Economic anemia and financial crisis (I)

First released in ‘Segunda Naturaleza‘ on 28 March 2009. Updated March 16, 2011

Prior to the financial crisis and as a prelude to the one we behold, we are witnessing a gradual but determined economic anemia. Since 2006.

The history of capitalism is marked by crisis. Definitely, since the 70′s we are witnessing a dip every 5 or 6 years. Systematically. Yet, the current one we endure, we ignore its internal mechanics: this is neither a cyclical crisis we ensue periodically nor a predictable structural collapse – so not analyzable in conventional terms.

Since capitalism exists per se in the dawn of the nineteenth century, the housing issue became a matter of essential focus. The issue is whether or not granting a mortgage to someone who has no assets, but offers reasonable assurance to invest the equivalent of 5 – 7 years earnings, which is the average housing cost. The loan is granted through a mortgage atop the object by itself, provided that the financial institution truthfully assesses the applicant’s income – say provided holder’s solvency. The financial institution does not usually covers further than 70 to 80% overall. The mechanism relies therefore on the holder’s complementary efforts.

However, in practice, since the late 90′s, the tendency in the United States has been encouraging a majority of citizens to become capitalist (whether they were solvents or not) and beginning with the house. The Bush administration pushed this ahead, banks operated with lax « after all, they said, why not lending to anyone. » Often, the assessment on the client’s financial coverage capacity depended if his face fitted, when not in practice, he was supposedly solvent. The bank saved itself because its solvency position no longer depended on the borrower’s sole creditworthy but especially on the intrinsic value of the property: so, if the holder failed to pay, the bank expropriated (sometimes people speak wrongly of seizure) and sold the house to redeem the debt. This system generalized up to December 2008. U.S. banks and European to a lesser extent, granted credit indiscriminately, especially low-income families and active minorities (Hispanics and African Americans), bestowing 100, 110 and even 120% of the property value with the reason that there is always some home remodeling to perform or new furniture to buy when you get settled in a new place. And in order to get a more tempting technique when possible, financial engineering used to propose a financial gimmick: namely, there was no capital refund thru the first 2 or 3 years, other than interests. The uncut gadget was escorted by variable interest rates, i.e. fluctuating, under the pretext that with time, « you’ll see your earnings will go up. » This is what has come to be called the doctrine of constant expansion.

Throughout the summer of 2007 roughly 1,700,000 American families loosed their homes, seized, evicted and their children threw out the street, frequently evicted from the school system. In fact expropriation measures were targeted at around 4,000,000 households, but the authorities responsible for executing the judgments of eviction – judges and police –refused regularly to enforce such unpopular measures. This impelled serious cash flow problems for a lot of credit institutions –to say bankruptcy as they were holding massive amounts of toxic loans (150 to 300,000 million dollars). The multiplier effect soon arose and the entire U.S. banking system realized it was holding failed, flawed, toxic mortgages: the so called subprime lending involved an extra interest rate, a bonus on the event of the loan holder was insolvent.

Yet we cannot talk of robbery; let us rather point to a cynical « brutalization » of the banking system inasmuch as the system decided not to deal with individuals (families, children and their risks), but with objects (the value of their risks). In an ethical and regular system, their loss statements should have been assessed, compulsory provision of funds required and finally the security authorities (central bank and stock exchange authorities) would have taken the necessary steps. Not so. Most financial institutions disguised toxic  loans with others who were not, creating packages, the perverted packages. These, in turn, were subject to new transactions targeted to other entities (which obviously did not warn the gambit). With it, banks got rid of noxious loans on their balance sheets while new (surreptitious) assets appeared healthy. This technique, called « securitization of credit », is perfectly legal but it has been denatured in those circumstances. In theory it happens to convert assets (loans, for example) in securities or bank values. In practice, the conversion was made ​​based on personal loans, thus giving rise to corrupted assets because the failed effects remained hidden behind the creditworthy assets. The hoax is unquestionable as long as the U.S. banks have accepted the situation and many Western banks assumed the subprimes without question. Since then the new titles became « marketable securities » throughout the world, ie they were admissible to official stock exchange quoting and were therefore transferable in the stock market. Titles invaded Western markets and, little by little, the deposit banks collapsed: some were aware of it and others suspected insolvent loans in their portfolio, but they were incapable to determine how many and how important they were. The perversion led to extreme fraud:  there were cases where the mortgage ownership on a home was split throughout several titles so as to detach and include them throughout different packages. Who bids higher?

Very few banks were clever enough to assess their risk or that of their neighbor whom, so far, traded cash daily. Mistrust among banks generalized and interbank credit was finished off.

As for Q4 2008, the real (productive) economy suffered strongly the bias effect of the increasing blockade of credit lines to businesses and small firms. From then on, banks do not guarantee their fundamental duty, i.e. the necessary cash « irrigation » in order to keep in force the levels of trade.

Next post: The imbalances in the spotlight

The social economy, an antidote to the crisis

ECONOMICS AND UTOPIA (4/4)

Between SOEs and private sector, there is space enough for respect for human and environment

The Industrial Revolution in the nineteenth century changed the world. But it also produced rural exodus, crowding of workers in impoverished and poorly organized suburbs. It generated as well long working hours in noisy and polluting factories and workshops, and exploitation of children and women assigned to ungrateful tasks. The concept of social and solidarity economy (SSE) was born in response to this vulnerable and unprotected new working class.

Britain, where the textile industry was booming thanks to the cotton supplied by the colonies, became the first laboratory of social economy. On top of a spinning factory in New Lanark, Scotland, Robert Owen (1771-1858) made his fortune thanks to the cotton trade. At the same time, he was not insensitive to his workers’ plight. He implemented a schooling system for them and their children, financing and establishing nurseries, dairy care and stores where customers were also owners. Thereby the cooperative movement was born, and Robert Owen went on to become one of the founders of SSE.

The Social and Solidarity Economy Network
In France, Charles Fournier (1772-1837), inventor of the phalansteries, communities where many families were sharing housing, work and leisure; Louis Blanc (1811-1882), creator of the social workshops as spot of workers’ protection; and Pierre-Joseph Proudhon (1809-1865), initiator of mutual societies, were the forerunners. After the First World War, cooperatives are institutionalized and are characterized by a great utopia: the cooperative movement can establish a cooperative republic. But even before the Second World War, it seems clear that the cooperative movement will not be skilled in overthrowing the capitalist economy. Since that time, the cooperative movement lost its unique alternative purpose.
In line with it, the European cooperative movement grows economically while it goes gradually downplaying the original values. First of all cooperatives try to survive in a world marked by large organizations and the growing influence of management and administration. Democratic participation weakens whilst the power of managers increases. Together, access to the independence of the southern hemisphere countries causes an unprecedented deployment of cooperative organizations, particularly in agriculture, savings and credit.

In France, the State has tried to appropriate most of the independent action of the cooperative movement. The Délégation Interministérielle à l’Innovation Sociale et à l’Economie Sociale and the Conseil Supérieur de Coopération, promote ‘from above’ a skewed view of the cooperative area. Meanwhile, in 1968, federations and confederations of cooperatives agglutinated in an association, Groupement National de la Coopération (National Association for Cooperation) with the mission to defend and promote the fundamental principles of cooperation, ensure exchange of information and experiences between different national organizations, organizing and promoting the development activities undertaken by their members. In France, one in two people is a member of one or more cooperatives. The cooperative sector includes there companies such as ACDLEC – E. Leclerc, Crédit Agricole, Système U, Crédit Mutuel, Caisse d’Epargne Groupe, Banque Populaire, Vivo, Terrena, Tereos and Astera.

In Switzerland, the retail networks Migros and Coop, several housing cooperatives and the Raiffeisen Bank are based on the cooperative movement. More recently the Swiss Alternative Bank (BAS) and all fair trade firms joined the SSE.

Although at first utopian, SSE has continued bringing new supporters. The recession in industrialized countries in 2008-2009 where thousands of people were tossed out, has pushed them to seek alternatives to the dominant economic system. In 2010 the 37 European members of Cooperatives Europe have 160 000 organizations, employing about 5,400,000 employees. Italy, Spain and France are the top three countries in terms of number of cooperatives. French cooperative movement is a leader in terms of number of cooperatives with more than 23 million members, followed by Germany (20,509,973) and Italy (13,063,419). As workers, Italy has more than one million employees, nearly a million France and Germany over 830,000.

Drifts of free trade
As an alternative to state-owned enterprises and private sector, the SSE follows number of fundamental values. It is nonprofit or for-profit limited. Commercial or industrial units are handled democratically and owners, whatever the size of their investment, have only one vote – unlike the practice in private companies, where the number of votes depends on the number of shares. The wage differences are minimal.

Besides in its modern way, the other economy intends as an antidote to the excesses of mercantilism and free trade. Thus, the respect for human beings and the environment is a main concern. The SSE is firmly positioned against speculation or profits maximization at any cost.

Related Posts:
· Economics & Utopia (1/4) – Do we need central banks?
· Economics & Utopia (2/4) – The regression of workers’ self-management
· Economics & Utopia (3/4) – The resurgence of mercantilism

The resurgence of mercantilism

ECONOMICS AND UTOPIA (3/4)

Buried by Adam Smith, mercantilism recurs.

The temptation recurs elsewhere.
In the seventeenth century, France was trying to get rich at the expense of its neighbors. When the European partners accuse Germany to promote its exports and curb imports, they do not just throw spears against a country unwilling to assume its pivotal role in the euro area in crisis. They accuse it of consciously practicing a policy that has left bad memories when it was applied for the last time on a large scale between the two world wars: mercantilism.

