delaying the retirement age of public employees; cuts in housing benefits, employment compensation and museums funding; as well as a 10% cut in administrative costs.

The German government will decide upon concrete austerity measures on June 6 and 7. The so-called "debt brake", anchored in the German federal constitution, imposes a reduction in new debt of €60 billion by 2016. Among the many measures under discussion are cuts in social programs, such as family, child, welfare and disability benefits, annuities and pensions.

Delaying Retirement Age Counterproductive

The EU Commission suggests that the retirement age in Europe should continue to rise steadily. This is to ensure that in the future, no more than a third of a person's adult life could be spent in retirement. In the long term, this would mean raising the pension age to 70. This will add pressure on young new entrants to the job market for the next two decades, as fewer positions will be vacated by retirement of the currently employed.

The new center-right British conservative government announced immediate budget cuts of £7.2 billion, including a hiring freeze in the civil services. The new Prime Minister, David Cameron, said Britain's budget deficit will be cut over the next four years by more than £100 billion. This will include slashing 300,000 posts in public service and a freeze on public sector pay.

For millions of workers and young graduates, the newly-adopted measures mean rising unemployment and poverty levels. In particular, old-age poverty will again become a mass phenomenon in Europe. Nothing will remain of the post-war welfare state. A study by the Carnegie Endowment for International Peace think tank in the US concludes that "the welfare states set up across Europe from the 1940s onwards with the aim of suppressing popular unrest and paying off tensions that could lead to another continental war" are "unaffordable". What was left unsaid in the study was that it would be unaffordable only if the disparity of income and polarization of wealth were to be allowed to continue. In an overcapacity economy, the people can afford what they produce if the system does not deprive the majority of their right to the wealth they create and hands it to a controlling minority. Revolution would have to come by policy or it will come by violence.

Crisis of Maldistribution of Income and Wealth

In a fiat money regime, it is the central bank's responsibility to ensure an adequate supply of money. The fiscal budget shortfalls that are being used to justify the dismantling of the welfare state are the result of the systematic maldistribution of income and wealth from those at the bottom of society who do the work to those at the top who do the manipulation.

For a quarter of a century since the late 1970s, both right-wing and center-left governments have reduced taxes on income and property for the rich, depressed wages through structural unemployment as a tool to fight inflation and have abdicated government responsibility in maintaining economic justice.

The concept of a living wage is regarded by new coalition as Utopian. Wages are set by their marginal utility to the return on capital in unregulated markets rather than by the economic law of demand management in a modern overcapacity economy of business cycles, the recessionary phase of which has become nearly continuous. Popular discontent is muted with unsustainable increases of the public debt. These are the main causes of the sovereign debt crisis, not over-consumption by the working poor.

Public Debt Crisis caused by Bank Bailouts

The public debt had been pushed up sharply in the last two years by the trillions that governments, run by free market policymakers, pumped into distressed banks to prevent their collapse from proprietary speculation in deregulated markets. Recent figures from the German Bundesbank showed that in 2008 and 2009, some 53% of Germany's new public debt was used to rescue distressed financial institutions. The total new public debt rose by €183 billion in those two years; the costs involved in supporting distressed financial institutions amounted to €98 billion.

Trade Union Leaders as Hatchet Men of Neoliberalism

To push through the austerity measures against the working poor, the ruling financial elite drafted the social democrats and the trade unions as their hatchet men. In the PIIGS (Portugal, Italy, Ireland Greece and Spain) countries, social-democrat-run governments impose the austerity measures, or, as in Britain, France and Germany, the social democrats have so discredited themselves by their previous cost-cutting measures that now the right-wing parties have reaped the political benefit. In all cases, the social democrats leave no doubt that they support the cuts, telling working people that there is "no alternative".

Trade union leaders have been willingly subscribing to the discredited "TINA" (There Is No Alternative) voodoo economics of Reagan and Thatcher, in cooperation with corporate-controlled governments to wage financial war on labor. The labor-organized demonstrations and strikes against austerity measures have all been suppressed by armed police, with the violence and deaths exploited as reasons why labor protects must cease.

Yet labor has a moral and functional obligation to force structural changes in this dysfunctional economic system, instead of continuing to remain a passive victim in the new age of wholesale anti-labor selfdom. Meanwhile, a conservative populist movement that calls itself TEA (Tax Enough Already) Party is gaining popular support and can easily be transformed into a fascist political force. Left unsaid in TEA Party rhetoric, beside protest on rising taxes, is protest on the prospect that the tax money should be spent on the poor, rather than bailing out the errant financial elite. Until labor takes the rein of reform, the EU's trillion-dollar stabilization package will end in failure.

Please see full article: Trillion Dollar Failure

Roosevelt Institute Braintruster Henry C.K. Liu is an independent commentator on culture, economics and politics.

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Is Ireland Different? Marshall Auerback says 'No'.

Jun 8, 2010Marshall Auerback

ireland-200Responding to Barry O’Leary, Marshall Auerback argues that austerity measures in Ireland will drain demand, weaken private spending, and actually worsen the deficit.

ireland-200Responding to Barry O’Leary, Marshall Auerback argues that austerity measures in Ireland will drain demand, weaken private spending, and actually worsen the deficit.

Barry O'Leary argues that in contrast to the other PIIGS, Ireland will be able to make the adjustments that the EMU is demanding and by cutting "fiscal spending sharply ... [to] ... pull themselves out of this mess through austerity". He's wrong.

