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    28 April 2010

    Beware the Canadian Austerity Model




    Andrew Jackson
    Paul Martin was Canada's Minister of Finance from 1993 to 2003, then served a short term as Prime Minister. He spoke on Canada’s 1990s debt reduction strategy to a February, 2010 Public Services Summit organized by the Guardian in the UK, and Canadian newspapers report that he is being tapped by the Europeans for advice on fiscal matters.
    Martin himself has said that he's been engaged in "informal" discussions with several European ministers and senior officials seeking advice on how to confront that continent's debt crisis. "There's a huge, huge interest," said Hamish McRae, a prominent columnist with the Independent, who recently advised readers that the route out of Europe's debt crisis was by following Canada's example. "Boy oh boy. Canada, along with four or five other countries, is attracting tremendous attention here."1
    This is unfortunate since the Canadian example should prompt concern rather than blind imitation. Canada stands out among the OECD countries for reducing deficits and debts through deep and permanent cuts to social programs and public services, at great cost to working families.
    In most OECD countries (with the major exception of Japan) government debt levels stabilized or fell as a share of GDP from highs in the mid to late 1990s until the start of the Great Recession in 2008. The basic drivers of debt reduction are well-known. Debt will shrink if the economy grows faster than interest on the accumulated debt, and/or if deficits (revenues less expenditures) shrink due to spending cuts or tax increases.
    From a labour and progressive perspective, the desirable approach to debt reduction is to maintain strong economic growth at low real interest rates and, if necessary, to raise taxes in a fair way to pay for the needed maintenance and expansion of programs. For most OECD countries, debts stabilized from the mid to late 1990s without major overall spending cuts as economies recovered from the downturn of the early 1990s, and as interest rates fell from very high levels (though not by nearly as much as they should have done in the Euro area).
    For the OECD area as a whole, gross government debt as a share of GDP increased very slightly from a peak of 72% in 1998 to 73.1% in 2007, driven mainly by much higher debt in Japan. For the Euro area, debt shrank very significantly from 80% to 70.9% of GDP over the same period, and the US debt also fell by 10 percentage points of GDP from its peak in 1993 through 2007.
    At one level, Paul Martin's reputation as a deficit and debt slayer is well-deserved. As Canada's Minister of Finance, he (together with like-minded provincial governments) presided over a huge reduction in Canada’s gross debt, from a well-above average of 101.7% of GDP at its peak in 1996 to a well below average of just 65% in 2007. This was one of the most sweeping fiscal consolidations in the OECD, and certainly the largest of the G7 countries. A mixed bag of small countries also saw major debt reductions over roughly the same period – Australia, Finland, Belgium, Denmark, the Netherlands, New Zealand and Sweden.
    What makes the Canadian experience really stand out is very heavy reliance on spending cuts to eliminate the deficit and then run budget surpluses. In 1996, when Canadian debt peaked, spending was 46.6% of GDP, down a bit from a peak of over 50% of GDP in the recession of the early 1990’s. By 2007, spending was just 39.1% of GDP, or more than 7 percentage points down from the peak debt year. By contrast, spending in the OECD area as a whole fell by only 0.7 percentage points of GDP between 1998 and 2007, and fell by 2.6 percentage points in the Euro area. Canada relied more on spending cuts than most of the smaller countries mentioned above.
    Canada also stands out in that it did not rely at all on tax increases to lower the deficit and debt. Indeed, once surpluses emerged after 2002, corporate and personal income taxes were cut. Revenues as a share of GDP fell from 43.8% of GDP in the peak debt year to 40.7% in 2007. By contrast, revenues remained unchanged for the OECD as a whole, fell well under one percentage point of GDP in the Euro area, and rose a bit in the US as the Clinton Administration raised taxes quite significantly as part of its debt reduction strategy.
    Putting the burden of debt reduction on social spending cuts rather than on taxation meant that the burden of Canadian deficit reduction fell on the lower end of the income distribution, and this was a significant factor behind the pronounced increase in Canadian income inequality over the 1990s. Between 1993 and 2001, the after tax and transfer income share of the bottom 80% of families fell as the share of the top 20% rose from 36.9% to 39.2%.
