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James Galbraith: The crisis in the United. States and Europe – a grim appraisal. ETUI conference cycle: The crisis and inequality. —. Date: 11 December 2012.
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James Galbraith: The crisis in the United States and Europe – a grim appraisal ETUI conference cycle: The crisis and inequality —

Date: 11 December 2012 Venue: Résidence Palace, Brussels ............................................................................................................................................

Conference report european trade union institute

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Editor: Willy De Backer Rapporteur: Craig James Willy Photographer: Gleamlight sprl © Publisher: ETUI aisbl, Brussels 2013 The views expressed in this report are the private views of individual speakers and contributors and do not reflect the opinions of the organisers. Reproduction of the contents of this report in whole or in part is allowed, provided full credit is given to the ETUI. Contents of this report, in whole or in part, cannot be sold for commercial ends. The ETUI is financially supported by the European Union. The European Union is not responsible for any use made of the information contained in this publication.

The crisis in the United States and Europe – a grim appraisal

Philippe Pochet, General Director of the European Trade Union Institute, introduced the conference by highlighting “two reasons” for its organisation. The first issue was that of the change in the dominant narrative surrounding the economic crisis. He said that between 2007 and 2010 there had been a “window of opportunity” during which new thinking came to prominence, including on the role of finance, the real economy, the importance of the welfare state and social buffers during crises, and the environment. Since 2010 however a “totally new dominant narrative has emerged” with the European sovereign debt crisis, emphasising in popular discourse the idea of “belt-tightening”, treating the State as if it were a household. In this second reading of the crisis, the social dimension of Europe came to be seen as the problem with as a result attacks on wages, pensions and trade unions.

“Europe is dividing itself, rather than uniting, which was the historic project of the Founding Fathers.” Philippe Pochet

The second issue was that of divergence within the eurozone. Pochet said that the previous assumption of complex, slow but steady convergence of Member States through the European Union’s regional, social and agricultural funds had been discredited. The crisis has made evident that there has been ever-greater divergence between countries in terms of their real economies, performance and labour markets. “Europe is dividing itself, rather than uniting, which was the historic project of the Founding Fathers,” he said. Pochet concluded by detailing his views of the new economic geography of Europe: “These divergences can lead to what I have called the ‘three circles’ of Europe: —— a circle around Germany, not necessarily geographically, but in terms of production, which is extremely productive; —— a second circle which in the language of automobile manufacturers would be called the ‘subcontractors of the first order,’ which include the Czech Republic, Poland and Slovakia; —— a third group which some have called ‘the new China’ being all the countries which in a few years will have a minimum wage lower than that of the Chinese coastal provinces, in which we potentially have the emergence of extremely worrying territorial inequalities in areas of industrial specialization.”

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Conference report: James Galbraith

James Galbraith, Professor at the University of Texas at Austin, gave a broad overview of the crisis’ origins, its unfolding, and the interpretations that have been made of it and the link with his work on inequality. The role of inequality, according to Galbraith, had not been fully integrated into the study of the crisis and on the contrary had been sidelined. He said that his studies of inequality in the 1990s had found that more egalitarian wages coincided with less unemployment, with a straightforward gradient from northern to southern Europe. Galbraith said this contradicted the “conventional wisdom” of that time which called for the flexibilisation of labour and attributed high unemployment “eurosclerosis” to “an excess of trade union power and social democracy.” He remarked that the U.S., which had lower unemployment at the time, also had less pay inequality than European Union countries taken as a whole, taking into account the large differences in average pay that exists between European countries. Galbraith then turned to the current crisis stating that most explanations of the economic crisis thus far had been “exceptionally disappointing”. Most explanations view the crisis as a “transient event from which recovery would proceed more or less on its own” resulting in them being consistently overoptimistic. One note narratives such as a “Black Swan” statistical freak event and famed economist Paul Krugman’s explanation of a “liquidity trap”, whatever truth they may have, could not account for the failure to return back to what was previously considered to be normal economic activity. Galbraith argued there was a strong connection between the crisis and inequality as the rise of inequality in the U.S. correlated strongly with the rise of financial sector income, in part based on predatory mortgage lending to lower income individuals. He noted that a vast amount of related financial fraud had gone unpunished. “This is the aspect that gets discussed the least”, Galbraith said. “People don’t want to face it because it lacks an element of politeness.” Galbraith asked: “Why did this happen? How can the financial sector in the United States collapse the way it did with a de-supervision which lets it get taken over by the most aggressive kind of hucksters? This is not something

“Why did this happen? How can the financial sector in the United States collapse the way it did with a de-supervision which lets it get taken over by the most aggressive kind of hucksters? This is not something that happens on its own.” James Galbraith

