CRISIS 2.0: A POLICY FOR THE 99%
By Hans Baumann, Beat Ringger, Hans Schappi and Johannes Wickli
[This discussion paper published by the Swiss think tank Denknetz in December 2011 is translated from the German on the Internet.]
Crisis 2.0: Old and New Causes
The crisis cycle beginning in 2007 has entered a new phase. The financial crisis has raised its head again and this time the trouble-spot is in Europe. Whether the European elite will successfully put out the fire or whether uncontrollable events will occur and the Euro will fall into danger is uncertain. This could dramatically accelerate the crisis. A return to national currencies could be allied with shaken global economic relations whose effects can hardly be foreseen.
An important element of the new crisis phase is the European Union's slowness to make decisions and act. This weakness has opened scandalously great possibilities to speculative financial market actors. An extensive fire arose out of the attacks of the financial markets on the credit-worthiness of securities in a peripheral country of the Eurozone (Greece). This could have been prevented through resolute actions (for example issuing Euro-bonds).
The "Stability Union" resolved by EU heads of government on December 9, 2011, and the installation of debt brakes in state budgets continue a policy that will worsen and not overcome the crisis. Strengthening austerity policy will further restrict demand. The reasons why global capitalism in 2007 entered a crisis cycle are not removed. Quite the opposite!
The following five reasons explain the depth and stubbornness of the crisis.
The capital surpluses accumulated in the thirty years of neoliberal dominance were not cleared away in the course of the past crisis. [In the time period 1980-2007, the nominal worldwide financial assets grew 15-fold while the world social product grew 5 fold. The fact that the share of profits in the social product clearly increased is the motor behind inflation of financial assets. The share of wages and real investments fell. This capital overhang (capital over-accumulation) must be corrected sooner or later. Capital wants to gain profit. Such profit will be scrutinized in its real core in crisis situations. Purely speculative "securities" must then be written off. Mountains of securities were taken over by the state in 2007/ 2008 to bail-out banks.] Rather, enormous state funds were injected in 2007 and 2008 (and also today) to prevent a collapse of the financial markets. The capital surpluses are a constant source of new speculative waves regarding securities and currencies. Besides the financial institutes, the mammoth international businesses and wellsprings are the motors of this capital over-accumulation. Multinational corporations are a driving force in developing tax avoidance or tax planning practices. Both tax avoidance and wage pressure lead to a further growth of capital surpluses. Many transnational combines are among the big investors on the financial markets without obligating banks or other financial institutions. Caution is necessary when "good real capital" is opposed to "evil financial capital."
The growing unequal distribution of income and wealth leads to growing inequalities between supply and demand. The share of wages in economic output declines worldwide. The luxury consumption of the rich cannot make up for that. Therefore, private demand falls behind the supply. Attempts to raise demand by encouraging private households to heavy debts (for example, cheap mortgage credits) increase the crisis-proclivity. The state sector (infrastructures, health care, education etc) suffers under the restrictive tax policy of the elites. The austerity policy now promoted as a prescription against state indebtedness further expands the demand gaps. The special position held by the US for decades strikes its limits today. For years, the US became disproportionately indebted. The position of the dollar as the world currency meant no other economic power could limit the US in creating new dollar assets. The enormity of accumulated current US debts and the relative weakness of the US in international competition make continuing this debt policy increasingly difficult.
The elites refuse to carry out a turn in tax policy. This is dramatic in two ways. First, the state budgets were burdened by the 2007/ 2008 bailout actions and increased spending in favor of the unemployed. These costs of the crisis should not be shifted to wage-earners and the large majority of the population. The state sector narrows again. A fundamental development is hidden behind this. Economic activity increasingly shifts to person-related services (education, healthcare, nursing, and childcare) given the far-reaching rationalization of goods manufacture. These services are public services. The increased prosperity today depends on growing public services and stable systems of social security. Therefore, the state shares must increase. This prosperity is blocked or forced down – instead of the state share being continuously increased that is indispensable for greater prosperity. Moreover, the elites in the last years shifted the tax burden from businesses and high incomes to consumer taxes and fees that put a damper on private demand. Thus, the crisis of state finances is mainly a crisis of tax refusal. The argument that the revenue of businesses would flow in the real economy is dubious. Profits increased more strongly than investments in the real economy. Tax increases for redistribution did not occur in the past as part of crisis management since the elites refuse any correction. In Switzerland, for example, businesses and the rich were relieved of tax burdens. In other countries, general tax increases for the rich had at best a symbolic value. No breakthrough for a transactions tax can be seen.