    Part of the decline in total Canadian government spending over the mid to late 1990s was cyclical, driven by a gradual fall in the national unemployment rate from a very high level. But by far the greater part came from a major retrenchment of the welfare state. As Minister of Finance, Paul Martin cut federal transfers to persons by 1.9 percentage points of GDP. With elderly benefits virtually untouched, most of the burden fell upon federally administered Unemployment Insurance.
    Access to benefits was restricted, and the maximum benefit was frozen in nominal terms for a decade. Today, Canada has one of the least generous unemployment schemes in the OECD. During the current downturn, only one half of unemployed workers have qualified for benefits, and the maximum benefit is just 60% of average earnings. The average unemployed worker qualifies for a maximum benefit period of less than 9 months.
    Martin also cut deeply into federal transfers to the provinces, which fell by 1.9 percentage points of GDP, 1992 to 2000. Most of the burden fell on social programs under provincial jurisdiction, notably public health insurance (which covers physician and hospital care) and welfare or social assistance which provides basic income support. The old formula under which the federal government paid one half of welfare costs was scrapped, and welfare rates were slashed in real terms in almost every province. Because of cuts to unemployment insurance and welfare, poverty rates remained at near recession levels through most of the 1990s and the incomes of the bottom half of households rose very modestly, despite falling unemployment.
    Martin's cuts stopped the Liberal government from implementing their promise to introduce a national child care and early learning program, leaving working families pretty much on their own in seeking care arrangements. Worse, his fiscal revolution and abdication of federal leadership in social policy made Canada a much more market-dependent society, moving it much closer to the US model. Between 1993 and 2002, the difference between the level of non defence program spending in Canada and the US fell from a huge 15.2 percentage points of GDP to just 5.7 percentage points.
    Martin and others argue that Canada was in such a fiscal mess in the mid 1990s that there was no alternative to deep cuts. However, as argued at the time by the labour movement and leading Canadian macro-economists such as Lars Osberg and Pierre Fortin (both past Presidents of the Canadian Economics Association), rising debt was not the result of over-spending but of a very deep recession, 1989 to 1991, exacerbated by the exceptionally high real interest rates inflicted by Bank of Canada governor John Crow in his search for the holy grail of zero inflation.
    The cyclically adjusted budget balance in the mid 1990s was the same as the OECD average (4.6% of GDP in 1995), and below that in the Euro area. Canada could, like other countries, have made much more modest fiscal adjustments to gradually return to balanced budgets as the economy improved. Taxes in the mid 1990s were a bit lower than the European average and could have been raised at least in line with US taxes under Clinton. Canada had no real trouble financing government borrowing which was and is overwhelmingly denominated in Canadian dollars.
    A key feature of Canada's deficit wars was the deliberate cultivation of fear. As documented by Canadian journalist Linda McQuaig in her book Shooting the Hippo, the media and officials fanned totally groundless fears of a debt default and even resorted to talking down Canada's debt standing in influential international circles such as the Wall Street Journal editorial board to create a sense of crisis.
    The macro-economic consequences of Canada's huge fiscal retrenchment were limited by a shift to easier monetary policy, and a significant depreciation of the Canadian against the US dollar. Canada grew somewhat faster than the US and most of Europe from the early 1990s to 2000 despite fiscal restraint. But unemployment was very slow to decline, falling from 11.2% in 1992 to a still very high 8.7% in 2000. Average real hourly and weekly wages stood still over this entire period, under-scoring how far the economy fell short of its potential. For working Canadians, the 1990s were experienced as a lost decade.
    As Paul Martin argues, Canada's experience holds lessons for others. The key lessons are that deep fiscal restraint is hugely damaging to the well-being of working families, and that better alternatives exist.
    1  http://www.ottawacitizen.com/business/Europeans+Paul+Martin+advice/2616493/story.html