People calling for fiscal austerity assume that major cuts can be made in public spending at a time when private sector spending has collapsed, confidence is at a low, and foreign direct investment is weak and paralysed by uncertainty. They also think that you can increase taxes (that is, reduce private demand further) and cut wages (and hence private incomes) and not expect major multiplier effects to make things significantly worse.

The Irish also seem to have bought the IMF line that the fiscal multipliers are relatively low and that the automatic stabilisers (working to increase deficits as GDP falls) will not drown out the discretionary cuts in net spending arising from the austerity packages.

The overwhelming evidence shows that the implementation of policies based on this way of thinking causes generational damages in lost output, lost incomes, bankruptcy and lost employment (especially in denying new entrants from the schooling system a robust start to their working life).

The following graph is taken from the latest Irish National Accounts which cover up to the fourth quarter 2009. Flash estimates for the first quarter 2010 are available but not broken down like this.

ireland_gnp_gdp_growth_rates

The graph shows the difference between Gross Domestic Product (which counts all output produced) and Gross National Product (which exclude the profits of foreign residents) for Ireland. Once you make that correction, then you can see how much worse the domestic contraction has been in the Irish economy.

So GDP was 7.1 per cent lower than in 2008 while GNP was 11.3 percent lower than in 2008.

Once you adjust for this (ignore these transfers) by using Gross National Product (GNP) which "excludes the profits of foreign residents, then Simon Johnson (amongst others) concludes that the "budget deficit was about 17.9 percent of G.N.P. in 2009, and ... will be roughly 14.6 percent in 2010 and 15.1 percent in 2011″. They say that "(t)hese numbers make Ireland look similarly troubled to Greece, with a much higher budget deficit but lower levels of public debt".

However, I part company with Johnson when he argues that the Irish government has to persist with the "tough fiscal steps" and take advantage of the IMF and EU bailout funding to "bridge the tough journey of fiscal cuts ahead".

From a Modern Monetary Theory perspective, all this is doing is insulating the government from being 100 percent exposed to the private bond markets. It doesn't stop the demand drain arising from the austerity and the already weak private spending.

It will also not allow the government to reduce its deficit very quickly at all -- indeed, as we have witnessed, the budget deficit gets worse and places further strains on the government funding crisis. This vicious circle can only eventually collapse in default (a la Argentina). The same goes for Greece.

The problem is that the Irish government has no real options while they remain constrained by the Maastricht Treaty and their lack of sovereignty. As noted above, while the Prime Minister might define economic sovereignty as the avoidance of default in a fixed exchange rate world, this is far removed from what true currency sovereignty constitutes. The design of the monetary system in which the Irish find themselves is incapable of delivering sustained prosperity and is crisis-prone when there is a major asymmetric aggregate demand shock experienced across the member nations. All the bailout packages and other add-ons will not change that.

Either they have to enter a fiscal union to support the monetary union or the nations should exit the system.

And also, in the specific case of Ireland, I don't see how they can make credible their guarantee to back all of the country's deposits, which are 600% of GDP. And they'll get little help from the Germans who view the growth of their financial services industry to be a form of regulatory and tax arbitrage, which undermined the German economy.

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Is Ireland Different? Barry O'Leary says 'Yes'.

Jun 8, 2010Bryce Covert

ireland-200Barry O'Leary is the CEO of IDA Ireland, an agency that promotes foreign investment in the country. He wants to assure investors that Ireland's situation is fundamentally different from that of the PIIGS.

ireland-200Barry O'Leary is the CEO of IDA Ireland, an agency that promotes foreign investment in the country. He wants to assure investors that Ireland's situation is fundamentally different from that of the PIIGS. I caught up with him to discuss spending cuts, unemployment, and how working and middle class citizens will be affected by fiscal austerity measures.

BC: What does it means for Ireland to improve its financial standing and what are the government's plans?

BO: Quite clearly, with the financial turmoil over last couple of years, Ireland has suffered quite significantly in the downturn. Many of the problems were more domestically made in Ireland itself. The over-hyped property market for construction prices, property prices, and houses meant prices were going up like a rocket. When the slowdown came there was a quick reversal of that, property prices went down 40% as an average. The structure of the banking system was exposed because banks were overexposed in property they couldn't realize the value of. The government set up NAMA [National Asset Management Agency, similar to TARP] -- a new vehicle, and it effectively over the next ten years has to work off the bad loans, not dissimilar to what happened in Scandinavia in the early 90s. That's one side of it, but without doing that the banks will not lend to small businesses and it causes blockage in the economy as well. The second biggest milestone is around the national balance sheet, because from a tax revenue point of view, it was very over-reliant on the construction industry because of the taxes they paid, also consumer goods, people furnishing houses, and with the number of property units increasing taxes went up. But now that tax base has disappeared. This caused Ireland's deficit to balloon. It went from one of the lowest -- from level of borrowing it was second after Luxembourg -- now up to average. There is a rebalancing going on with the national balance sheet. This has led to spending cuts and income tax levies being applied to get the balance sheet in order. These two items are a work in progress at the moment.

BC: What exactly are those spending cuts?

BO: From an Irish perspective the public sector wages and salaries are being cut, anything from 6-30% over a 21-month period. That's pretty dramatic, effectively reducing the salaries of public servants. That has been implemented. It's one part of the equation. The second part is cutting back on unnecessary spending and spending that can be delayed. Also an early retirement or an incentivized retirement program for public servants to reduce headcount numbers. Salaries will come down, but the number of people working will be down as well.

