The economic crisis is not a cluster of distinct and separated events, a subprime crisis in the US or a public debt crisis in Greece, nor are there distinct US and European crises, writes James K. Galbraith.
There is one crisis, only one crisis, a deeply interconnected crisis of the world system. This crisis has three deep sources going back 40 years to the early 1970s and the end of what we sometimes call the "golden age," the "glorious 30" years in the immediate aftermath of World War II.
The first of the three deep sources is the rising real cost of the resources that we use, of energy and of everything that we use energy for. This was a problem that emerged in the 1970s and was then submerged again; it was deferred by new discoveries, by the geopolitical situation, and by the financial power of the western countries, which because of the debt crisis in much of the rest of the world had the effect of suppressing demand for these core resources. But the cost of energy is now roughly twice of what it was a decade ago and the future is far more uncertain. And as we confront the problem of climate change and as we begin to pay the price of climate change this problem is going to become more difficult.
The second great underlying issue is technical change, the particular character of which in our time is quite different from before. If you take the digital revolution together with globalization, the ease of transnational manufacturing and also to some degree the outsourcing of services, we find we live in an era where technology is radically labor-saving. It supplants workers. We can say without too much exaggeration that the computer and its associated technologies are now doing to the office worker what a century ago the internal combustion engine did to the horse.
And the third great source of our problem is ideological. It is the neoliberal notion that markets can function on their own without breaking down or blowing up. It is this notion as applied especially to finance. This is the great illusion of the last generation, and it fostered a form of economic growth that was intrinsically unstable and unsustainable. Why? Because it was based on declining standards for loans and on lax accounting of the proceeds of those loans. Or to put it in simple terms, it was based upon financial fraud, on the most massive wave of financial fraud that the world has ever seen. This was true of housing loans in the United States and it was also true of loans to the public sector, for example Greece. The fact that Greece had a weak public sector and a weak tax system was not a state secret before the crisis. It was equally true of commercial real estate in Ireland and of housing in Spain. You simply had to go and observe what was going on.
And when the extent of the fraud could no longer be concealed, there was panic and collapse. This happened both in the United States and Europe and it did damage to the financial structure that was essentially irreversible. Millions of jobs were also lost in both continents. That was the collateral damage.
Every man for himself?
These matters have not gone away. So we need to ask, how do we deal with them? And the basic choice is between two principles. It's between all-in-it-together or everyone-for-themselves.
People have often said that the US has a flexible labor market. But in the United States real wages did not fall in the crisis, actually in the first year they went up. Labor markets did not adjust. We did not restore employment. The employment population ratio was five percentage points lower than it was a decade ago.
What happened in the United States was that we have an effective system of public transfer payments which rose rapidly in the crisis. Unemployment insurance, early retirement under social security, disability, lower tax collections, and then on top of that, the expansion package, the stimulus package, the Keynesian policy that was enacted in 2009. And these things broke the fall in incomes and preserved living standards to a very substantial degree.
In Northern Europe of course you have national institutions that were built, very strong ones, on the tradition of social solidarity and social insurance. It is the critical tradition of any successful society in the modern world - of the ability to react to stress. But it's not the case for continental institutions which were built later in a different time. Those institutions are neoliberal, they are built on ideas that were exported from the United States to a large degree. Europe accepted these exports - the arbitrary debt and deficit ceilings, the monetarist central bank charter, and the reliance on capital buffers in bank regulation - and is paying for them now.
A few years ago, Germany even wrote the so-called debt brake into its constitution - a balanced budget except in times of severe economic crisis. What is that? It's a constitutional provision that you will always have a severe economic crisis. What could be more absurd than that?
James K. Galbraith
But most of all, Europe's politics imposes a dysfunctional austerity on the debtors who cannot pay and cannot escape their debts. And Europe's leaders justify this by confusing surpluses with virtue and deficits with vice, an easy transfer to economics from religion, pretending that one can exist without the other. In fact, in economics deficit and surplus are simply the accounting counterparts of each other and you cannot erase the deficits without also erasing the surpluses.
Now in the US, as well, these core social institutions are under threat. We have the so-called fiscal cliff, a contrived crisis, a reactionary device to force cuts in the programs that have so far survived 30 years of Reaganism - cuts in Social Security, Medicare and Medicaid, as well as other public spending. We have to fight these battles too.
But Europe, and especially Germany, has a much harder task. Europe is moving from stopgap to stopgap, from false assurance to false assurance as the situation gets worse. Eventually the debtors-turned-victims will rebel but they lack moral standing, political power, and the economic capacity to save Europe.
So what is the alternative? It must first involve a comprehensive restructuring of the debts. There is the Yanis Varoufakis-Stuart Holland "Modest Proposal" which I think is a very good starting place. It insists on three elements: A common pool of Maastricht-compliant bonds; second, an European Investment Bank-funded New Deal program marrying the challenge of economic reconstruction to the challenge of dealing with our larger energy and climate problems; and third a common, independent banking authority with the authority to supervise and the authority to restructure, as required, including to downsize and rationalize the financial sector.
Here are a few more ideas: A pension union - a European Pension Union to ensure that people who have worked their entire lives, retire decently on the standard of Europe as a whole and not on the past productivity of their own impoverished countries. Later on, there could be a topping up scheme for wages on the model of the earned income tax credit in the United States; maybe a continental minimum wage. These are low-impact, easy-to-administer, old-fashioned devices, and they bypass weak and ineffective governments in the periphery. They stabilize incomes, employment, and purchasing power.
What will happen if we do not succeed? I think there is a model, not so long ago, not so very far away. It's Yugoslavia, which was, in its day, a very successful middle-income country. And when the violence starts in an advanced, in a developed country, it moves quickly and the fractures are not clean. If you talk to people in certain parts of Europe, and Greece particularly, you can hear already the anxieties that you could have heard in Yugoslavia in the early 1990s.
Therefore, having considered the alternatives, we come to a conclusion. Europe must be saved. It will not be saved on its own. In the words of Abraham Lincoln, in his message to the United States Congress in December of 1862:
"The dogmas of the quiet past are inadequate to the stormy present. As our case is new, so we must think anew and act anew. … We say we are for the Union. The world will not forget that we say this. We know how to save the Union. The world knows that we do know how to save it. We - even we here - hold the power, and bear the responsibility. The way is plain, peaceful, generous, just - a way which, if followed, the world will forever applaud."
James K. Galbraith hold the Lloyd M. Bentsen Jr. Chair in Government/Business Relations and is Professor of Government at the University of Texas at Austin. This is a condensed version of remarks he delivered to the Congress of IG Metall on "Changing Course for a Good Life" in Berlin, December 6, 2012.
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