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    Andrew Jackson is Chief Economist and National Director of Social and Economic Policy with the Canadian Labour Congress (CLC), where he has worked since 1989. He is also a Research Professor in the Institute of Political Economy at Carleton University, a Research Associate with the Canadian Centre for Policy Alternatives, and a Fellow with the School of Policy Studies at Queen’s University. He has written numerous articles for popular and academic publications, and is the author of Work and Labour in Canada: Critical Issues, published by Canadian Scholars Press (2005).

    21 April 2010

    Making its voice heard: a role for the labour movement in policies for recovery

    Andrew Watt
    Let us be optimistic and assume for the sake of argument that the economic crisis is behind us and the world’s economies will return slowly to ‘trend’ growth. What are the main challenges facing policymakers and, especially, the labour movement? There are the urgent issues of rethinking our financial system (key to averting a relapse into crisis down the line) and the medium-run need to manage the transition to an ecologically sustainable growth model. In the middle are a set of intertwined challenges on which I want to focus here: getting unemployment down; getting fiscal deficits down; and reducing inequalities. All these are vital if we are to move towards a sustainable economic and social growth model that serves the interests of the many, not the few.
    The good news is that these aims are not mutually exclusive. On the contrary, there is a set of policies – a policy mix – that can achieve them all simultaneously. The bad news is that in many cases such policies do not seem to be high on the to-do lists of policymakers. Getting the balance between monetary, fiscal and wage policy right, over time and across countries, is not quite everything, but it is key to addressing the grave challenges that face us and avoiding a backlash in favour of reactionary policies.
    What would that policy mix look like?
    Key to getting both unemployment and fiscal deficits down is returning to faster economic growth. Merely getting back to ‘trend’ growth rates – in the advanced countries 2-3% a year – will not be enough. For the foreseeable future this requires the maintenance of aggressive stimulus measures in most countries (I’ll come back to the ‘most’ caveat).
    It is vital that the world’s leading central banks uniformly commit to keeping interest rates at or near zero for the foreseeable future and fiscal expansion is initially maintained as far as possible.
    But what about the risk of inflation and the problems of overburdened government budgets? Actually, both factors are arguments for sustained expansionary monetary policy. Government budgets are indeed in a parlous state in most countries, ‘inviting’ welfare state cutbacks. Low interest rates are absolutely vital to bringing them back close to balance. Lower policy rates help to keep the interest paid by governments down, thus limiting debt-servicing costs. They stimulate real economic growth and, not least, bring about a desirable rise in the rate of price increases. Why desirable? Because inflation is substantially below target, and faster inflation raises the nominal rate of economic growth, which is decisive for fiscal consolidation. (Ch. 2 of this shows just how important this effect is.) Specifically in the euro area, a faster average rate of inflation would also dramatically ease the solution of the adjustment problems for those countries (like Greece and Spain) that have to reduce their relative wages and prices. And if you are worried about bubbles, regulate the markets – don’t kill the economy with high interest rates.
    Given an extended period of low interest rates, what should fiscal policymakers do?
    Deficits will be reduced only when the economy picks up sufficiently for unemployment to fall. In the short-run this means most counties still need an expansionary fiscal policy. With monetary policy still up against a zero bound and with the banking system still sluggish, fiscal policy has a vital role to play in sustaining demand and also channelling spending towards socially desirable outcomes, such as lower inequality or the transition to a low-carbon economy. At the same time, credible consolidation plans should be announced now and foreseen with an appropriate ‘trigger’. It makes no sense to use an arbitrary date (‘the start of 2011’) as a starting-point. Instead a sensible real-economic trigger (a certain output or employment target), tailored to national conditions, should be used.
    A key challenge for the labour movement is to ensure that, in qualitative terms, these consolidation measures are favourable to working people. This implies a focus on strengthening revenue capacity, and deflecting the tax burden away from labour and on to capital, high incomes and material resources. Specifically, progressive political forces should unite behind calls for a financial transactions tax (at international or European level) and for the introduction of an EU carbon tax with a levy at the external border.
    Should all countries run the same expansionary fiscal policies?
