Daily Archives: January 16, 2012

It is far too easy to blame the crisis of capitalism on global finance and sky-high executive salaries. At a deeper level the crisis marks the triumph of consumers and investors over workers and citizens. And since most of us occupy all four roles, the real crisis centres on the increasing efficiency by which we as consumers and investors can get great deals, and our declining capacity to be heard as workers and citizens.

Modern technologies allow us to shop in real time, often worldwide, for the lowest prices, highest quality, and best returns. Through the internet we can now get relevant information instantaneously, compare deals, and move our money at the speed of electronic impulses. Consumers and investors have never been so empowered.

Yet these great deals come at the expense of our jobs and wages, and widening inequality. The goods we want or the returns we seek can often be produced more efficiently elsewhere by companies offering lower pay and fewer benefits. They come at the expense of main streets, the hubs of our communities.

Great deals can also have devastating environmental consequences. Technology allows us to efficiently buy low-priced items from poor nations with scant environmental standards, sometimes made in factories that spill toxic chemicals into water supplies or release pollutants into the air. We shop for cars that spew carbon into the air and for airline tickets in jet planes that do even worse.

Other great deals offend common decency. We may get a low price or high return because a producer has cut costs by hiring children in South Asia or Africa who work 12 hours a day, seven days a week. Or by subjecting people to death-defying working conditions. As workers or as citizens most of us would not intentionally choose these outcomes but we are responsible for them.

Even if we are fully aware of these consequences, we still opt for the best deal because we know other consumers and investors will also do so. It makes little sense for a single individual to forgo a great deal in order to be “socially responsible” with no effect. Some companies pride themselves on selling goods and services produced in responsible ways but most of us don’t want to pay extra for responsible products. Not even consumer boycotts and socially-responsible investment funds trump the lure of a bargain.

The best means of balancing the demands of consumers and investors against those of workers and citizens has been through democratic institutions that shape and constrain markets. Laws and rules offer some protection for jobs and wages, communities, and the environment. Although such rules are likely to be costly to us as consumers and investors because they stand in the way of the very best deals, they are intended to approximate what we as members of a society are willing to sacrifice for these other values.

But technologies are outpacing the capacities of democratic institutions to counterbalance them. For one thing, national rules intended to protect workers, communities, and the environment typically extend only to a nation’s borders. Yet technologies for getting great deals enable buyers and investors to transcend borders with increasing ease, at the same time making it harder for nations to monitor or regulate such transactions.

Goals other than the best deals are less easily achieved within the confines of a single nation. The most obvious example is the environment, whose fragility is worldwide. In addition, corporations routinely threaten to move jobs and businesses away from places that impose higher costs on them – and therefore, indirectly, on their consumers and investors – to more “business friendly” jurisdictions.

Finally, corporate money is undermining democratic institutions in the name of better deals for consumers and investors. Campaign contributions, fleets of well-paid lobbyists, and corporate-financed PR campaigns about public issues are overwhelming the capacities of legislatures, parliaments, regulatory agencies, and international bodies to reflect the values of workers and citizens. The US Supreme Court has even decided that, under the First Amendment to the Constitution, money is speech and corporations are people, thereby opening the floodgates to money in politics.

As a result, consumers and investors are doing increasingly well but job insecurity is on the rise, inequality is widening, communities are becoming less stable, and climate change is worsening. None of this is sustainable over the long term but no one has yet figured out a way to get capitalism back into balance. Blame global finance and worldwide corporations all you want. But save some of your blame for the insatiable consumers and investors inhabiting almost every one of us, who are entirely complicit.

The writer is a professor of public policy at the University of California at Berkeley, and was US secretary of labour under president Bill Clinton

Friday’s actions from Standard and Poor’s were hardly the biggest surprise in the financial universe: the ratings agency warned in December that eurozone nations were in danger of being downgraded.

Germany is, in effect, the last man standing. Others have succumbed to a mixture of three deadly sins: optimism, inaction and omission.

Too many countries are too optimistic about recovery when all the evidence is now pointing towards a eurozone-wide recession. Contracting output will only exacerbate the revenue shortfalls which have already placed countries on unsustainable fiscal paths.

Inaction is, perhaps, inevitable for politicians faced with a difficult trade-off between political expediency and fiscal reality. France, for example, needs to deliver austerity to bring its primary deficit back under control – and also to persuade its eurozone colleagues that Paris is serious about fiscal discipline – yet Nicolas Sarkozy hopes also to win the presidential election this spring.

As for omission, the idea of a fiscal pact is all very well but it doesn’t deal with the shortfall of income which led to today’s crisis. Until the 2008 economic collapse, many countries in Europe had good fiscal records. They would surely have met many of the conditions associated with the proposed fiscal pact.

Fiscal conservatives in the eurozone have, up until now, argued that austerity will bring its own rewards: tighter fiscal policy will lead to lower deficits and lower deficits, in turn, will lead to lower interest rates and, hence, faster economic growth. Throw into the mix the gains to competitiveness of lower labour costs associated with austerity and it suddenly looks like austerity really can pay off.

Within the eurozone, however, the argument hasn’t worked. Greece has its own problems which, if Friday’s breakdown of restructuring talks are anything to go by, are set to get worse. Even those who have been fiscally-conservative, however, have not been rewarded. Irish 10-year government bond yields are still up at 7.8 per cent, a ludicrously high level given the weakness of economic activity.

In the months ahead, the eurozone’s difficulties are likely to mount. As the contagion spreads, and as investors lose confidence in the ability of countries to deliver lasting fiscal austerity, countries which, to date, have benefited from immunity will also begin to suffer.

Next in the firing line may be Germany, not so much because its bond yields are about to spike higher but, instead, because its exporters are hugely exposed to trade with the rest of the eurozone and its financial institutions are groaning under the weight of the region’s financial disorder.

The narrative may then change. Until recently, the orthodox German take on the crisis was simply to argue that other countries should be more like Germany delivering fiscal conservatism, hard work and a current account surplus. But Germany may end up more like the others, unable to avoid a descent into recession.

That, in turn, could provide the eurozone with an unexpected lifeline. Faced with recession in both the periphery and the core, and with interest rates already close to zero, the European Central Bank may have to bite the bullet and begin a programme of quantitative easing, using newly-created money to buy government bonds. It won’t solve the crisis – that requires a leap of political imagination – but it would at least make the crisis easier to solve.

The writer is group chief economist at HSBC

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