Sometimes known as « beg thy neighbor », this policy consists for a country to boost exports and cut back imports in order to accumulate as much wealth as possible. Emerged since the Renaissance, developed over the seventeenth and eighteenth centuries, particularly in France of absolute monarchy, the theory was to allow the king to assert his economic and military power. The main architect was the Minister of Economy and Finance of Louis XIV, Jean-Baptiste Colbert, who tried to stimulate exports by expanding the luxury industry in the kingdom. Denounced by liberal economists including Adam Smith at the end of the Enlightenment, mercantilism gave way to free trade during the industrial revolution of the next century.

Increased disorganization
The theory re-appeared in the inter-war years, when the major Western countries have tried to emerge from the crisis through competitive devaluations and protectionist measures. The result was a greater disruption of economic networks on the eve of the Second World War. The implementations of the Common Market after the conflict, and globalization of trade, have seemed to definitely place mercantilism in the cemetery of outdated ideas.

This is not a mere utopia. Germany is not the only in being accused of reviving a ghost – the United States and China as well. The first, as a result of its uncontrolled money supply resulting in a constant devaluation of the dollar and curbing imports. The latter, because of its refusal to let the yuan rising – thus stimulating exports. In the case of these three countries, protectionism does not take place via the customs office, in contrast to the 1930s. In Germany, the standard is a concerted policy of wage moderation. In United States and China, the chosen instrument is the exchange rate policy.

The problem with the mercantilist policies is that they evade large parts of their domestic economy to international competition, leading ultimately to a lack of competitiveness. India, which has practiced it over forty years since its independence in 1947, had to adapt its industrial sector after the gradual opening of its borders by 1991. The classical theorists have denounced, in addition, an inflationary effect: If you earn gold in your economy without allowing the market to grow up, you cause price rises ultimately.

Mercantilism, however, is not devoid of supporters. It holds a social value because it confers on the State the responsibility for determining the goods and services that must escape from Liberalism – whose limits have been demonstrated by the crisis. In the 1930s, John Maynard Keynes himself equally complimented the mercantilism due to job protection in times of crisis.

Related Posts:
· Economics & Utopia (1/4) – Do we need central banks?
· Economics & Utopia (2/4) – The regression of workers’ self-management

The regression of workers’ self-management

ECONOMICS AND UTOPIA (2/4)

100 years ago, the first kibbutz was founded. Today, the traditional ideal of a collectivist society and community model is disappearing.

On 28 October 1910, two women and eight men went across the Jordan towards the east. They settled on the shores of Lake Tiberias and founded Degania – the one still identified today as “the mother of all kibbutzes.” These pioneers from the second aliyah – literally “ascent” or emigration to Israel – had fled the pogroms in Russia and Eastern Europe to settle in Palestine. Imbued with utopian and revolutionary mainstream of the late nineteenth century, they landed onto the “Promised Land” with the one and only dream of building a new life.

Neither exploiter nor exploited

New migrants will then benefit from the Yishuv – the Jewish community present in Palestine before the creation of the State of Israel – as a “laboratory” for building a new form of ideal society where all people live free and equal. With the help of the Jewish National Fund, they will buy land to Arabs on a regular basis and will conduct experiments of communal villages.

It was not until the founding of Degania that a real settlement adopts a structure and a collectivist organization. The reason is simple: people no longer want to work on behalf of others but want to live off the fruits of their labor. Following this example, many communities organized around the principle of common ownership of production means and consumer goods, will then bloom all over Palestine.

The ideal of a new society is not the only reason for this success. Community life also responds to practical issues. Faced with the hostility of the land on which they arrive — malaria, swamps in the north, desert in the south and Bedouins who do not necessarily look kindly the inception of new residents– migrants are well advised to joint their forces if they intend to build the Jewish homeland as hoped. Conversely, a village where everyone would live separately in its own corner would not be viable. The kibbutz will thus become one of the pillars of Zionism and actively participate in the construction of the State of Israel and the design of its future borders.

End of individualism

When moving to a kibbutz, newcomers abandon all forms of personal property. All their personal belongings are now owned by the community. Collaborative decisions are made democratically and horizontally at regular meetings. As for individualism, it gives way to a community life assembled around social, economic and cultural shared activities. The refectory is usually the kibbutz hub. Housing, schools and treatment rooms are available to residents here and there. Beyond in the periphery, we find the fields and factories where rotations are organized among the members to sustain the community economically.

The kibbutz does not live in autarky. As members are not self-sufficient, they engage trade and even employ staff from outside. By contrast, money does not exist as such inside the kibbutz. Resources – be it fruit or clothes – are not bought but are always distributed equally among all residents.

End of an era

This ideal did not survive globalization and economic and demographic crisis of the 1980s. Although in 2010 – the centenary year – there is always more than 120 000 people living in some 270 kibbutzim in Israel and the West Bank, the traditional model has become a minority. Most members now work outside the kibbutz. They always give a percentage of their earnings to cover common expenses but the distribution of resources is more often based on each person revenues. Some critics of workers’ self-management from the left, such as Gilles Dauvé and Jacques Camatte, do not admonish the model as reactionary but simply as not progressive in the context of developed Capitalism. For other detractors this attests that the kibbutz as a social project no longer exists.

Related Posts:
· Economics & Utopia (1/4) -Do we need central banks?

Do we need central banks?

ECONOMICS AND UTOPIA (1/4)

A trend of thought, increasingly listened within liberal theory, wants to end the monopoly of issuing institutions

Bankers put their feet down

A Bloomberg survey from early December shows that 16% of Americans support abolishing the Federal Reserve. Malaise is real in the public. Central banks are mostly accused of manipulating currency and rates to soften the economic cycles and subsequently generate false and perverse incentives that result in generalized crisis. The explosion of their balance sheet, the massive purchases by the ECB of government bonds of peripheral European countries are finger-pointed. Fears of loss of independence over the policies are logically strengthened.

The emergence of a movement calling for the abolition of central banks is not extraordinary. The Tea Party and one of its leaders, Ron Paul, who has just published “End the Fed”, reassert the idea today. In Switzerland, the banker Karl Reichmuth, laureate of Röpke Price 2010 (from the “Liberales Institut”), has long argued for a system of competition in the production of currency. “Doing economy is having a choice. This is true everywhere except for the currency”, he said early December in Zurich.

The thesis is not new. The Austrian school of liberalism, led by Ludwig von Mises, in his book on currency (1912), wanted to “privatize the production of currency.” In 1977, Hayek assumed that “if we want a change worthy of the name, it will not come from the statesmen.” Hayek and von Mises want to give back the central role to interest rate as main indicator of money value in economy.

By artificially lowering rates, central banks are pushing companies to invest. “The end result is that producers have used up resources in order to produce future goods for which there is not a sustainable demand,” writes Gary Wolfram in the National Review.

The current monetary system is based on institutions – as the monopoly of central banks and paper money – which have been set up by governments for over a century. It is they who are the primary beneficiaries, according to Jörg Guido Hülsmann (The ethics of money production, 2010). This criticism to central banks has been widely documented, from Pierre Leconte (The Counterfeiters, 2008), to Pascal Salin (Return to capitalism to avoid crises, 2010).

Return to a gold standard

The Austrian solution is free banking. The term was coined in 1984 with Lawrence White’s homonymous opus (Free Banking and the Gold Standard). Free banking means primarily the end of central banks monopoly on issuing currency. They could issue money but in a competitive situation. The idea is intellectually attractive, but it is not at no cost. It requires an acceleration of loans repayment and debt reduction.

The cost of the process would be “undeniably costly in terms of a loss in output and employment” (i.e. in terms of growth), says Thorsten Polleit, chief economist at Barclays Capital and recognized author of the Austrian school. This debt reduction also prevents governments to continue to live on credit. Free banking therefore leads to a reduction in the size of the State, which means necessarily an outcry among politicians.

A large majority of supporters to such reform favors a return to a gold standard. This system would eliminate the problem of systemic risk, according to Thorsten Polleit. Bank collapses will not lead to further reduction in money supply. In addition, taxpayers would not be called to come to the rescue.

No question, free banking does not require a return to gold utterly. Of course, the argument is somewhat marginal. Three years ago, however, no newspaper would do public speaking on it. Besides George Selgin, professor at the University of Georgia, gave an interview on this topic on the Richmond Fed website…

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· Economics & Utopia (2/4) -The regression of workers’ self-management

Economics of Happiness – An Alternative to the Crisis?

University of Leicester first ever World Map of Happiness

The US Declaration of Independence of 1776 states that “the pursuit of happiness” is an “inalienable right”. The economics of happiness aims to reconsider the traditional measurements of well-being, by identifying the variables influencing private well-being in order to implement public policies more susceptible to satisfy the aspirations of citizens. The macroeconomics of happiness reveals that from a certain level of attained degree of development, the possession of capital does not intrinsically entail happiness. Therefore, a reduction of marginal utility occurs. Similarly, the microeconomics of happiness reveals that social and environmental quality has an increasing impact on the durability of human satisfaction.

Public policies derived from the economics of happiness currently encourage the debate for a new remedy to the ongoing crisis, characterized by an economic crisis and a democratic deficit of representation. This new debate sustains the need for greater state intervention and for considering social problems as constitutive of the concern of the political sphere. The state must implement institutions and rules able to form a legal frame in which intense competition is less valued, because of its alienating and destructive long-term effects on the community’s organic character. Policies able to act in a transformative approach upon human nature are valued. For instance, policies instituting a progressive consumption tax or a progressive income tax, should allow individuals to pay less attention to the issue of capital accumulation. This would benefit both the state (higher fiscal income) and the individual (more cooperative and altruistic).

In conjunction with it, the economics of happiness provides an answer for the macroeconomic orientation states should take with regard to the unemployment/inflation issue. Empirical studies highlight that unemployment is worse than inflation for the degree of happiness. Employment provides essential intrinsic satisfaction. Because the current crisis is all-embracing an economic and democratic crisis, states should be aware of the importance of intrinsic satisfaction when implementing policies, provided by the realization of personal aims and perseverance (Spinozian conatus). States should increase the number of subsidized jobs and offer aid for structuring the unemployed free time.