    No. Those countries with relatively low deficits/debts and with current account surpluses should do more for longer to stimulate their economies. In the euro area this means Germany, Austria and the Netherlands. Faster demand growth in these countries would be good for employment and would dramatically ease the adjustment issues facing the euro area. Similar considerations apply at the global level to Japan and China; (in the latter case, best via a return to a policy of steady exchange-rate appreciation). Fiscally constrained countries must attempt as far as possible to sustain demand while coping with their adjustment problems; clamping down on tax avoidance would raise revenue without depressing demand so much. Demand and price deflation is almost always the most costly strategy. There’s a better way.
    And what about wage policy, unions’ ‘core business’?
    It is both simple and hard at the same time. In ‘equilibrium’, real wages should rise at the same rate as labour productivity, nominal wages at that rate plus an allowance for ’desirable’ inflation. In most advanced capitalist countries real wages did not keep pace with labour productivity during much of the neoliberal period: rising profits, siphoned off by the financial sector and CEOs and channelled into speculation, were a major cause of the crisis. In a nutshell, this happened because the institutional structures that underpinned the balanced growth, and especially the productivity-wage nexus, of the Fordist era were destroyed by neoliberalism. Modern equivalents need to be found. No general blueprint for this can be given, but progressive governments and union movements have to start designing and developing such mechanisms. Some useful points of departure include establishing or strengthening minimum wages and governmental support for collective bargaining institutions (e.g. extending the coverage of representative collective agreements or reducing free-riding by charging non-member firms and workers a bargaining levy). An important role can be played by measures to reduce price pass through by companies: there is a strong progressive case to be made for ‘smart deregulation’ of product and services markets to reduce firms’ pricing power and thus raise real wages.
    The right path for nominal wages is key. In the short run, the concern is to avoid deflationary wage developments (concession bargaining) which will hamper, not aid, recovery as generalised price deflation may take hold. In the medium run, as the recovery hopefully strengthens, nominal wage increases in line with the above rule will help underpin continued expansionary monetary policies.
    Within a monetary union, the issues are rather different. As recent events have shown, persistent divergences from the nominal wage norm (in both directions) can build up in the member countries over a longer period. Then suddenly they require correction - one-sidedly by deficit countries - in the worst possible context, a deep economic and fiscal crisis (a crisis to which the imbalances were an important contributing factor). The key step here is for the surplus countries to engineer faster wage growth. Once again, the policy goals are not in conflict: a good way to achieve this in the short term is to run more expansionary fiscal policy. At the same time, deficit countries need to reduce their relative price levels. As I said there is a better way than fiscal contraction and a deep recession to induce deflation: some form of social pact to freeze wages and prices (ideally against the background of faster area-wide inflation).
    What can labour hope for?
    There is a path out of the crisis, one leading to stable and balanced economic growth and a steady return to lower unemployment, sound public finances and rising real wage incomes. There are no insuperable goal conflicts or fundamental problems in moving on to this trajectory, and labour’s key interest must be to get onto it. However, for this to occur, the key areas of monetary, fiscal and wages policy need to be well coordinated with one another, both across time and space. The coordination mechanisms that do exist at the supranational (European, global) level are weak (the EU Macroeconomic Dialogue), flawed (the Stability and Growth Pact) and/or nascent (the G20). Meanwhile, the forces of globalisation undermine those coordination mechanisms that were, or still are, effective at the national level. Charting out the required policy mix is relatively easy and positive steps are possible even with the limited coordination structures currently in place. What will be harder is moving towards newer, more effective, coordination structures that permit economically efficient, socially just and ecologically sustainable outcomes over an extended time horizon.
    Neoliberalism has been decisively weakened by the crisis, but its proponents are regrouping. There is still an opportunity for labour to make its voice heard in a progressive restructuring of global, European and national structures. It has a vital interest in doing so. It has good arguments. It must also shout, and the others must be persuaded - or forced - to listen.
    Download this article as pdf

