“No one has the political will, courage or imagination to deal with the Eurozone crisis” —Ilene Grabel

No 368 Posted by fw, December 16, 2011

“I think the even bigger problem is this kind of institutional lacuna. There isn’t actually a space in the global economy for action to be taken. And so I think that’s why we have this effort to shift the problem back and forth between the European Union and the IMF and national governments. And not one of those entities actually has the political will or the courage or the imagination to actually deal with the problem – or the courage, for that matter. And so every day we find we’re watching for some decisions to come from some body, whether it’s the European Union or the IMF or to come out of the German and French dialogue. And yet every day we’re greeted with the kind of news that they’re going to consider it, they have a new plan, we don’t know what the plan is, no one knows what the plan is.” —Ilene Grabel

In a Real News video interview conducted by host Paul Jay, University of Denver Economics Professor Ilene Grabel explains why there’s neither the political will nor the courage to take on the austerity and privatization policies pushed by financial markets, maneuvering to augment their power. My abridged transcript, including subheadings, follows the video.

The G20 and Global Policy Paralysis by Ilene Grabel, uploaded by The Real News on December 12, 2011

 

ABRIDGED TRANSCRIPT (with added subheadings)

No one has the political will, courage or imagination to deal with the Eurozone crisis

When the G20 met in early November in Cannes, they had, of course, many very important things on their agenda. What we’ve been seeing at the last few G20 meetings, including the most recent one in November, there’s been a game of hot potato that’s being played between the G20, the IMF, the European Central Bank and the leaders of Germany and France. And every time they meet in the context of the global crisis they have failed to reach any clear decision that would take the Eurozone out of crisis and to deal with many of the important issues that have been on their agenda since the crisis really began in 2008. And in this last meeting in November, the G20 ministers essentially handed the ball back to the European Union and the European Central Bank and the German and the French governments. They [in turn] handed it back to the IMF. The IMF handed it back to the G20. And at this point we have a situation where nothing at all is happening and we’re seeing financial markets react to that uncertainty because it’s not clear who is going to take responsibility for getting Europe out of its national malaise. It’s clear that the IMF is not going to do it. European governments are not doing it. And as we saw late last night, leaders of the European Union are also not prepared to take any steps to get the zone out of the crisis.

Every day there’s news of a new plan but nobody knows what the plan is

The fundamentals are certainly all wrong. I think the even bigger problem is this kind of institutional lacuna. There isn’t actually a space in the global economy for action to be taken. And so I think that’s why we have this effort to shift the problem back and forth between the European Union and the IMF and national governments. And not one of those entities actually has the political will or the courage or the imagination to actually deal with the problem – or the courage, for that matter. And so every day we find we’re watching for some decisions to come from some body, whether it’s the European Union or the IMF or to come out of the German and French dialogue. And yet every day we’re greeted with the kind of news that they’re going to consider it, they have a new plan, we don’t know what the plan is, no one knows what the plan is. And of course last night, we had the announcement that some important European government, like the English government, is not prepared to participate in these dialogues in any sort of meaningful way.

Meanwhile the financial sector takes advantage of the crisis to augment its power

The financial sector is using the opportunity, the crisis, to push forward on the kinds of reforms that financial actors have long sought, which is to say, policies which give the financial sector far more power than it ordinarily has — pushes government into austerity, pushes government into dismantling the welfare state, pushes them into privatizing state-owned enterprises and generally shrinking the public sector and public employment. So it certainly is an opportune time for financial actors to push forward on the kind of agenda that they have long sought in Europe.

“We haven’t seen the worst of this at all”

I think we’re entering the period where the crisis is actually going to intensify. We may have hoped that all of the bad news was actually out but I think we haven’t seen the worst of this at all. The plan that was announced last night and was being discussed this morning doesn’t at all address the seriousness of the crisis in Europe. And, indeed, this morning the credit-rating agencies downgraded three major French banks. There’s talk of downgrading further banks in Europe. There have also been studies which have shown that European banks have a huge deficit of capital and that they’re seriously undercapitalized. That should make things far worse. And the European Union, this morning, is in much worse shape than it was in even last night because of the failure to reach an agreement. And so it’s hard to imagine that European leaders can engage in some new round of productive dialogue. After all they failed to reach a decision at the most important moment last night. And so I think that they’re very much out of the picture right now.

