WORLD VIEW:THE TOPSY-turvy world of international markets and finance – and the associated media coverage – focuses at the end of this week on crucial gaps in the architecture of the euro and the inadequacy of the latest efforts to shore up Greek finances.
At the week’s beginning, attention concentrated on the possibility that the US might default on its public debt.
That was avoided; but the deal to cut spending and not increase taxes raises the prospect of a double-dip recession with worldwide consequences. Prolonged austerity politics leaves little room for economic growth in the US, while rising inequalities there inhibit the consumer demand which previously bolstered it.
The fear is also emerging that if more action is not taken soon to address the euro’s problems, generalised indebtedness and austerity raise the much more alarming prospect of a global depression politics like the early 1930s.
In fact, the European and US issues are joined, as the markets rationally recognise, since together the two regions determine so much of the global economy.
It is a declining proportion, of course, as can be seen in Chinese concerns about where to put their surpluses. They have a real interest in the euro surviving as an alternative to relying on an increasingly uncertain dollar reserve currency.
Macroeconomics and macropolitics are also joined in such a period.
Markets react to weak political resolve in the euro zone and to political impasse, dysfunction and weak presidential leadership in the US. They crave the confidence and certainty that only political solutions can provide.
In yesterday’s Financial Times, Philip Stephens noticed a curious similarity between German chancellor Angela Merkel and US president Barack Obama’s leadership styles.
Both are addicted to a professorial kind of governing, tempted to stay above the political fray in the name of a higher pragmatism. But this loses them the political initiative to opposing conservative domestic ideologies of austerity and strictly balanced budgeting, in which the Bild tabloid and the Tea Party faction of the Republicans set public agendas.
Catching up then undermines their credibility – even if, so far, Merkel and Obama have managed to get there in the end.
Decisive leadership to deal with contradictory demands from the beginning would have been a better course.
Rational deliberation with such obdurate opponents proves unrealistic and self-defeating because conflicting interests are more important than empirical or conceptual inadequacy in this highly political game.
The trouble with the US deal is that its endgame is a dead end for Obama’s own political programme. It locks him into an indefinite commitment to spending cuts and appears to rule out compensatory tax increases on the richest individuals and corporations (although Obama does have the option of discontinuing George W Bush’s large tax concessions to them in 2013 if re-elected).
The deal also rules out the large-scale public infrastructure spending that the US badly needs to modernise and stimulate employment – another foundational election platform of Obama’s. That cuts off another path to growth.
The facts of accumulated inequality in the US are staggering and linked directly to dampened demand and poor growth.
Whereas inequality decreased in the post-war period until the 1970s, it has decisively shifted towards the richest Americans since then, influenced by the neo-liberal project of market deregulation.
The richest 1 per cent of Americans earned 9 per cent of national income in 1978 and 23.5 per cent by 2007. The top 10 per cent of households gained 43 per cent and the top 1 per cent gained 200 per cent, with the richest 0.01 per cent – about 15,000 taxpayers – gaining almost 500 per cent.
Since the 1980s middle-class incomes have fallen or stagnated. The Bush tax concessions have reinforced these trends.
As a result there are two quite separate US consumer economies, comprising the richer 25 per cent and the poorer 75 per cent of the population.
The New York Times reported this week that “even with the economy in a funk and many Americans pulling back on spending, the rich are again buying designer clothing, luxury cars and about anything that catches their fancy”.
But this does not float everyone’s boat, as a more equal society would and did, since the other 75 per cent are hit by falling house values, rising petrol prices, personal debts and job losses.
Paradoxically, the Tea Party populists are drawn from the poorer majority, although their funding and ideology comes from the rich.
Austerity politics and balanced budgets to contain indebtedness are central to this. But the budgets were more balanced in the Clinton years and went awry with Bush’s wars and tax cuts.
Class interests determine which section of the population bears the costs of socialising bank losses and paying for consequential state indebtedness.
A similar austerity politics is being fought out in the euro zone, but it is obscured by national differences and political disagreements. Generalising cuts snuff out funds for investment, extra demand and growth in both the US and Europe.