BC: How is the Irish economy different than Greece's?

BO: Two things really. Ireland started out on an adjusted program ahead of practically everybody else. Around the third or fourth quarter of 2008 it started to address particular challenges. A number of countries, Greece etc., only in the last couple months have they been addressing these issues. Also the demographics of the population -- we have a very, very young workforce and a highly qualified workforce because the retirement age is 65, in Greece I think it's 55. But more importantly the structure of industry that we have in Ireland is very much aligned with foreign direct investment, which has brought new technology. There has been development in the technology sector, life sciences, financial services sector, with a lot of U.S. multinationals, eight of the top ten technology companies, eight of the top ten pharmaceutical companies, 15 of the top 25 in medical devices, half of the leading financial institutions. We have a much more modern and technology-driven economy. This feeds strongly into the export-oriented nature of the portfolio we have. It's a combination of the demographics, which means with a young population you don't have to bear out a large burden of pension payment.

BC: How does this compare to the measures Greece has to take?

BO: We have set out fairly aggressive cuts. Initially Greece was talking pay freezes, now it's pay cuts. And there were protests on the streets of Greece, whereas in Ireland I think people recognize that we have grown at a phenomenal rate, the workforce increased dramatically. People are saying it's unrealistic to continue with the high standard we had. There's an adjustment going on in the economy. One good thing that has happened is Ireland's competitiveness has improved quite dramatically because the cost of land, labor, rent, even restaurants have gone down in price. This is leading to a more competitive environment. We see new companies come into Ireland-we are attracting a number of U.S. companies in particular with investments and increasing competitiveness. Improving competitiveness is such a likely silver lining coming out of this. When the economy is growing so strong, competitiveness disimproves. Now it's the opposite.

BC: In 2008, the Irish government responded to the downturn with capital injections, guarantees to depositors and creditors of major banks and purchasing troubled assets. Why is it now turning to cutting costs?

BO: I think the challenge is the priority of what you do. Other governments provided certain stimulus packages. But we were already spending a high proportion of capital on projects, a highway network -- Ireland was nascent in developing infrastructure but we spent a lot of money. If you take Dublin and major cities around Ireland, they will be linked with highways this year, but the capacity to pump prime growth has been limited because of the borrowing situation we have. Clearly we are borrowing a lot of money now with a certain time to get our house in order, and it's challenging to get the balance between stimulating growth or cutting costs. There are initiatives at an individual level, like establishing an energy research center involving United Technology Corporation. So there are individual initiatives taken to grow the economy by attracting foreign direct investment.

BC: How does the public in Ireland react to fiscal policy versus Greece? How is this shaping the government's policies?

BO: I think people in Ireland are unhappy with the situation, particularly as some fallout is from the downturn but a lot of it was homemade. People are angry at the irresponsible lending of leading financial institutions in Ireland. It's important to recognize the number of international organizations that were totally in a different business segment continued to grow and prosper. People are angry. But I think they recognize that we have to get back in order. There is no alternative. It's a balance of people taking a pretty educated view that there isn't a choice in this, and it doesn't stop at being angry but you don't find them out on the street burning cars and throwing stones.

BC: Workers are starting to protest that these cuts will inordinately hurt the middle and lower working classes. What is your response to their concerns?

BO: Yes, indeed, and there have been cuts already, but by international comparison Irish public service salaries and wages were very high. And they were very high I think because at the time the economy was booming there was actually a shortage of skills and people were encouraged to go into jobs like that. The government had surpluses so the rolls grew dramatically. Public service in Ireland paid more than the majority of European countries. There's clearly an adjustment now that is partly in place already. A number of salary cuts have already taken place. Social welfare payments were cut in the last budget by about 5%. But the cost of living has gone down about 5% as well, which is an important factor to take into account.

BC: With more than 13% unemployment, do you worry about the effects of spending cuts on the job market?

BO: Yes I do indeed actually. There is a fine balance between having to do the cuts but the more cuts the more likely you are to depress the economy. Hence we are hoping in Ireland that the balance will be with the world economy improving, led by U.S. technology companies. We have a number in Ireland and they are exporting strongly. It is a combination of some of the cuts we have to make, in particular balance greater revenue coming in from growth. And indeed it's not planned to be as steep as the previous two years. But we are in a very volatile international situation at present. The next budget doesn't come up until December and current indications are that cuts will be less than the previous ones.

BC: Is there a role for the government to play in easing unemployment?

BO: There is a role for government to lead. There is an exercise being done on how to create employment chances. For instance, the next generation networks have to be put in at some stage, building them means greater employment opportunity. An exercise is being done on that. There are areas that if there is loosening up on the borrowing situation we would actually undertake them. We rely on a combination of measures, the private sector but government has to take a lead role in certain areas as well. It can't be cut, cut, cut because it will die.

BC: Do you think staying on the euro is sustainable for you? Can the euro zone system as it is continue?

BO: My own view is that first off, from Ireland's view, we want to remain a part of the euro. By and large it has brought great benefits over the years. Now the euro has caused some issues, in the time of construction and property prices going up like a rocket the euro interest rates were very low. Normally if an economy becomes overheated, you can use the interest rate by upping it, but that wasn't possible during the boom years. We didn't control interest rate policies, that was the European Central Bank. Leaving that aside, we want to stay. We will stay because the euro has a lot of benefits.

