Archive for the Political Economy Category

Nader v. Dodd

Posted in Political Economy on November 20, 2009 by CjH

A Dream Match

“In the beginning of a change the Patriot is a scarce man, and brave, and hated, and scorned. When his cause succeeds, the timid join him, for then it costs nothing to be a Patriot.”

–Mark Twain

There is a word; a name actually. The very pronunciation of which sends a deathlike chill down the gelatinous spinal column of the self-styled “progressive” Democrat. Democrat media talking heads have even a more violent reaction. A reaction that is similar to that of the mythical, bloodsucking, soul-destroying vampire when confronted with the light of day.

There is a very good chance that Ralph Nader may run for US Senate in Connecticut in 2010. Ralph told Politico reporter Glenn Thrush “You can’t believe the number of people asking me [to run]… Right now I’d say I’m agnostic”.

The long whispered rumor began to take on greater credibility as far back as April when an article by Keith Burris first appeared in “The Norwich Bulletin” — Norwich, Connecticut. Back then the driving force was the anger that Connecticut voters felt towards Senator Chris Dodd.

Connecticut voters finally realized Dodd is a do-nothing corporate Democrat for whom they have been voting pretty much out of mindless habit. However, now that most cognizant voters realize that it was the repeal of The Glass-Steagall Act (which separated commercial and investment banking firms) that was the root cause of our current economic crisis, voters everywhere, Connecticut being no exception, are taking a hard look at corporate Democrats from Barry The Bomber on down.

Chris Dodd represented Wall Street and the banks when he should have been representing the people of Connecticut and protecting them from the predatory practices of the financial world. As it turns out, it was Chris Dodd himself who engineered the Glass-Steagall repeal. Senator Dodd’s only comment on this incredibly heinous deed was that he really didn’t mean to destroy the banking system! He blames the regulators but of course the regulators did not repeal the 1933 legislation; that was done by Chris Dodd and cheerfully signed by Bill the Stain Clinton.

The Big Five

Adding insult to injury, Senator Dodd is also one of the top 5 recipients of Wall Street bucks. According to the Center for Responsive Politics, “The finance, insurance and real estate sector has given $2.3 billion to candidates, leadership PACs and party committees since 1989, which eclipses every other sector. Nineteen percent of total contributions from the employees and political action committees across all sectors came from the financial sector.” Dodd has been the happy recipient of $752,698. He is the fourth largest leech being eclipsed only by Senator Charles Schumer (D-NY) at $2,167,300; Kirsten Gillibrand (D-NY) at $1,173,400 (yes, she’s the one who replaced Hillary Clinton in more ways than one) and coming in at number three is Harry Reid (D-NV) at $1,038,210.

Democrats all! Yes, the lesser evil party which has done so much to oppose the right-wing in the last 30 years it would take a volume at least the size of an entire postage stamp to enumerate.

Dodd is hardly the paradigm for the Democrat Party’s acquiescence to corporatism. The Democrats have been slopping out the corporate trough ever since the early 1980s when Tony Coelho convinced them that they should be dialing for the same corporate dollars as the Republicans. If there was little difference between the Democrats and Republicans prior to the 80s it was completely gone by the time William the Stain was elected in 1992.

Democrats follow the Republican lead in more than just corporate money. Advertising has replaced substance and when “Brand Obama” was put on the market the Democrats never bothered to ask “where’s the beef”. Now even Democrat strategists like David Swanson are saying that the Obama administration is no better than a third Bush administration. So much for the myth that “Anybody is Better than Bush”.

Lemons for Clunkers

Imagine the experience someone has after having dumped their old clunker for a new car only to discover they bought a lemon! Suddenly even the old clunker begins to look good! Pardon the Biblical excursion but Jesus really captures the Obama-following-Bush experience quite prophetically: “When a demon goes out of a man, it travels through the desert, seeking rest, and finds none. Then it says, ‘I will return to my house from which I came.’ Then it goes and takes with it seven other demons more wicked than itself, and they enter and dwell therein; and the last state of that man is worse than the first. So shall it also be with this wicked generation.” In other words, for those who thought Bush was bad, Obama will make him look like a schoolyard bully. Obama has already dropped three times as many bombs on innocent Pakistani men, women and children in one year than George Bush did in his last three years! And it took a Democrat to attack women’s rights in the recent health care spectacle – not even Bush did that!

Nevertheless the so-called progressive Democrats are beginning to raise a troubled eyebrow. No, they will never vote for anyone other than a Democrat for President; that would be asking way too much. But they may just have lost enough enthusiasm to stay home next November in some states or in Connecticut they may actually realize that choosing “the lesser of two evils” is morally correct only when there is no “good” choice. The overwhelming majority of Democrats have never been able to rise to that moral level in the past but Connecticut may give them the opportunity to obtain absolution for the sins of their entire party in 2000, 2004 and 2008. Whether they can ever be absolved for the lies they told about “Nader taking votes from Gore” is questionable. They may have to serve years in political hell to cleanse their political souls of that obscenity.

Caution: The Green Party

The Connecticut Green Party has already announced that it would welcome Ralph Nader into the 2010 race for U. S. Senate and thinks he would have a good chance to win against current Senator Dodd.

A Connecticut Green Party spokesperson said, “Since the media reports began in local and national web sites last week, we have seen hundreds of responses urging him to run. With Dodd losing in many polls to the Republicans who have announced, we think Nader could be a clear choice to many who have lost faith in Dodd and his scandals with the banking and financial industries. To win, Nader would have to raise $3-5 million, which he has done easily in past campaigns and build an army of hundreds of volunteers for the race.”

In meeting with Green Party officers, nevertheless, Ralph should wear a large chain of garlic and carry the largest cross available since the Green Party sees itself as nothing more than a special interest group within the Democrat Party. Instead of backing Nader in 2004 and 2008 it gave indirect support to the Democrat candidate even rigging its own convention so that Nader could not possibly win the nomination. Nevertheless, the Greens are in perhaps greater need of absolution than the Democrats. Absolution is, after all, part of the last rites. Even with a Nader candidacy it is doubtful that the Green Party will see Resurrection Day.

The Corporate Parties

At least three Republicans have announced their intension to run against Dodd! They think he can be defeated too. Connecticut, despite Lieberman and Dodd, is nevertheless a liberal stronghold and it would be difficult for a Republican to win unless the Democrats (as may very well happen) stay home in droves.

The Democrat Party of Connecticut seems unable to come up with a viable primary challenge to Dodd, leaving the door open for Ralph Nader to run as an independent. Of course, Ralph could run as a Democrat. Sure he could, and the Pope could become an Anglican!

The Nader Virus

When I ran for House of Representatives as an independent, a newspaper reporter asked me, “given that the Congress is dominated by two parties what could I, as an independent hope to achieve since I was critical of both parties”. I responded that the human body has trillions of cells yet one simple virus can bring the entire organism to a halt. Imagine what someone like Ralph Nader could do in the United States Senate! Sure, the mainstream media will do everything possible to ignore him and minimize his achievements but even the corporate media cannot completely ignore a United States senator especially when he holds the corporate feet of both parties to the fire.

