Saturday, August 27, 2011

A crisis tax for the rich

There is a bit of hypocrisy in recent declarations made by wealthy people like Warren Buffet, an American billionaire and others who followed in several countries like Luca de Montezemolo, the former president of industrialists n Italy or Etienne Davignon, a Belgian politician and businessman (as well as an influential member of the Bilderberg club). They acknowledged that their tax bill is too low and that all declared that they are willing to pay more taxes. Is that because the super rich are becoming more generous and are affected by a crisis of philanthropy?

The point is that most of these people made money with money and taxes on capital gains are ridiculously low relative to taxation on labour or productive capital. They got richer and richer, and inequality got bigger and bigger. If we look at effective tax rates over time, they have been declining substantially for those who are very rich. most governments introduced substantial tax cuts which benefited to them in a much larger proportion relative to the other categories of the population.

In fact, capitalists who became even richer are afraid of the social consequences of the crisis which led to  austerity programs which hit severely the poor and middle classes. Right wing governments as well as those led by socialist parties were so far reluctant to introduce higher taxation on capital. In fact, left wing parties are even more discredited as they failed to promote social justice and solidarity. It is not a coincidence that Merkel and Sarkozy pledged for a tax on financial transactions together with the'golden rule' on balanced budgets in all euro area countries.  

The rich should therefore pay their fair share, not only for moral reasons but also for economic reasons. A wealth tax (not limited to capital gains) would  alleviate the debt burden of the States which in large part is caused by the economic crisis and the  massive injection of public money into the banking system and other parts of the economy.  In the past decade or so, there has been a massive shift of resources from wages to profits. In other words, the money went to capital, not labour.

Against the 'less tax' slogan of the neo-liberals, we call for Tax justice to reduce poverty and inequality.

Saturday, August 20, 2011

A new "Bretton Woods" to save the World

Economic history reveals monetary and financial crises have been recurring for the past four decades. These are not simply accidental as postulated by mainstream economic theory which assumes that markets are always efficient.  It is ascertained that these crises have their origin in a perverse relationship between States and markets as well as the loss of effectiveness of institutions and procedures which were design to regulate the functioning of capitalism.

On 15 August 1971, Richard Nixon's historic speech ended the Bretton Woods system based on fixed exchange rates and convertibility of gold with the dollar at the fixed price of $ 35/ounce. His message could have been written today: "Who gains from the financial turbulence of these months? Not the American worker, not the real economy. Who gain are international speculators who caused this crisis".

For many economists, among which P.Krugman, a flexible currency system is the cause of periodic crises. It creates uncertainty for traders and investors as well as high volatility costs which led to irresponsible behaviour and systemic risks. There are many examples in recent history: the crisis of the lira in August 1992, which led to a devaluation of 30%; the crisis of the rouble in august 1998 which lost 50% of its value followed by a default on its debt; the subprime crisis in august 2007 which led to a massive injection of money from the FED and the ECB but could not prevent the bankruptcy of Lehman Brothers.

These crises are not the product of dysfunctional markets; they are caused by the losing power of States to regulate markets. The structure of capital has undergone radical changes, shifting from productive use towards financial speculation. The financialization of capital accumulation - whereby profit is increasingly generated through financial channels rather than through production and trade - developed over several decades leading up to the financial crises between 2007 and 2010. The consequence of the increased power and dominance of finance is that it has fundamentally transformed the role of States and reduced their margin of manoeuvre, endangering democracy itself.

Financial speculation has just one rule: greed for money. From St Paul to Luther, greed is considered as the origin of evil. Today, it is considered the cause of the decline of American capitalism*. Human greed has not produced shared prosperity but intolerable economic inequality and financial instability. Recent austerity measures to halt the debt crisis nourish that process of dramatic increase of inequality which hits severely poor and middle classes. This perverse trend is not caused, however, spontaneously by the functioning of markets, but it results from concrete political choices in the United States and the rest of the Western world.

