Currency War? Of Course
Currencies are a very particular economic problem. For currencies are the one true win-lose relationship. Whatever the merits of revaluing or devaluing a particular currency, these merits are only wins if others are losers. Everyone cannot devalue simultaneously. It is logically impossible and therefore politically meaningless.
The world situation is well-known. We have been living in a world in which the U.S. dollar has been the world’s reserve currency. This of course has given the United States a privilege that no other country has. It can print its currency at will, whenever it thinks that doing so solves some immediate economic problem. No other country can do this; or rather no other country can do this without penalty as long as the dollar remains the accepted reserve currency.
It is also well-known that the dollar has been losing its value in relation to other currencies for some time now. Despite the continuing fluctuations, the curve has been downward for perhaps thirty years at least.
The countries of northeast Asia – China, Korea, and Japan -have pursued currency policies that other countries have criticized. Indeed this is the subject of constant media attention. However, to be fair, it is by no means easy to establish the wisest policy at the moment, even from the selfish perspective of each country.
I consider the underlying issue simpler than the convoluted explanations of most policy analysts. I start with a few assumptions. The status of the dollar as the reserve currency of the world-system is the last major advantage that the United States has in the world-system today. It is therefore understandable that the United States will do what it can to maintain this advantage. In order to do so, it requires the willingness of other countries (including notably those of northeast Asia) not only to use the dollar as a mode of calculating transfers but as something in which to invest their surpluses (particularly in U.S. treasury bonds).
However, the exchange rate of the dollar has been steadily slipping. This means that surpluses invested in U.S. treasury bonds are worth less as time goes by. There comes a point at which the advantages of such investment (the principal advantage being that it sustains the ability of U.S. enterprises and individual consumers to pay for imports) will eventually be less than the loss of real value of the investments in the treasury bonds. The two curves move in opposite directions.
The problem is one which is posed in any market situation. If the value of a stock is falling, owners will want to divest before it becomes too low. But rapid divestment by a large stockholder can impel a rush to divest by others, thus causing even greater losses. The game is always to find the elusive moment to divest that is neither too late nor too soon, or not too slowly but not too fast. This requires perfect timing, and the search for perfect timing is the kind of judgment that quite frequently goes awry.
I see this as the basic picture of what is happening and will happen with the U.S. dollar. It cannot continue to maintain the degree of world confidence that it once enjoyed. Sooner or later, economic reality will catch up with it. This may happen in a five-minute shock or in a much slower process. But when it does, the key question is, what then happens?
There is no other currency today poised to replace the dollar as a reserve currency. In that case, when the dollar falls, there will be no reserve currency. We shall be in a multipolar currency world. And a multipolar currency world is a very chaotic world, in which no one feels comfortable because the constant swift shifts of exchange rates make minimally rational short-term economic predictions very precarious.
The managing director of the International Monetary Fund, Dominique Strauss-Kahn, is at the moment warning publicly that the world is plunging into currency wars, whose outcome “would have a negative and very damaging longer-run impact.” One real possibility is that the world may revert, it seems to me is already reverting, to de facto barter arrangements – a situation that is not really compatible with the effective functioning of a capitalist world-economy.
Caveat emptor!
Afghanistan: Does Anyone Want the Burden?
It is no secret that a lot of countries think they have interests in who governs Afghanistan. And, over the past thirty years, a lot of countries have been sending troops or military hardware or a lot of money in order to get the kind of government in Afghanistan they prefer.
It is not hard to show that the degree to which outsider countries have in fact gotten their way is very limited. And the prospects don’t look good for the outsiders. There is an increasing sense among outsiders that perhaps they should reduce their active involvement. Intrusion creates a burden that doesn’t seem to have too many rewards.
The Soviet Union was burned badly in the 1980s and finally withdrew its troops completely. The president they thought they were sustaining was hanged publicly by a grateful nation. The mujahideen that the United States supported in their resistance to Soviet intervention showed their gratitude by breeding and supporting a movement, al-Qaeda, which has ever since devoted its energies to a jihad against the United States and all those whom al-Qaeda considers allies of the United States.
The Afghan civil war, which has had more than two sides, has continued unceasingly during all this time. One major force, called the Taliban, has had its ups and downs during these wars. Currently, they seem to be on a considerable upswing again. Since almost all the outsiders, except Pakistan, endlessly repeat their negative views about the Taliban, the ability of the Taliban to persist and to gain ground within has led to a lot of private rethinking among all concerned outside countries. The question “should we continue to be involved?” is on the agenda everywhere.
The neighbors to the north and west – Uzbekistan, Tadjikistan, Russia (although it has no direct border), and Iran – all are concerned. They do not want a government dominated by militant, largely Pashtun, Taliban in power. They fear, probably correctly, that it would oppress in various ways the zones in the north and west which are ethnically tied to their countries. But none of these neighbors seems ready to send in troops. All therefore favor some intra-Afghan political negotiations that would end up with some protection of the zones in the north and the west.