Nader as a senator could not only put the lie to Obama’s mindless rambling about why single payer will not work in the United States, he would be the only member of Congress telling the truth about why we are in Iraq and why we are murdering innocent men, women and children in Afghanistan and Pakistan. He could speak out against the genocide being committed by Israel on the Palestinians and the Zionist’s plans to create a new Holocaust for Islam and how the whole operation is being financed by American taxpayers. He could beat the Corporate Democrats over the head with “Cap and Trade” and point out why we need a carbon tax instead. He would be the only member of Congress talking about The Basic Income Guarantee (BIG), taxing stock transactions, eliminating the federal income tax for anyone making under $100,000, restoring the progressive income tax and repealing Taft-Hartley. To be trite: a bull in a china shop.

You may say that I’m a dreamer

If Ralph Nader were to be elected to the Senate from Connecticut it would not be long before we saw a newspaper article looking something like this:

WASHINGTON – Senator Ralph Nader issued subpoenas today for the CEO’s of Goldman Sachs, JPMorgan Chase, Timothy Geithner, Henry Paulson…

Imagine!

John Murphy, CounterPunch

Maniacal Deregulation

Posted in Political Economy on November 12, 2009 by CjH

10 Years After Glass-Steagall

By Robert Weissman, President of Public Citizen; CounterPunch

Today marks the 10-year anniversary of the passage of the repeal of the 1933 Glass-Steagall Act and related legislation. It is an anniversary worth noting for what it teaches us about forestalling financial crises, the consequences of maniacal deregulation, and the out-of-control political power of the megafinancial institutions.

The repeal of Glass-Steagall removed the legal prohibition on combinations between commercial banks on the one hand, and investment banks and other financial services companies on the other. Glass-Steagall’s strict rules originated in the U.S. government’s response to the Depression and reflected the learned experience of the severe dangers to consumers and the overall financial system of permitting giant financial institutions to combine commercial banking with other financial operations.

Glass-Steagall protected depositors and prevented the banking system from taking on too much risk by defining industry structure: Commercial banks could not maintain investment banking or insurance affiliates (nor affiliates in non-financial commercial activity).

As banks eyed the higher profits in higher risk activity, however, they began in the 1970s to breach the regulatory walls between commercial banking and other financial services. Starting in the 1980s, responding to a steady drumbeat of requests, regulators began to weaken the strict prohibition on cross-ownership.

Despite herculean efforts by Wall Street throughout the 1990s, Glass-Steagall remained law because of intra-industry and intra-regulatory agency disagreements.

Then, in 1998, in an act of corporate civil disobedience, Citicorp and Travelers Group announced they were merging. Such a combination of banking and insurance companies was illegal under the Bank Holding Company Act, but was excused due to a loophole that provided a two-year review period of proposed mergers. The merger was premised on the expectation that Glass-Steagall would be repealed.

Citigroup’s co-chairs Sandy Weill and John Reed led a swarm of industry executives and lobbyists who trammeled the halls of Congress to make sure a deal was cut. But as the deal-making on the bill moved into its final phase in Fall 1999, fears ran high that the entire exercise would collapse. (Reed now says repeal of Glass-Steagall was a mistake.)

Robert Rubin stepped into the breach. Having recently stepped aside as Treasury Secretary, Rubin was at the time negotiating the terms of his next job as an executive without portfolio at Citigroup. But this was not public knowledge at the time. Deploying the credibility built up as part of what the media had labeled “The Committee to Save the World” (Rubin, Fed Chair Alan Greenspan and then-Deputy Treasury Secretary Lawrence Summers, so named for their interventions in addressing the Asian financial crisis in 1997), Rubin helped broker the final deal.

The Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act of 1999, formally repealed Glass-Steagall. Among a long list of deregulatory moves large and small over the last two decades, Gramm-Leach-Bliley was the signal piece of financial deregulation.

Repeal of Glass-Steagall had many important direct effects but the most important was to change the culture of commercial banking to emulate Wall Street’s high-risk speculative betting approach.

“Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively,” writes Nobel Prize-winning economist Joseph Stiglitz. “It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money — people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risk-taking.”

This is a very important part of the story of what created the financial crisis.

What lessons should be learned from the 10-year debacle?

First, Glass-Steagall’s key insight was in the need to treat regulation from an industry structure point of view. Glass-Steagall’s authors did not set out to establish a regulatory system to oversee companies that combined commercial banking and investment banking. They simply banned the combination of these enterprises. Cleaning up the current mess, we need strategies that focus on industry structure — meaning, especially, that we must break up the big banks — as well as more traditional regulation.

Second, we need to return to Glass-Steagall’s more particular understanding: depository institutions backed by federal insurance protection cannot be involved in the risky, speculative betting of the investment banking world. (Notably, the Glass-Steagall problem is now worse than it was before the financial crisis, following JP Morgan’s acquisition of Bear Stearns, and Bank of America’s takeover of Merrill Lynch.) Moreover, we need not just to reinstate Glass-Steagall, but infuse its underlying principles throughout the financial regulatory scheme. Commercial banks should not be in the business of speculation. They have a job to do in providing credit to the real economy. They should do that. Their job is not to engage in betting on derivatives and other exotic financial instruments.

Third, giant financial institutions exercise too much political power, and for that reason alone must be broken up.

Fourth, we need broad reform in the area of money and politics. We need public financing of Congressional regulations, even stronger lobbyist reforms, and tight restrictions to close the revolving door through which individuals spin as they travel between positions in government and industry.

A year ago, as the financial crisis was unfolding, it seemed very plausible that these reforms would be seriously debated in Congress. Three months ago, it appeared that Wall Street had successfully maneuvered to keep them off the table. But in Congress a recognition is now settling in that regulatory reforms on the table are failing to deal with the problems of size and industry structure — and that there may be a severe political price to be paid for such failure. Suddenly, it seems that common sense may again be politically viable.


Will California become America’s first failed state?

Posted in Political Economy, Welcome to The Machine on October 4, 2009 by CjH

Paul Harris, The Observer

Los Angeles, 2009: California may be the eighth largest economy in the world, but its state staff are being paid in IOUs, unemployment is at its highest in 70 years, and teachers are on hunger strike. So what has gone so catastrophically wrong?

California has a special place in the American psyche. It is the Golden State: a playground of the rich and famous with perfect weather. It symbolises a lifestyle of sunshine, swimming pools and the Hollywood dream factory.

But the state that was once held up as the epitome of the boundless opportunities of America has collapsed. From its politics to its economy to its environment and way of life, California is like a patient on life support. At the start of summer the state government was so deeply in debt that it began to issue IOUs instead of wages. Its unemployment rate has soared to more than 12%, the highest figure in 70 years. Desperate to pay off a crippling budget deficit, California is slashing spending in education and healthcare, laying off vast numbers of workers and forcing others to take unpaid leave. In a state made up of sprawling suburbs the collapse of the housing bubble has impoverished millions and kicked tens of thousands of families out of their homes. Its political system is locked in paralysis and the two-term rule of former movie star Arnold Schwarzenegger is seen as a disaster – his approval ratings having sunk to levels that would make George W Bush blush. The crisis is so deep that Professor Kenneth Starr, who has written an acclaimed history of the state, recently declared: “California is on the verge of becoming the first failed state in America.”

Outside the Forum in Inglewood, near downtown Los Angeles, California has already failed. The scene is reminiscent of the fallout from Hurricane Katrina, as crowds of impoverished citizens stand or lie aimlessly on the hot tarmac of the centre’s car park. It is 10am, and most have already been here for hours. They have come for free healthcare: a travelling medical and dental clinic has set up shop in the Forum (which usually hosts rock concerts) and thousands of the poor, the uninsured and the down-on-their-luck have driven for miles to be here.