BC: Will there be changes in monetary policy?

BO: I think some discussions are going on at the moment in Brussels about Brussels having greater oversight of what the budgetary situation is of individual countries. I think you will see perhaps more oversight in terms of budgetary policy. But at the end of the day, each country has to decide on its own particular thing but there is strong commitment to keeping the euro alive.

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The G20 Votes for Global Depression

Jun 7, 2010Marshall AuerbackRob Parenteau

earth-150How global 'fiscal austerity' benefits bankers and wealthy, well-connected political insiders, while screwing the rest of us.

earth-150How global 'fiscal austerity' benefits bankers and wealthy, well-connected political insiders, while screwing the rest of us.

The Communiqué of the past weekend's G20 meeting illustrates that deficit hawks have gained ascendancy in global policy making circles. Great Depression II, here we come.

"Those countries with serious fiscal challenges need to accelerate the pace of consolidation," the Communiqué noted. "We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions."

European Central Bank President Jean-Claude Trichet said fiscal tightening in "old industrialized economies" would aid the global economic "expansion" by shoring up investor confidence. German Chancellor Angela Merkel said Germany was poised for a "decisive" round of budget cuts that would shape government policy for years to come.

Although, the global economy has revived somewhat from its post Lehman collapse, it hardly merits Trichet's characterization of "expansion", given prevailing double-digit unemployment across the globe. And global recovery will be severely hampered if active fiscal policy support -- the kind of government stimulus required to sustain higher levels of growth and employment -- is completely abandoned, as the G20 discussions suggest. The new remedy for collapsing demand is "budget consolidation" -- a weasel term designed to mask more spending cuts in vital social services.

Notwithstanding the US Treasury's attempts to mitigate the rise of hair shirt economics, the Obama Administration has contributed to this rising type of deficit reduction fanaticism through its own policy incoherence. The President and his main economic advisors -- Timothy Geithner and Lawrence Summers -- continue to accept the deficit hawk paradigm: they agree deficits are ‘bad' in the long term. But they argue for the necessity of tax cuts and higher government spending increases in the short term, and deficit reduction later. They also embrace the principle of "sound finance" -- the type you read about every day in the papers: balancing the budget over the course of the business cycle and only increasing the money supply in line with the real rate of output growth. They ignore the more crucial consideration: namely, that the government should maintain a reasonable level of demand at all times and that principles of "sound finance" should not be divorced from economic context.

It's even worse in Europe. In Great Britain, the new Conservative-Liberal Democrat coalition is under pressure to eliminate the UK government's deficits in spite of the fact that the previous Labour Government's aggressive deployment of fiscal policy arrested the prospect of an Iceland-style economic calamity. Yet with no unintended irony, British PM David Cameron had this particular gem of an insight:

"Nothing illustrates better the total irresponsibility of the last government's approach than the fact that they kept ratcheting up unaffordable government spending even when the economy was shrinking." (Our emphasis)

So we're supposed to ratchet up government spending when the economy is growing? When it can present genuine inflationary dangers? If this is the type of policy incoherence we have in store, then God help the United Kingdom. This statement would be funny if not so unintentionally destructive. The government will most certainly uphold the promise of "decades of austerity" with economic thinking of this quality.

Meanwhile, within the rest of Europe, the so-called "PIIGS crisis" has merely further reinforced the now prevailing view that deficits are bad and destabilizing in the long term, thereby necessitating strong doses of fiscal austerity, even at the cost of more short term pain.

They are all tragically mistaken.

To get back to first principles, there is no meaning in the term "large deficit". As Bill Mitchell argues:

"The budget deficit is the difference between what the government spends and what it receives in revenue (mostly from taxation collections). We call the extra spending above taxation revenue - net public spending. It is an accounting statement only (that is, records information about the flows of spending and revenue collections) but movements in the deficit do provide information about the state of the economy... the budget balance will move toward or into deficit when the economy is weak because tax revenue is falling and welfare payments are rising." (Our emphasis)

In this circumstance, the government must increase spending (either directly or via tax cuts) to arrest the downward spiral of private spending. In basic accounting terms, government deficit spending is merely the counterpart of private sector saving. It is not some sort of financial vacuum that draws in government revenues into one big financial black hole over time. What government deficit spending does is to permit the private sector to achieve its level of desired saving. When the latter changes, government spending ought to be adjusting in the opposite direction to offset it (unless the current account balance also changes).

The level of employment is the most obvious factor which affects the private sector's tendency to save. Higher unemployment induces a bigger desire (need) for more precautionary private sector saving. The fact that there is nearly 10 per cent official unemployment in the US at present and even higher unemployment in Europe means that the governments have not helped enough to offset this higher tendency to save by generating higher levels of employment.

If the government ran budget surpluses for several years, then the private sector would have to run deficits for just as many years -- going into debt that totals trillions of dollars in order to allow the government to retire its debt. It is hard to see why households would be better off if they owed more debt, just so that the government would owe them less.

We should think of the fiscal policy as a balancing wheel where spending financed by borrowing must offset the propensity to save (and the propensity to import) out a full employment level -- as long as private sector going into debt is not sufficient. Our position is, in effect, a 21st century version of the great post-Keynesian economist, Abba Lerner's "functional finance" as opposed to the misleading and destructive "sound finance" theory. Lerner explained the way we ought to decide on fiscal policy like this: "The central idea is that government fiscal policy...shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound." ) Lerner's objective was to advance economic policy debate beyond what he called "sound finance" (which is the precursor to today's destructive neo-liberal thinking).