The United States currently has a large number of troops in Afghanistan. It is theoretically committed to begin a withdrawal of such troops by July 2011. In theory too, the United States government is hoping for a defeat, or at least a taming, of the Taliban forces, and a strengthening of the official Afghan army under the authority of the formally legal government presided over by President Hamid Karzai.
U.S. troops are assisted by a NATO force from several NATO countries. If the United States is waiting until mid-2011 to draw down troops, most of the NATO countries are anxious to get out sooner, or to announce now the certainty of their eventual withdrawal.
In the case of the United States, withdrawal presents an internal U.S. political question. President Obama is weighing whether he will lose more support by withdrawing troops or by not withdrawing troops. Public opinion polls point to the steadily increasing number of voters who are tired of what they see as an unwinnable war in a faraway country. My prediction is that the isolationist thrust is winning over the interventionist thrust in U.S. politics.
That leaves two other outsiders – Pakistan and India. These two countries are of course locked in a long ongoing political (and often military) struggle with each other. And each regards the situation in Afghanistan primarily in terms of its implications for their struggle.
Pakistan, via the army’s intelligence service, the ISI, has supported the Taliban over the whole period. These days, they tend to deny this because it exasperates the United States, but no one is fooled. Pakistan thinks it can control the Afghan Taliban and that a re-established Taliban government in Kabul would be a bulwark against India.
The Indian government has, for the last decade, been an active supporter of the Karzai regime, seeing it as a way to defang Pakistani influence in the country and, over the long run, help create the infrastructure needed to obtain energy resources from Iran and Russia.
Both India and Pakistan may be reconsidering their options. There are at least some Indian government analysts who think that, by withdrawing and turning over Afghanistan to the Pakistanis, they would be feeding Pakistan a poison pill that would sap Pakistan’s energy and military resources. These analysts are counting on the redoubtable independence of the Afghans, especially the Pashtuns, thinking they would no more tolerate Pakistani control than Soviet or United States control.
And what about Pakistan? There are not only Afghan Taliban but, somewhat separately, Pakistani Taliban. While the ISI may appreciate and support those in Afghanistan, they are scarcely enthusiastic about the local variety. Dealing with Pakistani Taliban may do more to distract Pakistan from dealing with India than anything else. Withdrawing from too much involvement in Afghanistan may reduce the internal tensions somewhat.
So, one possible outcome of the ongoing civil wars in Afghanistan is that, within five years or so, everyone may be tired of the burden of involvement and just leave the Afghans alone – “to stew in their own pot,” to use a popular phrase.
What would such an Afghanistan look like? It’s very hard to know. It could look ugly, with the infliction on all Afghans of the least palatable versions of shar’ia law. Or it may surprise us all with the kind of relative live-and-let-live ambiance that Afghanistan has had at some moments of its history. In any case, will the rest of the world care? The next five to ten years is going to be a terrible time economically and politically everywhere. There may be no time or energy to worry about Afghanistan.
Does Social-Democracy Have a Future?
This past month, two important events marked the world of Social-Democratic parties. In Sweden, on September 19, the party lost the election badly. It received 30.9% of the vote, its worst showing since 1914. Since 1932, it has governed the country 80% of the time, and this is the first time since then that a center-right party won reelection. And to compound the bad showing, a far right, anti-immigrant party entered the Swedish parliament for the first time.
Why is this so dramatic? In 1936, Marquis Childs wrote a famous book, entitled Sweden: The Middle Way. Childs presented Sweden under its Social-Democratic regime as the virtuous middle way between the two extremes represented by the United States and the Soviet Union. Sweden was a country that effectively combined egalitarian redistribution with internal democratic politics. Sweden has been, at least since the 1930s, the world poster child of Social-Democracy, its true success story. And so it seemed to remain until rather recently. It is a poster child no more.
Meanwhile, in Great Britain on Sept. 25, Ed Miliband came from far behind to win the leadership of the Labour Party. The Labour Party under Tony Blair had engaged in a radical remaking of the party under the label “the new Labour.” Blair had argued that the party should also be a middle way – one not between capitalism and communism but between what used to be the social-democratic program of nationalization of the key sectors of the economy and the unbridled dominance of the market. This was quite a different middle way than that of Sweden in the 1930s and afterwards.
The choice by the Labour Party of Ed Miliband over his older brother David Miliband, a key associate of Tony Blair, was interpreted in Great Britain and elsewhere as a repudiation of Blair and a return to a somewhat more “social-democratic” (more Swedish?) Labour Party. Still, in his first speech to the Labour conference a few days later, Ed Miliband went out of his way to reassert a “centrist” position. He did however lace his statements with allusions to the importance of “fairness” and “solidarity.” And he said: “We must shed old thinking and stand up for those who believe there is more to life than the bottom line.”
What do these two elections tell us about the future of social-democracy? Social-democracy – as a movement and an ideology – is conventionally (and probably correctly) traced to the “revisionism” of Eduard Bernstein in late nineteenth-century Germany. Bernstein argued essentially that, once they obtained universal suffrage (by which he meant male suffrage), the “workers” could use elections to win office for their party, the Social-Democratic Party (SPD), and take over the government. Once they won parliamentary power, the SPD could then “enact” socialism. And therefore, he concluded, talk of insurrection as the road to power was unnecessary and indeed foolish.