These policies were designed to dismantle the legal framework which helped the United States to get out of the great crisis of the 30s, in particular a strict regulation of the financial sector, with a set of norms which provided the banking sector with sound conditions to finance growth. But in the 70s and 80s, those norms were abolished everywhere, leaving entire freedom to markets under the assumption that they are always right. Deregulation became the fundamental norm; it is not that States have lost their economic powers, but the political class in power (including socialist parties) dominated by the ideology of financial capitalism did not consider - also because of vested interests of some of its members - any serious possibilities of controlling the power of money which has become a real plague in our societies. Every country has its own history to tell.

Now, speculation on sovereign debt has forced to introduce austerity policies, certainly not to address large inequalities which become inherent to the system. But, when in the 80s, some Latin American countries could not reimburse their loans, the US intervention (remember the Brady plan) was presented as a kind of assistance to debtor countries in default, while in fact this aid was geared to repay the US and European banks which lent the money. Furthermore, the aid was granted to those countries with special conditions attached to it, in particular rigorous adjustment programmes imposed by the IMF and the World Bank, which led to a decrease in income and slow growth. Is Europe in the same situation, with the same austerity policies? Past experience shows that these policies caused huge disasters to large parts of the population in the countries where they were applied (see the critical analysis of Joseph Stiglitz, who was chief economist at the World Bank).

In fact,  economic inequalities, that the subordination of polity to the anarchy of markets has increased, are seriously undermining our democracies - as well as totalitarian regimes - and they are the main cause of  social turmoil. The entire world seems in the grip of those who ask for social justice and equity, from the uprisings in most Arab countries to the young protesters ('indignados') in Spain and the riots in England.

But the true revolution which may come from the western world would be to abandon decades of wrong and iniquitous policies and to restore a global governance system based on the Rule of Law. It should aim primarily to address economic and social inequalities as well as a system of fundamental rights, including the right to have a decent job to meet human basic needs. We need a new 'Bretton Woods' system, with effective institutions to enforce a global 'Rule of Law' to create an economic harmony among nations based on equal rights and mutual solidarity. Hopefully, a global authority - building on existing UN institutions- should be created, as indicated by the Pope's latest encyclical letter 'Caritas in Veritate'.

Only in this way Mao's words will have any meaning: " There is great confusion under the sky: the situation is excellent".

* See Jeff Madrick, Age of Greed: the Triumph of Finance and the Decline of America, Knopf, 2011.

Wednesday, August 17, 2011

We should not surrender to sovereign markets

Between 25 July and 6 August, the sovereign debt crisis reached its most critical point as it spread to Italy and Spain where yields on State bonds reached their maximum levels. On 8 August, the European Central Bank (ECB) had to intervene buying back Italian and Spanish bonds to calm down financial markets . There was no other choice but to act : Italy like Spain are too big to fail.

Under the pressure of the European Central Bank and the EU, the Italian government was forced to issue a new plan which includes a series of unpopular measures to reduce public spending - especially on public sector wages and pensions - as well as on the revenue side with a special solidarity tax for higher incomes and higher taxation on capital gains. The whole set of measures is set to have negative effects on poor and middle classes and those who pay taxes whilst it does not affect (or very little) the rich and those who evade taxes.

But the key measure imposed by the ECB (in a confidential letter to the Italian PM) is to bring forward the budget balance in 2013 (instead of 2014) and the introduction of a no deficit clause in the national constitution. This has no precedent in European history: weaker States are losing their economic powers in terms of public spending and taxation. But this is not happening though fiscal integration of the EU nations which requires a much larger EU budget and more powers to the European Commission; it is just a mechanism of inter-governmental coordination and surveillance of national public finances which was introduced with the reform of the Stability Pact.

Yesterday's summit between France and Germany on the euro governance* raised strong expectations, but the outcome is rather disappointing. The two leaders stressed the need for greater economic coordination - which will be led by Herman Van Rompuy, the current President of the EU council. This will involve the inclusion of a 'golden rule' (no deficit) in all national constitutions by summer 2012. The other key proposal is a tax on financial transactions (the so-called Tobin tax) but there is no detail on how it will be applied throughout the EU.