The US is not going to ride to the rescue of European banks

I think that the suggestion that the US Fed should come to the rescue and buy up some of these European bonds is completely implausible. I understand that that proposal has been discussed. It’s impossible for me to imagine the US Federal Reserve actually taking on that role. US Treasury Secretary Timothy Geithner has been making it clear over the last couple of months that Europe’s problem is Europe’s problem. And given the political heat that he’s faced over the bailout in the US, I think it’s just politically not possible for the US Treasury and for the Obama administration to play any role in Europe other than to say “We feel your pain” at this point. But it’s really impossible to imagine the Federal Reserve taking responsibility for buttressing the capital reserves of European banks or in any way facilitating any further activity by the European Central Bank.

Sure, Europe’s problem is Obama’s problem but US isolationist sentiment prevents intervention in Europe

I think it [the European crisis] is very much [President Obama’s] problem because we cannot separate the fate of European economies from the fate of the American economy. That’s certainly true. But I think politically isolationist sentiment in the US right now is such that it really prevents the President and the US Treasury Department from taking any kind of decisive action that commits US economic resources to Europe. I just don’t think it’s politically possible to do so even though failure to do so certainly has very serious negative ramifications for the US economy.

“We will stumble into deeper global recession”

I think it’s clear that we will stumble into deeper global recession. It’s been fascinating over the last couple of weeks to see Europeans go hat in hand to some of the largest and most rapidly growing developing countries. We know that European leaders have been really trying to pound the pavement in China, in Chile, in Brazil, saying — “Okay, we need your sovereign wealth fund money, we need your governments to buy up European bonds.” And I think many of the rapidly growing developing countries’ policy makers have very rightly suggested that they’re not really interested in playing the role of bailing out Europe.

Policy makers in rapidly developing countries question the credibility of the entire Eurozone project

I agree with what some of the Chinese commentators are saying — “Why don’t we wait until it bottoms out then we’ll think about coming in.” It’s clear that Chinese policy makers, and policy makers in many other rapidly developing countries are quite rightly skeptical about the credibility Eurozone’s planning and even the credibility of the entire Eurozone project. So they’re not keen to commit any economic resources to stabilize Europe. We know that Brazil has very recently agreed to provide more funding through the IMF but not directly to the Eurozone itself because of the lack of credibility, the lack of commitment that Eurozone leaders have really shown to take serious action to get out of crisis.

“We have real reason to be worried about the future of the world economy”

I think people should be worried. At this point it seems clear that we’re headed for a new round of crisis coming this time from Europe. And this is really the time, I suggest, to batten down the hatches. I mean certainly we can try to influence debate in the US to press our government to get more involved in trying to get the US out of recession, to promote employment, to get behind the President’s job promotion plan. But we are in a situation of political gridlock, and this is the silly season in the US right now. It doesn’t seem like the US government is actually able at this point to take steps that make any sense to get us out of the crisis. With the President being hammered on all sides by Republican candidates really puts him in a situation where he’s paralyzed. And as you noted, Eurozone leaders are also paralyzed. And so this is the time I think when we have real reason to be worried about the future of the world economy.

Past missed opportunities for decisive action constrain future bold initiatives

There were certainly missed opportunities to make the case that getting the US out of the financial crisis was in everyone’s interest. That moment seems to have been lost in the US right now. And I think that makes it even more difficult to imagine the US government taking steps to try to stabilize Europe because after all there isn’t even a consensus among the broader populous of the US that further steps need to be taken to get the US out of its crisis.

FAIR USE NOTICE: This blog, Citizen Action Monitor, may contain copyrighted material that may not have been specifically authorized by the copyright owner. Such material, published without profit, is made available for educational purposes, to advance understanding of human rights, democracy, scientific, moral, ethical, and social justice issues. It is published in accordance with the provisions of the 2004 Supreme Court of Canada ruling and its six principle criteria for evaluating fair dealing

British historian warns of the danger of leaving political decisions to technocrats and experts

No 365 Posted by fw, December 14, 2011

Lisa Jardine, centenary professor of renaissance studies, Queen Mary, University of London

In a timely BBC Radio 4 essay, British historian Lisa Jardine warns “We should be wary of leaving political decisions to experts and technocrats.” She asks: “If someone is an expert in their field, does that make them the right person to run a country?”