The queue began forming at 1am. By 4am, the 1,500 spaces were already full and people were being turned away. On the floor of the Forum, root-canal surgeries are taking place. People are ferried in on cushions, hauled out of decrepit cars. Sitting propped up against a lamp post, waiting for her number to be called, is Debbie Tuua, 33. It is her birthday, but she has taken a day off work to bring her elderly parents to the Forum, and they have driven through the night to get here. They wait in a car as the heat of the day begins to rise. “It is awful for them, but what choice do we have?” Tuua says. “I have no other way to get care to them.”

Yet California is currently cutting healthcare, slashing the “Healthy Families” programme that helped an estimated one million of its poorest children. Los Angeles now has a poverty rate of 20%. Other cities across the state, such as Fresno and Modesto, have jobless rates that rival Detroit’s. In order to pass its state budget, California’s government has had to agree to a deal that cuts billions of dollars from education and sacks 60,000 state employees. Some teachers have launched a hunger strike in protest. California’s education system has become so poor so quickly that it is now effectively failing its future workforce. The percentage of 19-year-olds at college in the state dropped from 43% to 30% between 1996 and 2004, one of the highest falls ever recorded for any developed world economy. California’s schools are ranked 47th out of 50 in the nation. Its government-issued bonds have been ranked just above “junk”.

Some of the state’s leading intellectuals believe this collapse is a disaster that will harm Californians for years to come. “It will take a while for this self-destructive behaviour to do its worst damage,” says Robert Hass, a professor at Berkeley and a former US poet laureate, whose work has often been suffused with the imagery of the Californian way of life.

Now, incredibly, California, which has been a natural target for immigration throughout its history, is losing people. Between 2004 and 2008, half a million residents upped sticks and headed elsewhere. By 2010, California could lose a congressman because its population will have fallen so much – an astonishing prospect for a state that is currently the biggest single political entity in America. Neighbouring Nevada has launched a mocking campaign to entice businesses away, portraying Californian politicians as monkeys, and with a tag-line jingle that runs: “Kiss your assets goodbye!” You know you have a problem when Nevada – famed for nothing more than Las Vegas, casinos and desert – is laughing at you.

This matters, too. Much has been made globally of the problems of Ireland and Iceland. Yet California dwarfs both. It is the eighth largest economy in the world, with a population of 37 million. If it was an independent country it would be in the G8. And if it were a company, it would likely be declared bankrupt. That prospect might surprise many, but it does not come as news to Tuua, as she glances nervously into the warming sky, hoping her parents will not have to wait in the car through the heat of the day just to see a doctor. “It is so depressing. They both worked hard all their lives in this state and this is where they have ended up. It should not have to be this way,” she says.

It is impossible not to be impressed by the physical presence of Arnold Schwarzenegger when he walks into a room. He may appear slightly smaller than you imagine, but he’s just as powerful. This is, after all, the man who, before he was California’s governor, was the Terminator and Conan the Barbarian.

But even Schwarzenegger is humbled by the scale of the crisis. At a press conference in Sacramento to announce the final passing of a state budget, which would include billions of dollars of cuts, the governor speaks in uncharacteristically pensive terms. “It is clear that we do not know yet what the future holds. We are still in troubled waters,” he says quietly. He looks subdued, despite his sharp grey suit and bright pink tie.

Later, during a grilling by reporters, Schwarzenegger is asked an unusual question. As a gaggle of journalists begins to shout, one man’s voice quickly silences the others. “Do you ever feel like you’re watching the end of the California dream?” asks the reporter. It is clearly a personal matter for Schwarzenegger. After all, his life story has embodied it. He arrived virtually penniless from Austria, barely speaking English. He ended up a movie star, rich beyond his dreams, and finally governor, hanging Conan’s prop sword in his office. Schwarzenegger answers thoughtfully and at length. He hails his own experience and ends with a passionate rallying call in his still thickly accented voice.

“There is people that sometimes suggest that the American dream, or the Californian dream, is evaporating. I think it’s absolutely wrong. I think the Californian dream is as strong as ever,” he says, mangling the grammar but not the sentiment.

Looking back, it is easy to see where Schwarzenegger’s optimism sprung from. California has always been a special place, with its own idea of what could be achieved in life. There is no such thing as a British dream. Even within America, there is no Kansas dream or New Jersey dream. But for California the concept is natural. It has always been a place apart. It is of the American West, the destination point in a nation whose history has been marked by restless pioneers. It is the home of Hollywood, the nation’s very own fantasy land. Getting on a bus or a train or a plane and heading out for California has been a regular trope in hundreds of books, movies, plays, and in the popular imagination. It has been writ large in the national psyche as free from the racial divisions of the American South and the traditions and reserve of New England. It was America’s own America.

Michael Pollan, author of The Omnivore’s Dilemma and now an adopted Californian, remembers arriving here from his native New England. “In New England you would have to know people for 10 years before they let you in their home,” he says. “Here, when I took my son to his first play date, the mother invited me to a hot tub.”

Michael Levine is a Hollywood mover and shaker, shaping PR for a stable of A-list clients that once included Michael Jackson. Levine arrived in California 32 years ago. “The concept of the Californian dream was a certain quality of life,” he says. “It was experimentalism and creativity. California was a utopia.”

Levine arrived at the end of the state’s golden age, at a time when the dream seemed to have been transformed into reality. The 1950s and 60s had been boom-time in the American economy; jobs had been plentiful and development rapid. Unburdened by environmental concerns, Californian developers built vast suburbs beneath perpetually blue skies. Entire cities sprang from the desert, and orchards were paved over into playgrounds and shopping malls.

“They came here, they educated their kids, they had a pool and a house. That was the opportunity for a pretty broad section of society,” says Joel Kotkin, an urbanist at Chapman University, in Orange County. This was what attracted immigrants in their millions, flocking to industries – especially defence and aviation – that seemed to promise jobs for life. But the newcomers were mistaken. Levine, among millions of others, does not think California is a utopia now. “California is going to take decades to fix,” he says.

So where did it all wrong?

Few places embody the collapse of California as graphically as the city of Riverside. Dubbed “The Inland Empire”, it is an area in the southern part of the state where the desert has been conquered by mile upon mile of housing developments, strip malls and four-lane freeways. The tidal wave of foreclosures and repossessions that burst the state’s vastly inflated property bubble first washed ashore here. “We’ve been hit hard by foreclosures. You can see it everywhere,” says political scientist Shaun Bowler, who has lived in California for 20 years after moving here from his native England. The impact of the crisis ranges from boarded-up homes to abandoned swimming pools that have become a breeding ground for mosquitoes. Bowler’s sister, visiting from England, was recently taken to hospital suffering from an infected insect bite from such a pool. “You could say she was a victim of the foreclosure crisis, too,” he jokes.

But it is no laughing matter. One in four American mortgages that are “under water”, meaning they are worth more than the home itself, are in California. In the Central Valley town of Merced, house prices have crashed by 70%. Two Democrat politicians have asked for their districts to be declared disaster zones, because of the poor economic conditions caused by foreclosures. In one city near Riverside, a squatter’s camp of newly homeless labourers sleeping in their vehicles has grown up in a supermarket car park – the local government has provided toilets and a mobile shower. In the Los Angeles suburb of Pacoima, one in nine homeowners are now in default on their mortgage, and the local priest, the Rev John Lasseigne, has garnered national headlines – swapping saving souls to saving houses, by negotiating directly with banks on behalf of his parishioners.