What Bernstein was defining as socialism was in many ways unclear but still seemed at the time to include the nationalization of the key sectors of the economy. The history of Social-Democracy as a movement since then has been that of a slow but continuous shift away from a radical politics to a very centrist orientation.
The parties repudiated their theoretical internationalism in 1914 by lining up to support their governments during the First World War. After the Second World War, the parties algined themselves with the United States in the Cold War against the Soviet Union. And in 1959, at its Bad Godesburg conference, the German SPD officially repudiated Marxism entirely. It stated that “from a party of the working class, the Social-Democratic Party has become a party of the people.”
What the German SPD and other social-democratic parties came to stand for at that time was the social compromise called the “welfare state.” In this objective, in the period of the great expansion of the world-economy during the 1950s and 1960s, it was quite successful. And at that time, it remained a “movement” in the sense that these parties commanded the active support and allegiance of very large numbers of persons in their country.
When, however, the world-economy entered into its long stagnation beginning in the 1970s, and the world entered the period dominated by neo-liberal “globalization,” the social-democratic parties began to go further. They dropped the emphasis on the welfare state to become the advocates merely of a softer version of the primacy of the market. This was what Blair’s “new Labour” was all about. The Swedish party resisted this shift longer than others, but it too finally succumbed.
The consequence of this, however, was that Social-Democracy ceased to be a “movement” that could rally the strong allegiance and support of large numbers of persons. It became an electoral machine that lacked the passion of yesteryear.
If however social-democracy is no longer a movement, it is still a cultural preference. Voters still want the fading benefits of a welfare state. They regularly protest when they lose still another of these benefits, which is happening with some regularity today.
Finally a word about the entry of the far right, anti-immigrant party into the Swedish parliament. Social-democrats have never been very strong on the rights of ethnic or other “minorities” – still less on the rights of immigrants. Social-democratic parties have tended to be parties of the ethnic majority in each country, defending their turf against other workers whom they saw as undercutting their wages and employment. Solidarity and internationalism were slogans that were useful when there was no competition in sight. Sweden didn’t have to face this issue seriously until recently. And when it did,a segment of social-democratic voters simply moved to the far right.
Does social-democracy have a future? As cultural preference, yes; as movement, no.
Democracy – Everywhere? Nowhere?
Democracy is a very popular word these days. There is virtually no country in the world today whose government does not claim to be the government of a democracy. But at the same time, there is virtually no country in the world today about which others – both inside the country and in other countries – do not denounce the government as being undemocratic.
There seems to be very little agreement about what we mean when we say a country is democratic. The problem is clear in the very etymology of the word. Democracy comes from two Greek roots – demos, or people, and kratia, or rule, the authority to decide. But what do we mean by rule? And what do we mean by the people?
Lucien Febvre told us it is always important to look at the history of a word. The word, democracy, was not always so universally popular. The word first came into common modern political usage in the first half of the nineteenth century, primarily in western Europe. At that time, it had the tonality of terrorism today.
The idea that the “people” might actually “rule” was considered by all respectable people as a political nightmare, dreamed up by irresponsible radicals. In fact, the principal objective of respectable people was how to make sure that it was not the majority of the people who had the authority to decide. This authority had to be left in the hands of people who had interests in preserving the world as it was, or as it should be. These were people with property and wisdom, who were considered competent to make decisions.
After the revolutions of 1848, in which the “people” rose up in social and national revolutions, men of property and competence grew frightened. They responded first with repression, and then with calculated concessions. The concessions were to admit people, slowly and bit by bit, to the ballot. They thought that the ballot might satisfy the demands of the “people” and in effect co-opt them into sustaining the existing system.
Over the next 150 years, this concession (and others) worked to a considerable degree. Radicalism was muted. And after 1945, the very word, democracy, was co-opted. Everyone now claimed to be in favor of democracy, which is where we are today.
The problem, however, is that not everyone is convinced that we are all living in truly democratic countries, in which the people – all the people – are truly the ones who are ruling, that is, making the decisions.
Once the representatives are chosen, they quite often do not fulfill the demands of the majority, or they oppress important minorities. The “people” often react – by protest, by strikes, by violent uprisings. Is it “democratic” when the demonstrations are ignored? Or is it “democratic” when the government backs down and submits to the will of the “people”?
And who are the people? Are they the numerical majority? Or do major groups have rights that should be guaranteed? Should important groups have some relative autonomy? And what kinds of compromises between the “majority” and important “minorities” constitute “democratic” results?
Finally, we must not neglect the ways in which the rhetoric about democracy is used as a geopolitical instrument. Denouncing other countries as undemocratic is regularly used as a justification for intrusion into politically weaker countries. The results of such intrusions are not necessarily that more democratic governments come to power, just different ones with perhaps different foreign policies.
