Two-party lesser evilism rooted in winner-take-all system

It would be nice to vote for somebody we like as opposed to the “lesser evil.” Two-party systems are not to be found in any law, yet variations of them are prevalent among capitalist countries.

Countries as disparate as Britain, France, Germany and Spain have two dominant national parties, although nowhere is such a system as entrenched as in the United States, where there is not the limited space for small parties found elsewhere. The reason for such a constricted choice in the U.S. does not lie in its constitution (which makes no mention of parties), nor even in the iron-gripped dominance of its large corporations (although the Republican/Democratic split tends to replicate the industrialist/financier rivalry among capitalists).

Political parties don’t exist in a vacuum. They can exist only in a political system, the two basic types of which are legislatures or parliaments based on single-seat districts and those based on proportional representation. What sort of party system a given country has is more dependent on what kind of representative body it has than on any other factor.

A legislature based on districts each with one representative is a closed system. (This includes the U.S. Senate, which, because of its staggered terms, is effectively a single-seat system in which the district is an entire state.)

When there are two entrenched parties contesting for a single seat, there is no space for a third party to emerge. The two parties are necessarily unwieldy coalitions; they must be so because they will have to contain room for people and ideas across long portions of the political spectrum. (That does not mean that all factions’ desires are incorporated into the party’s positions or are even heard).

A faction of one of these two parties might gain the upper hand at one time, especially if it is linked with an ideology promoted by an energetic bloc of capitalists, but in this instance the party will become too narrow and rigid. The other major party will inevitably benefit and eventually the factionalized party will have to loosen the grip of its dominant faction and revert to becoming a coalition if it intends to compete successfully nationally in the future. This natural elasticity provides an additional stability to a two-party system.

Campaigns for elections in single-seat districts can be conducted on larger national issues or on the basis of an important local issue, but the tendency is for these elections to become contests between personalities. If the personality representing the other party is objectionable, or the other party is objectionable, then voting is reduced to the “lesser of two evils.”

Voting for a party or an individual becomes a sterile exercise in ensuring the other side doesn’t win. From the point of view of the candidates and parties, the safest strategy is one of peeling away voters from the only other viable candidate, thereby encouraging platforms to be close to that of the other viable candidate, promoting a tendency to lessen differences between the two dominant parties.

With little to distinguish the two parties, the importance of personality becomes more important, further blurring political ideas, and yet third choices are excluded because of the factors that continue to compel a vote for one of the two major-party candidates. In turn, such a system sends people to representative bodies on the basis of their personalities, encouraging those personalities to grandstand and act in an egocentric manner once they are seated.

These personalities are dependent on corporate money to get into and remain in office, and the parties they are linked to are equally dependent — the views of those with the most money are going to be heard more than other views. Corporations are the dominant institutions in advanced capitalist countries, and the accumulated wealth and power of those who lead and profit from them are able to disseminate their preferred ideologies through their influence over society’s other institutions, including educational, military and religious.

Leaders from corporate and other institutions, to be viable candidates, will seek office through one of the two dominant parties, thereby transmitting corporate ideology back into them, while also bolstering them by linking their personal “credibility” to the parties.

Compounding those tendencies, if the district boundaries can be redrawn any which way periodically, the two parties can work together so that both have “safe” seats. Elections cease to be competitive, and if you live in a district in which voters who consistently favor the other party are the majority, you are out of luck.

The two parties compete fiercely to win elections — they represent different groupings within the capitalist class who have a great deal of money at stake. This is a closed competition, however: They act as a cartel to keep corporate money rolling in and other parties out.

Although real choice is blocked, the illusion of competition is maintained and there is enough room to allow safety valves to work when needed, such as the removal from office of an unpopular office-holder. All this makes for a remarkably stable system: One U.S. government has fallen in 220 years.

More democratic is a parliamentary system, which in almost all cases comes with some form of proportional representation. The two notable exceptions are Canada and Britain, where members of parliament are elected from single-seat districts. Both have a third national party that consistently wins seats, but nonetheless usually produce single-party governments. This system retains some of the drawbacks of a single-seat congressional system, with the additional weakness that governments in both countries often take office with less than a majority of the vote.

One common parliamentary system is a combination of some seats representing districts and some seats being elected on a proportional basis from a list either on a national basis or from large political subdivisions. This allows voters to vote for a specific candidate and for a party at the same time. There is more scope for smaller parties here, and this type of system generally features several viable parties, depending on what threshold is set for the proportional-representation seats.

There can be two dominant parties in this type of system — Germany is an example — but the major parties often must govern with a smaller party in a coalition or even in a clumsy coalition with each other (thus, Germany’s tendency to produce periodic “grand coalition” governments). Parties in a coalition government will run on separate platforms and maintain separate identities — the next coalition might feature a different lineup.

Some countries fill all parliamentary seats on the basis of proportional representation. Each party supplies a list of candidates equal to the number of available seats; the top 20 names on the list from a party that wins 20 seats gain entry. This is a system that allows minorities to be represented — if a party wins 20 percent of the vote, it earns 20 percent of the seats.