In the end, the positive school of psychology put the accent on the importance of procedures and norms in the achievement of happiness. The utility of procedures appears as a key for the achievement of subjective well-being. It follows that the answer, for lightening the democratic deficit of representation, is the increase in the participation inside the political sphere. The increasing accountability and transparency of political institutions is therefore expected to revitalize citizenship, by empowering it. Hence, new public policies should implement a new agora for a vox populi, within which hierarchical relationships between semi-opaque state institutions and politically powerless citizens, dissolves into a comprehensive and participatory arena.

However, the implementation of this new type of policies does not consider the very nature of preferences, by not capturing the preference satisfaction in a given situation: there is no characteristic or appropriate purpose (i.e. contextualization). These policies pass over the fact the preferences are mostly adaptive, external and contingent, influenced by socialization. Owing that adaptation might be a form of resignation, if the current crisis persists – as it seems to occur – and reformative policies are not implemented, citizens might tend to have decreasing expectations and a less critical attitude towards the state. Hence, if policies derived from the economics of happiness were applied, they would provide citizens with only a minimum minimorum of happiness satisfaction. Another objection is that such public policies are unable to capture the variety of subjective preferences determining happiness. Without presenting a Huxleyan totalitarian risk, these public policies still do impose a universal regularity careless of particularities. These policies are by their very nature ethnocentric and impose some sort of paternalism. Indeed, as earlier mentioned preferences are adaptive, furthermore, in the case of the economics of happiness, preferences are no longer part of the private sphere. As politicians try to modify citizens’ preferences, they interfere in a more insidious manner with the traditional private sphere.

In conclusion, public policies derived from the economics of happiness – by being founded on realist grounds – provide elements of answer to the global crisis. However, in order to soften the effects of the crisis, such policies should have a more eudemonist dimension (1). They should focus more on the utility of the moment and not on the overall retrospective satisfaction.

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(1) Eudemonism, theory that states the highest ethical goal is happiness and personal well-being

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· The Ideology of Economic Growth
· The myth of GDP – 1. GDP questioned
· The myth of GDP – 2. Measuring progress
· Economics in the nude

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Shadow banking: still big, still dangerous (3)

A lot of attention has been focused on the work of traditional banks amongst the recession. But according to some measurements traditional banks lent only 40% of the money in the economy prior to the credit crisis. Shadow banks were responsible for the other 60% of lending and securitized a large portion of those loans.

The part of the financial system that lends the most money to Americans remains
almost untouched by regulation. It’s shadow banking, as Paddy Hirsch explains.

There is a strong consensus that the main fault which led to the current crisis was the total deregulation of the banking system. A banking system which in recent decades created a parallel clone to conventional banking, fully interconnected to global financial system, but disconnected from real economic activity. That parallel universe that found the financial industry to carry out the traditional role of linking savers with borrowers, had a huge increase in recent decades, as shown by the blue line on the graph. That is what is known as the “shadow banking system.”

This system is in the heart of the current financial turmoil and, according to the latest report of the New York Fed, is still larger than the traditional banking system. According to Fed data, there are still U.S. $ 16.000.000.000.000 (16 billion) sloshing around the financial system of the U.S. banks, polluting the world banking. The figure is greater than the entire GDP of the United States and it is remarkable to note its powerful boost since the 80s.

The shadow banking system gave rise to many of the issues that triggered the current crisis, and the report offers a detailed look at how the system did its job. First, the volume of credit grew bigger on the shadow banks than in retail. Before the crisis outbreak the shadow banking system had a $ 20 million liabilities compared to $ 10 billion of retail bank. Securitized loans, CDOs, CDS, the market for mutual funds, stock bubbles, are at the heart of this great legal fraud that allowed the existing self-regulation, as it provided huge inflows of money to keep the system moving.

The fragility of the system was demonstrated when its brutal collapse arose. But while the housing market crash was only the catalyst of the financial crisis, the sharp phase of the crisis was defined as a bank run on the shadow banking system in late 2007 and early 2008. Anticipating the crisis, all investors and lenders tried to recover their money at the same time. This is because on the shadow banking system – in contrast to retail banks – money is only paper – i.e. not backed by any real assets. Hence the strong bank run that sank Bear Stearns and Lehman Brothers before the monetary authorities were aware on what was happening in the market, despite Fannie Mae and Freddie Mac were knock down already. The fall of Lehman, in any case was the warning sign that the whole system collapsing and that the breakdown was imminent.

Fed specialists realized overdue this great market failure and the dangers that most of the system operates without any regulation. The bottom line is that if shadow banking is vulnerable too to financial runs that can produce a collapse of equal or greater magnitude than the retail bank runs, then it is reasonable to consider that shadow banks should also be regulated. Their failure has provoked a colossal damage to the entire world economy.

Related Posts:
Part 1 – Financial turmoil and global unemployment.
Part 2 – Ponzi Scheme and Global Finance.

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Ponzi Scheme and Global Finance (2)

For decades the whole U.S. economy has been structured as a pyramidal fraud under the “Ponzi scheme”.

Haga click aquí para la versión en Castellano.

Since the U.S. is the dollars printer, it generated a huge bubble which in turn ramified into a huge debt that cripples the world today. The financial mess that we now live, whether it is a tsunami or a perfect economic storm, is the result of unsuitable monetary and fiscal policies of the dominant reserve currency. As a blogger assesses in connection with a talk by Robert Solow: “The lesson that should be drawn is therefore that the real economy should be somehow shielded from the instabilities of the financial system.”

There is little hope on a quick return to fiscal and monetary discipline everywhere. At present, each and every one is in the midst of the storm without a compass or rudder. And we should not expect to keep banging with the oars. Nobody has accurate answers on the future action plans. What is known is that in January there were 550 000 unemployed again in the U.S., and that the rate will go on rising until year end. The Obama administration would give rise to 250,000 jobs per month – this figure is lower than job destruction – so employment will get higher, with the impact this has on the demand and consumption.

The Ponzi scheme developed in the financial markets have collapsed. And the culprits are still handing out awards such as the $37 billion that were distributed to top executives in December 2009. That’s why we lost faith in the financial system. And the famous phrase that comes on every dollar “In God We Trust” is now the subject of derision when for every dollar you give many people a few cents.

More than 40 years ago the economist Jacques Rueff, anticipated that an “uncontrolled U.S. deficit could destabilize the entire global economy.” Rueff ‘s vision was that issuing the U.S. reserve currency could incur in massive and unlimited deficits, forcing as well the creation of money in other countries to accumulate dollar reserves that, once entrenched, would come back to the U.S. in order to earn interests and give extra occupation to the greenbacks printer.

Now, the only clear way to stabilize the world’s economy and control social over-running is the creation of a world central bank and the return to a single reserve currency. For centuries gold was this reserve currency, allowing internal reckoning and external deficit control without losing real resources. It is not a matter of coming back to gold standard but to prove an anchor currency satisfying the requirement to provide a secure and stable environment – while allowing countries with the real concern of full employment. A reserve currency that can help bringing stability to a system that has collapsed and which repair will take a lot of time. If you do not believe it, look at this interactive graphic.

The Ponzi scheme collapse plunges dollar and the US economy

During the last decades, one of the main driving forces of global economic prosperity was the increase in debt and in financial design of the Ponzi scheme. Much of the growth occurred since the 80s but mainly from the 90s, was driven by the generous credit lines to governments, businesses and consumers used along this support. Well, no doubt, the crush of Ponzi scheme and the subsequent shadow banking system, have set in motion the collapse of the United States.

With the Ponzi scheme, a large number of people stretched to such limits debt choking the burst. For many, debt allowed the biggest party on earth – as through the “crazy years”, that period of loose waste in the 20s, which ended abruptly with the Great Depression in 1929. In those roaring years, the optimism of inventions like the airplane and the radio generated a huge level of debt aimed rather at waste than at investment. Hence, one of the causes of that crisis is endorsed by slam on brakes to credit and by the strong increase in the interest rates propelled by the Fed as a way to contain the waste. We already know how that ended: the entire economy collapsed and it took ten years and a World War to recover.

Today, things are awfully similar. The economic system based on debt was greatly dependent on it to create a parallel economic system, which from the shadows, swallowed us all. Except that the New York Fed was slow to take seriously the problem of parallel banking system, discovering that, before the crisis broken in July 2007, the shadow banking liabilities were twice the real banking charges –  70% of world’s GDP.

That is why this crisis is severe enough and will be here a while. So do not be surprised if dollar continues to slide down. That’s what’s coming. Fixing the Yuan to the dollar was the sole breadwinner in the last two years. However, a dose of that poison named indebtedness, may help resolve things if applied rigorously in generating employment. No way to do it however even though employment is the only variable that can boost demand and begin to move ahead the real economy machinery.

The collapse of the shadow banking system has paralyzed the first economy in the world: the U.S. certified unemployment is 10% (the real climbs to 17%), retail sales plummeted, and property sales have fallen to their lowest level in 50 years. United States faces a deficit of $ 1.6 trillion, a debt of $ 16 trillion and a total debt of $ 60 trillion.

With these data, there is no system that works, mainly if it has been for massive bad habits and waste. United States is in the early stages of a financial implosion that will make history. Since late last year, Europe saw the markets were obsessed with the sovereign debt crisis of the European countries. Well, we now enter a new phase: the alarm bells of the global economy big ship just starting to sink.

Related Posts:
Part 1 -  Financial turmoil and global unemployment.

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even though

Financial turmoil and global unemployment (1)

This August marks another anniversary of the origin of financial chaos that swept the world in overall unemployment drift.

Haga click aquí para la versión en Castellano.

