Saving Capitalism- notes on Reich's book

The title of Robert Reich's new book is somewhat odd: how can we save a system which is crapped and caused pain to so many people? However, the subtitle is perhaps more important 'for the many not the few'. The book contains a number of  economic and moral arguments as it assumes that the capitalist system is not working as it used to, meaning that it was regulated in a way that it was in equilibrium where it could provide jobs to most of the active population which in turn could buy the goods and services available on the market. Reich makes a valuable point when he argues that the debate is not choosing between market and government as market without government or rules does not exist as a state of nature. This point was developed in the groundbreaking book of K. Polanyi 'The Great Transformation'. 

The whole argument is how to make the system work for the middle class, that is pursuing the right policies to give it more purchasing power, for instance increasing th minimum wage to an acceptable level to avoid 'working poor' class and extending the rights of people for health care and education. If we compare the US in terms of social progress, it lags behind many advanced countries with a more progressive welfare system and wider redistribution among social groups. In this regard, it has been quite anomalous relative to 'the 'social market economy' which has prevailed for at least five decades in Europe. 

The other point which is worth noting is the rising influence of the ruling class in politics. Is this a distortion of the political system?  The issue is how to prevent that oligarchs change the rules to their advantage. These trends are also present in some European countries. This wave of populism has endangered the basic foundations of democracy based on the 'one person, one vote' rule using scapegoats such as the invasion of immigrants taking the jobs of  national workers or the rise of supranational powers such as a European federation. 

Reich's optimism for the future derives from historical experiences such as the Great society in the sixties which actually led to a compression of income disparities and the emergence of a vast middle class. This is quite an unambitious and perhaps view of how the American society should become. The driving forces of globalization and technology (combined with demographic change) have changed the nature of capitalism into a 'Stateless' or an unregulated system where big corporations have an unprecedented power of influencing legislation and tax systems.  The very idea to restore a 'normal' state of capitalism is utopia - can we really change its inherent logic which is to maximize profit by any means? 

Keynes raised  in his concluding notes to the 'General Theory' a number of questions : 

"Is the fulfilment of these ideas a visionary hope? Have they insufficient roots in the motives which govern the evolution of political society? Are the interests which they will thwart stronger and more obvious than those which they will serve?

He never responded to these questions, showing how difficult it was to put in place an alternative to the 'laissez faire system'. His ideas went through  and inspired  policy makers at least for some decades. We also hope that Reich's ideas will be applied despite the current state of affairs, and lead to a better economic system to th mutual advantage of all. 

Robert Reich and the Austerity Failure

The Pope's Moral Lesson

The Pope's address to the US Congress has a historic significance as he spoke to the most powerful country to remind the congressmen their duties and responsibilities. Most of his words derive from the Church's social doctrine.

His main message is summarized in this part of the speech, where he recalled the pursuit of common good as the mission of politics.

All political activity must serve and promote the good of the human person and be based on respect for his or her dignity. "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness" (Declaration of Independence, 4 July 1776). 

If politics must truly be at the service of the human person, it follows that it cannot be a slave to the economy and finance. Politics is, instead, an expression of our compelling need to live as one, in order to build as one the greatest common good: that of a community which sacrifices particular interests in order to share, in justice and peace, its goods, its interests, its social life" 
P.S:  The Pope expresses a progressive view of the world and its modernity and without him the world would be much worse. 

Robert Skidelsky: Keynes and the General Theory

Germany's self interest

For decades Germany saw its role as the driving force and beneficiary of Europe's unity which combines its sense of guilt of its past history and self interest.  The rest of the Continent came to rely on it as the country that could be trusted to keep the European project moving forward.

But with the handling of Greece's bailout package agreed at the Euro summit on 12 July, Germany has lost this trust. By taking an aggressive and punishing attitude toward Greece, the German leadership may have undercut its moral authority. By advancing the idea that Greece should leave the euro, Germany exhibited its national interest more openly than in the past and made it clear that there are  limits to its willingness to put European unity first.

Jurgen Habermas, a pro-European German philospher argues that Ms Merkel and her political coalition " have gambled away in one night all the potential capital that a better Germany had accumulated in half a century"while previous governments had displayed 'greater political sensitivity and a post-national mentality".  For much of the German post-war history, patriotism was considered shameful and the national interest coincided with Europe. 

But with the reunification of the country and the creation of the largest member country of the European Union, Germany became more open to use its power to defend its national interest. the big change began when Germany pushed for a more rules-based system to manage the euro area. 

In the past, Germany was willing to provide the money or arrange deals to hold Europe together and go forward. History shows that European unification has progressed only through crises from the ashes of WWII to economic stagnation of the 80s. But the enlarged Europe resembles to a 'conglomerate' of States defending their national interests. Coming to Greece, Ms Merkel fought to keep Europe united with little conviction as few people expected a deal on Greece with such high economic costs.

There is much to argue, as many economists do, about the need for austerity policies in times of recession. Even the ECB and the IMF called for debt relief to make the Greek debt a bit more sustainable; this did not work out due to the inflexible position of the Germans supported by a large coalition of countries, including the Netherlands, Finland and several Eastern countries. 