Perhaps we should think of democracy as a claim and an aspiration that has not been realized anywhere yet. Some countries may seem to be more undemocratic than others. But are any countries demonstrably more democratic than others?
Xenophobia All Over the Place?
The dictionary defines xenophobia as “fear or hatred of strangers or foreigners or of anything that is strange or foreign.” It seems to be an endemic plague everywhere in the world. But it infects larger numbers of people only sometimes. This is one of those times.
But who is a stranger? In the modern world, it seems that the strongest single loyalty is that to the state of which we are a citizen. It is called nationalism or patriotism. Yes, some people put other loyalties ahead of patriotism, but it seems they are in a minority.
Of course, there are many different situations in which people express their nationalist feelings. In a colonial situation, nationalism expresses itself as a demand for liberation from the colonial power. It seems to take similar forms in what some call a semicolonial situation, which is one in which the country is technically sovereign but lives under the shadow of a stronger state, and feels itself oppressed.
Then there is the nationalism of the strong state, which expresses itself in an assertion of technical and cultural superiority, and which its proponents feel give them the right to impose their views and values on weaker states.
We may applaud the nationalism of the oppressed as something that is worthy and progressive. We may condemn oppressive nationalism by the strong as unworthy and retrogressive. There is however a third situation in which xenophobic nationalism rears its head. It is that of a state in which the population feels or fears that it is losing strength, is somehow in “decline.”
The sentiment of national decline is inevitably particularly exacerbated in times of great economic difficulty, such as the world finds itself in today. So it is no surprise that such xenophobia has begun to play an increasingly important role in the political life of states around the world.
We see it in the United States, where the so-called Tea Party wants to “take back the country” and “restore America and…her honor.” At the rally in Washington on Aug. 28, the organizer, Glenn Beck, said: “As I look at the problems in our country, quite honestly, I think the hot breath of destruction is breathing on our necks and to fix it politically is a figure that I don’t see anywhere.”
In Japan, a new organization, the Zaitokukai, last December surrounded a Korean elementary school in Kyoto, demanding to “expel the barbarians.” Its leader says he has modeled his organization after the Tea Party, sharing the sense that Japan now suffers from a loss of respect on the world scene and has gone in the wrong direction.
Europe, as we know, has seen in almost every country the rise of parties which seek to evict foreigners from the country and return the country to the exclusive hands of the so-called true citizens, although how many generations of continuous lineage it takes to define a true citizen seems to be an elusive question.
Nor is this phenomenon absent from the countries of the South – from Latin America, Africa, and Asia. There is no point in spelling out the multiple and repeated instances of when and where xenophobia has reared its ugly head.
The real question is what, if anything, can be done to counter its pernicious consequences. There is one school of thought which essentially argues that one has to coopt the slogans, repeat them in a watered-down form, and simply await the cyclical moment when xenophobia will have died down because economic times are better. This is the line of most of what may be called the Establishment right and center-right parties.
But what about the parties of the left and center-left? Most, although not all, of them seem to be cowed. They seem to be fearful that once again they will be tarred as “unpatriotic,” as “cosmopolitan,” and worry they may be swept away by the tide, even if the tide may recede in the future. So they speak, feebly, of universal values and of practical “compromises.” Does this save them? Sometimes, but often not. They are often swept away by the tide. Sometimes, they even join the tide. The past history of fascist parties is replete with the numbers of “left” leaders who became fascists. This was after all the story of the man who virtually invented the word, fascist – Benito Mussolini.
The willingness fully to embrace egalitarian values, including the right of all kinds of communities to observe their autonomy, in a national political structure that accommodates the mutual tolerance of multiple autonomies, is a politically difficult position both to define and to sustain. But it is probably the only one that offers any long-term hope for humanity’s survival.
Contradictions in the Latin American Left
Latin America has been the success story of the world left in the first decade of the twenty-first century. This is true in two senses. The first and most widely-noticed way is that left or left-of-center parties have won a remarkable series of elections during the decade. And collectively, Latin American governments have taken for the first time a significant degree of distance from the United States. Latin America has become a relatively autonomous geopolitical force on the world scene.
But there has been a second way in which Latin America has been a success story of the world left. Movements of the indigenous nations of Latin America have asserted themselves politically almost everywhere and have demanded the right to organize their political and social life autonomously. This first gained world attention with the dramatic uprising of the neo-Zapatista movement in the Mexican state of Chiapas in 1994. What has been less noticed is the emergence of similar kinds of movements throughout Latin America and the degree to which they have been creating an inter-American network of their local organizational structures.
The problem has been that the two kinds of lefts – the parties that have achieved power in the various states and the movements of the indigenous nations in the various states – do not have identical objectives and use quite different ideological language.
The parties have made as their principal objective economic development, seeking to achieve this objective at least in part by greater control over their own resources and better arrangements with outside enterprises, governments, and intergovernmental institutions. They seek economic growth, arguing that only in this way will the standard of living of their citizens be enhanced and greater world equality achieved.