If the cutoff limit is set too high (as is the case in Turkey, where ten percent is needed), then smaller parties find it difficult to win seats and voters are incentivized to vote for a major party — thus even in this system it is possible for only two or three parties to win all seats and a party that wins less than 50 percent of the vote can nonetheless earn a majority of seats because the seats are proportioned among only the two or three parties whose vote totals are above the cutoff.

A low cutoff better represents the spectrum of opinion in a country and allows more parties to be seated. Governments of coalitions are the likely result of such a system, which encourages negotiation and compromise. A party needs to earn five percent of the vote in many of these systems, but cutoffs are set as low as two percent.

Such a system in itself doesn’t guarantee full participation by everybody; a national, ethnic or religious majority, even if that majority routinely elects several parties into parliament, can exclude a minority, as happens in, for example, Israel. The most open legislative system must be augmented by a constitution with enforceable guarantees for all.

Still another variant on parliamentary representation are multiple-seat districts in which districts are drawn large. Voters cast ballots for as many candidates as there are seats — a minority group in a district should be able to elect at least one of their choice to a seat. This is a system that also has room for multiple parties, and with several viable parties in the running, votes are likely to be distributed in a way that no single party can win all seats in a given district. Ireland uses such a system.

One way to ensure that multiple parties will be seated might be to limit the number of candidates any party can run to a number lower than the total number of seats — more than one party is then guaranteed to win representation.

All the systems above are based on the traditional concept of one vote for one seat. But there is no need to limit ourselves to tradition. There are voting systems that enable the casting of multiple votes. One of these is “cumulative voting.” This is a system in which each voter casts as many votes as there are seats on a legislative body. A voter can vote for as many candidates, or cast all her votes for a single candidate, as she wishes. If the voter has five votes, he can cast all five votes for a preferred candidate, or split them among as many as five candidates if he so wishes. This is a system that enables a minority to earn representation if that minority — racial, ethnic, political or some other basis — votes cohesively.

Cumulative-voting proponents argue that this method encourages the creation of coalitions, encourages attention to issues because community groups can organize around issues and elect candidates that represent those interests, and encourages high turnouts. This is a complicated system, and probably appropriate only on the local level. A few U.S. cities do use this system.

Another alternative voting system is instant runoff. Here, voters cast a ballot by voting for as many candidates as they wish, ranking each candidate. First votes are tabulated and if there is a candidate who earns a majority of votes, the winner is seated. If not, the candidate with the fewest first votes is eliminated, and the second votes on ballots that voted for the eliminated candidate are now added to the first votes on the other ballots. If there is still not a winner, there are more rounds, each time with the lowest vote-getter eliminated, until a candidate has a majority. This system works the same way for multiple-seat elections.

The advantage of this system is that it encourages voters to cast ballots for the candidate they truly support, as their first choice, without the need to vote only for the “lesser evil.” A voter could still choose the “lesser evil” as the second choice to block the worst choice from winning. It also ensures that there is some level of majority support for the winning candidate rather than a simple plurality. Australia uses such a system, but with an added unnecessary, undemocratic requirement mandating that all candidates be ranked (otherwise the ballot is voided). Instant runoff can be democratic only with full freedom of choice.

That any representative system truly reflect the diversity of a society in all possible ways is the important thing, and that what can be accomplished at local levels or through direct democracy be decided there.

No matter what system is used, however, a true political democracy can only exist when there is economic democracy and a measure of equality — any economic system in which a handful dominate through their immense wealth will be corrupt and undemocratic. Otherwise, we are ultimately tinkering around the edges.

There are no national solutions for Greece, or any other country

There is no Greek solution to Greece’s crisis. There can be only an international solution. However that solution unfolds, the day when a radically different course, a clear alternative to austerity, can no longer be avoided is perhaps drawing closer.

Aware of their dwindling support and the increasing desire among Greeks for a different course, the two “left of center” parties propping up the pro-austerity right-wing government of Greece may yet balk at committing a final suicide.

Four days after the expiration of a deadline handed down by European Union finance ministers, the leaders of Pasok and the Democratic Left were still refusing to fully agree to demands for yet another round of cuts and labor “reforms,” the standard euphemism for eliminating job protections. Those leaders’ reluctance to agree to terms with Prime Minister Antonis Samaras, and their apparent ending of talks (at least for the moment) on October 23, adds more uncertainty to the already conflicting signals coming from the Greek government.

The “troika” — the International Monetary Fund, the European Central Bank and the European Commission — have been unyielding in insisting that Greece impose more austerity on its citizens in exchange for the latest tranche of financing totaling €31.5 billion.

On the one hand, we have Mr. Samaras, head of the conservative New Democracy party, saying at last week’s European Union summit that Greece will be broke next month without the latest loan installment, yet declaring:

“The economy and society are at their limits, the bloodline of the economy that is liquidity is at point zero; unemployment has reached nightmarish levels and every Greek is facing a personal tragedy.”

On the other hand, the Greek finance minister, Yiannis Stournaras, in an October 22 speech to the Greek parliament, declared the country’s nightmare does not reside in the austerity cuts demanded in exchange for fresh loans, but rather in not imposing the cuts:

“The cost for the country will be boundless if we don’t get the €31.5bn installment. … If we don’t get the loan people will go hungry.”