Unemployment rate 2009 © Publico.es

Abandoning the gold standard on August 15, 1971 is closely linked to the mass unemployment experienced by industrialized countries. Until then, the dollar was as close as possible to gold, and all nations were trying to maintain a constant balance between exports and imports. Most countries devised ways to export more than they imported, so as to accumulate gold reserves or, otherwise, U.S. dollars – according to the treaty of Bretton Woods in 1944 – could be exchanged for gold.

Unlike the rest of the world, America was not particularly concerned about maintaining a balance between exports and imports since, as under the Bretton Woods Agreement, the US would pay export deficit sending more dollars to creditors. As it was the sole source of international currency, the U.S. had a clear advantage over the rest of the world: it was the only country that could pay its debts by printing money. Something that the rest of the world did not matter a little: the dollars were a seductive line of credit that allowed access to the key casino in the market. No one took into account that the gadget also had limits.

So it was when, at the end of the Second World War, more than 20,000 tons of gold that the U.S. owned dwindled year by year while many countries (especially France) insisted convert dollars for gold. This situation came to an end in 1970 when two unexpected phenomena put the U.S. government on the wrong foot: the upcoming oil crash (a situation that forced the U.S. to import oil instead of export until then) and the adverse outcomes of war in Vietnam. Both events brushed away the US gold reserves and pushed the country to bankruptcy. The benefit it had to hide its bankruptcy was clear: being the owner of the dollars printing press.

In the early months of 1971, Henry Hazlitt and Paul Samuelson urged the Richard Nixon administration to devaluate the dollar sharply as it would need to increase the amount of dollars it would take to get an ounce of gold from the U.S. Treasury. But Nixon did not take their advice into consideration and followed the suggestion of Milton Friedman who advocated the idea to let floating freely the dollar and eliminate the dollar-gold convertibility into  – as the international currency was worth at the very back offered by the U.S. government, the global economic locomotive. Thus Sunday morning August 15, 1971, Richard Nixon declared the dollar-gold inconvertibility, so he unilaterally broke the Bretton Woods agreement.

Since then, the whole world trade has been accomplished using the dollars printed by the U.S. Treasury, which is nothing more than fiat money, i.e. easy papers. Up until then, international trade was valid as it was backed by gold; from that moment onwards, trade depends on a fiat money produced by the major press in the world. The consequence of that fateful day was that all countries (that could do so) began to accumulate dollars as an unrestrained U.S credit expansion – without the restrictions imposed by Bretton Woods. The rest of the world had to accumulate dollar reserves and these reserves had to be ever increasing, since the slightest sign that a country’s reserves fell, woke currency speculators who could attack that country’s currency and destroy it with a sharp devaluation.

The increasing flow of dollars throughout the world prompted the global credit expansion, which only stopped the speed in August 2007, after exhausting all instances of what is called the ponzi scheme (1). The international banking elite always strove to devise mechanisms for higher profits and to extend credit. A provision that was released from the restriction of having to pay international accounts in gold, and that scored the U.S. trade boom.

Until the ’70s, a poor country like China had no interference with world trade: it sold low and bought little. The globalization of the 80s, provided by this extension of counterfeit money, offered great facilities to companies in search of cheap labor, they set up their factories in China. This was the beginning of the industrialization process that began in the U.S. and went on with Europe. A process which destroyed jobs in the industrialized countries as never seen before. A no return pathway.
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(1) A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Related Posts:
Part 2 -  Ponzi Scheme and Global Finance.

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Economic trends ‘After the Empire’ age

A change of economic model for the next decade is possible

Pulse aquí para la versión en Castellano.

Without having to draw on awful – but sometimes accurate – predictions of Emmanuel Todd’s After the Empire, it must be admitted that the influence and power of the U.S. will no longer be what they were. American political, economic and military supremacy of the last century is coming to an end. The 120-page report of the National Intelligence Council (NIC) on Global Trends 2025, (November 2008) remains up to date when considering the end of the unipolar world and the emergence of multilateralism. A multilateralism in which China, India and Russia weaken the U.S. dominance. It is expected that by 2025 the relative strength of the U.S. will decline and its levers of influence will be more limited, being only one among the global players, with a minor role and not decisive as it was in the past.

End of U.S. hegemony

The financial crisis and the collapse of the superpower at the end of 2008 were a clear sign of how intense the global economic crisis  would be (a crisis that began in August 2007). In this aspect it will be very difficult not to question the basics of the economic model applied in most countries and the weakness of regulatory mechanisms. Since the 80s, the Reagan, Bush Sr., Clinton and Bush jr. administrations, got used to admonish and reproach to the world about keeping finances in order, via the IMF and Washington Consensus (1). Meanwhile, Washington completely neglected own’s at a level of irresponsibility and exuberance completely irrational.

A key issue of ‘Global Trends 2025: A Transformed World (Global Trends 2025: a world transformed)’, is the gradual abandon of the dollar as standard of exchange and the growing strength of Asian currencies. Asia as a whole is the continent that will emerge with strength in a growing shift of wealth from West to East in terms of technological and cultural development. Latin America, with Brazil at the top – and Mexico, Argentina and Chile to a lesser extent, if the political will and the economic powers do not fail – has a golden opportunity to gain their own lever to progress. Hollywood productions will cede ground to Asia which mass culture will popularize widely. The positive predictive value of the report is the weakening of al Qaeda and terrorism in general and the low risk of using nuclear weapons – but it seems to ignore the unknown Russian factor.

The report confirms that Brazil (and not Mexico) will be the Latin American country to gain considerable influence on the global stage, as – with Russia, India and South Africa – it will help define the new challenges and game rules of humanity. Climate change will be the biggest problem and the shortage of drinking water and reduced harvests in some parts of the globe (for every degree the temperature rises the agricultural production decreases by 10%) will bring troubles and hunger. But this increase in temperature will benefit Canada and Russia by increasing their agricultural capacity and better and easier access to oil reserves in the north: these are elements that will powerfully reinforce their economies.

The U.S. will remain trapped and will live a lost decade as a result of the huge deficit left by the Bush administration. Its debt (2) now exceeds 13 billion dollars and it is growing by one million per minute (U.S. $ 1,400 million a day). Hence the importance of what Barack Obama can do to reverse a potentially adverse scenario across the line. It remains to be seen whether he will be a new Franklin D. Roosevelt to lead the country into the stormy waters of the current decay and collapse.

Overall trends for the next decade

Some of the projections of the Global Trends report, and that at the time were not taken into account, are:

• The leading economies are, from most to least, the United States, China, India, Japan, Germany, UK, France and Russia. (Note that Japan lower second to fourth place ranking in and Italy and Canada go out)

• The growth of the BRIC countries (Brazil, Russia, India and China) would exceed the GDP of the G-7 in 2040.

• Brazil, and not Mexico, will be the Latin American country that gain more influence in the international arena.

• The economic axis will move from west to east as China and India are the countries with greater economic progress.

• The U.S. weakness will not take away its economic supremacy (its GDP is three times higher the following country) but its influence and domination will be undermined.

• This will allow the emergence of multipolarity, which will allow overcrowding and the use of different currencies.

• While terrorism will not disappear it is difficult it ever meet the preponderance as in the past, especially when the relevance of Al Qaeda is increasingly diluted. The real danger may lie in the opportunism of groups that want to exploit the rise of multipolarity: gangs, criminal networks, religious organizations, tribes, companies and insurgent groups.

• As a result of the crisis, and at global level, there will be a resurgence of public enterprises which will increase the “state capitalism”, a phenomenon that may promote corruption and the consequent emergence of criminal groups.

The authors’report point that the survey “only” reflects the opinion of some specialists. Never mind, almost over two years after its publication, we can see its accuracy in several points. What should we do then, to avoid falling into the hands of corrupt governments and criminal gangs, according to what the report delivers?

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(1) See the contrasting views of John Williamson, the originator of the concept in A Short History of the Washington Consensus and the critical approach of the program of the Center for International Development at Harvard University.

(2) A meter of the U.S. debt at the U.S. National Debt Clock : Real Time.

The Art of Waste Management (2)

Visual pollution, illegal dumping, wild beach Oceania · © South Images

Key Benchmarks for Assessment

There are a number of concepts about waste management which vary in their usage between countries or regions. Some of the most general, widely-used concepts include:

1. Waste Hierarchy: The waste hierarchy refers to the “3 Rs” reduce, reuse and recycle, which classify waste management strategies according to their desirability in terms of waste minimization. The waste hierarchy remains the cornerstone of most waste minimization strategies. The aim of the waste hierarchy is to extract the maximum practical benefits from products and to generate the minimum amount of waste (Wikipedia 2008).

2. Extended Producer Responsibility (EPR): This is a strategy designed to promote the integration of environmental costs associated with products throughout their life cycles into the market price of the products (Organisation for Economic Co-operation and Development 1999).Extended producer responsibility imposes accountability over the entire life cycle of products and packaging introduced on the market. This means that firms, which manufacture, import and/or sell products and packaging, are required to be financially or physically responsible for such products after their useful life. They must either take back spent products and manage them through reuse, recycling or in energy production, or delegate this responsibility to a third party, a so-called Producer Responsibility Organization (PRO), which is paid by the producer for spent-product management. In this way, EPR shifts responsibility for waste from government to private industry, obliging producers, importers and/or sellers to internalise waste management costs in their product prices (Hanisch 2000). A life-cycle perspective is also taken in Extended Producer Responsibility (EPR) frameworks: “Producers of products should bear a significant degree of responsibility (physical and/or financial) not only for the environmental impacts of their products downstream from the treatment and disposal of their product, but also for their upstream activities inherent in the selection of materials and in the design of products” (Organisation for Economic Co-operation and Development 2001). “The major impetus for EPR came from northern European countries in the late 1980s and early 1990s, as they were facing severe landfill shortages. EPR is generally applied to post-consumer wastes which place increasing physical and financial demands on municipal waste management” (Environment Protection Authority New South Wales 2003).