This refusal is part of the continuing neoliberal policy of deregulation. The states were systematically weakened over against the financial market actors. A structural imbalance arose between financial capital and the state regulatory power. Therefore, not astonishingly the political elites have a considerable aversion to confronting speculative financial actors. They allow a handful of managers in rating agencies, hedge funds, and big banks to bring politics over the coals. Confronting the speculators would lead to an upgrading of politics. Conflicts of interest must be settled politically and cannot be handed over to the "markets" anymore. This would oppose neoliberalism's goal for 30 years – weakening politics and strengthening "market forces" in almost all social matters.
One central example of such a conflict of interest is the conflict between the German elites (in towrope with some other countries) and the elites of most other EU countries. Thanks to low piece-labor costs, German businesses conquered considerable market shares and are not ready to abandon these advantages. They urge a severe austerity policy for the EU crisis countries and block European solutions, for example, Euro-bonds. The speculative pressure on national securities or bonds could be eliminated with one blow in issuing these bonds… Stabilization measures were too late and too weak. They could not stop an aggravation of the crisis although a sum of 700 billion euros was at work.
A leftist answer to a new escalation of the crisis
European elites will be unable to put out the fire. This must be expected. As in 2007/ 2008, the financial markets are again threatened by collapse today. Banks distrust one another and do not award credits anymore. The financial markets must be flooded with dollars to maintain the liquidity of the banks. For the same reason, the European Central Bank again lowered the interests that it demands from the banks for the euro-relationship. In the latest announcement from December 21, 2012, EU banks were awarded 500 billion euros for three years at 1% - without any conditions on the use of these cheap credits.
If the situation destabilizes, the crisis could quickly become uncontrollable. The left must define the benchmarks for reacting to a new intensification of the crisis in a country like Switzerland that was long hardly affected by the crisis. In 2007 and 2008, all the social forces were taken by surprise by the crisis. This argument could not be made any longer in 2012 or 2013.
Too big to fail; financial services as public service
The solvency of many banks would be threatened if the inter-bank business collapsed or the euro fell to pieces or disintegrated. With one blow, the big Swiss banks would be considerably exposed even if their demands on the main debtor countries are now trifling. The too-big-to-fail problematic could be quickly raised again. A second bailout action according to the model of the UBS-bailout of 2008 is not possible anymore. Banks can hardly still be supported with massive state funds while their active power remains inviolable. Big banks that go into a spin must be put under direct public control. In any case, the obligations of the bank may not be transferred to the state.
The following steps must be taken in assuming control over the banks
Ensuring elementary financial services (monetary transactions, service charges, banking/ credit system). These elementary financial services should be transferred into a public service.
Immediate cancellation of all bonuses and all claims to bonuses
Disclosure of all books
Public discussion and democratic determination of criteria where creditors are judged with preference given to small savings, home owners, small- and medium-size enterprises and pension funds…
The fiscal program drafted in the Denknetz tax agenda should be implemented as quickly as possible. Higher business taxes, the abolition of tax privileges for holding companies and joint partnerships, higher taxation on the highest incomes and bonuses and the introduction of a national inheritance tax are central. In this way, part of the fiscal redistribution policy of the last 15 years would be canceled. Switzerland must stop robbing other countries of their tax substance. The possibilities for a progressive tax policy should also be improved in other countries.
Tax authorities could intervene in tax fraud and are committed to international cooperation. Banking secrecy in the sense of tax fraud secrecy should be abolished. The rules of automatic information exchange should be in effect for the financial institutes in dealing with tax authorities at home and abroad. Switzerland should effectively oppose off-shore financial centers worldwide and their practices promoting tax deception and tax avoidance. Switzerland should finally bid farewell to its past anti-social parasite policy in the interest of tax dodgers and the banks.