For some campaigners and advocates against suburban sprawl and car culture, it has been a bitter triumph. “Let the gloating begin!” says James Kunstler, author of The Long Emergency, a warning about the high cost of the suburban lifestyle. Others see the end of the housing boom as a man-made disaster akin to a mass hysteria, but with no redemption in sight. “If California was an experiment then it was an experiment of mass irresponsibility – and that has failed,” says Michael Levine.

Nowhere is the economic cost of California’s crisis writ larger than in the Central Valley town of Mendota, smack in the heart of a dusty landscape of flat, endless fields of fruit and vegetables. The town, which boldly terms itself “the cantaloup capital of the world”, now has an unemployment rate of 38%. That is expected to rise above 50% as the harvest ends and labourers are laid off. City officials hold food giveaways every two weeks. More than 40% of the town’s people live below the poverty level. Shops have shut, restaurants have closed, drugs and alcohol abuse have become a problem.

Standing behind the counter of his DVD and grocery store, former Mendota mayor Joseph Riofrio tells me it breaks his heart to watch the town sink into the mire. His father had built the store in the 1950s and constructed a solid middle-class life around it, to raise his family. Now Riofrio has stopped selling booze in a one-man bid to curb the social problems breaking out all around him.

“It is so bad, but it has now got to the point where we are getting used to it being like this,” he says. Riofrio knows his father’s achievements could not be replicated today. The state that once promised opportunities for working men and their families now promises only desperation. “He could not do what he did again. That chance does not exist now,” Riofrio says.

Outside, in a shop that Riofrio’s grandfather built, groups of unemployed men play pool for 25 cents a game. Near every one of the town’s liquor stores others lie slumped on the pavements, drinking their sorrows away. Mendota is fighting for survival against heavy odds. The town of 7,000 souls has seen 2,000 people leave in the past two years. But amid the crisis there are a few sparks of hope for the future. California has long been an incubator of fresh ideas, many of which spread across the country. If America emerges from its crisis a greener, more economically and politically responsible nation, it is likely that renewal will have begun here. The clues to California’s salvation – and perhaps even the country as a whole – are starting to emerge.

Take Anthony “Van” Jones, a man now in the vanguard of the movement to build a future green economy, creating millions of jobs, solving environmental problems and reducing climate change at a stroke. It is a beguiling vision and one that Jones conceived in the northern Californian city of Oakland. He began political life as an anti-poverty campaigner, but gradually combined that with environmentalism, believing that greening the economy could also revitalise it and lift up the poor. He founded Green for All as an advocacy group and published a best-selling book, The Green Collar Economy. Then Obama came to power and Jones got the call from the White House. In just a few years, his ideas had spread from the streets of Oakland to White House policy papers. Jones was later ousted from his role, but his ideas remain. Green jobs are at the forefront of Obama’s ideas on both the economy and the environment.

Jones believes California will once more change itself, and then change the nation. “California remains a beacon of hope… This is a new time for a new direction to grow a new society and a new economy,” Jones has said.

It is already happening. California may have sprawling development and awful smog, but it leads the way in environmental issues. Arnold Schwarzenegger was seen as a leading light, taking the state far ahead of the federal government on eco-issues. The number of solar panels in the state has risen from 500 a decade ago to more than 50,000 now. California generates twice as much energy from solar power as all the other US states combined. Its own government is starting to turn on the reckless sprawl that has marked the state’s development.

California’s attorney-general, Jerry Brown, recently sued one county government for not paying enough attention to global warming when it came to urban planning. Even those, like Kotkin, who are sceptical about the end of suburbia, think California will develop a new model for modern living: comfortable, yes, but more modest and eco-friendly. Kotkin, who is writing an eagerly anticipated book about what America will look like in 2050, thinks much of it will still resemble the bedrock of the Californian dream: sturdy, wholesome suburbs for all – just done more responsibly. “We will still live in suburbs. You work with the society you have got. The question is how we make them more sustainable,” he says.

Even the way America eats is being changed in California. Every freeway may be lined with fast-food outlets, but California is also the state of Alice Waters, the guru of the slow-food movement, who inspired Michelle Obama to plant a vegetable garden in the White House. She thinks the state is changing its values. “The crisis is bringing us back to our senses. We had adopted a fast and easy way of living, but we are moving away from that now,” she says.

There is hope in politics, too. There is a growing movement to call for a constitutional convention that could redraw the way the state is governed. It could change how the state passes budgets and make the political system more open, recreating the lost middle ground. Recently, the powerful mayor of Los Angeles, Antonio Villaraigosa, signed on to the idea. Gerrymandering, too, is set to take a hit. Next year Schwarzenegger will take steps to redraw some districts to make them more competitive, breaking the stranglehold of party politics. He wants district boundaries to be drawn up by impartial judges, not politicians. In previous times that would have been the equivalent of a turkey voting for Christmas. But now the bold move is seen for what it is: a necessary step to change things. And there is no denying that innovation is something that California does well.

Even in the most deprived corners of the state there is a sense that things can still turn around. California has always been able to reinvent itself, and some of its most hardcore critics still like the idea of it having a “dream”.

“I believe in California. It pains me at the moment to see it where it is, but I still believe in it,” said Michael Levine.

Perhaps more surprisingly, a fellow believer is to be found in Mendota in the shape of Joseph Riofrio. His shop operates as a sort of informal meeting place for the town. People drop in to chat, to get advice, or to buy a cold soft drink to relieve the unrelenting heat outside. The people are poor, many of them out of work, often hiring a bunch of DVDs as a cheap way of passing the time. But Riofrio sees them as a community, one that he grew up in. He is proud of his town and determined to stick it out. “This is a good place to live,” he says. “I want to be here when it turns around.” He is talking of the stricken town outside. But he could be describing the whole state.

IMF Catapults From Shunned Agency to Global Central Bank

Posted in Global Order, Political Economy on October 2, 2009 by CjH

The Rise of the SDR’s

By Ellen Brown, CounterPunch

“A year ago,” said law professor Ross Buckley on Australia’s ABC News last week, “nobody wanted to know the International Monetary Fund. Now it’s the organiser for the international stimulus package which has been sold as a stimulus package for poor countries.”

The IMF may have catapulted to a more exalted status than that. According to Jim Rickards, director of market intelligence for scientific consulting firm Omnis, the unannounced purpose of last week’s G20 Summit in Pittsburgh was that “the IMF is being anointed as the global central bank.” Rickards said in a CNBC interview on September 25 that the plan is for the IMF to issue a global reserve currency that can replace the dollar.

“They’ve issued debt for the first time in history,” said Rickards. “They’re issuing SDRs. The last SDRs came out around 1980 or ’81, $30 billion. Now they’re issuing $300 billion. When I say issuing, it’s printing money; there’s nothing behind these SDRs.”

SDRs, or Special Drawing Rights, are a synthetic currency originally created by the IMF to replace gold and silver in large international transactions. But they have been little used until now. Why does the world suddenly need a new global fiat currency and global central bank? Rickards says it because of “Triffin’s Dilemma,” a problem first noted by economist Robert Triffin in the 1960s. When the world went off the gold standard, a reserve currency had to be provided by some large-currency country to service global trade. But leaving its currency out there for international purposes meant that the country would have to continually buy more than it sold, running large deficits; and that meant it would eventually go broke. The U.S. has fueled the world economy for the last 50 years, but now it is going broke. The U.S. can settle its debts and get its own house in order, but that would cause world trade to contract. A substitute global reserve currency is needed to fuel the global economy while the U.S. solves its debt problems, and that new currency is to be the IMF’s SDRs.