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The crisis in the United States and Europe – a grim appraisal

that happens on its own.” He traced the roots of financial fraud to two “fundamental facts” of the past decades. A first was the rise of resource prices since the 1970s and particularly in the 2000s which led to a “profit squeeze” which had pushed companies to report results in new, often fraudulent ways. A second was in the “nature of the technological changes” which “have been fundamentally labour-saving,” to the detriment of workers in developed countries. “As anybody who employs journalists or office workers knows, there is vast and continuing potential for substitution by electronic technology and for outsourcing,” Galbraith said. Galbraith added: “It is doing in effect to the office worker and certainly to the journalist, and maybe eventually to the college professor, what the internal combustion engine did a century ago to the horse, rendering them redundant.” These two factors weakened the labour and tax bases of developed countries, Galbraith said, being compensated for by “the fraudulent extension of credit in the United States”. This also occurred in Europe, in a different form, with lending to the Greek public sector and military, to Spanish and Irish real estate development, and to the Icelandic financial sector, among others. “It’s very much the same story but on a different institutional foundation and a different set of creditor-debtor relationships that are much more institutional and much less oriented towards individuals”, Galbraith said. Galbraith underscored the importance of the fundamental financial interdependence of the world economy. “It is extremely important to recognise that what one has beginning in 2007 and culminating in 2009 is a single world crisis of an integrated financial system,” he said. “There was a flight to safety by investors who know they’re going to take big losses on their American assets and therefore dump the weak European sovereigns as a result of that.” This explains the en masse lending by financial markets to weak borrowers, the swift common retraction of such credit, and the inadequacy of purely national responses.

“I think there was in this also a complete failure on the part of progressive economists to understand what they were up against.” James Galbraith

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Conference report: James Galbraith

Galbraith singled out progressive economists as having failed to fully get to grips with the causes of the crisis: “I think there was in this also a complete failure on the part of progressive economists to understand what they were up against or perhaps a wilful desire to be useful which required them to suppress an understanding of the extent of the institutional and structural underpinnings of this disaster.” Keynes had been “revived” during the crisis and Keynesian solutions were proposed, some of it in good faith but also by “false Keynesians” who opportunistically used stimulus to try to return to normal activity without addressing underlying problems. “As though a fundamental breakdown in the structure of core institutions that motivate and maintain economic growth can be repaired by public spending alone”, Galbraith said. Galbraith used the analogy of a sick patient, saying “There is a difference between giving an injection of, say adrenaline, to an otherwise healthy patient to get them going again and a medical intervention to deal with organ failure.” He added: “It’s something different entirely which is going to give you a much longer and more troubled recovery period.” This action under the banner of Keynesianism “created an enormous problem for progressives because it led to overpromising and disappointment and therefore a loss of credibility on the part of the whole progressive side of the ledger.” Galbraith said it led to attempts to discredit Franklin Roosevelt’s New Deal, the spread of the idea that the crisis was due to “too much government”, and was translated into American politics with the so-called “fiscal cliff” and into European politics by austerity. Galbraith argued that austerity worsens the crisis as it leads to a decline in GDP and tax revenues, similar deficits and higher debt-to-GDP, and weakening of public institutions, all of which in turn undermine investor confidence. Galbraith was extremely pessimistic on the consequences of such policies, possibly even leading to civil conflict. “It’s going to lead to destruction,” he said. “This is something we have seen before, not long ago, not far away. Yugoslavia was in its day a very successful middle income country.”

“Solidarity is not just a principle of compassion. It’s a stabilising principle that has to be applied across the whole spectrum of the problem.” James Galbraith

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The crisis in the United States and Europe – a grim appraisal

Galbraith added: “And we know what happens when an advanced country breaks apart under the stresses among other things of international debt. Things can go very quickly in a direction which nobody would want to see again.” He concluded that while the timing of such events could not be predicted, it was a possibility, and recent history should not be dismissed as an aberration. In Europe, Galbraith suggested central EU welfare provisions, analogous to the U.S. federal budget, could be necessary for the functioning of the Eurozone, including a European unemployment scheme and a European pension union. “Solidarity is not just a principle of compassion”, he said. “It’s a stabilising principle that has to be applied across the whole spectrum of the problem.” Galbraith highlighted the fact that the U.S. financial crisis was being resolved partly because it mainly involved individuals, who were defaulting and losing their homes in personal stories which, however tragic, were not a threat to the national system. In Europe the debt-holders, being large banks and sovereigns incapable of defaulting without systemic consequences, the financial crisis is unable to be resolve itself. He said however that “[d]ebt crises always end, particularly debt crises between sovereign governments, with renegotiation and restructuring, only when the creditors are compelled to expect less.”