Perhaps the finance minister, one of the “technocrats” who hold most portfolios in the current government, is unaware that Greeks already are starving. Several rounds of imposed austerity has brought only misery to the people of Greece. Here are some of the results:

  • Overall unemployment is at 25 percent.
  • Youth employment is at 55 percent.
  • Average wages have been cut 40 percent.
  • Cuts to the health care system of 25 percent since 2009.
  • Economy has shrunk 18.4 percent since 2008.

The years of austerity were supposed to turn around the Greek economy, yet the deficits only become larger. The country’s deficit for 2011 is now estimated to have been 9.4% and its debt has widened to 171% of gross domestic product. If more people are thrown out of work and those still employed take home less, then less can be bought and less taxes will be paid.

Although the International Monetary Fund quietly admitted earlier this month that austerity does not work, the troika is holding to a hard line in demanding still more austerity measures. Greece is expected to come up with another €13.5 billion in cuts. The troika demands implementing a six-day working week; further cuts to the minimum wage; further reductions to pensions; “increased flexibility” of work schedules; tens of thousands of government workers and professors be laid off; and income-tax rate gradations flattened, which would increase the tax burden on those who aren’t wealthy.

The latest €31.5 billion installment won’t be going to Greeks; virtually all of it will go to banks. A conservative Greek newspaper, Kathimerini, reported (based on a leak from Pasok) that Germany’s finance ministry demanded that an escrow account be set up that would ship money to the European Central Bank. The proposed escrow account would not only be the recipient of all the bailout money, but Greece’s tax revenues would also sent there.

To put this in plain language, Greece would be reduced to a vassal state in which it had no control over its finances and its tax revenues would be used to pay banks instead of for government functions.

European Union finance ministers had demanded, as long ago as February 2012, that such an escrow account be set up for bailout money, but the extension to Greece’s internal revenue is something new. Kathimerini quoted Germany’s finance minister, Wolfgang Schäuble, as declaring:

“In the last program [for Greece] we introduced mechanisms; we need to strengthen those in the sense of control mechanisms, perhaps also automatic stabilizers.”

The “automatic stabilizers” are measures that would automatically further cut Greek government spending beyond whatever is agreed if the deficit grows wider. Given that austerity will lead to less revenue, a wider deficit is the likely outcome. Seeming to draw a line, Democratic Left leader Fotis Kouvelis on October 23, following the impasse in talks with Samaras, added still more contradiction to the government coalition’s signals. Kathimerini reported:

“ ‘If the unacceptable demands of the troika are met, they will increase sackings, unemployment and the recession,’ said Kouvelis, adding that he felt the troika was aiming to ‘flatten’ any working rights that remain.”

It must be asked, however, why Mr. Kouvelis’ Democratic Left, and Pasok, are propping up Mr. Samaras’ pro-austerity government, since such goals have long been in place. Mr. Samaras’ New Democracy — Greece’s leading big-business party — has strong links with European capital and has no basic disagreement with the ruthless austerity being imposed across the continent despite the prime minister’s public worry that the Greek “economy and society are at their limits.”

The waves of strikes that have washed over Greece is a development that Samaras can’t fail to notice. Yet he and his government have nothing to offer other than more austerity; the “troika” certainly has nothing else to offer. A radically different course is necessary. Greece can not survive as an island unto itself — to repeat, there is no Greek solution to Greece’s problems, only an international solution. Financiers and industrialists operate internationally, and working people have no alternative to uniting across borders in order to defend themselves.

That does not, however, mean that Greece can’t adopt new programs internally. The main political current offering a radically different program is Syriza, the Coalition of the Radical Left, the largest opposition party and which currently leads in polls. In a talk last summer, a Syriza representative laid out a different course:

“The reversal of the descent towards degradation and marginalization cannot be achieved without the implementation of a radical program of reforms and transformations of the state, the political system and the entire ‘body’ of the Greek social formation. … [T]he crisis we are living through is a crisis of the system itself, rather than simply a management crisis of the system. Everything must change: the political system, the state, the relation of the citizen with the state and with politics. Consequently, the way out cannot be found in a return to some version of the past. The way out lies in opening up new paths to new productive and consumption paradigms, to new forms of real democracy, to new social arrangements based on equality and solidarity, the respect of human dignity and the environment.”

Among the highlights of Syriza’s program are:

  • New taxation policies to lessen the burdens on low-income people and small businesses to make taxation more fair and to eliminate the large problem of the “black market” whereby many Greeks don’t pay taxes.
  • Elimination of the “clientist” system that rests on the “inside dealing” of the two-party system (New Democracy and Pasok) through a drastic overhaul of the administrative system and empowerment of citizens through bottom-up and top-down changes.
  • New institutions of workers’ control and social control to increase day-to-day democracy and accountability.
  • Democratic planning involving the parliament, the scientific community and society at large, linked to specific policies.
  • Development of long-term plans to reconstruct the economy on the basis of increased bargaining power for labor; reducing dependence on imports and external borrowing, supporting employment and respecting the environment; and building a society of justice, full employment and solidarity, with an enhanced and equal position in the European and international division of labor.
  • Changing the banking system to support the real economy and a targeted productive reconstruction, establishing public control over banking, and recapitalizing banks through the issuing of ordinary voting shares.