The French-german meeting has produced a pact of the strong based on financial orthodoxy. Italy was a test case of the new economic order. But the pledge for stronger coordination will not suffice to stop the widening debt crisis. The creation of new government bonds backed by all member States of the euro area - which is gaining acceptance by more economists and federalist politicians - is simply ruled out, or at best will be considered in future.

The obsession for debt reduction without growth will just worsen the situation and until Germany refuses to take another direction, it will just produce another economic mess. But Europe requires a political leadership based on a long term vision  to fight international speculation . The solution, or at least part of it, resides in a certain degree of tax harmonization and a common conduct of fiscal policies based on mutual aid and solidarity. This will open a new phase for the euro with the creation of eurobonds which are a tangible and necessary instrument to insufflate a new common spirit.

 Protecting the euro means preserving a true European Union as a global public good. A European Union that defends the general interest of all states and citizens against the individual and selfish interest of strong economic powers. Unfortunately, this is not the vision of a political European Union that prevails today.


Saturday, August 13, 2011

Broken Society

The dramatic events in England are a symptom of a growing malaise in our societies. The revolt of youngsters living in suburban areas is the product of the fracture between the haves and the have-nots. There is an analogy with the explosion of anger in the French banlieues, led by young French born with a clear ethnical identity (sons of Maghrebian immigrants). But the backdrop in which the riots exploded (in Tottenham, a suburban area with high poverty and unemployment) is characterized by a deep economic crisis, severe cuts in public spending and growing uncertainty on future prospects.

Z.Bauman* argues that the revolts are caused by young people deprived from access to consumer goods. His point is that these are not bread riots like in Arabic countries although there is some commonality in being equally humiliated. He writes: " For defective consumers, those contemporary have-nots, non-shopping is the jarring and festering stigma of a life un-fulfilled – and of own nonentity and good-for-nothingness. Not just the absence of pleasure: absence of human dignity. Of life meaning. Ultimately, of humanity and any other ground for self-respect and respect of the others around".

It is sad to see these young people without an ideology, guided by consumerism. Their fathers used to protest for justice and liberty. As Z.Bauman puts it " Supermarkets may be temples of worship for the members of the congregation. For the anathemised, found wanting and banished by the Church of Consumers, they are the outposts of the enemy erected on the land of their exile. Those heavily guarded ramparts bar access to the goods which protect others from a similar fate".

It would be wrong to affirm that the young people from the poor suburban areas are just criminals or 'casseurs'. These problems exist in many cities of the world but it is difficult to predict when a small flame turns into a social chaos. Over the last decades, societies have undergone a process of disintegration, becoming less cohesive and more vulnerable. D.Cameron, the British PM, put forward a year ago his project of Big Society, meaning a devolution of State prerogatives to individuals as well as charities to reconcile the British society. In fact, it is just a revisited project of M.Thatcher's extremist ideology which considered that society does not exist, but just individuals. The consequence of this pure folly is a broken society, that is a society with intolerable injustice, with middle classes disoriented by the austerity measures introduced by the right wing government.

Social inequality has become a major political problem in today societies and it often underestimated by political leaders. We need an Ethical revolution to give human dignity to all, not just give access to material or symbolic objects such as sophisticated cell phones.
This is a long, difficult endeavour.

*The London Riots – On Consumerism coming Home to Roost, published in Social Europe Journal, August 2011

Thursday, August 11, 2011

Corruption and the Rise of Dignity

Corruption is becoming a transnational issue which affects most economies and societies, including the most advanced democracies. The preamble of the UN convention on corruption raises concern about the "seriousness of the problems and threats posed by corruption to the stability and security of societies, undermining the institutions and values of democracy, ethical values and justice and jeopardizing sustainable development and the rule of law". Most countries have ratified the convention with different legislative acts according to their legal and institutional frameworks.

Yet, if a global framework exists to combat corruption - unlike financial markets for which there is a lack of global rules- States seem powerless to defeat this evil which jeopardizes the bases of democratic societies and prevent any effective intervention to address issues of social injustice and inequality.