Following is an abridged transcript of the second half of Jardine’s 10-minute broadcast, A Point of View: Beware the Experts, BBC Radio 4, December 9, 2011, repeated December 11, 2011. To listen to a streaming audio of the broadcast on the program’s website, click on the preceding linked title. After December 17, it will remain accessible on the show’s podcast page. For the full version of Jardine’s own transcript of her essay, click on this link — A Point of View: Beware of experts.

ABRIDGED TRANSCRIPT (With my added subheadings)

Back in 1960 CP Snow warned that “those charged with taking vital political decisions had no proper grasp of the issues.” Fifty years later, and nothing has changed except perhaps the life or death urgency and gravity of the decisions on so many fronts

The scientist, novelist and British civil servant CP Snow is probably best remembered for his controversial lecture The Two Cultures And The Scientific Revolution, on the gulf of incomprehension separating the arts and sciences, delivered in 1959.

In it he argued that in spite of the increasing importance of science, British intellectual life continued to be dominated by the traditional humanities. Today his argument continues to resonate, though perhaps now economics has joined science as a specialist field which baffles those who have received only an arts education.

A year after his Two Cultures lecture, Snow expanded on his argument and gave it an added sense of urgency in his 1960 Science and Government lectures, delivered at Harvard. He warned that at a time when specialist scientific understanding was indispensable, those charged with taking vital political decisions had no proper grasp on the issues.

“One of the most bizarre features of our time,” he wrote. “Is that the cardinal choices have to be made by a handful of men who cannot have a first-hand knowledge of what those choices depend upon or what their results may be.”

Snow specified that he had in mind decisions, I quote, “which determine in the crudest sense whether we live or die”. He named some of them. In recent British history they had included the choice in England and the United States to go ahead with work on the fission bomb in 1940-41, the decision in 1945 to use the atomic bomb against Japan, the choice in the United States and the Soviet Union in the late 1940s to make the hydrogen bomb.

<Starting here, I omitted about ten short paragraphs recounting a confrontation which took place during World War II between Snow’s hero, the chemist Henry Tizard and his villain, the physicist Frederick Lindemann over his recommendation in support of strategic saturation bombing of Germany.>

I pick up the story here, with the lesson Snow learned from this historical event –

“If you are going to have a scientist in a position of isolated power,” Snow concludes, “the only scientist among non-scientists is dangerous whoever he is.”

In government matters where scientific expertise is required, informed decision makers must collaborate

Snow has a clear sense, based on his own wartime experience, that in government informed individuals have to work together as a team towards a consensus – or at least an informed disagreement. But they can only do so in matters of science if there are enough of them who understand how scientific argument works.

Non-experts at the table must at least be able to follow the arguments and evaluate the proposals on their merits

All those in positions of power and influence, Snow maintains, ought to be able to evaluate proposals put to them which involve science and technology. It may not be possible for them to master the detail themselves, but they must be able to follow the argument. And be surrounded by those with good enough scientific backgrounds to explain the reasoning processes by which the proposed course of action was reached.

To achieve this minimal requirement, Snow made the case for an integrated arts-science culture and educational curriculum

The only way to achieve this, says Snow, is to set the sciences squarely alongside the arts at the heart of education. More than 50 years after Snow launched his appeal for an integrated arts-science culture and curriculum, it is, in my view, high time that we renewed and intensified our efforts to realize Snow’s as yet unrealized goal.

Together, elites in both the sciences and humanities must insist that educated debate inform highly technical political policy in government decision making

Because as I see it, the issue today is not whether the sciences or the humanities get more funding out of the shamefully small pot currently allocated to higher education. It is rather whether the educated elites in both sectors are prepared to stand side by side to insist that informed, educated debate is needed wherever political policy has to be formed in so-called “technical”, “specialist” areas of life. Which today means those number and formula driven disciplines with which the humanities-trained struggle to engage.

Currently, educated debate is not informing highly technical government decision making

In current debates about GM crops, nuclear energy and climate change, the public at large – including governments and senior administrators – are liable to be swayed by the most persuasive of the advisers or interest groups, because they are not equipped with the knowledge or the reasoned strategies needed to judge. Many of them are dismayed by any argument that involves number and maths.

