Beyond neoliberalism?

Nicolas Pons-Vignon

For the generation that came of age in the 1990s, the belief in the labour movement’s ability to inspire progressive change collapsed soon after the Berlin Wall. Not unlike the Wall, this belief had been seriously shaken during the 1970s and 1980s, which saw the rise of neoliberalism from Chile to the United Kingdom and, thanks to the Washington-based international financial institutions, to much of the developing world. Jan Breman (1995), in a biting analysis of the triumphant World Bank’s World Development Report on “Workers in an integrating world”, notes that the Bank saw “drastic restructuring in the balance of power in favour of capital” as a necessary condition for both economic growth and poverty reduction. Written at the height of the Washington Consensus, the report represented an arrogant dismissal of workers as political actors. Only if they would keep quiet, letting the invisible hand of the market decide how many shillings (3, maybe) to put in their pockets, would their lives improve.

While some economists and politicians were genuinely convinced that neoclassical economic theory could offer an alternative to the previous dominant Keynesian paradigm, it has since appeared that, behind the market fundamentalism justified “scientifically” by economists (such as those of the Public Choice School) eager to show that governments and unions were predatory self-interested agents, lay the formidable enterprise of shifting the balance of forces in society towards private business and particularly capital holders. As Harvey (2006) points out, far from being a technical choice over allocative efficiency, neoliberalism is first and foremost a political enterprise aimed at restoring the power of capital. It does so in two ways: first by shifting economic resources back to owners of capital, and second by weakening the capacity of organized labour to resist policy changes in the workplace or in public policy.

At odds with the professed neutrality of neoclassical economics, neoliberal policies have actively promoted the interests of large (often Western, in developing countries) companies by extending the realm where they could invest (through privatization and liberalization) and the conditions under which they were able to do so (repatriation of profits, low taxation and regulation)1. Such measures have been accompanied by the systematic undermining of labour’s capacity to constitute itself as a political force that could challenge these policies, as exemplified by the aggressive behaviour of Margaret Thatcher’s Government towards the miners’ strikes of the 1980s in the United Kingdom. The victory of the Conservatives in this country paved the way for far-reaching deregulation of the labour market, which resulted in widespread precariousness for working people. This not only made life harder but also undermined the strength of unions, since the number of workers employed in permanent contracts started dropping rapidly. In light of these facts, it remains a puzzling reality that in most developed countries critical views did not catch the imagination of people and that majorities repeatedly voted for minority interests. The result of these policies has thus been a massive skewing of income towards the very rich, with remarkably little resistance in the process. The extent of this growing inequality in the United States can be strikingly observed in the long-term evolution of the income share of the top 1 per cent (figure 1)2.

Figure 1: United States: Income share of the top 1 per cent, 1913–2006

Notes: [1] = including realized capital gains; and [2] = excluding capital gains. Three-year moving averages.
Source: Palma, 2009.
 

For many years, neoliberal policies have undermined the living conditions of workers, from Chile to the United States and Africa, and with a possibly greater impact than anywhere else in former communist countries. The current crisis confirms what many heterodox economists have been arguing for many years, namely that neoliberal policies are not only bad for workers, but also for growth and development. Amsden (2010) thus points out the paradox of their continued dominance in the face of a proven inability to generate higher growth than the policies they replaced: per capita growth performances have been superior in the period 1950–80 than in the period 1980–2000 everywhere but in South Asia and in the United States. In the latter, as has been discussed above, growing inequality has meant that growth has disproportionately benefited the richest, with the “bottom 90 per cent” of earners in the United States having actually experienced stagnation between 1971 and 2005 (Palma, 2009). Moreover, China and India, two countries which seem to be steadily emerging despite the crisis, have adopted development policies markedly different from those recommended by the Washington Consensus, even if their labour policies have been more aligned with it. And the current economic crisis offers convincing evidence that the growth path of the leading neoliberal countries was premised on very shaky foundations.