“We need to recognise that the physical and institutional bases of the previous growth economy are deeply impaired.” James Galbraith

The professor said the eurozone had been founded on the economic ideology of monetarism, with lasting consequences. “Europe was constructed at a moment when there was a particular economic ideology,” he said. He cited in particular the EU’s deficit reduction pact, which he termed the “Instability and No-Growth Pact”, as an example of an arbitrary and permanent mechanism adopted to meet short-term goals (in this case, heavily indebted Italy’s accession to the euro). Galbraith contrasted the position of the European Central Bank with the U.S. Federal Reserve. “The charter of the European Central Bank got caught up in the monetarist moment,” he said. The ECB only targets inflation whereas the Federal Reserve has a “dual mandate” to also promote full employment.

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Conference report: James Galbraith

Galbraith said he had helped draft the legislation on the Federal Reserve’s mandate as a congressional staffer in the 1970s to ensure it contained “nonideologically specific language”. Galbraith also stressed that the Federal Reserve is a mere statutory agency, not a quasi-constitutionally defined branch of government like the ECB, which can therefore be reformed or abolished by a simple act of Congress. He said it was important that the central bank “be truly accountable to elected representatives”. When asked what “ambitious project” one might have in a context of low growth, Galbraith said, differing with Paul Krugman, that he had “no solution for returning to postwar rates of growth.” He added: “We need to recognise that the physical and institutional bases of the previous growth economy are deeply impaired.” Galbraith argued that the focus should be on stabilisation and preventing further economic degradation or even the onset of violence. He suggested that, once this had been achieved, the focus might shift to issues like energy and climate challenges. He asked: “Why are we dealing with these magical notions like confidence of the markets instead of these concrete issues which are going to be affecting the future?” Jan Willem Goudriaan of the European Public Services Union (EPSU) underscored the disenchantment with the European project on the part of trade union members and citizens more generally. Goudriaan highlighted what he called the “utter failure” of austerity policies, with the collapse of GDP in several Member States and the “destruction” of public services such as hospitals and schools. “You can’t call that a success, at least not in my book”, he said. He cited a growing body of research by economists at as well as the International Labour Organization and elsewhere showing that austerity policies were self-defeating and suggested the Commission was afflicted with “tunnel vision”. On the attacks on democracy over the course of the eurozone crisis, Goudriaan cited a secret letter in which the European Central Bank instructed the Italian government to liberalise local public services despite a recent national referendum result explicitly disavowing such action. Goudriaan said the ECB and the Commission were still pushing for such policies despite this: “That is the extent of the gap of democracy.” He added that European Commission President José Manuel Barroso’s Blueprint for a Genuine Economic and Monetary Union “does not solve any of these democracy problems.” Goudriaan described the consequences of the reduction of public services. “The destruction of public services through privatisation and public-private partnerships has taken away a factor pillar of stability in the economy”, he said, citing especially the case of the privatisation of public banks. He added that the reduction in public services was leading to aimpacted labour inspectorates predictable reduction in labour safety, environmental projectsprotection

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The crisis in the United States and Europe – a grim appraisal

“The disenchantment with the European project among our members is enormous and getting worse.” Jan Willem Goudriaan

agencies, and other regulatory bodies and we can wait for accidents to happen. He also referred to the reduction in the number of and tax inspectors, the latter being particularly galling in light of the role of tax evasion and avoidance and fraud of corporations leading toin increasing public deficits. Goudriaan said trade unions were arguing for a social pact which the Commission’s documents were “not even giving lip service to”. “The disenchantment with the European project among our members is enormous and getting worse and worse,” he said. In terms of industrial action, Goudriaan cited a recent successful 14 November mobilisation as well as planned action for the upcoming March European Council. He added however: “It is disappointing that our actions and our proposals only get into the newspapers when there is violence, when people break through to the police. Because is that really how we want to get the attention of our government leaders leaders?” There was later some debate with the floor on the issue of the ECB’s letter to Italy. A former EU official argued that, as the ECB is the only specifically pan-eurozone institution, it is the most democratic eurozone institution. Goudriaan argued that, as the letter was secret and as the ECB has no mandate to deliver detailed policy prescriptions to Member States on labour markets and ownership of public companies, this was undemocratic. Also during the floor discussions, Robert Cox, Trustee of think tank Friends of Europe, asked whether the problem was not waste and inefficiency in the public sector, citing the example of schools where he claimed one quarter of teenagers were “technically illiterate”. Goudriaan answered that while “inefficiencies obviously need to be addressed,” there were also inefficiencies in the private sector, such as tax-dodging, and that studies have shown that public-private partnerships don’t work.