3. Polluter Pays Principle:  In environmental law, the polluter pays principle is the principle that the party responsible for producing pollution should also be responsible for paying for the damage done to the natural environment. With respect to waste management, this generally refers to the requirement for a waste generator to pay for appropriate disposal of the waste. Polluter pays is also known as extended polluter responsibility (EPR). This is a concept that was probably first described by the Swedish government in 1975. EPR seeks to shift the responsibility dealing with waste from governments (and thus, taxpayers and society at large) to the entities producing it. In effect, it internalises the cost of waste disposal into the cost of the product, theoretically meaning that the producers will improve the waste profile of their products, thus decreasing waste and increasing possibilities for reuse and recycling (Wikepedia 2008). Organisation for Economic Cooperation and Development defines extended polluter responsibility as:
A concept where manufacturers and importers of products should bear a significant
degree of responsibility for the environmental impacts of their products throughout the product life-cycle, including upstream impacts inherent in the selection of materials for the products, impacts from manufacturers’ production process itself, and downstream impacts from the use and disposal of the products. Producers accept their responsibility when designing their products to minimise life-cycle environmental impacts, and when accepting legal, physical or socio-economic responsibility for environmental impacts that cannot be eliminated by design (Organisation for Economic Co-operation and Development 2001).

4. Zero Waste: This is a philosophy that aims to guide people in the redesign of their resourceuse system with the aim of reducing waste to zero. Put simply, zero waste is an idea to extend the current ideas of recycling to form a circular system where as much waste as possible is reused, similar to the way it is in nature (Wikepedia 2008). Zero waste requires that we maximize our existing recycling and reuse efforts, while ensuring that products are designed for the environment and having the potential to be repaired, reused, or recycled (“What is Zero Waste? 2004). The zero-waste strategy is to turn the outputs from every resource-use into the input for another use, or in other words outputs become inputs. An example of this might be the cycle of a glass milk bottle. The primary input (or resource) is silica-sand, which is formed into glass and formed into a bottle. The bottle is filled with milk and distributed to the consumer. At this point normal waste methods would see the bottle disposed in a landfill or similar, but with a zerowaste method the bottle can be saddled with a deposit, at the time of sale, which is redeemed to the bearer upon return. The bottle is then washed, refilled, and re-sold. The only material waste is the wash-water, and energy loss has been minimized. Zero Waste is a goal, a process, a way of thinking that profoundly changes our approach to resources and production. Not only is Zero Waste about recycling and diversion from landfills, it also restructures production and distribution systems to prevent waste from being manufactured in the first place. In addition, the materials that are still required in these re-designed, resource-efficient systems will be recycled back into production (Roper 2006: p. 326).
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References

· Ackerman F 1997. Why Do We Recycle?: Markets, Values, and Public Policy. Washington: Island Press.
· Alan B 2007. The Self-Sufficiency Handbook: A Complete Guide to Greener Living. New York: Skyhorse Publishing Inc.
· Castell A, Clift R, Francae C 2004. Extended Producer Responsibility Policy in the European Union: A Horse or a Camel? Journal of Industrial Ecology, 8: 4 – 7.
· Hanisch C 2000. Is Extended Producer Responsibility Effective? Environ Sci. Technol, 34: 170 -175.
· Organisation for Economic Co-operation and Development 2001. Extended Producer Responsibility: A Guidance Manual for Governments. Paris, France. From Organisation for Economic Cooperation and Development fact sheet about EPR:<http://www.oecd.org/document>
· Roper W 2006. Strategies for building material reuses and recycle. International Journal of Environmental Technology and Management, 6: 313 – 345.
· The Economist, Weekly, June 7, 2007 “The truth about recycling” <http://www.economist.com>
· The League of Women Voters 1993. The Garbage Primer. New York: Lyons & Burford, pp. 35-72.
· Tierney J 1996. Recycling Is Garbage. New York Times, Daily, June 30, 1996, P. 3.
· Tong X., Lifset R, Lindhqvist T 2004. Extended Producer Responsibility in China: Where is Best Practice? Journal of Industrial Ecology, 8: 6-9.
· Wikipedia 2008. Recycling. Website 2008 <http:// www.wikipedia.org>
· Winter J 2007. A world without waste-The ‘zero waste’ movement imagines a future where everything is a renewable resource. The Boston Globe, pp. 1-3. From LexisNexis database: Website 2008 <https:// www.lexisnexis.com>
· Zero Waste California Fact Sheet 2004. What is Zero Waste California?  From Website 2008 <http:// www.zerowaste.ca. gov/WhatIs.htm>

The Art of Waste Management (1)

Pigou, the economist who wanted to tax the smog

Cecil Arthur Pigou (1877-1959)

Founder of the Polluter Pays Principle, the English economist Arthur Cecil Pigou comes out of the shadows.

British Petroleum has assumed responsibility for the oil disaster occurred April 21 in the Gulf of Mexico. The explosion of the floating platform releases tons of oil and threatens the entire U.S. Gulf Coast. BP noted that the Polluter Pays Principle (PPP) does not suffer further discussion. This principle is based on measures adopted since forty years to prevent the damage inflicted on nature by the producers, repair them in case of accident or punish them for violations.

This principle of polluter pays appeared as such in the work of an English liberal economist Arthur Cecil Pigou (1877-1959). As a supporter of regulation by the markets, the founder of the Economic School of Cambridge noted that, left to themselves, these markets suffer from imperfections. For example, they do not take into account the “external” costs of products, such as pollution. In The Economics of Welfare (1920), he developed the idea that an economic agent whose activities generate negative externalities makes the community to support a cost higher than it supports as a private agent. Rather than banning the activity, it was necessary to discourage putting a price on its negative effects. This was to be paid in the form of taxes that would eliminate the gap between the private cost and social cost of this activity. Pigou proposed e.g. to introduce such a tax on emissions from London smokestacks to fight against smog.

This same reasoning led him to advocate a compulsory health insurance: what one pays to stay healthy, for example, by vaccinating, has positive externalities on the environment which yet does not participate in the expenses. This positive externality therefore deserved to be distributed equitably.

By the time they were issued, these ideas have not been successful. A proposed tax could frighten the economic establishment, yet close to Pigou for his views on the flexibility of labor markets and hostility to regulation of wages. Regarding left-winger economists and thinkers, they excluded that pollution — considered a crime — could be any bargain, as if a polluter stopped being left when becoming a payer. Having also objected to John Maynard Keynes, whom he was professor, Pigou found himself in the shadow of the glory ousted by his prestigious student and friend.

The increase of environmental risks and environmental accidents in the second half of the twentieth century, however, brought his reflections on the front of the stage. Faced with threats to ban their dangerous activities, or a highly restrictive state control, farmers have gradually agreed to take responsibility in this area and consider the management of adverse consequences of their productions. In 1972, the OECD erected the polluter-pays basis for the protection of the environment. In 2003, the European Parliament did the same, following what several countries did before — Denmark and Switzerland.

Meanwhile, a derived concept, the Extended Producer Responsibility (EPR), stated that

“producers of products should bear a significant degree of responsibility (physical and/or financial) not only for the environmental impacts of their products downstream from the treatment and disposal of their product, but also for their upstream activities inherent in the selection of materials and in the design of products”.

These words, which seem commonplace today, took almost sixty years to be heard.

The CO2 tax introduced in countries as Sweden and Switzerland in 2008 and 2009 is the quintessential example of a “Pigouvian” tax. It is not about an income tax because the entire collection is redistributed to citizens (through medical insurance) but it is save incentive as it rises fuel prices. Without ideological opponent confessed, the carbon tax has many practical issues however: as it makes consumer to bear the responsibility for pollution, it faces strong political obstacles. Many countries prefer CO2 emission quotas instead, allowing trading on an international market for quotas established by the Kyoto Protocol in 1997 — signed and ratified by 187 states to date.

If the concept of responsibility was installed in people’s minds, and if the economic explanatory of externalities proposed by Pigou found an echo within the political left, there is yet no international system that institutionalizes the application form as to guarantee the neutrality and impartiality. The concept occupies many researchers — as many skeptics who are ready to set off the alarms at the slightest attempt.

A Pigou Club, founded in 2006 by the American Republican economist Gregory Mankiw, ensure the sustainability of pigouvisme in its various interpretations. It includes among its sixty members well-known economists like Paul Krugman, Nouriel Roubini, Ralph Nader or Jeffrey Sachs, politicians like Michael Bloomberg and Al Gore and even the actor William Baldwin. Them all support the principle of a gas tax or CO2, and any form of eco-tax to internalize the same social and environmental costs of energy. Some of them, not all, call for offsetting tax cuts on income or sales.

From where he is, Arthur Cecil Pigou watches his new friends with an ironic satisfaction. We guess, behind his mustache, the pleasure of victory.

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References:

· Cecil Arthur Pigou, The Economics of Welfare, Library of Congress (U.S.), 2009
· Organisation for Economic Co-operation and Development 2001. Extended Producer Responsibility: A Guidance Manual for Governments. Paris, France. From Organisation for Economic Cooperation and Development fact sheet about EPR:<http://www.oecd.org/document> (Retrieved February 2010).

The Ideology of Economic Growth

The end of the continuous economic expansion

The never ending economic growth within a finite planet is basically impossible. A child can understand that. But the belief in economic growth bringing peace and prosperity to everyone is tough enough.

How is this mystification possible? How political and economic elites can maintain the deceit? What is the interest of everyone to consider or pretend to accept the assertion as true?

Economic growth involves extra consumption of energy, natural resources – water, oil, mineral substances … – constantly further waste, pollution, and aggravation of global warming, loss of biodiversity in sum, and poses ultimately the question of the mankind survival.