    Andrew Watt is a Senior Researcher at the European Trade Union Institute (ETUI). He edits the ETUI Policy Brief on European Economic and Employment Policy and is co-editor of a recent book "After the crisis – towards a sustainable growth model". He writes a monthly column for the "Social Europe Journal".
    Further links
    • http://www.etui.org/research/Publications/Regular-publications/ETUI-Policy-Briefs
    • http://www.etui.org/research/activities/Employment-and-social-policies/Books/After-the-crisis-towards-a-sustainable-growth-model
    • http://www.social-europe.eu/author/andrew-watt/

    15 April 2010

    Taxing financial transactions: the right thing to do when you owe $600bn a year and have lost control over global finance

    Pierre Habbard
    For those who had placed some hope in the G20 process to start re-regulating global finance the result, so far, has been utterly disappointing. Governments and central banks have been as eager to bail out the bankers and take on their ‘toxic assets’ as they have been reluctant to move decisively on financial regulation. At every G20 Summit since the first one in November 2008 in Washington, we have been told that a revamped and enhanced Financial Stability Board (including the IMF, the OECD, the BIS and other key financial organisations) would lead the way with concrete deliverables to bring the focus of global finance back to the real economy. We have seen instead a long series of reports on what-went-wrong and “high level” principles and “guidance”, but with no teeth when it comes to enforcement. If anything, these reports reveal the extent to which supervisory authorities are exposed to a “significant lack of information” on “where risks actually lie” (FSB & IMF 2009). They tell us that, two years into the crisis, the “current state of analysis limits the extent to which very precise guidance can be developed” (BIS, FSB & IMF 2009) and that “considerable work remains” (SSG 2009) in the areas of banks’ internal controls and regulatory infrastructure.
    At the G20 Summit in Pittsburgh (G20 2009) in September 2009 however, some hope emerged that at last something tangible could be agreed upon in the near future. G20 leaders called on the IMF to undertake research to determine a “fair and substantial contribution” that the financial sector could make to pay “for any burdens associated with government interventions to repair the banking system”. They further asked the IMF “to strengthen its capacity to help its members cope with financial volatility, reducing the economic disruption from sudden swings in capital flows.” Read together, the two mandates were seen as an opening to an old policy issue that had been long neglected by governments and international financial institutions: the creation of a global Financial Transaction Tax (FTT).
    In its original proposal by James Tobin in the 1970s (TUAC 1995), the economic justification for an FTT starts with the acknowledgement of the harmful effects of short-term speculation producing strong and persistent deviations of asset prices from their theoretical equilibrium levels. Such “overshooting” in prices lead to speculative bubbles over the long run. A measured and controlled increase in transaction costs implied by an FTT (from 0,02% up to 0,5%) would slow down trading activities so as to align capital flows with economic fundamentals and the real economy, while freeing up new sources of financing for global public goods. Since then, the FTT has been developed in different ways by economists and civil society groups, each putting different weight on the twin objectives of curbing financial speculation and freeing up new sources to finance global public goods. In fact, some proposals had such a strong focus on financing for development that in most cases they explicitly excluded the initial objective of Tobin to curb speculation, targeting a minimalist tax rate of 0.005% to avoid “producing market distortions” (HILLMAN et al. 2007) or “disrupting the market” (SCHMIDT 2007).
    Unlike in the pre-crisis literature, the FTT has now gained considerable traction, both as a financial stability instrument and as a solution for financing development. There is a strong case for this. Regarding financial stability, it would be hard to contest that at least part of the crisis we face today has been triggered by a speculative bubble in the derivatives markets and by global imbalances of current accounts between regions and within regions. As Stephan Schulmeister (SCHULMEISTER 2009) puts it, the size of the trading in derivative products is just much too big to be accounted for by its original purpose: to hedge against price volatility or credit default risk. On the revenue side, OECD governments still have to deliver on their past commitments to finance global public goods, including the Millennium Development Goals (MDG), but also on ‘new’ demands regarding climate change adaptation and mitigation measures for developing countries (the financing of which was a major contributory factor in the failure of the Copenhagen Summit). According to TUAC estimates (TUAC 2010), the global public good resource gap that would emerge would be in the range of $324-336bn per year between 2012 and 2017 ($156bn for financing climate change measures in developing countries, $168-180bn for Official Development Assistance to reach 0.7% of GNI).