Such a program is by no means “revolutionary,” and Syriza supporters don’t claim it is. But such a program (which has much more to it than the above summation) is no mere reform, either; rather, it offers a radically different way of organizing Greek society tomorrow that can be built with the bricks of today. This program also keeps Greece connected to Europe; Greece can’t prosper in isolation.

Present-day Europe, in the form of a European Union dominated by the unaccountable and undemocratic European Central Bank, is not capable of becoming a platform for such a program as outlined by Syriza. Ultimately, Greeks, Europeans and everybody else can only prosper in a democratic system geared toward social good, public accountability and an economy oriented toward full participation and the development of all men and women.

The dismantling of the current structure of the E.U., one-sided trade agreements, international financial institutions and the immense power concentrated in corporate hands will have to be mirrored everywhere. If we are living in a globalized world, then the world’s salvation can only be on a global basis.

Nationalizing banks works for the short term; why not permanently?

U.S. President Barack Obama famously sneered that “Sweden had like five banks” when dismissing the idea of a government takeover of the U.S. banks that brought down the world economy. He did so despite acknowledging that Sweden had swiftly overcome its early 1990s financial crisis by taking over its largest banks.

The president was channeling a prevailing mythology within the United States — namely, that Sweden is a socialist country. Socialist! Run, run for your life! Therefore anything Swedish must automatically be so horrifying that we must not allow any thoughts about it to enter our minds for even a fleeting second.

Sweden is actually a capitalist country (albeit one with social-welfare policies to ease capitalism’s harshness), and the solution that it used to put its big banks back on their feet was well within the confines of capitalism. Actually, Sweden did not go as far as its neighbor, Norway, which also nationalized big banks to overcome its own early 1990s financial crisis.

Sweden and Norway made the banks — and their executives, directors and shareholders — pay for the crisis they caused, rather than making their taxpayers pay for it. Unsurprisingly, deregulation and speculation were behind the Scandinavian meltdowns.

Rather than following the Scandinavian model, the U.S. government shoveled trillions of dollars into its big banks following the 2008 financial meltdown without forcing any changes in banking practices or management. Or much of anything — it was the world’s biggest blank check. As a result, the banks are bigger than ever, the bonuses executives give themselves are as big as ever, not a single financier has been brought to justice, the financial crisis goes on and we remain at the mercy of the financial industry.

Sweden and Norway may not be large countries, but, despite President Obama’s sneering comment, they are not tiny, either. Sweden, in fact, has more than 100 banks. What Sweden and Norway have in common with the U.S. is that their banking industries are dominated by a few large banks. The four biggest banks in the U.S. in the first months of the economic crisis — JP Morgan Chase, Citigroup, Bank of America and Wells Fargo — accounted for almost two-thirds of the assets of U.S. commercial banks. Thus, as Keynesian economist Paul Krugman once noted in his blog, “as far as this discussion is concerned, we’ve got, like, four banks.”

Norway wipes out shareholders, fires bankers

Because Norway took stronger measures than Sweden, let’s start the comparison there. Four banks accounted for almost 60 percent of bank lending in Norway on the eve of its crisis, and three of them would get themselves into deep trouble. Norwegian banking had been tightly regulated, but in the mid-1980s a series of measures lifted most regulation of banking and housing and eliminated capital controls, sparking a wave of speculation in the forms of a boom in new lending and a real estate bubble. Household consumption rose dramatically, based on debt incurred via the new loose credit, and bank managers began to be paid based on growth in lending.

A simultaneous drop in oil prices (Norway is dependent on oil exports) led to a devaluation of Norway’s currency (then on a fixed exchange rate) and a trade deficit. As the real estate bubble began to burst, several of Norway’s small banks failed, a problem that could initially be contained because the Norwegian government had continued to enforce a requirement that all of the country’s banks contribute to guarantee funds; these funds covered depositors. But continued financial turbulence caused two of the country’s four biggest banks to fail and a third to be on the brink of failure.

The guarantee funds had been depleted due to the failures of the small banks, and private investors were unwilling to invest with their own capital. The Norwegian parliament stepped in and injected capital directly into the banks, taking ownership and enforcing several conditions, including these:

  • Existing share capital would be written down to fully cover losses — shareholders would be wiped out.
  • Managers and members of the board of directors would be fired.
  • Banks must reduce operating costs and downsize some activities.

The banks were now owned by the government, which acted like an owner. But that ownership was exercised not directly by the government, but through a special agency created for the purpose of managing the taken-over banks and staffed by specialists to avoid political interference. Eventually, the Norwegian government sold all the shares of two banks and retained a minority interest in the third to block a foreign takeover of what is now the only one of the major banks to be based in Norway. By 2001, the government had earned a net gain for its troubles.

