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The Fight Between Capitalism & Democracy??

June 16, 2012

Today’s crazy making only took me a few minutes to stumble across, but will likely have me scratching my head and re-evaluating my worldview for a few days or weeks or perhaps even longer. Deep down, I am starting to wonder if our preferred form of capitalism – this virulent free-marketism – isn’t definitionally opposed to democracy. And not just in theory, but in practice also. While there are many ways we could approach capitalism, democracy seems easier to measure: are we collectively doing what is best for the majority of the citizens? I know this is simplistic, but I don’t think it is wrong. And you can make the case that from 1870-1950 (we can quibble over start and stop points) the power of money over-rode all but the semblance of democracy. As inequality was flattened out, citizen participation seemed to bloom, circa 1950-1980, and since then money has been on the ascendency yet again.

It would seem that the more socially responsible visions for capitalism have never been capable of holding sway for very long. We can see perhaps even the entire European crisis as capital’s final power moves to forcibly dismantle the remnants of “social democracy.”

This is not yet a coherent thought. But these little snapshots sure do paint a picture.

Globalization is good? Not for the middle class.

As a rich country internationally, the United States is necessarily a capital abundant country. As a comparatively low population density country, it is land abundant but labor scarce. The answer is to our initial question is then quite clear: expanding trade is harmful to U.S. workers because imports of labor-intensive products and services from abroad create competition for American workers, reducing their real wages. As I have discussed before, U.S. real wages have remained below their peak for 39 straight years…

Just as transportation innovation and cost declines made trade easier, they also make it easier for owners of capital to locate it in a broader range of places than 30 or 40 years ago. Similarly, the decline in communication costs make it easier for owners of capital to coordinate production on a global scale as well as offering additional ways of moving financial capital (think tax havens).

Note that I have said nothing about actual movements of capital. Simply the ability to move capital strengthens capital owners in their negotiations with business and labor, because it makes the threat of moving credible and thereby gives companies greater bargaining power. Kate Bronfenbrenner showed clearly that after the passage of the North American Free Trade Agreement (NAFTA) in 1993, companies more frequently resorted to threats in their bargaining with workers, even to the point of violating the National Labor Relations Act by threatening to move during union organizing drives. In this blog, I have previously discussed the case of Boeing’s establishment of a Dreamliner plant in South Carolina and admitting it was due to workers in Washington state exercising their right to strike, a form of retaliation that was a prima facie violation of the Act.

Similarly, we have seen how companies have used the threat of relocation to extract subsidies from state and local governments. Sears, with its $275 million (nominal) retention package from Illinois, is just the most egregious in recent years. That package alone could support 550 state jobs at $50,000 a year for 10 years (assuming no raises, something pretty common for state workers lately though unlikely to last 10 years). And remember, Sears did this in 1989 as well, when it got $178 million not to move out of state.

I tend to have two core problems with Libertarian thought: excessive insistence on individualism, to the point of failing to account for social, collective goods & way too much faith in unregulated markets. If more Libertarians talked like this, I’d be far more open to the rest of their arguments, which often have merit but are overshadowed by those two core failings. I do, however, wonder just what kind of standing this type of “liberalized” thinking has in libertarian circles. She is probably a “socialist.”

Externalities, asymmetrical information, and other collective action problems are even more pervasive in economic life.  Countless ways of conducting business reap gains for some while imposing unjust costs on others.  Create a cartel.  Stuff rat feces in sausages.  Engage in insider trading.  Dump toxic waste in rivers.  Market useless medicines.  Withdraw renewable resources at unsustainable rates.  Stuff insurance contracts with obscure loopholes, collect premiums from customers, and then deny their claims.  Fill corporate boards with cronies who reward top managers with huge bonuses even when they fail to meet contracted performance requirements.  Rig the terms of a complex loan to trap financially unsophisticated borrowers into spiraling debt and fees.  Get rating agencies to certify worthless assets as AAA. Use leverage to reap profits from self-generated asset bubbles, sending the global economy into financial collapse when they burst.  Without extensive regulation, markets happily accommodate such negative-value-added business plans.  Tomasi sometimes acknowledges this fact.  But he puts a heavy thumb on the scales against regulation by describing economic activity in general in terms of “self-authorship” and “economic liberty.”  Such descriptions cut no normative ice with respect to destructive or predatory business plans.  Nor should judges, who lack the expertise to assess economic regulations designed to stop such abuses, use such exalted abstractions to strike them down.

But financial innovation – surely that is how we add value and increase net worth and world wealth, right? Well, not so much.

Here’s proof. According to a 2010 paper by Andrew Haldane, head of the Bank of England’s financial-stability department, the financial crisis of 2008-09 produced an output loss equivalent to between $60 trillion and $200 trillion for the world economy. Assuming that a crisis occurs every 20 years — just about what does happen —  the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year, Haldane says. What that means is that overall, our unrestrained financial sector does not add any net benefit to the economy—its repeated crises cost us far more than Wall Street brings to overall economic growth.

Matt Taibbi’s head explodes when he finally watches Jamie Dimon in front of the Senate Banking Committee. You should read the whole thing, but here is a choice bit:

112:54 Finally there are some tough questions. Jon Tester starts asking Dimon why he accepted collateral from MF Global, even though Chase’s own risk management people were concerned that these might have been customer-segregated funds. In other words, Chase knew something was up at MF Global, but it still allowed Jon Corzine’s firm to trade off-limits customer money for cash, essentially helping Corzine rob his own customers.