The movements of the indigenous nations have sought to get greater control over their own resources and better arrangements not only with non-national actors but also with their own national governments. In general, they say their objective is not economic growth but coming to terms with PachaMama, or mother earth. They say they do not seek a larger use of the earth’s resources, but a saner one that respects ecological equilibrium. They seek buen vivir – to live well.
It is no surprise that the movements of the indigenous nations have been in conflict with the few most conservative governments in Latin America – like Mexico, Colombia, and Peru. Increasingly, and quite openly, these movements have also come into conflict with the left-of-center governments like Brazil, Venezuela, Ecuador, and even Bolivia.
I say even Bolivia because that is the one government that has elected a president who is himself a person from an indigenous nation with massive support from the voters from indigenous nations in the country. And nonetheless, there has been a conflict. The issue, there as elsewhere, is whether and how natural resources are developed, who makes the decisions, and who controls the revenue.
The left parties tend to accuse the movements of the indigenous nations that come into conflict with them of being, wittingly or not, the pawns (if not the agents) of the national right parties, and of outside forces, in particular of the United States. The movements of the indigenous nations that oppose the left parties insist that they are acting only in their own interests and on their own initiative, and accuse the left governments of acting like the conservative governments of old without real regard for the ecological consequences of their developmentalist activities.
Something interesting has recently happened in Ecuador. There, the left government of Rafael Correa, which had won power initially with the support of the movements of the indigenous nations, subsequently came into sharp conflict with them. The most acute division was over the government’s wish to develop oil resources in an Amazonian protected reserve called Yasuni.
Initially, the government ignored the protests of the indigenous inhabitants of the region. But then President Correa decided to champion an ingenious alternative. He proposed to the wealthy governments of the global North that, if Ecuador renounced any development in Yasuni, these wealthy governments should compensate Ecuador for this renunciation, on the grounds that this was a contribution to the world struggle against climate change.
When this was first proposed at the Copenhagen climate summit in 2009, it was treated as being a fantasy. But after six long months of negotiations, five European governments (Germany, Spain, Belgium, France, and Sweden) have agreed to create a fund to be administered by the U.N. Development Program to pay Ecuador not to develop Yasuni on the grounds that this contributes to the reduction of carbon emissions. There is talk of inventing a new verb, yasunize, to denote such deals.
But how many such deals could one make? There is a more fundamental issue at stake. It is the nature of the “other world that is possible” – to use the slogan of the World Social Forum. Is it one based on constant economic growth, even if this is “socialist” and would raise the real income of people in the global South? Or is it what some are calling a change in civilizational values, a world of buen vivir?
This will not be an easy debate to resolve. It is currently a debate among the Latin American left forces. But analogous situations underlie much of the internal strains in Asia, Africa, and even Europe. It may turn out to be the great debate of the twenty-first century.
Ponzi Solitaire
Reading newspapers can be a startling experience. On July 26 this year, U.S. papers ran two quite contradictory stories. In the first news article, USA Today reported on its quarterly forecast of economists. The headline read: “Economists’ optimism wanes.” It seems that the combination of “turmoil in Europe, lackluster job growth, a weak housing market and a slowdown in factory output” make it very unlikely that the United States can recover the lost 8.5 million jobs “at a more-than-glacial pace.” In addition, they fear “global financial instability.”
So, quite reasonably, they are not optimistic. One could say that the economists’ congenital optimism about the world market has finally hit the hard rock of reality. Some of us came to this conclusion a lot earlier. So how is it possible that, the very same day, the New York Times ran a front-page story about the “surging profits” of U.S. industries?
The answer is again in the headline: “Industries find surging profits in deeper cuts.” It is not that the industries are selling more products. They are indeed selling fewer. But they have been cutting costs – that is, they have been firing workers.
They have found that, if they fire enough workers and make the remaining workers work harder, they may have fewer sales but they have greater profits. This is called a “triumph of productivity.” Ethan Harris, chief economist at Bank of America Merrill Lynch, is quite honest about it: “Companies are squeezing their labor costs to build profits.”
However, as the Times notes, the result is that “the benefits are mostly going to shareholders instead of the broader economy.” And the industries do not intend this to be a temporary solution. For even if sales improve, they are not planning to hire more workers. On the contrary, according to one chief executive of a large firm, “the last thing we’re worried about is when we are going to have to add more capacity.” Rather, we’re “reconfiguring our entire operational system for greater flexibility.”
So, have U.S. industries (and industries elsewhere in the world) found the magic bullet that will enable them to expand profits ever into the future? You’ve got to be kidding. In the 1920′s Henry Ford famously paid his workers higher wages than was the norm because, he said, he wanted them to be his customers. His successors at Ford today have reduced their North American work force by over 50 percent in the last five years. More profits – but fewer customers.
There’s the little problem of what Keynes and Kalecki wrote about – effective demand. In any medium-run calculation, if there are not enough customers, there will not be enough sales, and very soon the profits will dry up. The industries that are increasing their profits by reducing their work force and squeezing their remaining laborers are going to have surging profits for a very short run until they run into the hard brick wall of serious deflation. And then they’ll crash.