This program specifically avoided guaranteeing bank losses. It was designed so that taxpayers would not assume the risk, which would only encourage more risk-taking by bankers. In a report on these events, the deputy governor of Norges Bank (Norway’s central bank) wrote:

“If the government injects new capital into a crisis-stricken bank, it is important that the value of the existing shares are written down as far as necessary to cover the losses. Otherwise, the government would implicitly be using taxpayers’ money to subsidize shareholders of a failed or failing bank and would give rise to serious moral hazard problems.”

Sweden forces banks to write down losses

The Swedish government did not impose conditions as stringent as those imposed in Norway, but did make shareholders absorb some of the pain and nationalized the most troubled big banks. Financial deregulation in the 1980s led to reckless lending and a real estate bubble in Sweden. When the bubble burst in 1991 and 1992, Sweden fell into a recession and unemployment quintupled in three years.

The Swedish government declared it would guarantee all deposits in all banks, committed itself to recapitalizing banks in trouble and said any bank seeking government money would have to first write down its losses. Sweden did seize the most troubled big banks, although in one case (in which it already owned a majority interest) the government paid the full price for acquired shares rather than wiping out shareholders.

Sweden then set up two “bad banks” and transferred non-performing loans made by the taken-over banks to them. Privately owned banks would have forced immediate bankruptcies to shut down and seize the assets of the small and midsize businesses that had taken out these loans they could not repay. In contrast, the government “bad banks” took control of the businesses and worked to stabilize them for eventual re-sale, the proceeds of which would recover the bad loans.

For the most part, however, Sweden forced shareholders out of failed banks and imposed stringent risk-management measures and overhead reductions. But by issuing a blanket guarantee of all bank loans, the government benefited shareholders of the banks that had not been taken over, a contrast to Norway. But, similar to its neighbor, Swedish taxpayers benefited when the government later sold its shares in taken-over banks.

U.S. rewards bankers for destroying economy

In contrast, the U.S. government, during both the Bush II/Cheney and Obama administrations, handed out vast sums of money with no strings attached. Wall Street executives, on loan to the government, “advised” the presidents that unconditional and unlimited bailouts to their companies could be the only solution. As a result, financiers remain free to speculate at will and give themselves vastly bloated salaries and bonuses. A good example is provided by a Dartmouth University professor, B. Epsen Eckbo, who wrote during the first months of the economic meltdown:

“It’s a zero-sum game: if the tax-payer doesn’t insist on the best possible deal, some other party to the bailout will reap benefits at the tax-payer’s expense. A clear case in point is the $8 per share windfall to shareholders of Bear Stearns, when the government debt guarantee of that firm caused JPMorgan to raise its takeover bid from $2 to $10. This type of shareholder windfall, which we also saw in Sweden as the stock market responded to the government’s blanket debt guarantee, would have been avoided had the government taken an equity stake in the bailed-out bank.”

The Obama administration did take an equity stake when it bailed out the automobile manufacturers General Motors and Chrysler, with the potential to earn a profit from doing so, while saving jobs directly and indirectly associated with the two companies.

Why not do the same with big banks? Or, why don’t we not be timid and go further: Why not eliminate financial speculation through public ownership of banks? Norway and Sweden did solve their banking crises, but not underlying economic weaknesses — Norway remains dependent on high oil prices and Swedish unemployment, while well below its peak, remains far above what it was before the early 1990s crisis.

In fact, there is a successful example of state-owned banking inside the United States. It is the Bank of North Dakota, wholly owned since 1919 by that state’s government. The Bank of North Dakota operates as a commercial bank, taking deposits and making loans, and also is where the state government deposits its revenue.

The state’s tax money, therefore, is invested in local infrastructure projects rather than being used for speculation by national banks as other states’ revenues are. So successful is the bank that it has given $300 million in profits to the state government in the past ten years.

North Dakota is the only one of the 50 U.S. states to have its own bank, and while the local economy is currently strong due to an oil and gas boom, it certainly serves as an example. Why not replicate this success elsewhere?

As long as we are asking questions, why should something so critical to a modern economy as finance and banking be in private hands for private profit, and be conducted recklessly at the expense of everybody else? Why shouldn’t banking be a public utility, operated for public good? Otherwise, it is only a matter of time before the next financial crisis, when, once again, the profits will be privatized and the losses socialized.

Quietly, the IMF confesses that austerity does not work

Don’t say it too loudly, because it doesn’t want you to know: The International Monetary Fund admits that austerity is not working.

The IMF of course did not come out and say this directly. But it was there, unmistakably, in its World Economic Outlook published on its web site on October 9. Forecasting the world economic growth rate to continue to decline, the IMF genteelly noted that:

“Public spending cutbacks and the still-weak financial system [are] weighing on prospects.”

And please don’t complain about the bureaucratically tepid language —  you didn’t expect an IMF official to call a press conference and apologize? No you didn’t. But that is as clear an admission as we are likely to get from the horse’s mouth that cutbacks, the magic snake oil that the IMF, World Bank and other financial institutions relentlessly impose, weakens economies.

For the record, the IMF projects 2012 growth in the world’s advanced capitalist countries will be 3.3 percent and forecasts growth of 3.6 percent for 2013, both slower than 2010 or 2011. It predicts a similar rate of decline in growth among the world’s developing countries. But let’s take note of two passages in the outlook.