The persisting and tiring arguments put forward by the “green skeptics” to give support to economic growth, despite the obvious damage, is that of technical progress, the use of renewable energies or that we are entering a new economic era on information, digital and services supposed to have no impact on the biosphere.

Technological progress has improved (and will go on improving) the energy and resources outflow consumed to produce an object (former televisions and cars did consume more energy and resources than today’s). But this theoretical efficiency gain does not compensate for practical and concrete bulimia of consumer populations – and the most technologically advanced countries make ample evidence since their citizens exercise the biggest environmental pressure so far.

What’s more, renewable energy handled on the margin can not solve the problem of the finiteness of fossil resources and of ecological disaster under way.

Finally the different adjectives joined to the so-called new economy do not change the assumption of more and more physical resources: everyone wants a car, a television, a computer, a mobile phone … and to renew it all as quickly and as often as possible! The new economy, whatever its name, has not diminish at all the environmental impact of industry, agriculture or chemical engineering. Quod erat demonstrandum.

Why are we growth addicted?

The ideology of growth points to the quasi biblical reign of plenty. Everyone expects to get more, and the widespread accumulation of material resources would supposedly stop the social violence. Traditional societies, however, had not lost sight that the accumulation is quite a factor of social tension and violence. Facts and reality clearly show it, but the belief in a society of growth bringing abundance and peace is constantly pushy.

Takis Fotopoulos explains well enough the dynamic of the growth economy:

“The growth economy can only survive through its continual reproduction and extension to new areas of economic activity.” And doing this, the growth economy opens to new action scopes introducing “new discoveries, improvements in efficiency, possibilities for substitution, and technological innovations” in the mature growth economies – or through a destructive approach of geographic expansion of most self-reliant economies in the world. (1)

Economic growth is measured by the number of dollars per head. Everyone runs under this benchmark, being understood that the logic that prevails is to climb the highest and fastest possible in the income pyramid.

International institutions, such as the World Bank, are concerned about the fate of that billion of human beings whose regular earning is less than $ 1 per day, thus representing the stage of absolute poverty. These billion human beings located primarily in rural areas therefore benefits from the attention and interest of institutions to help them out of their extreme conditions, and tools such as micro-credit are highlighted.

Armatya Sen, Nobel Laureate, demonstrated in the late 1990s that one could live in the heart of the richest state in the world, in New York, at Harlem, and have a life much more miserable that within the poorest state of the planet, in the state of Kerala in India – measured on criteria as simple as that compelling example of life expectancy.

The facts show abundantly that many peasants, who abandoned their land in return for income in the city, live in subhuman conditions. The difference between this real city misery and that of peasants living autonomous on their land is that the former are involved in the growth of the economic pyramid (including miserable income not allowing to live with dignity), unlike the latter who do not give further support to the consumer society.

Hence the interest of the institutions to worry for the rural population who do not receive income.

Economic growth requires everyone’s participation as the system does not leave aside several billion people representing potential consumers, and thus substantial growth.

The terrible conclusion is that economic growth creates more miserable individuals than people who could reach a decent revenue.

And regarding those luckier people whose revenue allow them to live in dignity, the mechanical construction of their earnings is disastrous both for the environment and social issues.

Economic growth does not lead us to abundance and peace, but to war and continuing shortage, i.e. insufficiency of absolute vital assets such as land or water.

Our blindness on this reality, our unwavering support to the tyranny of the growth economy, derives from our relative and provisional material well-being, and from our indiscriminate faith in the saving science.

As Marie-Dominique Perrot (2 )says:

“We confuse the quantity and quality and we consider the accumulation of anything as a synonym for progress”.

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(1)  In Takis Fotopoulos, Development Or Democracy? SOCIETY & NATURE,  Vol. 3, No. 1 (issue 7), 1995

(2)  From the Graduate Institute of International and Development Studies, Geneva

The myth of GDP (2)

II. Measuring progress

>> Haga click aquí para la versión en Castellano

Behind every accounting system of indicators there are not only social conventions but mostly social choices.

GDP cartogram © Worldmapper · Click on image for a larger version

How to measure progress?
The introduction of the concept of GDP was first developed in the nineteenth century when Adam Smith highlighted the need to assess the exchange.
For over 200 years the concept of progress has been identified with economic growth – to the point of being confused with it. That is inaccurate since one can not assimilate under the same umbrella such disparate concepts as progress of customs background, human capacity to improve control of its own destiny, progress of science and technology or the spread of knowledge.
The term progress in the nineteenth century identified the role of transforming human nature radically to almost deny it (Hegel): while I transform the world I transform myself. The idealistic Hegel’s vision contrasts with other economists such as Jean-Baptiste Say who identified consumption and progress. Through consumption man sharpens his faculties and moves away from the raw state.
There is therefore a theoretical and bibliographic production, which still weighs on our shoulders, and according to which production and consumption are quintessential civilizing acts. Say it’s true. Yet they are not the only.

Who the progress is intended for?
Since the dawn of capitalism, back in the early nineteenth century, every generation has embraced the concept of progress without caring much what future generations would dare.
A more current assessment should now be opposed: Our collective wealth is the durable sum of individual utilities. What matters is the permanence of our societies over time, their sustainability, their sustainable development: each generation owes a heritage of culture, social relations, a natural heritage. Hence, the need to encourage the development of this heritage and carry out the inventory in order to transmit to the next generation a heritage as much extensive.
But what inventory? And starting from what unit of measure?

Progress and quality of life
The report from the Stigkitz-Sen-Fitoussi commission (International Commission on the Measurement of Economic Performance and Social Progress) proposed the concept of income or net income (and even global income) that integrates i.e. household tasks and leisure time activities. The problem is to monetize them, because how to quantify the quality of life? Or if you prefer, how measuring happiness?
Given these constraints it becomes increasingly necessary to target more objective indicators that tend toward a goal of social development – the goal of social health from Jany-Catrice and Miringoff – as decent housing, durable health, which would cover the progress of this wealth

Two explanations to consider: Primo, there is no economic basis that does not come preceded by ecological and anthropological foundations, or both at once. Any situation that endangers this heritage is handicapping the potential for future economic progress. Thus, the main information we can expect from an indicator is that it alerts us of any significant fraud on the asset. Secundo: quantification is a tool for the qualification and not vice versa. What characterizes a democratic society is its ability to discuss their possible options and values – which is true for a political community endowed with a motto like “liberty – equality – fraternity”, as for other subsystems. By subordinating quantification to qualification we are pointing towards a double right: scoring in another way or otherwise not scoring at all — as well as the odds of discussing the qualifications without regard to the reductionist optics of quantification.

Even though being limited, GDP is an indicator that has allowed access to a multilateral dialogue which is embodied into international relations: in this sense, the rationale of the GDP is to recognize the specific weight of countries like India, Brazil, China or Russia which will be more fairly represented in the IMF, the World Bank or WTO. This indicator allows therefore enriching the politically very intricate geostrategic debate.

Thus, the Stigkitz-Sen-Fitoussi commission anticipates power ratios to evolve within a comparative logic. That was the genesis of GDP in the postwar period. And the big issues that postwar societies face are indeed industrial reconstruction – but they neglect other more fundamental questions, namely: how could it be that the worst atrocities has been able to birth within a cultured and educated civilization?

The myth of GDP (1)

I. GDP questioned

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How to go beyond the gross domestic product?
Pursue a modern reflection of wealth means finding tools to move away from an excessively quantitative, restrictive and accounting outlook to assess the collective performance. Changing indicators of wealth while we amend our way of production and thinking involves rethinking the limits of national accounts.

The Satisfaction with Life Index. Blue through red represent most to least happy respectively; grey areas have no reliable data available.

Thirty years to date, GDP per capita has tripled in our developed societies. Why, then, according to all surveys, the welfare of the average Joe has not known same dynamic? How can we move beyond GDP? How to measure progress and the wealth of a nation?

New indicators of wealth: a dispute that goes way back.
The first time the indicator of gross wealth was challenged academically came about the 1970s when the Club of Rome casted doubt on the goodness of the concept of growth. Also in 1972-1973 the first Tobin-Nordhaus report — Measure of Economic Welfare — tried to correct the GDP by eliminating what they called defensive expenditures, ie those costs that do not meet net investment: for example costs repair, recycling costs, etc.

It goes without saying that such initiatives aroused the indignation of the national accounts of the moment — criticism that reappeared in the 1990s, since GDP is a taboo indicator, a fetish indicator of human behavior, a structuring myth as a result of the War World; a myth displayed as the guidebook of postwar reconstruction from a Keynesian perspective of budgetary programming. Somehow it took so long to implement that one understands well the current reluctance not to put into question: GDP is the monetary indicator of excellence, the result of the added values, a convenient indicator that lets you add units from various sources. It is universal and widespread as it shows the supremacy of production and consumption into our advanced societies.

GDP, a growth model of industrial production after WW-II, becoming now obsolete.
Currently, the prevalence of environmental concerns and the primacy of issues related to the culture of services and the economy of knowledge are critical – mostly when foreseeing a change in the assessment criteria of the global accounting aggregate.

The GDP has significant limitations. Primo: It only takes certain activities into consideration and always around paid work. It neglects significant activities: care of children, housework, voluntary work, political activity: non-monetary activities that allow our civilization to last over time and which count for nothing in the overall aggregate assessment.
Second key limitation: the GDP is little or no sensitive to inequalities in consumption and production sharing.
Third limitation: it is a cash flow indicator, a flow and stock accounting that does not outcome into a balance: you can not produce added value and simultaneously destroy part of natural capital — human and social. Its principle of action is to “create assets primarily, and then redistribution will follow.”

That is why it is essential to review the wealth concept while we change our way of thinking. Another accounting logic is possible.