The origins of corruption may vary greatly, but in a sense, it reflects the changing nature of capitalism. R.Dworkin, in a recent book* argues that modern culture has introduced a false (and apparently persuasive) belief that the most important criterion for 'good life' is wealth and luxury and the power it conveys. The search of wealth as the only value in life, nurtured by the ideology of free market and monetary accumulation has led to corruption as a mere instrument of class domination and therefore as a source of social injustice.

Populist parties seek today legitimation and social acceptance of corruption as an inevitable evil based on the principle "all guilty, all innocent". This is contradiction with the kantian principle that we should honour humanity and morality. But these words seem today meaningless, if we just observe the magnitude of corruption, in its various forms in our democracies. It is not incidental that in the US corruption takes the form of unlimited funding from large corporations to political candidates, which is even considered legal under the consitutional principle of freedom of opinion. But money is not an opinion.

Recent events in Italian political life show the extent of corruption both in public and private spheres and the increasing connection with organised crime. Judges are systematically accused of being "communists" or "terrorists" by corrupted politicians (with the complicity of their allies) to defend their priviledges and their system of power.

The rule of Law, the principles of liberty and justice are not applied onsistently, become obsolete or are circumvented by 'ad hoc' norms. But if democracies are vulnerable and weak to fight corruption, this is also true for totalitarian States, as demonstrated by the recent revolutions in Tunisia, Egypt, Lybia and now in Siria. The search for liberty and justice against corruption has led to an uprising of poor and middle classes living in urban and rural areas, students and young people as well as ethnic and religious groups.

The fight against corruption is therefore essential to address issues of economic development, intolerable inequality, rising unemployment and poverty and more fundamentally the existence of the democratic societies. We need a culture of social justice where dignity prevails over the "culture of corruption". The principles of this alternative culture link the rule of Law to morality and dignity. These are the principles stemming from the Age of Enlightnment, whose ideas have so powerfully inspired our common sense of living together. In Kant's words** we find the essence of these principles: " Morality and the humanity as capable of it is that which alone has dignity".

* R.Dworkin, Justice for Hedgehogs, Harvard Univeristy Press 2011, 422 p. The book is about one's responsibility to living well rather than 'Good Life'. At the end of the book, Dworkin writes: 'without dignity, we are only blinks of duration. But if we manage to lead a good life well, we create something more. We make a subscript to mortality. We make tiny diamonds in cosmic sands"

** I.Kant, Fundamental Principles of the Metaphysic of Morals, 1785, Transl. by Thomas Kingsmill Abbot

Thursday, August 4, 2011

Speculation is a European problem

Yesterday, in his speech to the parliament, the Italian PM pointed out that markets are wrong because fundamentals are right, and therefore there is not much that can be done. Yet, the situation of the Italian economy cannot be compared with other peripheral countries. In aggregate terms, there are some positive elements : a relatively sound fiscal position despite a huge public debt, a high saving rate, households are little indebted, and the resilience of domestic banks. The main issue for the Italian economy is the lack of economic growth but it is difficult to increase the rate of investment as this is interpreted by markets as a sign of increased debt in future. But above all, it has a huge problem of credibility given the mediocrity of the political class in power.

So why investors are so aggressive in Europe and not the US? Europe has not organised properly its own institutions to curb speculation, starting from regulating the rating agencies. In the US, during the debt crisis, yields on 10 year bonds remained at 2,7% as before. While in Europe, speculation has attacked first the weaker countries, then intermediate countries like Italy and Spain, now France where the spread has reached 1%, and probably next Germany.

In fact, as President Barroso acknowledged ( FT 4 August), it is an attack against the euro, not single countries. This is possible because it is an incomplete construction: a currency without a government being able to coordinate financial and fiscal policies of member States and operate corrective measures as well as solidarity if needed. Strong institutions are therefore necessary, notably a European federal government. This will take time but a step forward could be the emission of eurobonds.