Thinking along Lerner's lines, we suggest that the primary objective of fiscal policy must be to spend on productive job creation packages. It should not be driven by crony capitalism, which directs massive financial subsidies to a few wealthy, well-connected political insiders. This has been a crucial flaw in virtually all global fiscal packages. Bond holders continue to get paid back at par, whilst the sheer magnitude of these payments is being used as an excuse to slash vital public services, pensions and other government spending.

As private spending recovers over time, the budget deficit starts to shrink automatically (via the automatic stabilisers). At some point, the government may have to cut back its discretionary net spending to avoid overall aggregate demand (the total spending in the economy) becoming excessive in relation to the capacity of the output side of the economy to produce. If demand outstrips that capacity, then we get inflation. Of course, when inflation happens, governments may choose to increase taxes to choke off some private spending. It all depends on the economic context in which these decisions are taken.

With Lerner's ideas in mind, here's what we would consider an ideal statement from the G20:

"A prosperous and sound economy is indeed one of the foundations of national security, if not the central pillar (or even the ground, for that matter) of any such foundation. Therefore, we demand that all G20 nations launch a new comprehensive employment security measure which entails a minimum or living wage job guarantee for all takers.

In Europe, we urge suspension of the self-imposed fiscal rules embodied in the Treaty of Maastricht. Furthermore, we recommend the expansion of the European Investment Bank to become the funding mechanism through which the current account surplus nations, such as Germany, can recycle their surpluses in demand deficient deficit countries within the EU, so as to generate additional employment and thereby better facilitate debt service across the euro zone.

In the US, pilot projects will be immediately authorized and put into action in Detroit and along the Gulf, preferably before a long hot summer gets too far underway. Gulf hiring will be devoted primarily to environmental restoration, including the largest scale roll out of Army Core engineers ever contemplated in civilian history to mitigate the emerging ecological disaster approaching our shores. Troop recalls and a significant slimming of the public trough upon which defense contractors have been engorging themselves since even before Eisenhower's famous "military industrial complex" confession will be completed to ensure budget "neutrality", which is an arbitrary and utterly useless thing, since the only sustainable fiscal balance is the one that ensures full employment with product price stability. The time for a new national security directive has indeed arrived, and we urge all national governments to reconsider what the true basis of national security really is - a sustainable and thriving economy, and not one picked over by global speculative capital or its sock puppets politicians within the Predator State."

The more the bankers' interest is served, the worse and more debt-burdened the economy will become. Their gains have been bought at the price of domestic austerity. The G20 Communique irresponsibly and immorally ratifies this disgraceful state of affairs and we will all pay a severe price going forward.

The G20 policy makers, and their allies in finanzkapital, are like vultures picking over a dying carcass. And the rest of us are helpless because the institutions designed to serve broader public purpose have become subverted. We are making bond holders and big bankers whole at the expense of impoverishing the entire society.

It is hard to avoid drawing very dark conclusions. Our policy making elites have discovered that the underclass doesn't matter politically anymore, so why respond to it? That indifference is extending to the middle class. Ordinary, struggling folks are all becoming so demoralized that they present:

1. No voting threat, because none of the major political parties in Europe or the US genuinely represent their interests (and haven't for years). There have been, as a result, no political price to pay for such shameless predatory capitalism.

2. They present no power threat, because they have been systematically destroyed over the last 30 years and what is happening now in Europe represents the final assault on the residue of the 20th century welfare state (the US social safety net eviscerated well before this).

The message from the G20 seems to be this: We're through with domestic spending to employ the underclass.

There are decent jobs for about 20% of the working-age population in the west. And for the rest? Poverty a la South America. It is extraordinary that voters around the globe continue to tolerate this corrupt state of affairs, but it's getting increasingly hard to see a way out.

Roosevelt Institute Senior Fellow Marshall Auerback is a market analyst and commentator.

Rob Parenteau, CFA, is sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and research associate at the Levy Economics Institute.

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The Root Causes of Recurring Global Financial Crises

May 21, 2010Henry Liu

euro_banknotes-150The causes of recurring  financial crises reach far back, even to neo-liberal ideas in the Medieval Ages.

euro_banknotes-150The causes of recurring  financial crises reach far back, even to neo-liberal ideas in the Medieval Ages.

Severe global financial crises have been recurring every decade: the 1987 crash, the 1997 Asian financial crisis and the 2007 Credit Crisis. This recurring pattern had been generated by wholesale financial deregulation around the world. But the root causes have been dollar hegemony and the Washington Consensus.

The Case of Greece

Following misguided neo-liberal market fundamentalist advice, Greece abandoned its national currency, the drachma, in favor of the euro in 2002. This critically consequential move enabled the Greek government to benefit from the strength of the euro, albeit not derived exclusively from the strength of the Greek economy, but from the strength of the economies of the stronger Eurozone member states, to borrow at lower interest rates collateralized by Greek assets denominated in euros. With newly available credit, Greece then went on a debt-funded spending spree, including high-profile projects such as the 2004 Athens Olympics that left the Greek nation with high sovereign debts not denominated in its national currency. Further, this borrowing by government in boom times amounted to a brazen distortion of Keynesian economics of deficit financing to deal with cyclical recessions backed by surpluses accumulated in boom cycles. Instead, Greece accumulated massive debt during its debt-driven economic bubble.