    To make matters worse, the very same OECD governments are running budget deficits at unprecedented levels as a result of the global crisis, including the bailing out of the banking sector. According to the OECD, the size of the fiscal consolidation that would be needed in the 2012-2017 period to bring deficits back to normal levels (below 2%) is projected at $300-370bn per year - on top of the above resource gap for public goods. Unsurprisingly, the OECD experts would want to fund this gap with cuts in public expenditure, “long overdue reforms” to public pensions and regressive tax reforms that would hit working people front on. In the absence of new tax revenues, such a fiscal scenario would have working families pay twice for the crisis: first through rising unemployment and falling incomes and secondly as a result of cuts in public and social services.
    Against this background – “heavily indebted rich countries” whose supervisory authorities have lost control over global finance – then surely now is the time to take the FTT option seriously. This is what many unions have been campaigning for, together with social movements, as seen in recent initiatives in the US, Europe and Asia. For its part, the TUAC has been working on a paper (TUAC 2010) on the parameters of a FTT together with the ITUC. Based on recent contributions by Dean Baker (BAKER et al 2009), Stephan Schulmeister (SCHULMEISTER 2009), and Bruno Jetin (JETIN 2009), the paper shows that an FTT could be designed with different rates per counterparty (large banks, other financial institutions including hedge funds, and non-financial corporations) and per market (‘traditional’ foreign exchange markets, exchange-traded derivatives, over-the-counter derivatives). Such a multi-tiered tax regime would help hit where it really hurts and target the counterparties (e.g. large banks and hedge funds) and transactions (e.g. derivative products) that are more prone to speculative trading than others. The revenues generated would be in the range of USD200-600bn per year if the tax is applied on a global scale.
    Following the G20 summit in Pittsburgh, the IMF was quick to publicly dismiss the FTT (IMF 2009) as an option to be considered in the commissioned report (forthcoming, April 2010). The sceptical reaction of the IMF is not surprising. Ever since 1995, when the Tobin tax became a “global issue”, the IMF has not seriously considered the issue. The main objections are with the negative impact that the reduction in trading volume would have on price volatility and market liquidity. Other objections relate to the potential transfer of the added transactions cost to “middle class investors”, the opportunities for tax avoidance or the more economic theory textbook argument that tax should apply to value added, not to transactions. Dean Baker (BAKER 2010) has published a solid set of responses to those criticisms as has Stephan Schulmeister. Overall, the single most important aspect to keep in mind in considering the pros and cons of an FTT is the need to look at the specific problems associated with the FTT (in contrast to generic problems that would also be encountered by comparable regulatory options). IMF and OECD concerns about feasibility clearly belong to the latter category: yes, implementing an FTT would be complicated, but would it be more complicated to implement than an alternative solution that would deliver comparable financial stability and global public good financing? On that, the IMF has argued for the creation of a “global banking insurance scheme” as an alternative to an FTT. However the two instruments differ in terms of both revenues (which would not be available for public goods under an insurance scheme) and the handling of risk. Regarding the latter, the insurance scheme in fact would be more onerous for regulators than the FTT. A pre-requisite for any insurance scheme is the ability to price the risk associated with the banks’ balance sheets, which in turn presupposes the ability of the insurer (the regulator) to conduct proper risk assessment of the insured (the banks) and to do so at reasonable costs. And yet it appears that such a basic requirement has become a step too far for financial authorities.
    An FTT, unlike the insurance proposal, would provide governments with a powerful regulatory tool which would not depend on the ability of the supervisory authorities to price or assess risk. It would be no panacea for the much broader agenda on financial re-regulation, but it would offer government a ‘low-cost’ instrument for tackling volatility in asset prices and for downsizing the global banking industry, particularly at a time when the international financial supervisory framework is in tatters and will take a decade to reform. It would free up new sources of financing for global public goods at a time when public services and welfare are at threat.
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    Pierre Habbard is a Senior Policy Advisor at the Trade Union Advisory Committee (TUAC) to the OECD.