This tendency for governments to be swayed by non-elected experts is most evident in finance and economics

Currently, this tendency to be swayed by experts is most clearly to be seen in the field of economics. Recently two nations within the European Union, Greece and Italy, have replaced their elected prime ministers by so-called technocrats – men with a significant track record in finance, but not experience of government at local or national level.

Governments are being run by oligarchies of experts where interests of the financial markets take precedence over the “public interest”

In the case of Italy, the entire cabinet consists of financial specialists. The non-elected prime minister’s people head “governments of national unity” which pursue policies for which nobody in the electorate voted. Indeed, they are not expected to consider the interests of the public, except insofar as introducing austerity measures sufficiently swingeing to satisfy the international markets is supposed ultimately to ensure the solvency of the nation as a whole.

Are we really comfortable leaving grave political decisions to technocrats whose successes have been measured in terms of investment yields? We have been forced into the position of doing so, I suggest, by very much the circumstances that CP Snow described 50 years ago, in connection with key decisions in time of war.

In wartime, Churchill – himself exclusively humanities-educated – took the advice of the man closest to him whose views were, as it happened, not shared by other prominent figures within the scientific community.

Today, faced with an international financial crisis, Europe’s elected representatives have singled out individuals with economic expertise for a solution. In this case too, significant voices have been raised by economic experts outside government, questioning the wisdom of adopting the measures proposed.

“The rule of a few wise men is oligarchy, not democracy”

The rule of a few wise men is oligarchy, not democracy. So democracy depends upon our being able to sustain informed debate in the fields of science and economics. Each and every one of us has to take responsibility for the decisions that shape the future of the nation as a whole.

Most importantly, we, the people, must be able to follow the arguments of the experts

But we will only be able to do that if those we have elected to govern us can master the technical aspects of difficult decision making – and if we in our turn are able to follow their arguments.

MY COMMENT — And there, in Jardine’s closing paragraph, is “the rub”. Quite clearly, few of our elected representatives or the electorate are intellectually equipped to follow the best advice and arguments of scientific and technical advisers. The disappointing outcome at COP17 is further evidence – as if further evidence were needed — of this cognitive deficiency.

FAIR USE NOTICE: This blog, Citizen Action Monitor, may contain copyrighted material that may not have been specifically authorized by the copyright owner. Such material, published without profit, is made available for educational purposes, to advance understanding of human rights, democracy, scientific, moral, ethical, and social justice issues. It is published in accordance with the provisions of the 2004 Supreme Court of Canada ruling and its six principle criteria for evaluating fair dealing

“We should not take democracy as a given anymore” —Dr Heiner Flassbeck

No 363 Posted by fw, December 13, 2011

“I think it’s extremely dangerous. We should not take democracy as something natural or given. If you look at southern Europe people are on the streets every day. The riots are getting harder to fight and the governments really do not know what to do anymore. So if you put people into such a situation where they’re really desperate about their outlook, where they’re desperate about their kids’  future, and so on, then people are doing things that might look quite unreasonable but it’s just a result of their desperation. And so far I think G20 could be the forum to act but in a more rigorous and a totally different way. I have been following G20 in the last year and it was unfortunately a very bureaucratic affair. I would hope that the leaders come together one more time and to see that they need a bigger approach, a broader approach. And they have to face not only some minor economic questions but they’re facing a big challenging century, a question of a century in terms of overall politics.” —Dr Heiner Flassbeck, Director, Globalization and Development Strategies, United Nations Conference on Trade and Development (UNCTAD)

In a Real News interview, Eurocrisis: Democracy is Not a Given, Dr Heiner Flassbeck talks about the European Union Summit agreement of September 9, 2011, and the Eurocrisis that precipitated it. He concludes that the German policy of low wages and beggar-thy-neighbour remedies is the root cause of the crisis. This latest agreement, concocted by Sarkozy and Merkel, has not resolved the crisis. We have reached a point, as Flassbeck says in the above passage, where “We should not take democracy as something natural or given.”

Watch a video of the interview here, followed by my transcript with added subheadings and links. As Woody Allen said about accountants, in one of his movies, “They have a language all their own.” So, too, do economists. Much of the Flassbeck interview is heavy slogging, with a relatively long historical account of wage developments, replete with economic jargon. Viewers and readers may prefer to skim through to the second half of the interview – the last 5 or so paragraphs of the transcript – which focuses on the impact of the flawed summit agreement.