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Conference report: James Galbraith

Alfonso Arpaia of the European Commission gave an overview of Europe’s economic diversity and the choices available to national leaders in undertaking economic adjustments. Arpaia asked whether there was indeed a trade-off between equity and efficiency in terms of labour market flexibility. “We can see big differences in performance indicators across countries,” he said. “If you look at the Nordic countries, despite the fact that there is wage compression it is true that the labour market performance is very high.” He added that strong labour unions play a role in negotiating and softening the blow of necessary economic adjustment. On public services, Arpaia argued that their quality can be guaranteed by strong monitoring and the pressure of citizens. “There are a lot of efficient local public services when there are local pressure groups, at the level of the commune, that have an interest in the management of those services,” he said.

“If you look at the Nordic countries, despite the fact that there is wage compression it is true that the labour market performance is very high.” Alfonso Arpaia

Arpaia said there were differences in how economic adjustment was being implemented across Europe, with the case of Ireland being much more progressive than Portugal. “There governments also have a say and there is no preference from the point of view of the Commission in implementing one adjustment or the other,” he said. On public spending cuts, Arpaia added that governments had leeway in what they chose to cut, in some cases public services being so inefficient that financing could be reduced without also reducing the quality of the service. He concluded: “All this of course implies choices.” Pierre Defraigne of the Madariaga – College of Europe Foundation gave an overview of how debt and inequality since the 1980s had set the stage for today’s crisis. Defraigne highlighted the importance of social dialogue in Europe saying “Democracy in Europe is founded on social compromise.” He added that it

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The crisis in the United States and Europe – a grim appraisal

took two centuries in Europe to find a “stable equilibrium” between capital and labour, through the nations’ various social models. He emphasised the plural saying there is no single European social model. These models, Defraigne argued, coexisted without problems during the postwar boom years (trente glorieuses) but had gradually been sapped by international competition. “We put these social models progressively into race-to-the-bottom competition. It’s one of the tragedies of Europe,” he said.

“We put these social models progressively into race-to-the-bottom competition. It’s one of the tragedies of Europe.” Pierre Defraigne

Defraigne discussed the problem of inequality saying that, though it had begun 30 years before, it was the crisis’s primary cause. In particular, he argued that private debt was accumulated, either in the pursuit of wealth through speculation or to “keep up with the Joneses”, while States became similarly indebted as they reduced taxes on the wealthy while maintaining social protection for the poor. Other factors contributing to the crisis were the end of the West’s privileged economic position, the outsourcing of profitable industrial sectors to Asia, rising energy prices and the “financialisation” of the economy. The latter had given a huge advantage to newly-mobile, transnational capital over labour. The result is that the past decades of growth had been illusory, based on unsustainable debt and a declining economic position. “After the Thirty Glorious Years of economic growth [after the Second World War] we have had the Thirty Deceptive Years [‘trentes trompeuses’],” Defraigne said. “That is to say years in which we thought we were growing but didn’t realise that we were buying this growth with ever more inequality and ever more over-indebtedness.” Despite all this, Defraigne said inequality was not a subject of conversation in EU discourse. “In the 2000s, inequality had already been around for a long time but it was becoming obvious, there was a refusal of the Commission as an institution to look at inequality,” he said. He added that the Commission declined to collect deeper statistics on inequality, considering that it would only increase tensions between the Member States.

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Conference report: James Galbraith

To the extent there has been convergence between “new” and “old” Member States within the EU, Defraigne said this was occurring at the cost of increased inequalities within the old countries. He argued this was “because of this tax competition which is organised within Europe and by the Single Market. It is deeply written into the Lisbon Strategy and the Europe 2020 Strategy, which talk about lots of things, but not about upward social convergence.” On the issue of public finances, Defraigne said “I think the Golden Rule is a good thing, but all depends on the timing.” He lamented the fact that while the Commission was becoming a “budgetary policeman” with significant powers there was “not a single word on tax harmonisation.” Defraigne said that while the economy was fuelling division in Europe, political action could bring about unity on the basis of the “two pillars” of eurozone economic governance and the “much more important” convergence of social models. Defraigne concluded by suggesting three courses of action. First the debt overhang should be eliminated through its mutualisation and restructuring. Second jobs and incomes should be more equitably shared. Third a federal budget, as proposed by Council President Herman Van Rompuy, should be created, based on a tax on large firms and wealth, also dealing with the problem of tax havens in Europe. “Europe has to be a laboratory for the re-foundation of market capitalism,” he concluded.

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