Changing or completely replacing GDP?
There are other indicators in our day. Starting on the human development index till the ecological footprint — not to mention Osberg and Sharpe’s index of economic welfare, Ruut Veenhoven’s ranking of quality of life and happiness or the Catrice Jany’s social health index.

Other indicators are concomitant, such as the administration of physical resources, the aggregate indicator of the ecological footprint and the adjusted net savings – though the latter, simply monetary, suggests a poor vision of sustainability: roughly speaking, a country can pursue a sustainable development path even when its natural capital is deeply exhausted.

Africa Underrepresented

Beyond Africa, Developing World should have more say in key forums. African officials dismayed not to have a bigger voice in key global economic forums.

When world leaders meet to tackle the global financial crisis, Africa is represented only by South Africa. African officials argue that the continent need better representation, given the effects that the turmoil is having in Africa as well as the continent’s growing financial importance. The complaint could apply equally to other developing countries.

The global crisis has come just as many African economies were turning a corner, carrying on  improvements in governance, technological change, debt relief, higher prices for their exports as well as inflows of funds from Asia and from Western investors seeking higher yields. Many African countries have spent decades gearing economic policies to attract more private capital and chase away a reputation as unreliable investment destinations.

But turmoil on world markets has cut the supply of money as the world’s biggest banks shift funds from new projects to shoring up balance sheets, leaving African governments wondering how their infrastructure will get built.

But should Africa be better represented?
Compared to its own recent history, African economies have been doing extremely well, but they are still small in global terms. As Africa’s biggest economy, South Africa will be attending, together with representatives of the main developed and developing countries. Is that enough? What advantage might Africa gain from having a bigger voice at the key summits? What about the world’s other poorer regions? Should they have more say too?

Current Crisis,  Cure or Croak

The real economic situation is constantly in a state of fluctuation and the ready made solutions in the classical or neoclassical patterns avoid an enduring and secure solution to the current crisis. Over the years the very concept of ‘economy’ has undergone a sea change. The models that concentrate on national economies of olden years have become redundant and they don’t go beyond a transitory solution suppressing the real economic forces, side tracking the long term perspectives. The durable solution needs a fresh debate among the political economists to come out with an integrated co-operative model, keeping in mind the linkages of the so called developed and the developing economies, in which the monetary and the fiscal policies play a incidental role.

Simon Kuznets was a far sighted development economist who could foresee more than half a century ago that “poverty anywhere is a threat to development everywhere”. The ‘national economy’ is a misconception today and an attempt to resolve the existing depression at the national levels will always contradict the expectations, specially of the developed countries, and they are likely to slip from devil to the deep sea.

I look at the present crisis as a consequence of too much monetarism of the developed countries for maintaining their growth rates overlooking the potential development of South Asia, Africa, Latin America and the Middle East. This might lead to persistent speculative tendencies, playing down the primary role of money and ultimate crash down of core economies of the world creating a worldwide economic chaos.

The retrieval from it might take a century.

The Financial Bubble is Ready

Stanley Kubrick’s Dr. Strangelove [ The music is We'll Meet Again by Vera Lynn]

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Dubai’s House of Cards
Dubai is the leading exponent of housing bubbles that have occurred worldwide.  Eccentricity of management has turned a city in the middle of the desert in a field full of hotels and skyscrapers. It was a time – the golden era – when anything was little for the Emirate.

But the crisis has beaten hard Dubai. Works have stopped and credit flow is dead blocked. Up to the point that, yesterday the state holding announced a moratorium on payment of $ 4 billion debt – the same holding that built the famous Jumeira Palm Island. This did not sit well with international markets.

The problem is that the Emirate owes $ 80 billion and markets begin to have doubts about its solvency. As soon as the moratorium on debt payment was announced markets felt down. The worst financial crisis could recur. But instead of banks’ cessation of payments we may now witness States’ suspension of payments.

Speculative Bubble Emerging
Meanwhile, in another part of the planet – the United States – the policy of the Federal Reserve to keep interest rates near zero is fuelling a wave of speculative capital that can initiate the next crisis. Many warn that a new bubble is brewing, and several specialists see in this quantitative easing an equivalent outcome Japan had for its crisis of the early 90s. Low Japanese interest rates did contribute definitely to the outbreak of the Asian crisis in 1997.

Ben Bernanke, an academic on the Great Depression, monitored the most massive injection of liquidity into the world’s largest economy, committing himself not to make the mistake of the 30s when the Fed officials pursued a strict and rigorous monetary policy that only aggravate the crisis further enough. The lack of available money in 1930 is regularly considered the reason why the crisis lengthened for a decade. The little response to current liquidity injections shows that the situation is all but comforting and that new limits of monetary policy may further alter the global imbalances that the crisis left uncovered.

One of these speculation operations is the so-called carry trade; investors borrow in $ (0%) headed for invest in other currencies that offer higher interest rates such as Australia, Brazil and New Zealand. Much of the flow in the capital markets moves ahead that direction. Hence the importance that Asian and Oceania assets are acquiring versus Europe and US assets. Korea, Taiwan, Hong Kong and Singapore assets are rising to levels that are incompatible with the reality that replicates the real estate bubble of US in the 90s and Japan in the 80s – when the Imperial Palace Gardens in Tokyo came to cost more than the entire US state of Washington.

Despite this, former Fed Governor Frederick Mishkin assumed that there is no evidence that a speculative bubble is emerging, since not all bubbles present risks to the economy. Mishkin split good from bad bubbles. The former are instigate by a credit boom, whereas expectations lead to increased demand, generating a rise in asset prices, encouraging lending against those assets and positive feedbacks cycle until it explodes.

The second category of bubbles what Mishkin calls “pure irrational exuberance bubble” is less harmful because there is no credit boom, and if no credit boom occurs the bursting of the bubble can not damage the system – e.g. the bubble in technology in the ’90s and the dotcom’s of 2000, had no global impact. For Myshkin the rise of the credit stirs the bubbles. Now, there is no credit boom in small scale. But bubble is building on the macro scale of speculative capitals, those who move billions of dollars of pension funds, the very same that play in the stock market or speculate on the gold and oil at the expense of the dollar. And at macro levels, everything where bubbles get involved presage awful signs for the economy. Otherwise, it’s like thinking that a bomb may have some positive effect.

Sustainable Cities for Freedom and Environment (3)

The city and its operation

Previous articles outlined the way to configure cities in order they become sustainable or not. Sustainability depends on the city functionality itself as well – the aim of this third article.

Adam Smith in his invisible hand hypothesis stated that market optimizes the distribution, enabling better allocation of resources without public intervention. It can also operate by creating unwanted situations to market players (cases of monopoly, cartels, lack of coordination, etc.) and then worsening the social scene.

For instance, the decision to travel by private car instead of using public transport can outcome the worst case scenario. In this direction, several investigations have revealed that it would take less to London bus users – as in any other city – than motorists to move from one place to another if there were less cars. Hence the idea of Mayor Livingston of an expensive access to London downtown by private car in order to provide greater flexibility to surface and underground public transport.

Urban planning is therefore absolutely essential for coexistence and progress. Consequently, European citizens from the early nineteenth century claimed to eliminate obstacles (walls down!). They claimed broaden their cities, which became progressively constrained by sea, hills, and old walls – now absolutely unnecessary, with severe communication problems, crowding and hygiene.

In this context, it was clear to Ildefonso Cerdà when designing the Eixample (urban expansion) of Barcelona that the city should be open, cosmopolitan, outside connected by well done road and rail networks… But above all, it had to be habitable for citizens. The city would grow in small islands: city blocks chamfered, with large inner garden patios, thus uniting the best of countryside life with the advantages of the city. Even then, many Barcelonans turned these courtyards into dedicated warehouses, small factories, and even buildings.

The Cerdà’s pioneering urban planning (1860) through areas, gardens and building expansions – quite different from the internal reform of Haussmann (1852) in Paris – is our daily bread. Managements of urban municipalities generally deal with this responsibility. They have to operate with long-term vision – avoiding short-termism that under-sizes capabilities and services with serious further quicken consequences. In this direction, planning must address a number of priority issues on water, air, noise, energy, waste, health, housing, and transportation.

Cleaner Water
Human intervention in water availability has quantity and quality implications as water used in cities floods back to environment, thus closing a cycle already enforced. Thus, sewage without any treatment, returning to their natural environment, creates serious pollution of rivers and aquifers. To avoid such an issue, the European Water Charter (1968) marked a series of objectives that have been largely completed in the EU-15 – while it remains outstanding work in some of the new 27 Member States of the Union.

In addition, water consumption has to be rationalized: in most large cities, a cubic meter of clean water is less expensive than a Coke at a bar, then increasing produced waste. Consequently, it is essential to charge water waste, starting with a low prices block about 60 liters a day – subsequently changing basic allowance – and then becoming gradually more expensive.

Air
The topic is most evident in cities where sustainability is not shining for its excellence. The most valuable asset – what we breathe 24 hours a day – is consumed in very inadequate conditions. The air of London in the mid 1950s, with frequent smog waves, became suffocating. Following these situations a clean air policy arose, with the first laws, specifically British, in 1955. European Countries came after with further regulation mechanisms.

In summary, the most essential is to ensure clean air, with sensors networking and a very long series of measures that would not exceed the allowable cap, forcing the phasing out of most harmful emission sources.

Noise
Everyone agrees – starting with psychologists and psychiatrists – that noise is one of the environmental factors that affect most the quality of life. From small discomforts, more or less anecdotal, to levels of irreversible disorders in the human mind.

Definition of noise is well known:

“The sound, or set of sounds that are perceived by human beings, and that alter the acoustical medium within they normally move.”

…with the additional peculiarity that everything depends on the inevitability of impact also. Regarding the latter, a noise is obliged to be heeded, and even foreseeable at the time – as when a summer storm occurs, or when the passage of a train at a fixed time takes place, or when children voices arise from the playground in the courtyard of a school near you – and then the sound waves seem justified, and the trouble is diluted. Not at all when the roar of an uncontrolled neighbor turntable in its 50 watts comes to you, or when it deals with crying on Friday night in usually quiet streets, on these occasions everything just become the most detestable.