Eurocrisis: Democracy is Not a Given, Real News interview with Dr Heiner Flassbeck, December 10, 2011.

TRANSCRIPT (abridged)

“More austerity for Europe” that’s a major implication of the  Dec 9, 2011 European Union Summit agreement

Well this agreement first of all is about more austerity for Europe. It’s an agreement that more or less all the countries in the Eurozone, and some others, are going for more austerity, are going to cut down public expenditure, and that they are going to try to improve what they call, improve the competitiveness. But that means wage cuts.

The core of the Eurozone dilemma is the divergence of wage development between Germany and southern Europe

Well I think the rule of this crisis is not a violation of rules of fiscal discipline, of degrees of public debt in the Eurozone, different degrees of public debt. What I think is the core of the issue is the divergence of wage development. Unit labor costs have diverged dramatically in the last ten years. They did not follow the commonly agreed inflation target in Europe. On the one hand southern Europe went beyond this inflation target of 2% but, more so, Germany went below this target by a very wide margin and this has led to an overall gap in competitiveness inside the Eurozone where you cannot depreciate or appreciate anymore of something like 25% between Germany and southern Europe and 20% between Germany and France.

Wage cutting and pressure on unions, designed to reduce unemployment, have failed dramatically

It was dramatic pressure, political pressure on the unions, on wage agreements that we had never before [seen] in Germany. First of all it started at the end of the 90s with a tripartite agreement between government, unions and employer associations. But then on top of that the red-green – paradoxically, the red-green government – put another big round of pressure on the unions by restricting the possibility to negotiate certain wages for low skilled by reducing unemployment contributions and so on. So in that way, wage flexibility has decreased dramatically. It was part of the program that everybody called “labor market increase”, your labor market flexibility, and that is exactly what is asked for now from the other Europeans.

That was the idea. They had clearly what we economists call a neoclassical approach. They tried to improve employment by wage cutting and pressure on the wage negotiations. But it dramatically failed in terms of the domestic markets. It dramatically failed. The only thing that happened, and that could be expected by all reasonable economists would have expected, that if you go into a currency union at the same time the other countries will have no chance to depreciate their currencies. Well, the end is that you beggar your neighbours and that is exactly what happened. So we have huge current accounts of business in Germany and huge current account deficits in the other countries. The unfortunate thing is that we cannot correct it anymore by exchange rate changes.

Overall it failed. It benefitted only the export industry, that’s right. And a certain kind of elite, that’s right also. But overall, German growth was weak. Over the time Germany, in the first ten years in the Eurozone was the worst country in terms of growth and in terms of employment. But only, if you do something like that, you know the increase, the improvement in competitiveness accumulates over time. So you start with say a difference of 2% and after 10 years you have, as I say, 25%. So under these conditions you have 25% premium over your competitors, over the other countries, then the increase, the benefits that you get in the export industry are accelerating and this is why Germany at the end was extremely strong and the others extremely weak.

Without radical policy changes in Europe and the U.S. we’re headed for deflation and stagflation

I think the most probable outcome that we are facing now, not only in Europe but in the United States and in Japan is something like the Japanese two lost decades that started at the beginning of the 90s because we’re heading for a deflation clearly, a deflation in Europe, and stagnation, because wages are not rising anymore. Wages are cut in the south and in Germany they’re not rising very much. That leads immediately to faltering domestic demand. On the export side we cannot expect very much from, as I said, the United States and Japan and China cannot do it alone. So we’re really in a trap that will not . . . you will not be able to escape if you do not [have] radical changes over our policies in Europe and, maybe, in the United States.