That’s the solution to Triffin’s dilemma, says Rickards, but it leaves the U.S. in a vulnerable position. If we face a war or other global catastrophe, we no longer have the privilege of printing money. We will have to borrow the global reserve currency like everyone else, putting us at the mercy of the global lenders.

To avoid that, the Federal Reserve has hinted that it is prepared to raise interest rates, even though that would mean further squeezing the real estate market and the real economy. Rickards pointed to an oped piece by Fed governor Kevin Warsh, published in The Wall Street Journal on the same day the G20 met. Warsh said that the Fed would need to raise interest rates if asset prices rose – which Rickards interpreted to mean gold, the traditional go-to investment of investors fleeing the dollar. “Central banks hate gold because it limits their ability to print money,” said Rickards. If gold were to suddenly go to $1,500 an ounce, it would mean the dollar was collapsing. Warsh was giving the market a heads up that the Fed wasn’t going to let that happen. The Fed would raise interest rates to attract dollars back into the country. As Rickards put it, “Warsh is saying, ‘We sort of have to trash the dollar, but we’re going to do it gradually.’ . . . Warsh is trying to preempt an unstable decline in the dollar. What they want, of course, is a stable, steady decline.”

What about the Fed’s traditional role of maintaining price stability? It’s nonsense, said Rickards. “What they do is inflate the dollar to prop up the banks.” The dollar has to be inflated because there is more debt outstanding than money to pay it with. The government currently has contingent liabilities of $60 trillion. “There’s no feasible combination of growth and taxes that can fund that liability,” Rickards said. The government could fund about half that in the next 14 years, which means the dollar needs to be devalued by half in that time.

The Dollar Needs to be Devalued by Half?

Reducing the value of the dollar by half means that our hard-earned dollars are going to go only half as far, something that does not sound like a good thing for Main Street. Indeed, when we look more closely, we see that the move is not designed to serve us but to serve the banks. Why does the dollar need to be devalued? It is to compensate for a dilemma in the current monetary scheme that is even more intractable than Triffin’s, one that might be called a fraud. There is never enough money to cover the outstanding debt, because all money today except coins is created by banks in the form of loans, and more money is always owed back to the banks than they advance when they create their loans. Banks create the principal but not the interest necessary to pay their loans back.

The Fed, which is owned by a consortium of banks and was set up to serve their interests, is tasked with seeing that the banks are paid back; and the only way to do that is to inflate the money supply, in order to create the dollars to cover the missing interest. But that means diluting the value of the dollar, which imposes a stealth tax on the citizenry; and the money supply is inflated by making more loans, which adds to the debt and interest burden the inflated money supply was supposed to relieve. The banking system is basically a pyramid scheme, which can be kept going only by continually creating more debt.

The IMF’s $500 Billion Stimulus Package:
Designed to Help Developing Countries or the Banks?

And that brings us back to the IMF’s stimulus package discussed last week by Professor Buckley. The package was billed as helping emerging nations hard hit by the global credit crisis, but Buckley doubts that that is what is really going on. Rather, he says, the $500 billion pledged by the G20 nations is “a stimulus package for the rich countries’ banks.”

Why does he think that? Because stimulus packages are usually grants. The money coming from the IMF will be extended in the form of loans.

“These are loans that are made by the G20 countries through the IMF to poor countries. They have to be repaid and what they’re going to be used for is to repay the international banks now. .  . . [T]he money won’t really touch down in the poor countries. It will go straight through them to repay their creditors. . . . But the poor countries will spend the next 30 years repaying the IMF.”

Basically, said Professor Buckley, the loans extended by the IMF represent an increase in seniority of the debt. That means developing nations will be even more firmly locked in debt than they are now.

“At the moment the debt is owed by poor countries to banks, and if the poor countries had to, they could default on that. The bank debt is going to be replaced by debt that’s owed to the IMF, which for very good strategic reasons the poor countries will always service. . . . The rich countries have made this $500 billion available to stimulate their own banks, and the IMF is a wonderful party to put in between the countries and the debtors and the banks.”

Not long ago, the IMF was being called obsolete. Now it is back in business with a vengeance; but it’s the old unseemly business of serving as the collection agency for the international banking industry. As long as third world debtors can service their loans by paying the interest on them, the banks can count the loans as “assets” on their books, allowing them to keep their pyramid scheme going by inflating the global money supply with yet more loans. It is all for the greater good of the banks and their affiliated multinational corporations; but the $500 billion in funding is coming from the taxpayers of the G20 nations, and the foreseeable outcome will be that the United States will join the ranks of debtor nations subservient to a global empire of central bankers.

Government Spending is the Solution–Not the Problem

Posted in Political Economy on September 15, 2009 by CjH

All Debt is Not Created Equally

By Marshall Auerback, CounterPunch

Hundreds of thousands of people marched to the U.S. Capitol on Sunday, carrying signs with slogans such as “Obamacare makes me sick” as they protested the president’s health care plan and our so-called “out-of-control spending”. The marchers were chanting “enough, enough” and “We the People.” Others, channeling their inner Joe Wilson, screamed “You lie, you lie!” while waving U.S. flags and the now omnipresent images of Obama as Hitler, Obama as the Joker, along with the usual placards decrying the “march to socialism”.

And the reaction against the expansion of the state is by no means restricted to America.  According to the London Sunday Times, voters are overwhelmingly in favor of cutting public spending rather than tax rises to close the budget “black hole”. Sixty per cent want to shrink the size of the state to curb the £175 billion deficit amid mounting government disarray over the public finances. Naturally, there is also growing support for this line of thinking in the financial community, despite having successfully received tens of trillions of dollars, even for deeply insolvent financial institutions.  The large banks and brokers lobbied for special treatment and got it; they manipulated government legislation for their own ends.

To the extent that government spending is being used to prop up these economic zombies, we sympathize with the prevailing orthodoxy.  However, we believe that the principle opposition to increased government spending is predicated on the simplistic notion that the same government that has driven social security and Medicare to bankruptcy and national ruin is about to do the same with health care. Ultimately, objections to fiscal activism always come back to what we have been saying for a long time:  namely, the need to get past the deficit myths and wrongheaded notions of “national solvency” so that we can move forward in other areas.  In the words of economist Bill Mitchell of the University of Newcastle, Australia:

“Within a modern monetary economy, as a matter of national accounting, the sovereign government deficit (surplus) equals the non-government surplus (deficit)…In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.  The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.” (http://bilbo.economicoutlook.net/blog/?p=4870 – our emphasis)

A seemingly growing populist drive toward a return to fiscal orthodoxy follows a stream of similar pronouncements from Wall Street, the Fed, the European Central Bank, the OECD, all of whom are legitimizing a campaign against further public spending and mobilizing support for “exit strategies” as they confidently pronounce the end of the recession

Implicit is the view that somewhere along the line ongoing government involvement in the “free market” reaches a tipping point where fiscal “intrusions” no longer act as a stabilizing force, but serve to impede the natural tendency of the market to equilibrate to recovery. The major hypothesis is that anytime the government is involved in the economy, eventually things go bad.  But markets do not self-regulate in ways that avoid major financial upheavals and activist government is required as a counterbalancing force.

