Economic Science and the EU

June 22, 2013

Every few decades or so we are brutally reminded that the global economic system can experience serious dysfunctions and that the science called upon to find the necessary remedies is rarely, if ever, up to the task. The latest controversies among economists regarding austerity policies or possible solutions for dealing with sovereign debt are a case in point.

The head of the IMF’s research unit and potential Nobel-prize recipient, Mr Olivier Blanchard, has recently revealed that his institution is partly responsible for botching the rescue of Greece and, by miscalculating the impact of austerity policies, for plunging Spain, Portugal, Italy, Ireland and even the Netherlands into recession (Alternatives économiques).

In a parallel development, a 2010 study by former IMF chief economist Kenneth Rogoff and Carmen Reinhart of Harvard University has stirred up a huge controversy involving three economists from Amherst University and Nobel-prize laureate Paul Krugman. The study claimed to have found a connection between economic growth and public borrowing: whenever government debt rises above 90 percent of GDP, the data available seems to indicate that growth slows down, although the authors freely admit that they are not entirely sure if higher debt leads to slow growth or whether it is the other way around (The Economist).

Almost as influential among EU finance ministers is a second Harvard study, “Large Changes in Fiscal Policy : Taxes vs. Spending “, authored by Alberto Alesina and Silvia Ardagna. According to it, deep cuts in public spending generally lead to economic expansion, not to contraction. As the two have explained during a meeting in the spring of 2010 with Ecofin ministers, austerity policies give the private sector the confidence it needs to increase their investments, which compensate for the budget cuts . The study found a convert in Jean-Claude Trichet, who claimed the same year that

[…] the ideea that the austerity measures could bring about stagnation is incorrect […] I am firmly convinced that in the current circumstances such policies that inspire confidence would reinforce, not affect the economic recovery because today’s essential factor is confidance.” (as quoted by P. Krugman in New York Times)

This is all academic, one might say. Only, in an unfortunate turn of events, Mr Rogoff’s or Alesina’s studies determined the European Union’s neoliberal-leaning politicians to adopt stringent austerity policies aimed at reducing public debt, thus bringing about the current recession on the continent. As Mr Rogoff argues, however, his recipe for debt reduction involved not austerity, but writing down bank debt, allowing for some inflation and using “financial repression” techniques.

This, of course, is not the first time that the IMF’s policies have gone tragically wrong, or that macroeconomists’ advice has fallen short of expectations. The ‘dismal science’ – a nickname for economics that many Asian, Latin American and European nations would readily approve as appropriate – is after all relatively young and imperfect.

In fact, during the discipline’s two and a half centuries of evolution, the most influential theorists were actually members of entirely different professions. As we know, Adam Smith was initially a customs agent and a professor of moral philosophy; David Ricardo – a stockbroker; Thomas Malthus – a pastor; Quesnay and Juglar – medical doctors; Marx – a philosopher; and Leon Walras – a mining engineer and journalist. As a rule of thumb, policy recommendations by economists have not been consistently successful to date, when they were not ignored by governments on ideological grounds. Even well-known policies such as Roosevelt’s New Deal were discontinued before they could produce their full effects, such as solving mass unemployment in the US. The latter, as J.K. Galbraith pointed out, was solved not by the adoption of macroeconomic policies, but inadvertently by Hitler, who decided to wage war on the West.

The current economic climate tends to lend full credibility to Keynes’ stagnationist thesis, as it bears many similarities to the long period of stagnation following the 1929 crash. His thesis is again influencing business people and social scientists alike, making economic recovery a distant and uncertain prospect, especially within the EU.

When Elites Expire

 

June 1, 2013

It has been almost a century since O. Spengler heralded the decline of the West. Apart from a 30-year hiatus between 1945 and 1975, this decline has become irreversible, a development even Samuel Huntington was forced to acknowledge.

One of the most telling symptoms of the west’s fall from its former pre-eminence is its citizens’ disenchantment with elites. In its April 25, 2013 issue, the French magazine Marianne has published an opinion poll which shows that only 25 percent of the French public still trusts their national politicians, regardless of party affiliation. This low score is consistent with an IFOP poll from 2012 where just 25 percent of respondents have said they still have faith in the capitalist system.

Sure, in the massive, EU-wide rejection of capitalism and its elites, it could be tempting to read a mere repeat of the social and political developments which followed the Great Depression of the 1930’s. Today’s prolonged economic crisis, the lack of job opportunities for the 20 million European unemployed and the harmful policies of austerity adopted so far seem to justify such a parallel. This time, however, the people’s disgust with their elites in the west is squarely focused on the 1 percent who profited hugely from three decades of neoliberalism, as well as on the associated political and intellectual elites who helped them along the way.