“The IMF said that its forecast rested on two crucial policy assumptions—that European policymakers get the euro area crisis under control and that policymakers in the United States take action [to] tackle the “fiscal cliff” and do not allow automatic tax increases and spending cuts to take effect. Failure to act on either issue would make growth prospects far worse.”

The “fiscal cliff” is the congressional agreement made earlier this year that, barring superseding action by the U.S. Congress and president, a series of steep automatic cuts to federal-government spending kicks in at the end of the year — austerity imposed by one’s own von Neumann machine. Concurrently, the IMF believes that government investment is not necessarily a bad thing:

“The main driver [of growth in Asia] will be China, where activity is expected to receive a boost from accelerated approval of public infrastructure projects.”

So why do central bankers, financiers and multi-national financial institutions still preach austerity? Ideology, surely, plus arrogance and a lack of ability to admit the wisdom of financial elites is wrong. Nonetheless, at bottom such people are carrying out their class interests. If we had a different, more egalitarian economic system, and somebody came along and said, “Let’s immiserate entire countries so that a handful of financiers could remain fabulously wealthy by guaranteeing their profits” you would see the idea as insane. And it is.

There was one other tidbit — it seems that governments applying austerity programs over-estimated the savings to be accrued from them. The IMF said a common figure used by governments was to assume that for each dollar lost in government spending, 50 cents is erased from gross domestic product, an assumption used when creating austerity budgets. But, the fund said, its study of the issue has found that, since the economic collapse that began in 2008, for each dollar cut from government spending, GDP is reduced from 90 cents to $1.70.

In other words, the result of austerity is that it has accelerated economic contraction. A commentary on the Naked Capitalism web site written by a financial-industry professional caustically sums up what that re-calculation means:

“In case you missed it, this is an admission of complete and utter incompetence.”

IMF officials probably won’t be calling a press conference to admit that, either. The results of austerity across Europe has been devastating:

  • 25 percent unemployment in Spain.
  • 15 percent economic contraction in Ireland.
  • Population exodus out of Lithuania and Latvia.
  • 40 percent wage cuts and 22 percent economic contraction in Greece.

Unemployment has risen and wages reduced in the advanced capitalist countries. Demand is inevitably soft because of that — a vicious circle when 60 to 70 percent of economic activity is accounted for by consumer spending. Each country would like to get out of this impasse by exporting more, but the slowdown in economic growth has not spared any corner of the world. And although some countries might export more than they import, it is a zero-sum game — every country can’t be a net exporter.

One way to boost exports is to devalue your currency, but, here again, every country can’t devalue in relation to all others. China, Japan, Switzerland and the United States each has intervened in foreign-exchange markets in order to devalue their currencies (this is done through large-scale trading, not administrative fiat), but these actions can only go so far.

A critical problem for countries like Greece and Spain is that they don’t have their own currency, so, for them, the euro is over-valued. When imbalances force devaluation on a country, some of that devaluation can be achieved when its currency declines in value against others. But for users of the euro, all the devaluation has to come internally, through wage reductions, government spending cuts and destruction of capital values. Capitalism is a system of relentless competition in which only so many can be winners.

That competition tends to be seen through national lens; thus the form in Europe has been German bankers and politicians wagging disapproving fingers at Mediterranean neighbors. That distorted vision obscures the fact that it is only German industrialists and financiers who have benefitted; German workers have endured a decade of declining wages. And now that austerity has been relentlessly imposed in its eurozone customers, a decline in exports can’t be made up by internal demand thanks to those declining wages.

Eventually, austerity bites back — the IMF forecasts the composite eurozone economy to contract this year and increase by 0.2 percent in 2013, and Germany to grow by a mere 0.9 percent this year and next after posting four percent growth as recently as 2010. The German government has kept dissent down by acknowledging the sacrifices made by German workers, a point made repeatedly by the country’s mass media in the context of whipping up national feelings and directing those feelings against “profligate” countries on the eurozone’s southern rim.

It was thus a promising sign that the leader of Die Linke (the German Left Party), Bernd Riexinger, attended the October 9 demonstrations in Athens with Alexis Tsipras, the leader of Greece’s main Left opposition coalition, Syriza. Austerity is a cross-national offensive by financiers and industrialists to maintain their power and wealth at all costs. The response to austerity can only be cross-national. Capital does not care about borders and nations; similarly, working people can only reverse the devastating attacks on them through linking hands across borders.

 

Can a no-growth future and capitalism be compatible?

Is the era of economic growth over for advanced capitalist countries? If stagnation is what is on offer for the future, what does that portend?

The first question, although limited to the United States, is the subject of an interesting paper by the economist Robert J. Gordon, in which he makes a case that the era of high growth that has persisted for the past two centuries is drawing to a close and that, by the end of the 21st century, the annual growth in gross domestic product per capita may be as low as 0.2 percent — the estimated rate of growth prior to the 18th century.