The Euro Trap

By adopting the euro, a currency managed by the monetary policy of the super-national European Central Bank (ECB), Greece voluntarily surrendered its sovereign powers over national monetary policy, and rested in the false comfort that a super-national monetary policy designed for the stronger economies of the Eurozone would also work for a debt-infested Greece. As a Eurozone member state, Greece can earn and borrow euros without exchange rate implications, but it cannot print euros even at the risk of inflation. The inability to print euros exposes Greece to the risk of sovereign debt default in the event of a protracted fiscal deficit and leaves Greece without the option of an independent national monetary solution, such as devaluation of its national currency.

Notwithstanding a lot of expansive talk of the euro emerging as an alternative reserve currency to the dollar, the euro is in reality just another derivative currency of the dollar. Despite the larger GDP of European Union (EU) as compared to that of the US, the dollar continues to dominate financial markets around the world as a bench mark currency due to dollar hegemony which requires all basic commodities to be denominated in dollars. Oil can be bought by paying euros, but at prices subject to the exchange value of the euro to the dollar. The EU simply does not command the global geopolitical power that the US has possessed since the end of WWII.

Dollar Hegemony and the Washington Consensus

Economic growth under the dollar hegemony regime requires market-participating nations to follow the rules of the Washington Consensus, a term coined in 1990 by John Williamson of the Institute for International Economics to summarize the synchronized ideology of Washington-based establishment economists, reverberated around the world for a quarter of a century as the true gospel of economic reform indispensable for achieving growth in a globalized market economy. It is an ideology that has landed much of the world in recurring financial crises.

Initially applied to Latin America and eventually to all developing economies, the Washington Consensus has come to be synonymous with the doctrine of globalized neo-liberalism or market fundamentalism to describe universal policy prescriptions based on free-market principles and monetary discipline within narrow ideological limits. It promotes for all economies macroeconomic control, trade openness, pro-market microeconomic measures, privatization and deregulation in support of a dogmatic ideological faith in the market's ability to solve all socio-economic problems more efficiently, and to assert a blanket denial of an obvious contradiction between market efficiency and poverty eradication or income and wealth disparity.

Return on Capital vs Wages

Financial capital growth is to be served at the expense of human capital growth. Sound money, undiluted by inflation, is to be achieved by keeping wages low through structural unemployment. Pockets of poverty in the periphery are deemed as the necessary price for the prosperous center. Such dogmas grant unemployment and poverty, conditions of economic disaster, undeserved conceptual respectability. State intervention has come to focus mainly on reducing the market power of labor in favor of capital in a blatantly predatory market mechanism.

The set of policy reforms prescribed by the Washington Consensus is composed of 10 propositions: 1) fiscal discipline; 2) redirection of public expenditure priorities toward fields offering high economic returns; 3) tax reform to lower marginal rates and broaden the tax base; 4) interest-rate liberalization; 5) competitive exchange rates; 6) trade liberalization; 7) liberalization of foreign direct investment (FDI) inflows; 8) privatization; 9) deregulation and 10) secure private-property rights.

Abdication of Government Responsibilities

These propositions add up to a wholesale reduction of the central role of government in the economy and its primary obligation to protect the weak from the strong, both foreign and domestic. Unemployment and poverty then are viewed as temporary, transitional fallouts from wholesome natural market selection, as unavoidable effects of economic evolution that in the long run will make the economy stronger.

Neo-liberal economists argue that unemployment and poverty, deadly economic plagues in the short term, can lead to macroeconomic benefits in the long term, just as some historians perversely argue that even the Black Death (1348) had long-range beneficial economic effects on European society.

The resultant labor shortage in the short term pushed up wages in the mid-14th century, and the sudden rise in mortality led to an oversupply of goods, causing prices to drop. These two trends caused the standard of living to rise for those still living. Yet the short-term shortage of labor caused by the Black Death forced landlords to stop freeing their serfs, and to extract more forced labor from them. In reaction, peasants in many areas used their increased market power to demand fairer treatment or lighter burdens. Frustrated, guilds revolted in the cities and peasants rebelled in the countryside. The Jacquerie in 1358, the Peasants' Revolt in England in 1381, the Catalonian Rebellion in 1395, and many revolts in Germany, all served to show how seriously the mortality had disrupted traditional economic and social relations.

Neo-liberalism in the past quarter century created conditions that manifested themselves in violent political protests all over the globe, the extremist form being terrorism. But at least the bubonic plaque was released by nature and not by human ideological fixation. And neo-liberalism keeps workers unemployed but alive with subsistence unemployment aid, maintaining an ever-ready pool of surplus labor to prevent wages from rising from any labor shortage, eliminating even the cruelly derived long-term benefits of the Black Death.

Bashing of the State

The Washington Consensus has since been characterized as a "bashing of the state" (Annual Report of the United Nations, 1998) and a "new imperialism" (M Shahid Alam, "Does Sovereignty Matter for Economic Growth?", 1999). But the real harm of the Washington Consensus has yet to be properly recognized: that it is a prescription for generating failed states around the world among developing economies that participate in globalized financial markets. Even in the developed economies, neo-liberalism generates a dangerous but generally unacknowledged failed-state syndrome. (Please see my February 3, 2005 10-part series: World Order, Failed States and Terrorism - Part I: The Failed State Cancer)

This is an excerpt from a recent article.

Roosevelt Institute Braintruster Henry C.K. Liu is an independent commentator on culture, economics and politics.