Can’t they see this? Sure, some can, but they are operating on the hedonistic principle of eat, drink, and be merry, for tomorrow we may die. It might be called “Ponzi solitaire.” In ordinary Ponzi schemes, the operator bilks other people until the house of cards collapses – as it did for Bernie Madoff. In Ponzi solitaire, you bilk yourself until you crash. And just as the investors in an ordinary Ponzi scheme (potential victims) hope that the crash will come only after they have gotten their profits, so the players of Ponzi solitaire (industry executives) hope they’ll escape with their personal profits before the whole industry collapses. Good luck!
Whose Taxes Are Going Up?
Everyone knows the old saying that there is nothing inevitable except death and taxes. But most of us spend a lot of energy trying to postpone both of them. Taxes are a very unpopular idea, everywhere. Few people complain that they are not being taxed enough. The problem is that almost everyone wants many of the things paid for by taxes.
Just recently, there were amazing poll results in France. France has one of the highest tax rates in the world, yet a majority of the population believes that further tax rises are inevitable. Even more surprising, despite the fact that France now has a rightwing government, more voters on the right expect a rise in taxes than voters on the left, more well-to-do voters than poorer voters.
The simple fact is that there is hardly any government in the world today, national or local, that has enough income to meet the level of expenses that are mandated by law plus those desired by the majority of their constituents. So, these governments borrow money and get (further) into debt, which is unpopular, and/or they reduce expenses at the expense of someone. However, the reality is that neither borrowing nor cutting expenses seems to be enough.
The net result is that all governments, everywhere, are increasing taxes, and will continue to do so in the coming years. But most of them are denying that they are doing this. How can one hide raising taxes? There are multiple ways to do this.
Way number one is to increase the cost of government services. If a government raises an application fee for a document or a license, that is a tax increase on the applicant. If the government postpones the age of eligibility for a pension, that is a tax increase on the prospective pensioner.
Way number two is for a government to eliminate a subsidy to which it previously committed itself. If this was a subsidy to an enterprise, that is a tax increase on the enterprise, which often (but not always) can be passed on to consumers. If the subsidy went to an individual – for example, unemployment insurance – eliminating or reducing it is a tax increase on the individual.
But the most important reduction of subsidy, because the least obvious, occurs when a national government reduces one of the pervasive monetary transfers to a local government. What this does is simply shift the locus of the tax increase from the national level to the local level. The local government has then two choices. It can increase its taxes to make up the shortfall, say by increasing property taxes. Or it can reduce its expenditures, say by reducing what it invests in education at the local level.
If the local government spends less on public education, it is reasonable to suppose that the quality of education being offered is thereby lowered. This may lead to a response by the better-off residents, those who can afford to provide privately for the cost of education of their children. The poorer people get poorer education or no education. The better-off people get increased costs, which are in effect a tax increase, but one that does not benefit the whole of the population.
Taxes are inevitable indeed, and no time more so than when the world-economy is in poor shape, as at present. What is not inevitable is the group or groups on whom the greater burden lays. It’s all a question of whose ox is being gored. Some people audaciously call this the class struggle. It is being waged rather ferociously these days.
The only slogan to which no one should give credence is the slogan, “lower taxes.” There is no way whatsoever to do this. There are however fairer and less fair forms of taxation. The question we all face is whose taxes will be raised, and via which channel. This is one of the key political battles of our time.
Why McChrystal Did It
Gen. Stanley McChrystal, the U.S. commander in Afghanistan, gave an interview to Rolling Stone magazine in which he and his staff insulted the civilian leaders of his country. He was fired for insubordination by Pres. Obama. Even his defenders said that McChrystal’s remarks were impolitic and a mistake. Given the fact that McChrystal is an exceptionally intelligent and very ambitious person, why did he do it?
McChrystal gave the interview in order that he be fired. And why did he want to be fired? He wanted to be fired because he knew that the policies he was pursuing and championing in the war in Afghanistan were not working, could not work. And he didn’t want to be the one tarnished with the public blame.
Consider the long history that led up to this interview. The military strategy the United States forged in Afghanistan and Iraq was originally that imposed by then U.S. Secretary of Defense, Donald Rumsfeld. The policy was one of unlimited machismo. Bomb the enemy from way up high and don’t worry about who gets killed. Use torture on those you capture. Don’t consult with anyone, even if they are so-called allies. Occupy the country, indefinitely.
Stanley McChrystal was a one-star general at the beginning of these wars, working in Washington as one of Rumsfeld’s “golden boys.” He had a long history, since his West Point days, of being a daring rebel who knew just when to stop – contemptuous of superiors he did not respect but always seeking to advance himself. Rumsfeld placed him in charge of the military’s most secretive elite units, engaged in “special operations” and known to be a “killing machine.” He performed brilliantly, as usual.
Then in 2006, if we still remember, the military, the politicians, and the press all began to say that the United States was losing the war in Iraq. Resistance seemed too strong, and the number of U.S. lives lost was steadily going up month by month. The Republicans did very badly in the elections of 2006. Something had to be done.