Europe can prevent contagion and curb speculation. The European Financial Stability Fund (EFSF) has intervened to rescue Greece (or more precisely French and German banks), but it does not have sufficient resources to intervene in Spain and Italy. In fact, it should intervene like a European Monetary Fund with increased resources - probably 2-3 thousand billions - to be credible.

Furthermore, part of the problem lies with the fact that the ECB has not taken responsibility in the crisis. The problem is not inflation, but a general risk of deflation. The BCE should intervene and stabilise financial markets . It is the only institution which can do so, like the FED in the US. Panic in markets has led investors to sell Spanish and Italian bonds and buy German bonds, creating a vicious circle: spreads increase in Spain and Italy and austerity measures become more severe. The intervention of a supranational institution may alleviate the pressure of financial markets by buying bonds from States in difficulty. In fact, it has started buying back Irish and Portuguese bonds, and this may be followed by further intervention on Spanish and Italian bonds, which may trigger further institutional changes.

But time is a key factor: European institutions should act quickly and not delay decisions until September. Financial markets never sleep, so we need bold measures to fight speculation in the short term. Moreover, investment policies, especially on EU wide infrastructure networks should be conducted to boost economic growth along with (genuine) structural reforms, in particular on labour markets to create durable jobs as well as exploiting the potential of research and universities to stimulate innovation. But they cannot be achieved under the pressure of markets ; they require fiscal solidarity at the European level with stronger institutions. It is the only effective way to defend States from speculative attacks.

Saving the Horn of Africa

More than 10 million people are threatened by famine due to the drought which has devastated a vast area comprising the North of Kenya, South Ethiopia, Djibouti, part of Uganda and the whole Somalia. This is one of the biggest humanitarian crises with hundreds of thousands people displaced in refugee camps. This could have been avoided as signs of famine were evident since November. But the response of international donors has been insufficient and not always effective (see The Economist 30 July).

In the past, there have been other episodes of famine, for instance in Ethiopia where about 1 million people died in 1985. But the significance of the famine in the Horn of Africa is to be understood in a much larger context.

In recent times, globalisation has radically changed the role of agriculture in an export oriented activity of basic food products which guaranteed the reproduction of the communities living in the area. Droughts have periodically occurred, but people were not forced to leave their land before the creation of a pure market system, as it happens in Africa today. Crops are turned into commodities and oriented toward export activities based on world prices determined by oligopolistic market structures and not to feed primarily these communities. This has led to the collapse of basic infrastructures that they built during centuries to face the scarcity of food and water.

Providing aid to the refugee camps - with people living in fear and feeling abandoned - is not enough. It would be more effective to intervene for building irrigation and water supply systems, using modern techniques of cultivation ( as Israel did) to fix these communities in the territories where they have been living for centuries and guarantee their social reproduction. In fact, this immense region includes an infinite number of tribes and old communities which are now deprived from their natural habitat and their displacement into refugee camps could mark the end of their existence as communities.

Certainly, the food drama is also the result of an endless war in Somalia, where president Sharif Ahmed does not control the southern part of the country in the hands of radical islamic groups, which prevent any form of international aid and threaten anyone who accepts it. This is why it is vital to stop emigration from these rural areas which could be of help to rebuild the economy of the entire region and hopefully put an end to the oppression of jihadist groups.

In this regard, the effect of globalisation in those territories - by destructing entire communities which struggled over centuries to maintain their economic and social structures - has to be offset by alternative policies of using local resources in a more sustainable way. The combined effect of deeper integration into the world economy and growing desertification (also encouraged by corrupted local groups isolated from the rest of the population) can hamper durably the growth potential of a continent with immense resources which should be used more wisely to the benefit of local populations as well as the rest of the world. This is possible with the creation of a genuine African internal market based on complementarity and mutual solidarity; otherwise, the humanitarian issue will prevent any form of sustainable development and affect adversely the whole continent.

Beyond its immediate consequences, the African tragedy shows that the advent of a market without ethical rules creates destruction and death in fragile areas, despite all efforts to bolster people's resilience to face natural catastrophes, and impedes their economic development to the detriment of all mankind.

Saving the Horn of Africa means in essence saving ourselves.