“The majority of political leaders really do not understand”

Well, it’s not benefitting and I think they really do not understand — some may understand — but the majority of the political leaders I think really do not understand. And Germany, to be frank, people are talking all the time about the Swabian housewife, which means you do not spend too much. You’re saving a lot of your income. And this is the model for our policies so they take a micro-model for the macro economy and they do not understand that the macro economy is functioning in a totally different way. So it’s not just about who benefits or not. The core of it in my view is economists, the majority of economists, the mainstream in economics, strongly believe that saving is a good thing. And they do not understand the kind of Keynesian restriction or the Keynesian argument against this saving approach. And, more important, is that all good economists, as they say, on earth, believe that wage flexibility is a good thing and they do not understand fully that wage flexibility first of all leads to falling demand and not in the first round to rising employment. So you have a demand restriction, you have a demand constraint and that demand constraint will be very difficult to overcome. I mean look at the discussion in the United States. It’s quite similar to the European discussion. The people really do not take care of the very low wages of the family income expectations that are, as far as I see it, at the lowest level in the United States ever. And to overcome this you need a huge fiscal stimulus, and even that may not be possible. And this is exactly an analogy to the Japanese, the beginning of the Japanese two last decades.

We are in an age of diminished expectations, a totally new experience for capitalism

I think you need a mixture, you need a reasonable mixture. You need stimulus from the government side but given the political opposition against further stimuli you need in addition something like an incomes policy or at least more freedom to unite for the workers to do what is necessary. But you see the point is, in the United States, if unemployment is higher — and that was the case in the beginning of this century in Germany also – if unemployment is high it’s very difficult to negotiate for higher wages. Then the government has to give a strong signal either through minimum wages or other instruments, say wages in the public sector, so to make clear that people can expect that they have their part in the productivity increase in the future. We have a totally new situation, I think, in the capitalist system that we have never seen in 30-40 years before, namely, that we really have an age of diminished expectations, so to say, of the average people. And this diminished expectation, so to say, naturally leads to a stagnative mood and we have to overcome that by a very heterodox, unorthodox instrument. Just monetary policy does not work anymore. Fiscal policy is politically blocked. So you need to think hard about other instruments.

“We should not take democracy as something natural or given”

I think it’s extremely dangerous. We should not take democracy as something natural or given. If you look at southern Europe people are on the streets every day. The riots are getting harder to fight and the governments really do not know what to do anymore. So if you put people into such a situation where they’re really desperate about their outlook, where they’re desperate about their kids’ future, and so on, then people are doing things that might look quite unreasonable but it’s just a result of their desperation.

The time has come for the G20 to act “in a more rigorous, totally different way”

And so far I think G20 could be the forum to act but in a more rigorous and a totally different way. I have been following G20 in the last year and it was unfortunately a very bureaucratic affair. I would hope that the leaders come together one more time and to see that they need a bigger approach, a broader approach. And they have to face not only some minor economic questions but they’re facing a big challenging century, a question of a century in terms of overall politics.

Austerity is not enough. We need political leaders to understand just how serious the situation is

I think they have to realize that the bond holders are not so stupid. If you look at the much-criticized, in Europe, much criticized opinion from Standard and Poor’s this week about the rating of Europe as a whole, the Eurozone as a whole, then Standard and Poor’s has said something quite reasonable. They said just austerity is not enough. So if you just go for austerity then we have to downgrade you because the overall situation is deteriorating. And what was not clearly in the cards last year in the negotiation of the G20 was this dramatic development in the real economy and this has changed the situation. So this should be a wakeup call for everyone to go more serious than ever into negotiations about who could stimulate and who has to do some austerity even at this very critical circumstance. There was a very fruitful discussion at the beginning of last year but it faded away and it didn’t have the political momentum so I very much hope that we will have some political leaders somewhere in the world who will understand how serious the situation really is.

RELATED READING

• Eurozone Agreement: Bad For Germany, Bad For The World  Seeking Alpha, December 9, 2011 — “Europe is heading for what looks to be at least a 4% contraction in GDP in 2012, and there’s very little chance that this won’t impact the rest of the world, even if it isn’t accompanied by a financial crisis. The U.S. running high single-digit deficits-to-GDP has helped it and the rest of the world, but with China also looking very shaky, the global economy could be squeezed pretty hard between Occidental and Oriental book ends. And if the U.S. gets serious about jumping on the same leaky austerity ship that most of the world is on, watch out.”

FAIR USE NOTICE: This blog, Citizen Action Monitor, may contain copyrighted material that may not have been specifically authorized by the copyright owner. Such material, published without profit, is made available for educational purposes, to advance understanding of human rights, democracy, scientific, moral, ethical, and social justice issues. It is published in accordance with the provisions of the 2004 Supreme Court of Canada ruling and its six principle criteria for evaluating fair dealing