Unfortunately, President Obama himself has inadvertently legitimized this line of thinking himself, committing himself to the goal of “fiscal sustainability” (whatever that means) as a medium term policy objective.  He said as much last Wednesday again during his speech on health care.  Having failed to understand what got us into the crisis, and equally having failed to appreciate the extent to which government spending actually prevented an economic catastrophe along the lines of the Great Depression, our policy makers who are championing this move toward neo-liberal fiscal orthodoxy are almost certain to drive us into the next recession if they take these demands to shrink government too aggressively.

Deficit hawks fail to understand that not all debt is created equally. As James Galbraith, L. Randall Wray and Warren Mosler have argued, there is no legitimate analogy to be drawn about the budgets of the government, which issues the currency, and the budgets of the non-government sector (households, firms etc) which uses that currency. The former does not have a financial constraint and can spend freely whereas the latter has to “finance” all spending either through earning income, drawing down savings or liquidating assets.

Although the global debt problem is very serious, the focus on growing government deficits and the need to rein in fiscal expenditures is profoundly misplaced, particularly in the U.S., where (relative to Europe and Japan), the government debt low relative to the size of the economy.  Additionally, as a matter of national accounting, deleveraging in the private sector cannot happen without an increase in the government’s deficit (the government’s deficit equals by identity the non-government’s surplus.  Consequently, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue; the only other possibility is that the rest of the world begins to dis-save massively—letting the US run a current account surplus—but that is highly implausible). In addition, if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, and, given the size of the private sector’s debt problem, a full-blown debt-deflation process will emerge

Yet today we are still overwhelmed with a chorus of criticism against fiscal activism:  we hear constantly that governments are an impediment to the operation of a genuinely “free market” which alone can generate sustained growth and prosperity.  The reality is very different on a number of levels.  Based on current account and fiscal balance results through Q2, it appears the private sector as a whole is running a net saving position rivaled only once before in the 1973-5 deep recession. At 8% of GDP, the private sector net saving position is probably very near its peak given the rebound in equity prices, stabilizing home prices, and a labor market limping its way back from the abyss. What most commentators fail to acknowledge (Paul Krugman being a conspicuous exception), is that without the automatic stabilizers of fiscal policy, and the turn in the trade balance, the attempt by businesses and households to spend less than they earn would have otherwise been thwarted by a depression sized drop in private income.

Even though private individual and firms face external constraints as they accumulate debt, “household budget” analogies do not hold true for government, as Galbraith, Wray and Mosler argue:

“[I]f we take households or firms as a whole, the situation is different. The private sector’s ability to spend more than its income depends on the willingness of another sector to spend less than its income. For one sector to run a deficit, another must run a surplus (saving). In principle, there is no reason why one sector cannot run perpetual deficits, so long as at least one other sector wants to run surpluses.

In the real world, we observe that the federal government tends to run persistent deficits. This is matched by a persistent tendency of the nongovernment sector, which includes the foreign sector, to save. Its “net saving” is equal (by identity) to the government’s deficits, and its net accumulation of financial assets (or “net financial wealth”) equals, exactly, the government’s total net issue of debt—from the inception of the nation. Debt issued between private parties cancels out, but that between the government and the private sector remains, with the private sector’s net financial wealth consisting of the government’s net debt.” (http://www.levy.org/pubs/hili_98a.pdf )

The reality is – and it is a tyranny of accounting, not a theoretical impediment, since the financial balances of the three sectors must sum to zero – the only way to return to a fiscal surplus, or even a fiscal balance, without taking the private sector back into a deficit spending position, is if the trade balance can be heroically improved. The failure to recognize this relationship is the major oversight of neo-liberal analysis.

Beyond the benign neglect of the dollar depreciation, it is hard to see much in the way of policy measures to achieve either import replacement or export extension in the years ahead. If the fiscal balance is to return to surplus by 2013 – a more aggressive reversal than the CBO depicted in its August Outlook, but consistent with the political tone of returning to fiscal orthodoxy – one can trace out the implications for the private sector financial balance given various assumptions about the trajectory of the trade balance. To get both the fiscal and private sector financial balances to converge at a net saving position of 2% of GDP, the trade balance will have to migrate to a 4% of GDP surplus – something we have never seen before in the US during the post WWII period.

That leaves the emergence of a foreign middle class, and the shift toward domestic demand led growth abroad as the key elements that could support a better US trade trajectory, which are largely elements outside the control of US policy makers. All of this likely means the path of US fiscal deficit as a share of GDP is probably a better route to full employment and prosperity than the misguided sentiment to cut government expenditures precipitously in a return to financial orthodoxy.

In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.

By the same token, the US is no more a “free market” today than the Soviet Union was during the heyday of its empire. The United States is now a species of State Capitalism. The top federal government executives are a partnership of top political and corporate managers who operate a war economy to enlarge their power as their main continuing goal. Less Adam Smith, more Mussolini style corporatism. Today’s unemployment levels that are the hallmark of deep depression are now visible as additional millions “leave” the labor force and are not counted as unemployed by the Federal government even though they are actually jobless. Hence, an 9.7% “unemployment” rate as counted by the Federal government actually refers to a number almost twice as high if we incorporate underemployed and those who classify themselves as independent consultants but who are loathe to describe themselves as genuinely unemployed.  Meanwhile, the infrastructure of American society shows decay that can no longer be concealed despite the practiced showmanship of leading public officials.

By the same token, the emphasis on “sound fiscal management”, which allegedly created the platform for vigorous, low inflationary growth, generating jobs and higher incomes is false. Similarly, it is clear that the current reliance on monetary policy (accompanied by the budget deficit phobia) will always fail to deliver full employment and relies on the impoverishment of the disadvantaged for its ability to achieve low inflation.

In the “market fundamentalist” era, prior to the current economic crisis, governments began to rely on monetary policy for counter-stabilization. According to the logic, this rendered fiscal policy a passive player. Under the misguided inflation targeting regimes that emerged in the early 1990s, central banks adjusted short-term interest rates to control inflation and therefore saw the unemployment rate as a policy tool rather than a legitimate target in its own right. Given the erroneous belief that expansionary fiscal policy was inflationary and its use would compromise the primacy of monetary policy, governments began to pursue surpluses and put in place frameworks to punish deficits and penalize workers who obtained high wage settlements, on the grounds that this was inherently inflationary (as an aside, it is interesting that this logic is never extended to CEO executive compensation or Wall Street bonuses).

The results have been clear. They indicate that this way of managing the economy cannot possibly be a sustainable long-term strategy. The emphasis we have placed on “financial responsibility” on the government side has actually introduced a deflationary bias that has slowed output and employment growth (keeping unemployment at unnecessarily high levels) and has forced the non-government sector into relying on increasing debt to sustain consumption.  The complaints about “private sector debt fuelled” consumption miss the mark:  the debt accumulation is a direct consequence of our failure to use fiscal policy in a manner which supports aggregate incomes and job growth.  Targeting wages and the use of a buffer stock of unemployed labor have been the preferred methods of controlling inflation, but minimizing economic output below full potential.

This was not, however, the model which gave the US its greatest period of prosperity.  In fact, until the mid-1970s, the U.S. consistently paid the highest industrial wages in the world. According to the late Seymour Melman (a professor of industrial engineering at Columbia University), this fact actually helped the U.S. maintain its economic supremacy.