But the brutality of the negotiations over Greece has damaged the reputation of Germany inside the European Union. Moreover, it has reinforced an anti-German sentiment among European citizens which also reflects a growing rejection of the European Union with Germany being at the heart of it..

This will represent a turning point in Germany's role in Europe. The latter will appear as a different bloc than the one the founding fathers had in mind or even the creators of the single currency (namely Jacques Delors). The fight over Greece's bailout will, as Hans Kundnani (author of the book " the paradox of German power") put it , lead to a "more German Europe and a more coercive EU".

Beyond the apparent unity on the deal, the Greek crisis has highlighted a split within the Eurozone. Germany and its allies believe that that economic orthodoxy  with a strong Central bank are needed while another group led by France and Italy argue that budgetary and economic policy has to be driven by politics, not just rules. 

Since the reunification, Germany always wanted the euro area to resemble itself  and the euro to the D-Mark while solidarity depending on everyone playing by the rules. May be we need to change the rules (" no bail out", no " default" )which have largely been inadequate to  address the debt crisis, not only in Greece. 

P.S: Ms Merkel and Mr Schauble are federalists in their own way. Of course, they reject the idea of a European federation of  States. But in their view federalism means not an open ended commitment to rescuing other States (as it happened in the US with California's default), but a willingness to abide by agreed rules. On the other hand, Mr Hollande has relaunched the idea of a government for the euro zone with its own budget and with democratic control by the European Parliament which will be pushed forward by a 'vanguard' of 7-8 countries.  

The endless crisis

The Economist re-examines the Greek crisis since 2009 and highlights the mistakes made by the creditors. I quote : "As rising bond yields threatened to push Greece to default, creditors botched the first bail-out in 2010 (see chart 1) by imposing too much austerity too quickly. For all of their railing against austerity, Greek leaders mostly cut deficits instead of promoting growth. For too long, the ECB resisted any notion of imposing losses on private bondholders even when it was obvious that Greece was bust. When haircuts for bondholders, known as “private sector involvement”, were agreed on in 2011 they were too late to do the trick'.

In 2012, the issue of debt sustainability was not addressed and debt now stands at 177% of GDP. This inaction led to the brink on which Greece is now without much hope of recovery. The referendum will not be decisive on the future of Greece, because there is not much choice between accepting another bailout and probable chaos. 

The Greek crisis is the expression of  Europe's crisis and this is not solved yet . None of the bailed out countries returned to their pre-crisis levels.  But the crisis hit Greece harshly with Greek GDP shrinking by 25% over 4 years, unemployment rising to 27% and youth unemployment to more than 50% . 

Here is a graph published by the Economist which describes the evolution of the crisis :

 
If we look at the evolution of domestic demand, it has started growing in the US and Japan after the collapse resulting from the 2008 crisis, while in the euro area it has strongly declined since 2011.     

 Do we need more evidence that austerity is not a cure for the crisis? Just the ideologues of the euro zone want us to believe it.  

Quid prodest? 

Our Common Home

The recent papal encyclical by Pope Francis  Laudato Si : On care for our common home highlights that climate change is one of the principal challenges facing humanity and a moral issue requiring respectful dialogue with all parts of society. 

The encyclical warns of an "unprecedented destruction of ecosystems" and "serious consequences of all of us" if humanity fails to act on climate change. It takes a holistic approach where climate change cannot be separated from poverty and global inequality. But it also draws on solid scientific evidence showing significant warming of the climate system and that most of global warming in recent decades is mainly the result of human activity. 

“Climate change is a global problem with grave implications: environmental, social, economic, political and for the distribution of goods. It represents one of the principal challenges facing humanity in our day. Its worst impact will probably be felt by developing countries in coming decades. Many of the poor live in areas particularly affected by phenomena related to warming, and their means of subsistence are largely dependent on natural reserves and ecosystemic services such as agriculture, fishing and forestry. They have no other financial activities or resources which can enable them to adapt to climate change or to face natural disasters, and their access to social services and protection is very limited.” (Pope Francis, Laudato Si': On Care For Our Common Home, no. 15)

 It is a moral issue which requires respectful dialogue with all parts of the society.  But it also requires an imperative for action. The pope condemns the egoism of nations when he says " international (climate) negotiations cannot make significant progress due to positions taken by countries which place  their national interests above the global common good.  On this position, the UN secretary general , Ban Ki Moon called on governments to place 'the global common good above national interests and to adopt an ambitious, universal climate agreement" at the UN climate summit in Paris this December. 

The Pope's message is not only  addressed to the Catholic community but to all communities and other faiths to act together. His words are powerful and transcend all kinds of divisions:

"We need to strengthen the conviction that we are one single human family. There are no frontiers or barriers, political or social, behind which we can hide, still less is there room for the globalization of indifference.”  

P.S: Sign the petition to demand world leaders a strong agreement  at the Paris climate summit