    6 April 2010

    Finance capital will not fade away on its own

    Christoph Scherrer
    With the fall of the investment bank Lehman Brothers in the late summer of 2008, many have predicted major reforms to reign in the hazardous behaviour of financial institutions. Nonetheless, up until very recently, little has happened. In early 2010, serious proposals for stricter oversight were tabled for the first time. US President Barack Obama has proposed the most encompassing reform of the banking system - to prohibit bank holding companies from engaging in proprietary trading. This will allow them to purchase and sell stocks or derivatives only in the name of their clients. The purpose of the Volcker Rule, which Obama named after one of its strongest proponents, the former Federal Reserve chairman Paul Volcker, is to prevent banks (and possibly also the largest other financial institutions) as the central actors within the financial world to bring down the whole system through risky speculations.
    Does Obama’s proposal mark a change of course in favour of a more reasonable capitalism? The name alone casts doubts on the prospects of a much circumscribed financial sector. Volcker was the architect of the monetarist turn in central banking in the late 1970s, ushering in the period of neoliberalism. In the following, I will argue that the crisis alone will not lead to more labour friendly policies. Crises are not only part of capitalism, they are also, as Karl Marx has pointed out, moments of capitalist reinvigoration. Crises delegitimise capitalists, but they also weaken their potential counter forces, especially, organised labour.
    Capitalist crisis solution
    Marx would not have been too surprised about the course of the crisis so far. According to him, the destruction of capital is the main precondition for a new cycle of capital accumulation. The profits of the surviving capital will rise. In addition, the crisis speeds up innovation and leads to a higher degree of capital centralisation as competitors are eliminated. More centralisation promises higher profits because of increased economies of scale and market power. This theoretically stated mechanism of overcoming capitalist crisis seems to be empirically substantiated in the current crisis.
    By turning away from the New Deal banking regulations, the US experienced a rapid increase in bank concentration even before the crisis. This trend has continued. In 1995, the top five banks had 11% deposit share. Their share increased to 29% in 2004 and jumped to 38,6 % in 2009 (Celent 2009). In the already highly concentrated banking market of Germany only two of the five biggest private banks in 2006 survived in 2009. However, the crisis also brought forward new competition - mainly from the Far East. The competition, therefore, has reached a higher level.
    At the same time, the reputation of financial institutions has suffered badly. US tax payers, in particular, have vented their anger at highly paid bonuses for those who effectively brought about the crisis. Will this spontaneous outrage lead to collective action? And if it does, what kind of action will follow? History informs us that the middle and working classes do not always direct their anger in dire economic times against the rich. They have also turned against members of their own class, and especially against poorer classes. In fact, electorally, many voters have turned conservative in Europe since the outbreak of the crisis. While the election of Obama seems to contradict this trend, we are now witnessing the rise of a paranoid right in the US. The newly emerging “Tea Party Movement” turns its wrath against the federal government and Obama’s slightly progressive policy proposals. They reckon Washington has been captured by a finance-led cosmopolitan conspiracy.
    The crisis weakens labour
    In his Global Labour Column, Gregory Albo vividly described the onslaught of capital on workers in North America. In order to understand the current weakness of labour, it might be helpful to look at the sources of worker power on a more abstract level. For the sake of simplification, four sources of power can be identified: market, associational, institutional, and discursive power. The crisis undermines the market power of workers by letting demand for labour shrink. This also has an impact on its associational power. The export industries, the fortresses of organised labour in many countries, have suffered in the current crisis in particular. The well organised and well paid workers in the heavily impacted automobile industry are currently preoccupied by defensive struggles to keep “their” factories running. To a certain extent, their defence comes at the expense of the tax payers and the so-called temporary workers, who have been dismissed in great numbers and without compensation (Brehmer/Seifert 2009).
    If workers relied solely on market and associational power, the fate of the majority of them would be left to the vagaries of the business cycle. On the basis of institutional power, they can secure their right to collective bargaining even during times of crisis. Their institutional power rests on their past organisational and political successes. The successes of US unions date back to an almost distant past and they command little institutional power at present. While they contributed to Obama’s electoral success and the Democratic majority in Congress by mobilising their members in large numbers, they failed to secure the support of the Democrats for their own top legislative priority, better legal protection for organising (Greenhouse 2009).