Melman’s concept that explained this unconventional wisdom he called “alternative cost”. The basic idea is this: faced with high labor costs, firm managers will be more willing to mechanize, that is, use more machinery, and more sophisticated machinery, instead of using labor. By using more, better machinery, they increase labor productivity, which leads to higher wages, and they also stay at the cutting edge of technology. Melman compared factories in England and the U.S. after World War II, and found that the English, who paid lower wages, were using more primitive equipment than the Americans.   More recently, his theory has been echoed in Suzanne Berger’s new book, How We Compete, in which she argues that employing cheap labor is not the most effective way of responding to global competition.  The activities that succeed over time are those that involve conditions – such as long-term working relationships with customers and suppliers and specialized skills – which companies whose main asset is cheap labor cannot match.  A company policy of forcing down wages is not a recipe for long-term economic success.

Economic growth has never been strong enough to fully employ the willing workforce and inequalities are rising throughout the Western world not falling. Further, the disparities between wealth and poor countries have widened.  By curbing the role of government and fiscal policy, we risk reverting to an approach which not only established the pre-conditions for the current crisis including the massive build-up of non-government debt and persistently high labor underutilization, but will almost certainly ensure a return to intense recessionary pressures (at a time when we are still experiencing double digit unemployment).  To be clear: I am not advocating unlimited government deficits or spending. Rather, the size of the deficit (surplus) should be market determined by the desired net saving of the non-government sector. This may not coincide with full employment and so it is the responsibility of the government to ensure that its taxation/spending are at the right level to ensure that this equality occurs at full employment.

Accordingly, if the goals are full employment AND price stability then the task is to make sure that government spending is exactly at the level that is neither inflationary, nor deflationary but sufficient to create full employment.  This is the true “Goldilocks” scenario, much beloved by Wall Street.  It can be better achieved through fiscal policy, rather than the preferred approach of the majority, which suggests that the same outcome is engineered via a monetary manipulation of short term rates by the central bank.  Fiscal policy is relatively direct – that is, the dollars go into aggregate demand – immediately they are spent. The standard view that government budget deficits lead to future tax burdens is problematic it assumes a financial constraint which in reality is non-existent.  The idea that unless policies are adjusted now (that is, governments start running surpluses or that we experience a “deflationary recession”) is a recipe for social turmoil and revolution.  The sooner our policy makers understand that, the more likely we avoid repeating the mistakes that got us into this mess in the first place.

Naked and Shameless

Posted in Global Order, Political Economy on September 10, 2009 by CjH

Latin America and the End of Social Liberalism

Posted in Political Economy on September 10, 2009 by CjH

By James Petras, Dissident Voice

The current world recession and the potential recovery of some countries reveals all the weaknesses of the traditional “export market” – free trade – comparative advantage doctrines. Nowhere is this more evident than in the recent experience of Latin America.

Despite recent popular upheavals and the ascent of center-left regimes in most of the countries in the region, the economic structures, strategies and policies pursued, followed in the footsteps of their predecessors particularly in relation to foreign economic practices.

Influenced by the sharp demand and rise in prices of commodities, especially agro-mineral and energy products, the Latin American regimes, backed off from any changes in several crucial areas and adapted to the policies and economic legacies of their neo-liberal predecessors. As a result, with the world wide recession beginning in 2008, they suffered a sharp economic decline with severe social consequences.

The resulting socio-economic crises provides important lessons and reinforces the notion that deep structural changes in investment, trade, ownership of strategic economic sectors is essential to stable, sustained and equitable growth.

The Free Market, Free Trade Doctrine: the 1990s

From the mid 1970’s with the advent of pro U.S. military and authoritarian civilian regimes and under the tutelage of U.S. free market academics and U.S. educated economists, Latin America became a laboratory for the application of free market-free trade policies.

Trade barriers were lowered or eliminated, so that subsidized U.S. and European Union agricultural products entered unhindered, decimating local small farmers producing food for local consumption. Under the doctrine of “comparative advantage” policymakers financed and promoted large scale agro-business enterprises specializing in export staples – wheat, soya, sugar, corn, cattle, etc. betting on favorable prices, favorable market access and reasonable prices of food, farm equipment and non-agricultural imports.

The total de-regulation of the economy and the privatization of public enterprises opened the floodgates to foreign investment, the takeover of strategic economic sectors and increasing dependence on foreign investment to sustain growth and the balance of payments.

The overall strategy of the regimes was to rely on export markets, at the expense of deepening and extending domestic markets (local mass consumption); a policy which relied on cheapening local labor costs, and sustaining the high profits, of the agro-mineral ruling class. The latter’s presence in all the key economic ministries of the regimes ensured that the self-serving policies were given an ideological veneer around the notion of “rational efficient markets”, failing to note the long term history of built-in instability of world markets.

Crises of the Traditional Neo-liberal Regimes

The deregulated financial system and the world recession of 2000 – 2001, the savage pillage of the economy and treasury by the free market practioners and the monumental corruption and the unmitigated exploitation of workers, peasants and public employees produced region-wide revolts. A whole series of U. S. backed electoral regimes were overthrown and/or defeated in electoral contests. Ecuador, Argentina, Bolivia, Brazil, Uruguay, and Paraguay witnessed popular upheavals, which however ultimately led to the election of center-left regimes, especially in electoral campaigns promising “deep structural change”, including changes in the economic structure of power and substantial increases in social spending and land redistribution in the countryside.

In practice the political defeats of the established right wing parties, and the weakened economic elite did not serve as a basis for large scale, long term socio-economic transformations. The new center-left regimes pursued socio-economic policies which sought to ‘reform’ the economic elites forcing them to accommodate to their effort to reactivate the economy and to subsidize the poor and unemployed. The political elites were driven from office, a few of the most venal officials implicated in mass repression were put on trial but without any serious effort to transform the party – political system. In other words the demise of the neo-liberal elites at the crises, induced by the free market policies, remained in place, temporarily held in abeyance by the center-left regimes state interventionist crises management policies.

Center Left Policies: Crises Management and the Economic Boom

The new center-left governments adopted a whole series of policies ranging from economic incentives for business, financial regulations, increased expenditure on poverty programs, widespread wage increases and consultation with leaders of popular organizations. They repudiated the political enemies and perpetrators of the previous period along with the intervention in a few bankrupt private enterprises. These symbolic and substantive policies secured, temporarily, the support of the mass electorate and isolated and divided the more radical sectors of the popular movements.

Nevertheless demands for broader and deeper changes were still on the mass agenda while the center left regimes attempted to balance between the radical demands from below and their political commitments to normalize and stimulate capitalist development, including all the existing elites (foreign multi-nationals, agro-mineral, financial, commercial and manufacturing elites). The dilemma of the center-left was resolved by the sudden upsurge in prices of commodities in large part stimulated by the dynamic demand and growth of the Asian economies, namely China.

The center-left regimes abandoned all pretexts of pursuing structural change and jumped on the bandwagon of “export driven growth” – based on the export of primary products. Abandoning the critique of foreign investment and demands to ‘renationalize’ strategic private firms, the center-left regimes opened the door to large scale inflows of foreign capital – suspending the application of some of their regulatory controls.

The commodity boom of 2003 – 2008 allowed the center left (and the right wing) regimes to “buyoff” the opposition: trade unions received hefty wage increases, business received substantial incentives, foreign investors were welcomed, overseas workers remittances were encouraged, as contributions to poverty reduction.

In a word the entire socio-economic edifice of Latin America’s high growth export oriented strategy rested on world market demand and economic conditions in the imperial countries. Few of the economic experts, financial columnists and political celebrants of ‘rational markets’ expressed any doubts about the sustainability of the “export market” model.