Something was done. Rumsfeld was fired by President Bush. Vice-President Cheney, Rumsfeld’s strongest defender, lost influence to Sec. of State Condoleezza Rice and Rumsfeld’s successor, Robert Gates, who championed more “moderate” views, emphasizing diplomacy. A new military strategy suddenly gained ground, counter-insurgency (referred to by an acronym COIN). It was developed by a previously obscure military officer, David Petraeus.
Petraeus is as ambitious and as driven as McChrystal but a quite different personality. He is what might be called a military intellectual. He won the award as the top graduate of the U.S. Army Command and General Staff College in 1983. He got a Ph.D. in international relations from Princeton in 1989. He taught international relations at West Point. At the same time, he has a long record as a seasoned combat officer. And he cultivated favor with Washington politicians.
Since the 1980s, his published articles and reports advocated counter-insurgency as a doctrine. He drew on the experiences of the French using it in Algeria and the United States using it in Vietnam. As Petraeus’ right-wing critics note, these were not notable successes. COIN emphasizes the need for “winning hearts and minds,” which means necessarily incorporating diplomatic and political considerations into military tactics. The writer of the Rolling Stone interview, Michael Hastings, described COIN this way: “Think the Green Berets as an armed Peace Corps.”
Pres. Bush turned to Petraeus in 2006 and allowed him to implement COIN in Iraq. This was the famous “surge” that involved increasing the number of U.S. troops in Iraq and changing strategy. Basically, Petraeus did two things that did indeed reduce the amount of violence against U.S. troops. The first was to bribe Sunni tribal elders in central and western Iraq to cease their tacit support of non-Iraqi al-Qaeda units. Since the Sunni sheikhs had never liked the al-Qaeda units, they were willing to forget their dislike of the Americans – for a price.
The second thing that Petraeus did was to permit ethnic cleansing in Baghdad, turning a multi-ethnic city into two segregated zones, a larger Shi’a zone and a beleaguered smaller Sunni zone. This reduced violence against the U.S. troops at the expense of increased inter-Iraqi violence. It also served the political interests of the most persistent and effective opponent of U.S. interests in Iraq, Mokhtar al-Sadr, who is emerging as the key broker in the newly-elected Iraqi parliament.
As Hastings said in an interview with the Huffington Post about his article, “Petraeus is sort of a genius. He managed to turn what could have been catastrophic defeat in Iraq into a face-saving withdrawal.” But of course, a face-saving withdrawal is not a victory, even if Sen. John McCain insisted so when running for president in 2008 – unsuccessfully.
When Barack Obama ran for office, he said quite clearly that he was against the war in Iraq and for the war in Afghanistan. So obviously he had to pursue it. He promoted Petraeus, adopted COIN, and named McChrystal commander in Afghanistan. True to his “rebel” style, McChrystal publicly demanded 40,000 more troops from Obama who, after months of reflection, gave him 30,000 – plus a withdrawal date.
At this point, however, McChrystal abandoned his previous machismo style and became the enthusiastic, perhaps over-enthusiastic, implementer of counter-insurgency in Afghanistan. He issued super-strict directives to avoid civilian casualties, a policy not at all appreciated by U.S. infantry units. He developed warm relations with Pres. Hamid Karzai, whom other U.S. leaders held at a distance. He thought he could win a quick victory in Marja and turn the area over to Afghan forces. Instead, it was a failure. And he recently announced that the key operation in Kandahar province, heartland of the Taliban forces, had to be postponed until September.
Even McChrystal’s Chief of Operations, Maj. Gen. Bill Mayville, says Afghanistan will be like Vietnam: “It’s not going to look like a win, smell like a win or taste like a win….This is going to end in an argument.” Hastings ends his article this way: “Winning, it would seem, is not really possible. Not even with Stanley McChrystal in charge.”
So, what would you do if you were McChrystal? You’d invite a reporter for a rock-and-roll magazine, considered to be on the left, to accompany you on airplanes and to drink fests, and sneer at the government. This was guaranteed to get you fired. And it meant that the future “argument” would not involve you.
What could Obama do? He had to fire McChrystal. Then, he tossed the hot potato to Petraeus, who couldn’t refuse it. The next year or two are going to be a fast-moving game in which Obama and Petraeus are going to try to shift the public’s blame for the defeat on the other.
The far right, the friends of Cheney and Rumsfeld, are not fooled. Diana West, one of their pundits, says: “The COIN nightmare continues.” For her, COIN means ordering troops “to exercise fantasies of cultural relativism that makes lefty sense in a PC classroom, but are nothing short of appalling on the front line.” A slightly less acerbic view was that of retired Col. Douglas Macgregor: “The idea that we are going to spend a trillion dollars to reshape the culture of the Islamic world is utter nonsense.”