Depleted growth, stagnating income for workers and their families in many countries, and at the same time a massive enrichment of the wealthiest, in particular capital owners in the West: the outcome of neoliberal policies is such that its continued dominance can indeed be astonishing. The collapse of the Soviet bloc and the deep disillusion with state-managed planned economies has certainly played an important part in the difficulties experienced by the labour movement to resist and propose an alternative to neoliberal globalization. This was particularly clear in the case of South Africa, where the fall of the apartheid regime, achieved largely through worker mobilization, took place in an environment where the international and internal pressures to follow the neoliberal trend proved too strong to resist for the new leadership.

Despite several crises related to burst “bubbles” of over-valued assets, it is only with the current crisis that a consensus – claiming unlikely allies such as Alan Greenspan – is emerging to argue that the entire finance-driven system of accumulation is in need of regulatory reform. However, while growing numbers recognize its deep flaws, many still favour superficial changes in line with Guiseppe Tomasi di Lampedusa’s ultimate advice for the continuity of power in a time of crisis: “everything must change so that everything can stay the same”. While finance has been a locus of incredible accumulation over the last 25 years, it must be emphasized that this cannot be reduced to harmless speculation. At the core of finance, of its inflated assets and their over-inflated derivatives, lies the way in which neoliberal capitalism has been able to supplement the loss of demand linked to the depleted incomes of working people by trapping them in ownership of expensive yet worthless homes (or other goods) through credit. Indeed, it is thanks to credit that demand levels have been maintained for so many years; the fact that this credit growth was entirely linked to self-fulfilling fantasies regarding asset values signals an irrationality which ridicules the claims to science often heard in mainstream economics departments. Moreover, the hardships many average informal and formal workers and their families are suffering in the crisis has shed a particularly crude light on the readiness of states to invest hitherto unavailable billions of dollars in bailouts, which have often not even been used to re-assert control over the banking system.

This book and the Global Labour Column hope to make an important and engaged contribution to the public debate on some of the issues discussed above, but also to stimulate an exchange of ideas contributing to the rebuilding of the union movement. Moving towards more inclusive and more equal societies requires stronger unions and a broad-based movement for change. The column offers a unique meeting point to progressive academics, from universities, trade unions and international organizations, and activists and trade union leaders. The title of the book – Don’t waste the crisis – is meant to emphasize that, if one good thing can come out of this crisis, it is to reopen debate on the direction of economic policy and on how people are employed. Now that the claim that worker-adverse policies were “good for growth” has been dismissed, it is essential to join forces for a new economic dispensation, which will ensure economic development with decent job opportunities. It is time to question the central policies of neoliberalism and their assumptions, such as the “requirement” for the state and social security systems to spend less. Union members are among the first victims of state spending cuts. Challenging such policies requires economic strategies and political mobilization that are focused on quality jobs, fair wages, comprehensive public services, political as well as industrial democracy and long-term social and environmental sustainability, rather than on the narrow interests of a financially affluent minority. But it is also time to discuss, honestly and in a constructive manner, the shortcomings of trade unions when they have sometimes failed to defend the weakest workers; and to propose ways in which unions can be inclusive and at the forefront of social and economic progress.

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1 Harvey (ibid.) shows how the very first series of measures adopted by Paul Bremer in Iraq in 2003 all revolved around the opening of the Iraqi economy to US corporate investment, while “[t]he right to unionize and strike … were strictly circumscribed” (p. 10). One can appreciate the sense of priorities that inhabited the US Government in the immediate aftermath of a war waged in the name of freedom, when much of the country’s critical infrastructure had been destroyed by bombs.
2 Gabriel Palma, the source of this graph, argues that neo-liberalism is the art of achieving such “redistribution” in a democracy.

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Nicolas Pons-Vignon is the editor of the Global labour Column and a Senior Research Fellow with the Corporate Strategy and Industrial Development (CSID) research programme, University of the Witwatersrand, South Africa. He is also the founder and director of the African Programme for Rethinking Development Economics (APORDE).

References:
Amsden, A. 2010. “Say’s Law, poverty persistence, and employment neglect”, in Journal of Human Development and Capabilities, Vol. 11, No. 1 pp.57–66.