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Latvia's Infernal Devaluation

May 19, 2010Marshall Auerback

jobless-man-150Latvia will have to crush its own workers to exit the recession.

jobless-man-150Latvia will have to crush its own workers to exit the recession.

Ojars Kalnins, director of the Latvian Institute, today told the LNT show that Latvia will go down in economic history as an example of a calm exit from a crisis. This from the man who helped plan Latvia's economy from the start. Kalnins was a Latvian-American Madison Avenue PR man who worked with the Clinton Administration and USAID to bring the whole neoliberal package to Latvia.

He is a champion of the idea of the "internal devaluation," with no room to adjust the exchange rate (because they keep the currency, the Lat, pegged to the euro). The only other way to make the currency lose value is to engineer a real depreciation -- that is, reduce labor costs and prices in order to make tradable products more attractive. This is euphemistically being described as an "internal devaluation," a one-off coordinated reduction of wages and prices across the board. It is, in reality, more like an "infernal devaluation." It amounts to a domestic income deflation -- as wages are crushed -- in order to get the prices of tradable goods down enough so the current account balance increases sufficiently enough to carry the next wave of growth.

The reasoning is a bit like what we saw in Vietnam: destroying a village to save it (presumably from the perils of communism, although there wasn't much to "save" once the place was turned into an ash heap). Kalnins forgets that rapidly cutting fiscal deficits, without considering the impact of such moves on private sector financial balances, is a shortsighted, if not dangerous, policy direction. Sector financial balances -- the difference between saving and investment, or income and expenditures -- are interconnected, and cannot be treated in isolation. The "exit" for Latvia appears to be the dumpster at the end of the trash shoot.

I can see why they call that excellent show on 1960s advertising executives "Mad Men."

Roosevelt Institute Senior Fellow Marshall Auerback is a market analyst and commentator.

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Fiscal Austerity Fever Goes Global

May 17, 2010Marshall Auerback

euro_banknotes-150A look at fiscal austerity fever and exposes the faulty economics that fuel it.

euro_banknotes-150A look at fiscal austerity fever and exposes the faulty economics that fuel it.

Virtually the entire world's press is now focusing on the travails of the euro zone, but continues to draw the wrong lessons from what now afflicts the region. But Americans might be pleased to know that this collective economic insanity is not restricted to the pages of the right wing press or the rantings of Fox News commentators such as Glenn Beck. No America, you can rejoice! This has become a fully fledged global disease. You are not alone.

As I have pointed out before, no euro zone government issues its own currency. Consequently, they have to "finance" every euro they spend. And, as Bill Mitchell notes, if tax revenues do not cover pre-existing spending desires, then all of these countries (including Germany) have to issue debt. The current crisis is manifested by the bond markets' unwillingness to lend to the PIIGS governments any longer because they are beginning to query the PIIGS' national solvency.

These funding constraints do not apply to the US government, which is sovereign in the US dollar and can never be revenue constrained.

The same applies to the UK government, although to judge from the comments of the new coalition Conservative-Liberal Democratic Government Cabinet, one would be hard-pressed to discover that fact. Will someone please remind the UK's new Chancellor of the Exchequer, George Osborne, that the UK is not Greece? Osborne attended Eton, one of Britain's elite private educational institutions, but they clearly didn't do a good job of teaching him economics out there, if one is to judge by his recent statements: "If anyone doubts the dangers that face our country if we do not, they should look at what is happening today in Greece and in Portugal."

The UK is a sovereign nation that issues its own currency and freely floats it on foreign exchange markets. Perhaps the keyboard operators have gone on strike (like British Airways), or the country has a paper shortage and can no longer write checks, but given the plethora of comments emanating from virtually all members of the UK commentariat, one has to assume plain ignorance. Just today, the incoming Chief Treasury secretary, David Laws, warned the British electorate that the UK has well and truly "run out of money." Hold on to those pounds, or you're doomed.

In defense of the current Greek, Spanish and Portuguese governments, they find themselves in a fiscal straitjacket not of their own making. It is a by-product of the Maastricht Treaty and the Stability and Growth Pact. The UK, by contrast, is willingly choosing to commit economic suicide. If the government had some understanding of the characteristics of its monetary system and the position of the currency in that system, they would stop worrying about debt ratios and deficit ratios and focus more on reversing the job loss and doing nothing to undermine the economy's capacity to recover. The Labour Party opposition ought to be secretly screaming with delight, although the Brown Administration clearly didn't know any better and therefore fully deserved to lose the last election.

The new UK coalition government has a choice. So do the Baltic nations, where a much more severe, more devastating and downright deadly crisis in the post-Soviet economies is taking place. Somehow the travails of countries such as Latvia and Estonia have escaped widespread press notice. The US and UK would do well to take note, because the Baltic Republics have well and truly imbibed the neo-liberal Kool-Aid peddled by the likes of the IMF.

On June 2009, the newly-appointed Latvian Prime Minister, Valdis Dombrovskis, made a national public radio address and said that his country had to accept major cuts in the budget because they would allow the country to receive the next installment of its IMF/European Union bail-out loans. He said the country was faced with looming "national bankruptcy" and then proceeded to ensure the validity of that claim by implementing the economic equivalent of carpet bombing. In effect, he turned the Baltic republic into an industrial wasteland via the most virulent form of neo-liberal economics.