The extraordinary vulnerability of these economies, their dependence on volatile markets, their dependence on a limited number of export products, their dependence on one or two markets, their dependence on overseas remittance from the most precarious workers should have raised a red flag to any thinking economist and policy maker. The high priced consultants and overseas advisory missions drawn from the Harvard Business School, Penn’s Wharton School and other prestigious centers of higher learning (enamored by their mathematical equations which demonstrated what their premises assumed) argued that the least regulated markets are the most successful and convinced their Latin American counterparts from Center Left to Right to lower the trade barriers and let the capital flow.

After only five years of export market induced rapid growth, the Latin American economies crashed. According to the United Nations Economic Commission for Latin American exports from Latin American and Caribbean nations in 2009 will show their steepest fall in more than 72 years (since the last world depression). The regions exports will decline by 11% by volume, while imports will fall by 14%, the biggest drop since the world recession of 19821.

Pitfalls of Specialization in Commodity Exports

The benchmark dates are indicative of the long standing commitments and vulnerabilities in trade structure: past and present recessions have an acute impact on Latin America because both now and in the past their economies depend on agro-mineral exports to imperial markets, which rapidly shift their internal crises to their Latin American trading partners. The historic decline in trade inevitably doubles and triples the unemployment rate among workers in the export sectors and has a multiple effect on satellite economic enterprises linked to spending and consumption generated by overseas trade. Specialization in agro-mineral exports limits the possibilities of alternative employment in a way that a more diversified economy does not. The dependence of the state for most of its revenues from agro-mineral and energy exports means automatic cuts in public investment and expenditures in social services.

Latin America’s trade crises has especially affected those counties with the most traditional export product configuration in agriculture, mineral and energy commodities: Venezuela and Ecuador (oil) Columbia (oil and coal) and Bolivia have experienced as much as 33% decline in 2009, far above the average for the region. Mexico, dependent for 80% of its trade with the U. S. (oil, tourism, remittances, automobiles) experienced the biggest decline, 11% in GNP, of all countries in the hemisphere.

While all export driven economies were hard hit by the crises those countries which had a more diversified trade mix, (manufactures, agriculture, services) dropped by nearly 20% while the countries which specialized in oil and mineral exports fell by over 50%.

Pitfall of Single Market Dependence

The counties with a greater diversity of markets and trading partners especially those which traded within the Latin American zone and with China experienced a smaller decline compared to those countries like Mexico, Venezuela and Central America which depended on the markets of the U. S. and the European Union which fell by over 35%.

Trade was only one of the four fronts which impacted negatively on Latin America: Foreign direct investment, remittances from workers abroad, and commodity pricing contributed to the crises.

Pitfalls of Dependence on Foreign Investment

Latin America’s open door to foreign investment (FI) was a major cause of the crises. FI flows escalated in response to the internal growth of Latin America, taking advantage of the high profits generated by the commodity/trade boom. With the decline in trade, income and profits, FI exited, repatriated profits and disinvested, exacerbating the crises and increasing unemployment. FI follows the practices of easy entry and fast withdrawal – a highly unreliable and volatile agency for development.

Pitfalls of Dependence on Overseas Remittances

Latin American regimes took for granted and built into their economic policies and projections multi-billion dollar transfers of income from overseas workers, overlooking the highly vulnerable legal and economic position of their citizens working abroad. The vast majority of overseas workers are in very vulnerable positions: many are undocumented (“illegal immigrants”) and during recessions or economic downturns are abruptly fired. Secondly they work in sectors like construction, tourism, gardening, and cleaning which are hard hit by recessions. Thirdly they have little or no seniority and are “last hired and first fired”. Fourthly, many are not able to collect unemployment insurance and face deportation if they cannot support themselves. The results of the high vulnerability of overseas workers are visible in the multi-billion dollar decline in remittances to Latin America, exacerbating poverty and tilting the balance of payments in the red.

Volatility of Commodity Prices

By putting all of their eggs in the basket of high commodity prices and overseas markets, the governments of the center-left lost a great opportunity to deepen their internal market via import substituting industrialization, agrarian reform and public investments in infrastructure linking agricultural – mining – manufacturing and energy sources in a “grid” to protect the national economy from externally induced crises.

The Limits of Social Liberalism (“Center-Left”) and the Economic Crises

Throughout the first decade of the new millennium the newly minted center-left regimes railed against neo-liberalism and even identified themselves as “21st century” socialists. In practice what this meant was hitching increases in social expenditures to the existing economic structures and trade policies, with some adjustments in trading partners, and in some cases “joint-ventures” with foreign investors. Throughout the period the entire range of regimes practiced social liberal policies familiar to observers of contemporary European social democratic regimes: they combined free trade and an open door for foreign investment with greater spending for anti-poverty programs, unemployment benefits and increases in the minimum wage. On the other hand vast profits accrued to the agro-mineral elites and to the banking sector which financed trade, consumer consumption and debt roll-overs.

The entire social liberal model rested however on the fragile foundations of the crises prone commodity export strategy, highly volatile trade revenues and income from vulnerable overseas workers. When Latin export markets dried up and commodity prices fell, revenues declined and workers were laid off. The social liberal model collapsed into negative growth and the previous gains in employment and poverty reduction were reversed.

Lessons From the Collapse of the Social Liberal Model

Several important lessons can be drawn from the ongoing experience of social-liberal regimes.

1. Positive social programs are not sustainable without structural changes which lessen external vulnerability.
2. Reducing external vulnerability depends on public ownership of the strategic economic sectors in order to avoid capital flight, typical behavior of foreign based capital.
3. Reducing economic vulnerability depends on diversifying markets away from crises ridden, financially controlled imperial centers. Greater economic sustainability depends on deepening the internal market, increasing inter-regional trade and redirecting trade toward high growth regions.
4. Social expenditures are necessary immediate palliatives but do not go to the root of poverty and low incomes. Far reaching land distribution programs linked to large scale development financing and investment in local food production and in domestic industries which complement and link up with agro mineral production will lessen dependence on overseas markets and stabilize the economy.
5. State control of foreign trade and strategic mineral enterprises allows for the capture of the economic surplus to finance economic diversification and innovation.
6. Regional integration has to pass from rhetorical declarations to actual performance and practice. Venezuela’s President Chavez, the leading advocate of regional integration and promoter of Latin American Bolivarian Association (ALBA), still depends on the U. S. markets for 80% of its sale of petroleum and 70% of government export earnings from petroleum, and over 50%of its food imports from U. S. military client Columbia. Regional integration is feasible based on planning complementary investments, and joint public ventures in industrializing mineral,petrol and other primary commodities.
7. Joint security pacts among and between Latin American regimes aimed at countering the U. S.-Columbian military bases and the U. S. militarization strategy can also have an economic function – creating joint venture armaments industries and reducing outside purchases.
8. Diversification of trade to Asia and lessening dependence on the U. S. and EU is necessary but insufficient if the export content continues to be predominantly primary commodities. Changing trading partners but perpetuating “colonial style” trading patterns will not decrease vulnerability. Latin America especially Bolivia, Brazil, Peru, Ecuador must insist that their primary products are industrialized and value is added before they are exported to China, India, Japan and Korea.

In summary the current world crises reveals the limitations and unsustainability of the social liberal policies and regimes. Recognition of the vulnerabilities and volatility lays the groundwork for a more thorough structural transformation based on changes in land tenure, trade patterns and ownership of strategic industries. The current crises has discredited both the neo-liberal and social liberal prescriptions and opens the door to new thinking that links social expenditures with social ownership.