Breman, J. 1995. “Labour, get lost: A late-capitalist manifesto”, in Economic and Political Weekly, 16 Sep.pp. 2294–2300.

Harvey, D. 2006. “Neo-liberalism and the restoration of class power”, in Spaces of global capitalism (London,Verso).

Palma, J.G. 2009. “The revenge of the market on the rentiers: Why neo-liberal reports of the end of history turned out to be premature”, in Cambridge Journal of Economics, Vol. 33, No. 4 pp. 829–869.

Social partner responses to the economic crisis in Europe: Why collective bargaining makes a difference

Vera Glassner

The second year of the economic crisis has had severe effects on the European labour market. The annual total unemployment rate for 2009 in the EU27 is estimated to be 9.1 %, with large differences between countries. The latest Eurostat figures (March 2010) indicate that total unemployment is highest in Latvia (over 22%), 19% in Spain, around 15% in Estonia and Lithuania and 13% in Ireland. This contrasts with comparably low levels of unemployment – between 4 and 6% – in the Netherlands, Austria and Luxemburg. A clear divide has also emerged with regard to unemployment growth in the course of 2009. Whereas in Latvia unemployment skyrocketed by almost 11 percentage points between January 2009 and 2010, and in Estonia and Ireland grew by 4.4 percentage points, in countries such as Germany, Belgium, Austria, France, Italy and Poland it remained rather stable, with increases of 0.3 to 1.4 percentage points during this period.

In tackling the economic crisis in Europe, government and social partner responses, in the form of collective bargaining between unions and employer associations, have been multifaceted and included a wide range of policy measures. Leaving aside governmental recovery pacts, and focusing on social partners’ responses to protect and promote employment and to safeguard workers’ purchasing power, two major observations can be made: First, statutory, i.e. law-based, provisions for short-time working and partial unemployment (as in Austria, Belgium, the Netherlands, Germany, France, Italy, Bulgaria, Romania, Slovenia, Poland and Hungary) have served as a buffer to mitigate negative employment effects resulting from the contraction of output. Such short-time working or partial unemployment schemes aim at maintaining employment through temporary working time reductions and at protecting wages by fully or partly compensating workers, by the provision of wage subsidies, for losses in income resulting from a reduction in hours worked. Insofar as they contribute to companies’ goals of increasing organisational and working-time flexibility, protect human capital and company-specific skills by avoiding redundancies and – at the same time – guarantee the social security entitlements and social welfare rights of employees as well as maintaining their purchasing power, short-time working arrangements have been widely welcomed by both unions and employers’ associations.

Second, the implementation of statutory short-time working provisions is carried out through collective bargaining at the national or sectoral and – in particular – at the company level. In countries such as Austria, Belgium, Germany and the Netherlands, provisions on the implementation of short-time working schemes have been established in a number of sectoral collective agreements. In other countries, mostly in the central and eastern European countries (i.e. Bulgaria, Hungary, Poland, Romania and Slovenia) where statutory short-time working schemes have been introduced (or, as in the Netherlands, re-introduced) as a response to the crisis, law-based provisions are implemented almost exclusively at the enterprise level. As a consequence, the role of company-level social partners in finding tailor-made responses to deal with the decline in industrial orders has increased.

Such ‘negotiated’ responses by social partners via collective bargaining differ considerably with regard to negotiation processes, their outcome, and the instruments and measures included in such ‘crisis-related’ collective agreements (Glassner and Keune 2010). Four factors account for the ‘character’ of a negotiated response made against the particular background of the crisis. First, the national system of industrial relations strongly determines the balance of power between organised labour and business. Inclusive multi-level bargaining systems allow for the conclusion of ‘higher-level’ agreements that set the framework for bargaining units at the company level. Thus, the bargaining process is highly coordinated, and basic standards are guaranteed and implemented in a flexible and decentralised way that allows appropriate responses to the specific requirements of the firm. Secondly, the deteriorating economic situation of companies (or sectors) sets limits on the negotiating leverage and tends to force unions and employee representatives into a defensive position. Thirdly, the role of the state is decisive in providing a supportive legal-institutional framework (as in the form of short-time arrangements) and in promoting collective bargaining as an instrument to deal with the crisis. And fourthly, although institutional and economic conditions determine the room for manœuvre of bargaining actors, the outcome of the collective agreement is strongly shaped by their strategies and their capacity to find innovative solutions and arrive at a ‘balanced’ compromise.