To gain more income justice, binding minimum wages should be introduced as the SGB citizens' initiative urges. This initiative was introduced in January 2012. The maximum wager-spread within a business should be limited to a span of 1:12 as corresponds to the initiative of Juso.
A global policy of justice
Switzerland should be actively engaged on international and particularly on the European plane
for a minimum effective business tax of 30% on profits over 10 million euro/ US dollars
for immediate implementation of an effective financial transactions tax
for the prohibition of speculative financial products and an effective approval process for new financial products
for prevention of over-the-counter financial businesses operating outside exchange relations
for capital-holding requirements of banks of 30%
for public control of rating agencies and hedge funds
for a Europe-wide coordination of wage- and social policy establishing coordinated minimum wages and preventing wage-dumping
for a worldwide implementation of the 1:12 rules for salaries within the same business
for reduction of the economic imbalance and a "Marshall Plan" for Europe as an alternative to the austerity policy toward indebted countries. Demand should be stimulated in the realm of the public infrastructure, public service, the education sector and by investments in ecological reconstruction.
A Policy for the 99%
We have become increasingly productive in the last decades. The goods needed daily can be produced in a fraction of the time necessary in the past. Our knowledge and technological skills have grown tremendously; the social wealth has increased markedly. Nevertheless, the living conditions of wide sectors of the population are worsening worldwide. We are unable to seriously tackle pressing problems like climate change.
In the last years, the riches of the top 1% in income have grown rapidly. The dominant politics wants to make us believe we lived above our means and must now tighten our belts. Politics can get nowhere against the unerring power of the markets. The wealth of the richest is now created in these markets.
This logic becomes increasingly absurd and increasingly anti-democratic. The more deeply the crisis becomes embedded, the more raising the basic alternative becomes more unavoidable. Either we allow a politics in the interest of the one percent to be enforced as currently practiced in Europe or we make sure the wealth of the one percent is transferred from the financial markets to the zones of social usefulness. With the first, we accept collapses and setbacks in the quality of life of the 99% and a blockade on urgently necessary social innovations, for example in environmental policy. The second, social usefulness, could succeed if the left is renewed and musters the courage to confront the politics and policy of the one percent.
How Bad is the Current State Indebtedness?
The state can finance its spending in three ways. It can levy taxes, demand fees for its services or borrow on the financial markets. It does the latter by issuing government bonds with specific repayment periods and a fixed interest rate. For example, Switzerland in September 2011 renewed government bonds with a repayment period of 10 years and an interest rate of 2% and in November 2011 another government bond with a repayment period of 15 years and an interest rate of 4%... When the government bonds run out, they must be paid back and refinanced, that is replaced by the issuance of new bonds (if the state wants to reduce its debts).
Debts make sense when higher yields can be realized than must be paid back in interests. That is the reason why businesses take out credits (or contract debts). A state can also generate future returns by investing in education, infrastructure etc. and strengthening its efficiency or economic output allowing it to budget higher tax returns in the future.
Again and again, we are told state debts are at the expense of future generations. That is false. Rather, the state renouncing on sensible and necessary investments (for education and a good infrastructure) only not to make debts is at the expense of future generations. Thus, debts can be sensible for a state as long as the total burden of the interests remains less than the likely increase in returns made possible on account of the borrowing costs.
There are good reasons not to let indebtedness grow above a certain level. Debt service (the payment of interests) may not limit the possibilities for state action. Debts lead states to go out on a limb on the financial markets. For decades, government bonds were regarded as the safest form of capital investment because states cannot "really" go bankrupt (at least they cannot disappear from the scene). However, important financial actors (a handful of hedge fund managers) decided in the winter of 2009/2010 to speculate with government bonds and make sure that the interest-rates were forced up. Greece was chosen as the first casualty. At that time, the Greek government tried to resist the pressure. It postponed the repayment period of these loans and took a confrontation course with the financial market actors – instead of repaying overdue loans. Greece mobilized its own population for this confrontation and sought allies in Europe (for example with unions, NGOs, left-governments etc). Owners and the rich in Greece had to pay taxes.
Obviously, no one could say with certainty that this project would be successful. In crisis situations, every political option is fraught with many uncertainties. The other option – subordination under the financial market actors – would lead to a rapid decline and fall before the worst or bottoming out is certain.