The rise of stateless corporations

In their quest to avoid paying corporate taxes, old-style multinational corporations have transformed themselves during the 1990’s into global entities. Their number increased from around 2,000 to 63,000 and they moved their financial operations to fiscal havens or to countries known for very low tax rates, such as Ireland. They were joined there by the richest 1 percent of the west’s individuals, with disastrous results for the public finances of their home countries.

According to James S. Henry, chief economist of leading management consulting firm McKinsey, the amount of money shifted offshore has reached 26,000 billion dollars in 2012. Half of this fortune belongs to only 91,000 people, or 0.001 percent of the world’s population. The other half is owned by 8.4 million citizens (CEO’s of multinationals, founders of SME’s, financial consultants and so on), or 0.14 percent of the world’s population. (Alternatives Economiques)

The most accomplished tax evaders are the big corporations whose complex “fiscal optimisation” schemes are devised by tax consultants working for the Big Four international accounting houses. Over the last decade, the ranks of the latter have swelled to 700,000 people, garnering 100 billion dollars per year in fees. (Stern)

Consequently, corporations like General Electric are currently able to pay only 2.3 percent tax on their profits; Google pays 2.4 percent. The burden of taxation in a country like France is heavier for companies with less than 20 employees: around 30 percent. By contrast, the CAC40 corporations pay only 8 percent in tax on average. Between 2007 and 2009, 40 percent of all tax revenue from CAC40 companies was collected from only 4 corporations – EDF, GDF Suez, Renault and France Telecom – in which the state is a stakeholder. Regardless of this fact, the current Socialist government is considering selling off its share in the abovementioned corporations.

As US Senator Levin has stated, tax avoidance by US corporations has diminished the share of corporate taxes to just 9 percent of federal government revenues. “A recent study found that 30 of the largest US multinationals, with more than 160 billion dollars in profits, paid nothing in federal income taxes over a recent three-year period” (Senator Levin, in The Economist).

The attitude of the new breed of stateless capitalists was best expressed by Eric Schmidt in an October 2012 interview:

I am very proud of the [tax] structure that we set up. We did it based on the incentives that the governments offered us to operate…It’s called capitalism. We are proudly capitalistic. I’m not confused about this.

An accommodating political elite

Political elites in leading western countries are remarkably homogenous, the products of a limited number of academic establishments. British politicians usually come from Oxford or Cambridge universities; the French political elite is educated at the Ecole Nationale d’Administration (ENA) or the Polytechnique, whereas leading US politicians are usually graduates of Harvard, Princeton or Yale. Firm supporters of neoliberalism or believers in social-liberalism, politicians belonging to these elites are spending the little capital they have left on promoting further privatisations and on defending the austerity policies that have brought most western economies to a standstill. In the United Kingdom even the privatisation of police services is underway. In France, former minister and current IMF director Christine Lagarde has opened the way for private justice to replace the state court system in a landmark (commercial) case in which Bernard Tapie of Adidas fame was awarded 400 million euros of public money in 2008. In many countries across the European Union leading politicians have been involved in mega-scandals involving serious financial fraud (Jerome Cahuzac in France, Silvio Berlusconi in Italy, Adrian Nastase in Romania and the examples go on).

Past solutions won’t work

Although the dire consequences of tax avoidance by corporations and individuals call for resolute political action, western political elites continue to demand more sacrifices from the middle- and working classes instead, in the form of higher VAT, increased taxation or diminished social benefits. Thus, experts like Nicolas Shaxson do not believe leaders such as David Cameron when they say they will now put an end to EU-wide tax evasion which, according to Mr. Barroso, is worth 1,000 billion euros. His assessment is shared by The Economist :

“[…] there are strong vested interests behind today’s flawed system. Chief among them are the governments of places that benefit from acting as tax havens, which are not just small tropical islands but include Luxembourg, Ireland (which gains jobs from hosting some of Apple’s subsidiaries) and Britain, which has a tradition of being relatively lenient on firms that break, as well as bend, the tax rules. So it will be no surprise if any reforms that emerge from the current political fury will do no more than tinker.”

People’s anger with their political and business elites has reached levels not seen since the time of the Ancien Régime in France. The problem, primarily, is not the mismanagement of state affairs, but, as Montesquieu put it in his 1721 Lettres persanes,

“Le plus grand mal que fait un ministre sans probité n’est pas de desservir son prince et de ruiner son people, […] c’est le mauvais exemple qu’il donne.”

Arnold Toynbee explained that when the elites lose touch with the rest of society or even become toxic for it, the civilisation they used to lead is about to implode. The challenge for progressive social scientists now is not to attempt to delay the inevitable, but to articulate alternative visions of our possible future instead.