The paper provides a useful starting point for discussion. A central idea that the paper rests on is that nearly all of the dramatic gains in standards of living, GDP growth and life expectancy that have occurred since the dawn of the Industrial Revolution had already occurred by the 1970s, and that those earlier inventions had vastly more impact than the Internet/computer/dot-com boom that arose in the mid-1990s.

To illustrate this point, Professor Gordon provides a graphic of past, present and projected future growth that assumes the shape of a steep bell curve. British economic growth is represented from 1300 to 1906, estimated by historians for the first four hundred years and by actual figures from 1700 because it was then the leading capitalist power. After 1906, actual United States growth in GDP per capita is used to the present day (because it became the leading capitalist power), followed by the author’s estimates out to 2100. The graph rises sharply starting at around 1870 until about 1950, peaking at 2.5 percent. It’s been downhill since, a trend that is forecast to continue until the growth rate declines to the Medieval rate.

If such a pattern does materialize — and Professor Gordon is far from alone in such pessimistic projections — what would that mean for an economic order, capitalism, that is based on endless growth? That is a question well outside the scope of his paper, and there is no intention here to imply a criticism of a paper for not discussing something beyond its scope. But as this blog attempts to tackle big questions, we are free to ask at a moment when stagnation is already upon us: Can capitalism survive an extended period of essentially no growth?

The Industrial Revolution and continued industrial innovation has brought fantastic changes to humanity, with the most dramatic changes coming in the 20th century. Professor Gordon posits three periods of major inventions: 1750 to 1830, 1870 to 1900 and the recent period of computer innovation. He argues that the first two periods brought a rapid series of inventions that took upwards of a century to be fully realized, fueling long periods of growth that lasted until the mid-20th century. Starting with the steam engine and the cotton gin, products resulting from the inventions of these periods include television, air conditioning and modern expressway systems.

Another example is indoor plumbing, which eliminated much manual labor, Professor Gordon writes:

“Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tonnes of water. Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out.” [pages 4-5]

Motorized vehicles also had a dramatic effect on productivity and standards of living:

“The average horse produced 20 to 50 pounds of manure and a gallon of urine daily, applied without restraint to stables and streets. … The low standard of living reflected not just the small amount that people could purchase but also the amount of effort at the workplace and at home where they had to expend to perform ordinary tasks. … To maintain a horse every year cost approximately the same as buying a horse. Imagine today that for your $30,000 car you had to spend $30,000 every year on fuel and repairs. That’s an interesting measure of how much efficiency was gained from replacing the horses. Gone was the need for unsanitary and repulsive jobs of people who had to remove horse waste.” [page 5]

After 1970, a slowdown in productivity growth (output per hour) began because the “one-time-only” benefits accruing from the earlier inventions and their spinoffs “had occurred and could not happen again.” The years from 1996 to 2004 brought an uptick in productivity and economic growth, but that had passed even before the economic downturn set in. The rapid development of online commerce lasted only a decade, and the innovations from the widespread adoption of the Internet have already occurred. Moreover, Professor Gordon argues, this most recent period of innovation did not focus on labor-saving measures but rather on entertainment and communication devices rather than replacing human labor with machines.

I would add that the primary economic effect of the Internet has been to shift commerce from one merchant to another, not altogether different from the mania of the past two decades in the U.S. to build new sports stadiums and casinos, which do nothing but shift consumer spending from one entertainment option to another with the additional expense of massive public subsidies. Professor Gordon illustrates his point most effectively when offering a thought experiment: You can keep all the inventions made in 2002 or earlier but none since, or you can have all the products of the past decade but none resulting from the two earlier periods of inventions.

“Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets. You have to haul the water into your dwelling and carry out the waste. Even at 3 am on a rainy night, your only toilet option is a wet and perhaps muddy walk to the outhouse. Which option do you choose?

I have posed this imaginary choice to several audiences in speeches, and the usual reaction is a guffaw, a chuckle, because the preference for option A is so obvious. The audience realises that it has been trapped into recognition that just one of the many late 19th century inventions is more important than the portable electronic devices of the past decade on which they have become so dependent.” [page 5]

The author offers six “headwinds” that he believes will reduce the growth of U.S. GDP per capita to a snail’s pace: the mass of retiring baby boomers leaving the workforce will cause output per capita to grow more slowly than productivity; the decline in U.S. educational attainment and growth in higher-education costs; growing inequality; the outsourcing and wage pressure inherent in globalization; environmental damage; and debt and the reduction in growth that results from austerity imposed to reduce debt.

Other than the reference to globalization as one of the six “headwinds” that will increasingly buffet the U.S. economy, the paper too narrowly analyzes the U.S. economy as a closed system, a weakness perhaps unavoidable given its specific focus. It is in no way controversial to note that no country is immune from the problems of the rest of the world given the deeply interconnected state of the world capitalist economy.

The paper is valuable in that it provides a reminder that the era of rapid economic growth since the Industrial Revolution has been a unique period in human history, and that such a time might not continue. Capitalism is a system that requires constant growth, an often overlooked aspect that has asserted itself in dramatic form as the stagnation of recent years has inflicted so much economic misery in advanced capitalist countries, and elsewhere.