Of course, Macgregor is right. What are the policy choices? The far right wants perpetual war. The only alternative is early and complete withdrawal. Obama doesn’t want the first and is politically afraid to embrace the second. So he sends CIA Director, Leon Panetta, out to give ABC News an interview, saying that making progress in Afghanistan is “harder” and going more slowly than anticipated. Indeed, it is.
Commentary No. 284, July 1, 2010
Impossible Choices in a World Depression
As the world’s leaders and pundits continue to deny the reality of the world depression – they won’t even use the word – the impossible choices that are faced by government after government become more and more obvious every day. Consider what has happened in just the last month.
The United States had its worst unemployment figures in quite a while. Yes, there were some new jobs, but 95% of them were of temporary census workers. Private employers added just 10% of the jobs they were expected to add. Despite this, it has now become politically impossible to get further stimulus money voted by Congress. And the Federal Reserve has ceased to buy Treasury securities and mortgage bonds. These had been the two main strategies to increase jobs. Why? The call for deficit cuts has grown too strong.
The most immediate consequence can be seen at the level of the budgets of the separate state governments. The cost of Medicaid has gone up because of the economic crisis. This cost is borne by the separate states. They have been helped in the past year by increased federal subsidies of state spending on Medicaid. Congress won’t renew this. Gov. Edward Rendell of Pennsylvania says this will increase his state’s budgetary shortfall by two-thirds, and force it to lay off 20,000 teachers, police officers, and other government workers. Of course, this is in addition to lost medical services for many people.
In Great Britain, the new Prime Minister, David Cameron, says that cutting down on borrowing is “the most urgent issue facing Britain today.” The Financial Times sums up his proposals in its headline: “Cameron pitches an age of austerity.” Its assessment of this policy: “If the government is to make such steep reductions in spending, it cannot avoid visibly damaging frontline services. The cuts will be more savage than anything contemplated by even the Thatcher government.”
Germany’s Chancellor Merkel has announced her version of austerity: deep public spending cuts immediately, rising in amount each year for the next four years. She has also announced new taxes on airlines, which the world’s airlines immediately announced would seriously hurt their ability to reduce their negative balance-sheets and save them from bankruptcy. Germany’s unemployment rates will increase, but its unemployment benefits will be reduced. Other governments in Europe plus the United States have been urging Germany to spend more and export less, in order to restore world demand. Merkel rejected these demands, saying that debt reduction was her priority.
Japan’s new Prime Minister, Naoto Kan, warned the country that the debt situation is so bad that Japan could face a situation comparable to that of Greece. To remedy this, he proposed some increased taxation, more regulation of the financial arena, and new kinds of public expenditures.
In the middle of all this super-austerity in the North, a most remarkable thing has occurred, which seems to have escaped almost all notice. As everyone knows, Spain is one of the many European countries now in economic difficulty because of very large debt ratios. On May 30, Fitch Ratings joined other ratings companies in reducing Spanish bond ratings from AAA to AA+. The question is why. Just the day before, the Spanish parliament had voted the country’s deepest budget cuts in 30 years.
Budget cuts are presumably what Germany and others have been calling for in Greece, Spain, Portugal, and other countries threatened by too much debt. Spain responded to this pressure. And just because it did, Fitch Ratings downgraded it. Brian Coulton, Fitch’s person in charge of ratings for Spain, said in the statement downgrading Spain: “The process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term.”
So there it is – damned if you do, and damned if you don’t. The financial speculators have created a disastrous fall in the world-economy. The ball was then thrown to the states to solve the problem. The states have less money and more demands on them. What can they do? They can borrow, until those who lend money won’t do it, or demand too high a rate of interest. They can tax, and the businesses say that this will cut back their ability to create jobs. They can reduce expenditures. And in addition to the terrible pain this inflicts on everyone, but especially on the more vulnerable, this action also will reduce the possibility of growth, as Mr. Coulton points out for Spain.
Of course, there is one big place to reduce expenditures – the military. Military expenditures do provide jobs but far fewer than if the money were used otherwise. This does not apply only to the biggest spenders like the United States. A virtually uncommented aspect of Greece’s debt problems was its heavy expenditure on the military. But are governments ready to reduce significantly military expenditures? It doesn’t seem too likely.
So, what can the states do? They are trying one thing today, and another thing tomorrow. Last year, it was stimulus. This year, it’s debt reduction. The year after, it will be taxation.
In any case, the overall situation will be worse and worse.
Can China save us? Stephen Roach, Morgan Stanley’s very acute analyst, seems to think so, provided the government “stimulate(s) private growth.” In that case, rising wages will be offset by higher productivity. Maybe. But the Chinese government has been resistant to such a policy up to now, not for economic but for political reasons. Its drive to maintain political stability has been paramount up to now. Furthermore, even Roach has one great fear – China-bashing in Washington leading to trade sanctions. Myself, I think that’s a high probability, as the U.S. economic situation continues to deteriorate.
The way out of all of this is not some small adjustment here or there – whether of the monetarist or the Keynesian variety.
To emerge from the economic box in which the world finds itself requires a fundamental overhaul of the world-system. This will surely have to come, but how soon?