This is an interesting line of questioning, but watch the sequence from minute 112 on – Dimon grows visibly annoyed by Tester’s inquiry, to the point where Tester sort of ends up apologizing for even asking these questions. The big crew-cutted Midwesterner throws his hands up a little and basically says, “Hey, man, I’m sorry, I’m just looking out for the farmers who got wiped out by MF Global, with your help. It’s nothing personal.”

“That’s all,” says Tester in a conciliatory voice. “Just lookin’ out for my folks.”

“I hope they get their money back,” sniffs Dimon halfheartedly. “I still believe they will, by the way,” he adds, staring off into the distance with undisguised boredom. He’s not quite rolling his eyes at all this nonsense about wounded farmers, but almost. If he was my child pulling that face at the dinner table, I would have grabbed him by the ear and sent him straight to bed without ice cream. But the senators bent to his annoyance like it was legitimate. It was disgusting.

Decoding Europe a bit. This is a showdown between neo-liberal globalization and, well… Perhaps the backlash of real social democracy. That first piece, over at Slackwire, is phenomenal. The point they are making is that the European Central Bank is deliberately enacting the neo-liberal agenda, and holding hostage the economies of sovereign nations to do so. (You should read this article) Here, after much evidence, is the critical thesis:

It’s hard not to think here of Perry Anderson’s thesis, developed (alongside other themes) in The New Old World, that the EU project is fundamentally a response by European elites to their inability to roll back social democracy at the national level. The new supra-national institutions of the EU have allowed them to bypass political cultures that remain stubbornly (if incompletely) egalitarian and solidaristic. In Alain Supiot’s summary:

In Anderson’s view, the European project has engendered neither a federation nor an intergovernmental organization; rather it is the most fully realized form of Hayek’s ultraliberal ‘catallaxy’. … Like a secular version of faith in divine providence, belief in the spontaneous order of the markets entails a desire to protect it from the untimely interventions of people seeking ‘a just distribution’ which, according to Hayek, is nothing more than ‘an atavism, based on primordial emotions’. Hence the need to ‘dethrone the political’ by means of constitutional steps which create ‘a functioning market in which nobody can conclusively determine how well-off particular groups or individuals will be’. In other words, it is necessary to put the division of labour and the distribution of its fruits beyond the reach of the electorate. This is the dream that the European institutions have turned into a reality. Beneath the chaste veil of what is conventionally known as the EU’s ‘democratic deficit’ lies a denial of democracy.

I hate to overly simplify things, but this becomes (in my mind at least) a very real battle between capitalism (as conceived in the neo-liberal mold, at least) and democracy. I don’t believe that to be hyperbolic in the slightest. And it would appear that neither do many of Europe’s citizens. From the above Jacobin Article:

There is no need to rehearse the narrative of the endless Eurozone crisis that began in 2009. Suffice it to say it has, for the first time, thrown into question fundamental features of the monetary union first conceived twenty years ago: the no-bailout principle insisted on by Germany; the independence of the central bank; the irreversibility of euro membership. What was once seen as a bewildering technical issue has become a vital matter of day-to-day social stability in country after country. Austerity enforced from Brussels, Frankfurt, and Berlin is not only sinking Europe into an ever-deeper depression with no visible endpoint; it is searing the political connection between daily hardships and E.U. structures into the consciousness of the continent’s citizens. In the interview featured in this section, the French political scientist Emmanuel Todd speaks of a “vast debate on economic globalization which will inevitably take place after the [May presidential] election,” and predicts that the winner will face decisive pressure from the French middle and even upper classes, who “are now turning their backs on free trade and perhaps even on the euro.”

Moreover, the astonishing defiance of democratic norms that has become an essential feature of European Union governance – a key issue in the rise of the Dutch Socialist Party (SP) highlighted by Steve McGiffen in this issue – is increasingly becoming its defining characteristic in the eyes of Europe’s citizens. Already in 2005, after the European Constitution failed in referenda in France and the Netherlands, it was simply repackaged as an ordinary treaty and passed via national parliaments; when that treaty was then rejected by the Irish in a referendum of their own, they were made to re-run their vote like schoolchildren who had failed a test. Last fall, when Greek prime minister George Papandreou had the temerity to call for a popular referendum on the austerity package that will subject his country to years of impoverishment and social disintegration, he was swiftly forced to resign and replaced with a technocratic viceroy dispatched from the European Central Bank. The same month, a former European Commissioner, Mario Monti, was brought in to run Italy after Berlusconi lost the confidence of E.U. leaders.

Because of what very much appears to be an ideological power play – a willingness to destroy the village in order to save it – the social contract is unraveling.

Suicides have increased sharply. Garbage is not being picked up. Public transportation is largely a thing of the past. Even though Greece always had a large black market, more people are resorting to barter, which shrinks the tax base. And in some ways worst of all, the health care system is on the verge of collapse. Critical medicines are not being imported and hospitals are short of basic supplies. Not only are people dying unnecessarily due to their inability to get drugs and operations, but worse, the breakdown of healthcare greatly increases the risk of a public health crisis. How many children are being vaccinated, for instance? What happens when curable but silent killers such as syphilis go untreated?

Greece has been told to reduce health care from its current 10% of GDP to below 6%. Imagine what would happen if the US were told to cut its medical expenditures by over 40% in a one or two year period. And if the IMF boot were put on the US neck, and we were told to get medical spending down to 6% of GDP, we’d need to reduce it by 2/3.

Ho hum. The News Makes Me Crazy.

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