With regard to the content of collective agreements concluded in response to the crisis, the flexible reduction of working time has been the most important instrument in dealing with the temporary suspension of business activity. In countries where arrangements for short-time working already existed or have been introduced, losses in income borne by workers have been limited. However, the extent of compensation differs considerably between countries and sectors. In some countries, social partners – in particular in the metal sector – agreed on top-ups to statutory minimum short-time working allowances or – as in Germany – introduced even more flexible procedures to implement working time reductions in the company. Furthermore, it is mostly workers in the manufacturing industries, in particular the metal, automotive, chemical and ICT sectors, that are covered by short-time working and partial unemployment schemes, service sector workers having been included in such measures to a lesser extent.

Another important issue addressed in collective agreements is the flexibilisation of wage-setting. In a number of companies, mostly in the automotive sector, in electro-technics and engineering, and in particular in Germany and the Nordic countries, collective agreements include opening clauses that allow for phased wage increases that may be suspended should the company face temporary economic difficulties. Similarly, training and skill enhancement has been an important issue, in particular in relation to the flexible reduction of working time. In a number of countries short-time working arrangements include incentives (such as exemptions from income tax and/or social security contributions as in Germany, Slovenia and Romania) for employers and employees to offer/participate in training programmes.

When it comes to assessing the impact of the economic crisis on industrial relations, two questions arise. First, have governments’ and social partners’ responses given rise to a trend towards ‘decentralisation’ of collective bargaining? In general industrial relations systems have proved rather stable and sufficiently flexible to respond to the current economic conditions. This is particularly true in those countries where bargaining coordination is centralised at the national and/or sectoral level. In countries where collective bargaining is widely decentralised with the enterprise as the predominant level – as in the majority of the central and eastern European countries and in the United Kingdom – the conditions for enabling social partners to arrive at negotiated responses have been less favourable. So far, only in Ireland does it appear that a decentralisation of collective bargaining may be on the way, as a result of a lack of state support and the threat of the largest employers’ association to withdraw from collective bargaining. Secondly, has the increased use of opening clauses opened the door for an undercutting of norms set in higher-level collective agreements? The large majority of agreements, in particular in Germany (a country often referred to in relation to the danger of ‘hardship clauses’), is a result of a rather balanced exchange of interest, albeit with wage restraint as a central feature. Wage concessions are often made in return for employment guarantees or the extension of employee participation rights. The downside of the social partners’ priority of safeguarding jobs is a further deceleration of wage dynamics that is particularly felt by employees working in companies strongly affected by the crisis and where resources to compensate for income losses due to short-time work are limited. In general, however, social partners have played a decisive role in drafting and adopting a wide range of measures aimed at increasing companies’ internal flexibility, limiting labour cost growth, maintaining employment, and improving skill levels, and in this way they contribute to creating the preconditions for sustainable recovery. For unions, meanwhile, it is vital to ensure that deviations from collectively set standards are in line with higher-level agreements and that they are temporary in nature. Equally important is the fight against wage restraint – in Germany gross wages in 2009 decreased (for the first time in the post-war period) by 0.4% – and the re-enforcement of a productivity-orientated wage policy. Unions should intensify the coordination of collective bargaining policies across borders in order to counter the pressure on wages and working conditions that is expected to continue even once the output crisis has been overcome.

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Vera Glassner is a researcher at the European Trade Union Institute.

Reference:
Glassner, Vera and Keune, Maarten (forthcoming 2010), ‘Negotiating the crisis? Collective bargaining in Europe during the economic downturn’, DIALOGUE Working Paper No. 10, Geneva: International Labour Office.

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).

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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.

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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/

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.