Having broken free from the chains of the former Soviet Empire, Latvia promptly surrendered its currency sovereignty by pegging its currency against the Euro. This means it has to use monetary policy to manage this peg. The domestic economy also has to shrink if there are downward pressures on the local currency emerging in the foreign exchange rates. So instead of allowing the currency to make the adjustments necessary, the Latvian government handled the "implied depreciation" by devastating the domestic economy. (Public sector pay has been cut by 40 percent over the last year, while the economy has contracted by almost a third.)

But now, cries the government, there is light at the end of the tunnel! In the first quarter, GDP declined by a mere 6%! Well, when a country experiences a cumulative decline greater than anything sustained by the US during the Great Depression, I suppose a mere 6 per cent contraction seems like positive boom times again. And sure enough, Prime Minister Dombrovski has proclaimed this as "confirmation of the economy's flexibility" - what is left of it - and "yield from reforms and the fiscal consolidation program, the so-called internal devaluation," according to The Baltic Course. "Infernal devaluation" is a more appropriate description.

The currency peg is nonsensical, even though devaluation would be severely disruptive given the current nominal contracts held by the Latvian private sector. Around 80 percent of all private borrowing in Latvia is in euros, with the Swedish banks being the most exposed in Latvia. And, of course, the devaluation would undermine Latvia's ambitions to join the EMU (hardly an exclusive club worth joining these days, as any Greek, Spaniard or Italian would likely tell the Latvians). The debate in Latvia about the EMU is that it will provide financial stability for the country. The fact that membership destroys their fiscal sovereignty is never raised in the public debate, narrowing the range of policy options that the political classes are prepared to discuss, and thereby legitimizing nonsensical ideas that a contraction of a "mere" 6% is something worth celebrating.

All of this pain for an exclusive club -- the euro zone - which today looks on the verge of imploding.

And Latvia is not alone. By virtue of its low public debt, and low inflation rate, Estonia has become the new poster boy for the IMF. Its budget deficit was 1.7 percent of gross domestic product in 2009, well within the 3 percent Maastricht limit, while its government sector debt was the lowest in the EU at 7.2 percent, according to the Statistics Estonia. Estonia could pay off all its public debts and still have reserves left over, which is why the country has been provisionally admitted to join the European Monetary Union in 2011.

So, should Greece, with public deficit of 13% and public debt of 113% (both as percentage of GDP), follow Estonia, bite the bullet and get down to slashing budget and wages? Or Spain? Like all of the euro zone nations, Estonia has no exchange rate policy option because the Kroon is pegged to the euro, so its fiscal policy is similarly externally constrained. The euphoria around Estonia should die rather quickly when one looks at the GDP performance in 2009. It fell nearly 15%; Greece's GDP contracted just 2%. More recently, according to the Baltic Post, the number of jobs in Estonia is the lowest in almost 25 years. The release of Estonia's first quarter labor statistics show that the unemployment rate grew by nearly four percentage points in comparison to the end of 2009 and reached nearly 20%. God help the rest of the world if it manages to emulate this "success story." While their governments seems to think that by joining the EMU they will be "shock-proofed," they should just get rid of the "proofed" part and realize that they will shock their citizens into a new kind of indentured servitude.

Roosevelt Institute Senior Fellow Marshall Auerback is a market analyst and commentator.

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Growth Needs to Come from Development, not Trade

May 14, 2010Henry Liu

workers-200The inequalities in global trade need to be leveled for both moral and economic reasons.

workers-200The inequalities in global trade need to be leveled for both moral and economic reasons.

Not withstanding the fact that in 2010, despite the global financial crisis, the EU and the US still remain the world’s two largest economies by GDP (EU=$16.5 trillion, US=$14.8 trillion, about 50% of world total at $61.8 trillion), the days are numbered when theses two economies can continue to play the role of the world’s main consumption engines and act as markets of last resort for the export-dependent economies. For sustainable growth in the world economy, all national economies will have to concentrate on developing their own domestic markets and depend on domestic consumption for economic growth.

International trade will return to playing an augmentation role to support the balanced development of domestic economies. The world can no longer be organized into two unequal halves of poor workers and rich consumers, which has been an imperialist distortion of the theory of division of labor into a theory of exploitation of labor, and of the theory of comparative advantage into a cruel reality of absolute advantage for the rich economies.

Wealth Should Be Shared Equitably between Workers and Capital

Going forward, workers in all countries will have to receive a fair and larger share of the wealth they produce in order to sustain aggregate consumer demand globally and to conduct fair trade between trading partners. Capital is increasingly sourced from pension and savings of workers. Thus, it is common sense that returns on capital cannot be achieved at the expense of fair wages. Moreover, capital needs to be recognized as belonging to the workers, not to the financial manipulators.



The idea that workers doing the same work are paid at vastly different wages in different parts of the world is not only unjust but also uneconomic. For example, there is no economic reason or purpose, much less moral justification, why workers in the US should command wages five times more than those of workers in China doing the same work. The solution is not to push down US wages, but to push up Chinese wages to reach bilateral parity between the two trading partners. International trade, driven by cross border wage and income disparity globally, will wither away from its own internal contradiction, which ultimately will lead to market failure. Low-paid workers are the fundamental obstacle to growth from operative demand management at both the domestic and international levels. Pitting workers in one country against workers in another will only destroy international trade with counterproductive protectionism, which is not to be confused with economic nationalism.

Roosevelt Institute Braintruster Henry C.K. Liu is an independent commentator on culture, economics and politics.

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