In previous posts on this blog, I have written that the Keynesian policies that fueled the long post-World War II boom in the U.S. economy rested on a pair of one-time occurrences that can’t be repeated because it depended on a strong industrial base and market expansion. A repeat of history isn’t possible because the industrial base of the advanced capitalist countries has been hollowed out, transferred to low-wage developing countries, and there is almost no place remaining to which to expand. Moreover, capitalists who are saved by Keynesian spending programs amass enough power to later impose their preferred neoliberal policies.

Those neoliberal polices are in the interests of the capitalists who impose them, but are not simply a “choice.” The competitive pressures of capitalism lead to globalization and austerity. Irresistible competitive pressures were foreseen by Karl Marx, who encapsulated some of these problems in his theory of the tendency of the rate of profit to fall. In order to maintain profitability and compete successfully, a capitalist must reduce the costs of production. (This can be more or less stressed at different times; for instance, during the 1990s, there was a Wall Street mania in which industrial companies regularly made public pronouncements proclaiming their intent to become the “lowest-cost producer” in their industry in an attempt to curry favor with speculators.)

Corporate globalization is a natural consequence of the pressure to reduce costs; moving production to countries with far lower wages and few enforceable labor laws is an obvious response under the logic of capitalism. Mechanization is another response — machines make labor more efficient and require fewer workers be employed. But, Marx argued, more advanced methods of production are more capital-intensive, and thus higher efficiency is offset by diminishing returns on capital. The Marxist economist Anwar Shaikh summarized this concept this way:

“[T]he … pattern implies that the more advanced methods tend to achieve a lower unit production cost at the expense of a lower rate of profit. Competition, nonetheless, forces capitalists to adopt these methods, because the capitalist with the lower unit costs can lower his prices and expand at the expense of his competitors — thus offsetting his lower rate of profit by means of a larger share of the market.”*

One way of visualizing this phenomenon is to think of a construction company. Where many workers are necessary when equipped with shovels, far fewer are needed for the same job when the company buys a truck in which one driver can excavate many times the amount of dirt as a worker with a shovel. The company can buy newer and bigger trucks, but the amount of gained efficiency will never be nearly as dramatic as the purchase of the first truck. If we’d like to carry this example further, we might imagine that some of the displaced workers, after turning in their shovels, go to work on the assembly line building the trucks. But competitive pressures eventually cause the truck manufacturer to move the assembly line overseas.

Countervailing factors can frequently reverse this tendency; cuts to wages, work speedups, layoffs, downturns in the prices of natural resources and shuttering of facilities can each buoy profit margins. Nonetheless, some economists argue that it is precisely a falling rate of profit that has caused the ongoing global economic slump. Marxist economist Andrew Kliman perhaps is the most forceful in arguing that the rate of profit has been falling since the 1970s, leading to sluggish investment and economic growth and mounting debt problems despite the adoption of “free-market” policies.

He is not alone in arguing that, unless there is a transcending of capitalism, the only way within capitalism to restore profitability is through a full-scale destruction of the value of existing capital assets — a process not nearly complete despite the harsh austerity imposed around the world since 2008. (Such a destruction happened in the closures of the Great Depression and the physical damage of World War II.)

The various theories discussed here are not necessarily incompatible; capitalism is undergoing a deep structural crisis — not one of its recurring cyclical downturns. This crisis is the culmination of multiple factors that affect one another, and complex analyses are necessary to understand it. Professor Kliman directly declares that stagnation and a crisis-prone economy is the “new normal” while Professor Gordon describes his paper as “intentionally provocative.” But, coming from different perspectives, they envision stagnation as the capitalist future (although the latter discusses only U.S. prospects), as do other perspectives.

What does it mean for a capitalist economy that no longer can grow? The route out of past crises has been expansion to new areas, but infinite expansion on a finite planet is impossible. U.S. capitalists tolerated high wages for a time after World War II because they could expand into overseas markets and thereby increase profits. Once intensified competition from rebuilt Europe and Japan, and the relative maturity of markets, put pressure on profits, the rise of neoliberalism ensued.

In the absence of new markets, the only way to increase or even maintain profits is to reduce costs, and ultimately that means cutting wages and benefits. Doing so, however, leads to a new set of problems — consumer spending in advanced capitalist countries tends to account for 60 to 70 percent of economic activity. When working people don’t have enough money to spend, consumer spending declines and depresses the economy, further squeezing profits. More austerity simply means more economic contraction, as many Europeans are experiencing first-hand.

Capitalist businesses must grow or die, and capitalism functions only if it is expanding. When it doesn’t, or can’t, crisis is the result. If so much money is concentrated into so few hands, those wealthy hands can’t possibly buy enough to offset the deprivation of everyone else, nor should that be a desirable way to run an economy.

If stagnation is the “new normal” of capitalism, then deprivation, pain and worsening inequality is all that it can offer, save for the occasional temporary uptick — a never-ending race to the bottom. Is such a system really the best humanity can do?

* “Falling rate of profit” entry in A Dictionary of Marxist Thought (Tom Bottomore, editor) [Harvard University Press, Cambridge, Massachusetts, 1983], page 159