    Furthermore, organised labour usually lacks access to economic policymaking even when traditionally labour-friendly parties are in government. Leading representatives of such parties have supported the neo-liberal agenda of the pre-crisis period. The financial centres of the US have voted Democrats into office ever since 1992. Even in 2006, hedge funds supported Democrats by a margin of 3:1 over Republicans. It therefore came as no surprise that the democratic senators Charles Schumer and Chris Dodd defended finance capital during the crisis (Phillips 2008). The German Social Democratic finance ministers in recent times, Hans Eichel and Peer Steinbrück, actively supported the liberalisation of financial markets in the period before the crisis (Kellermann 2005).
    Thus, workers’ organisations are left mainly with discursive power. Discursive power can be defined as the ability to convince others of one’s own arguments. The crisis has delegitimised finance capital and its economic paradigm, neo-liberalism, and therefore opens up space for alternatives. However, scandalising the crisis is not sufficient for real change. A clear alternative to the status-quo must be developed. Nevertheless, as yet, there has been little room for optimism.
    It has become popular to point to the Great Depression as an example of the possibilities of changing course in the direction of a “good capitalism” (Dullien et al. 2009). What this analogy overlooks is that the shift towards welfare capitalism was not without alternatives (facism and communism) and that it took World War II to decide which alternative to liberal capitalism would succeed. The parallel with the current situation is also flawed for other reasons. For one, learning from the Great Depression, today’s policymakers have acted against a deepening of the recession. The outcome so far is that the extent of the crisis and the level of social desperation cannot be compared to the 1930s in developed capitalist societies. Furthermore, it was precisely the existence of these alternatives to liberal capitalism that have led to its modification. Some social compromise was seen as the best defense of the private property order next to military might. These or other fundamental alternatives to liberalism are not currently in sight.
    Change of course in the fourth year of the crisis?
    President Obama’s push for banking regulation is widely seen as a reaction to the increasing resentment among the US population about his closeness to Wall Street. His regulation proposal came on the heel of the election of a Republican candidate to succeed the deceased Democrat Edward Kennedy. Is a change of course therefore possible without a resurgent organised labour? Is the diffuse anger of the electorate sufficient? It is probably not. For one, it was not a socialist who became heir to Kennedy’s senate seat, but a proponent of free markets. In addition, Obama’s proposal sounds a lot more radical than it is in reality. The prohibition of proprietary trading does not limit speculation in general; it only restricts the financial dealings of one group - the banks. Private investors would still be able to use hedge funds for risky deals with derivatives. They would still be allowed to take over companies for the purpose of selling them to other investors on the stock market after having them restructured, i.e. after having dismissed a significant part of their work force. There would also be no limit for them to take on debt. Speculation with borrowed money drives bubbles and aggravates their subsequent implosion. Thus, Obama’s proposal turns out to be a rather limited circumscription of the moneyed classes’ sovereignty. Whether Obama will be able to pass even these timid reforms through Congress remains an open question. And as for the German conservative government, it lags way behind even Obama’s tepid proposals.
    In other words, we cannot expect the capitalists and their representatives to adopt a more reasonable course. We also have to recognise that the crisis weakens labour. Thus, what is to be done? The situation varies from country to country but in general it is quite obvious that extraordinary efforts are called for. This begins with widespread support for workers who defend themselves against cuts in wages and jobs. Care should be taken that these do not go at the expense of weaker parts of the working class. The move from defensive to offensive strategies requires organised labour to become more political. Together with other social forces it has to develop alternative visions and it has to regain influence in political parties.

    References
    Celent 2009: Too Big to Bail? Bank Concentration in the Developed World, in: http://www.celent.com/124_2079.htm; 12.10.2009.
    Dullien, Sebastian/ Herr, Hansjörg / Kellerman, Christian 2009: Der gute Kapitalismus... und was sich dafür nach der Krise ändern müsste, Bielefeld, Transcript.
    Greenhouse, Steven 2009: Democrats Cut Labor Provision Unions Sought, in: The New York Times, 17.07.2009, A1.
    Kellermann, Christian 2005: Disentangling Deutschland AG, in: Beck, Stefan/Klobes, Frank/Scherrer, Christoph (Hrsg.): Surviving Globalization? Perspectives for the German Economic Model, Dordrecht, 111-132.
    Phillips, Kevin 2008: Bad Money, New York, NY.
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    Christoph Scherrer is Professor for Globalization and Politics at University of Kassel, Germany. He is also executive director of the International Center for Development and Decent Work and a member of the steering committee of the Global Labour University.

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