Among the most aggressive acoustic dealings, the continuous traffic of suburban highway (along with hundreds of miles of noise barriers) should be condemned – and what about major arteries within metropolitan area, and even in the formerly quiet streets in ancient downtowns?  In these ways, some motorists “do their best” traveling at full speed – as if they were in Silverstone. And it is certainly no less remarkable ambulances, day or night roistering circulating, carrying patients or not, whose sirens wailing penetrate your eardrums at completely unnecessary noise levels.

But most of all, among the most inconvenient and unnecessary noises, the urban cleaning must be pointed: the unpleasant scavenging machines in the vicinity of 100 dB, apart the absurd beep when they reverse or their stressful light pollution – equipments that go together with by “air gun carriers’”, top-mask and earplugs outfitted, raising dust clouds in the din with a volume of noise just about unbelievable – especially when you compare with the very human scavengers who still survive. All these issues must be fought, and there are many resources to do so, starting with the municipalities – now the main causing actors of noise.

Otherwise, cities as microcosm would become unsustainable.

Related posts:

>>Sustainable Cities for Freedom and Environment (1) – An Overview on Urban Developmental Evidences
>>Sustainable Cities for Freedom and Environment (2) – Prospects, Proposals and Local Agenda-21

A pedagogy on carbon tax

Carbon tax on the way back to Welfare Economics

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>> Click here to translate this page to French

Designing a tax for everything that contaminates incites people to preserve environment, the atmosphere in particular, which is in serious danger. The idea is to penalize polluting energy in transport, housing and personal consumption. Every time we consume less fuel but this is not enough to achieve the goals set at the last conference on climate change: hence the idea to programme a compulsory tax (to be paid per tonne of fossil fuel issued). This in order that the world decrease to half the emissions of greenhouse gas (2050) and limit Earth warming to 2 degrees – which causes climate change.

Global warming due to greenhouse gases from the combustion of carbon dioxide is 49,000 million tons of CO2 emissions. Enough is enough, this must be punishable. Its effects could lead to an overall increase of 3% of the temperature within approximately 100 years. The cost of global warming is estimated at 5,500,000 million (Nicholas Stern) [1]. While the concept of a tax on CO2 emissions comes from Arthur Pigou (Economics of Welfare) [2] who, in 1920, first established the polluter pays principle.

Now …

• Should we tax the product itself or the energy consumed?
• What about taxing imported products?
• How do we avoid the risks of inequality?
• What can we do with the tax revenue?

The solutions adopted by each country are different.
France, with about 50,000 million of environmental taxation laid up, shows a certain delay. The structure of French environmental taxation is so unwise by voluntarism emphasis that it will not generate benefits in the sense of net contribution or revenue – but only more taxes on water, on garbage, on the consumption of hydrocarbons (TIPP) which are not reversed in any improvements (infrastructure, citizen responsibilization); on the contrary, it is the umpteenth patch covering the phenomenal public deficit hole. The pedagogy turns into a demagogic fatalistic verbiage as to mislead the common man – because it ignores the virtues of consensus that in all the surrounding countries is originated in the parliamentary debate, which is where popular sovereignty revives up and where such taxation should be decided, not in the halls of the presidential palace – a very usual symptom in the French Republic whose skin politicians refuse to change. These rates represent 3% of GDP … thrown away. Unless considering France as the cleanest country in Europe thanks to its huge nuclear program, which on the contrary converts this country in less safe by the obvious potential for nuclear incidents due to its atomic central park and may involve in quantity of radioactive wastes concerned – the highest per capita in the world. The rhetoric continues, forward flight, too. The only positive point is that hydroelectricity accounts for 93% of energy resources … with the aggravated disadvantage that the driving force’s the nuclear cell. Who do we kidding? If the decrease in CO2 emissions must involve the breakneck growth of the nuclear beast, then where do we go? Stripped from one mouth to feed another.

Moreover, the tax on CO2 emissions in a country is not really quantifiable to impact CO2 emissions at the global level. Global policies are needed to internalize environmental costs and act on the behaviour of firms and households. That is the healthier principle. France is wrong in the way of carrying it out: confusion over the extent rate itself (cheerfully going from 20 to 32 for up to 100 euros / TN emitted by 2030, then left who can say where?) over the exemptions, over its operation. The increased cost of living is set: estimated at 10% the additional costs of household heating in French homes by 2010, from 5 to 10 cts. for a liter of fuel at the pump now. Another consequence is that the tax, as is, will ruin the remaining local industry (current bleeding is the largest ever seen in France) and as usual,  only a few (large) groups will afford to face such additional costs in the midst of an industrial desert. Who will invest in a country that overtaxes 100 euros each emitted CO2 TN? As for the wicked 35h law, nor study or reflection has been implemented and no effort tryed to coordinate with other European countries. The devil is in the details, French say …

The topic of compensation is often talked about, but what about inequality between consumers? What to do with the € 8,000 million that the government is supposed to enter through the concept (e.g. fatten the coffers of the ministry of finance)?

Swedish pedagogy against French demagogy
Other countries as Sweden have also established a carbon tax, even more substantial, but with a very different modus operandi: e.g. Swedish tax implies a graduated scale for companies that invest more in technological innovation to improve production processes in CO2 emission – now that is pedagogy. It’s bad times in terms of economic crisis situation but action is credible in Sweden and demagogic in France where nobody knows whether the tax will be redistributed or yet another ‘neutral’ tax – that is, outside of Pigouvian incitement, which has the favour of Prime Minister Fillon.
Because the environment policy can not be summarized to raise the level of taxation or implementing new taxes, unless you’re old tricks again and increase unemployment and public debt. Two years back here it was the bonus / malus tax on car CO2 emissions (an onerous  marketing device that ruined much of the automotive industry, with a fall of 40% of French production, forcing car manufacturers to abandon the profitable manufacture of sedans to engage in small cars’ on which the profit margin is zero or nearly zero), last year was the tax on diapers for newborns turn, this year it is the time of a tax on CO2 emissions … a joke (or better yet, a shortsighted policy).
The temptation to tax the super profits of the oil industry (Ségolène Royal) would only have negative repercussions in the pocket of the consumers. Better a tax that changes that behaviour and not simply going to fatten the coffers of the state and its lifestyle. Report and well communicate with citizen, having a little patience not changing everything at a stroke or by decree.
Taxation reforms are essential throughout our countries. We talk about tax incentive and not subsidies e.g. car industries so that they manufacture a kind of cars that they would have made anyway. Let’s face green taxes; it is just and necessary, but mostly to help us getting out from the unending virtual crisis of rampant capitalism, far from the real economy. No green custom duties at European borders, a trend advocated by some, in their eagerness, to lead us into a new protectionism; but rather concentrating on comprehensive policies, at least in Europe, better globally. It is useless to establish national policies not coordinated with the rest of countries, giving way to protectionist policies more or less latent: have a look on the global trade drop of 12%, if you want to add more crisis to crisis just add the perversion of protectionism to all the difficulties we face today. The environment is a global public good. To be honest we do not know how to deal with externalities steadily i.e. when China or Brazil pollute, they do not so in their respective territories only but in the entire world. Enforcing tariffs however is theoretically a nice building, but in practice it is just about regression. Also do not forget that China’s censure is unfair: the PRC is making genuine efforts to drastically reduce pollution in its industries – and it still does not occur in most of developed countries.

One of the biggest questions is to identify what the US attitude will be. So far the US had no concern on the Kyoto Protocol; the position is changing but it all depends on the type of changes that comes about there. Scenarios abroad are in my opinion: the role of the G20, the Doha WTO round re-launch and the climate meeting in Copenhagen. All three turn around the same concern: the need for global economic governance to meet challenges.

Pedagogy missing in the US and UK.
The increasing size of speculative capital flows, mainly in US and UK, is the pending business. I mean speculative capitals and hot money outflows are bigger now than a year ago – in the worst moment of financial-mortgage crisis. Hot money is tossed into the emerging economies as the first symptom relief crops up. Thus, the central bank of China is increasingly doomed to buy huge reserves to support a sick dollar (thus some $ 70,000 million per month, are beyond the circuit of productive investments in order to prevent the US currency to collapse again), deflecting precisely investment in productive economy. That is, in essence, we have not yet altered the global imbalances, and even we are somewhat higher than before the crisis. The issue of executive bonuses and allowances is less significant than the required dismantling of the opacity in the banking investment -something impossible in the most key European financial center, the City of London, since the future PM Cameron opposes to it. This, in US terms, is yet unimaginable. So far the best indicators of the City and NY – queues at the best restaurants – behave well as table reservations vary from 2 to 3 months … bonuses, windfalls, luxury cars, stratospheric contracts are just around the corner again. To pin a button: flows exchanged in the derivatives markets reached a record of vertigo – almost 10 times world’s GDP. So how can David control Goliath?

To be continued …

.

[1]  The Stern Review on the Economics of Climate Change is a report on the impact of climate change and global warming on the world economy. Written by economist Sir Nicholas Stern, commissioned by the UK government, the report was published in October 2006. The report represents a milestone by becoming the first government report commissioned by an economist rather than a climatologist.

[2] Arthur Pigou is considered the founder of welfare economics and the main precursor of the environmental movement to make the distinction between social and private marginal expenses and advocate for state intervention through subsidies and taxes to correct market failures and internalize externalities. Welfare Economics is his most emblematic book.

Sustainable Cities for Freedom and Environment (2)

Prospects, Proposals and Local Agenda-21

The first part of the analysis did consider the cities’ future –an analysis on ancient and current cities in a world becoming increasingly overpopulated.

This time we look after the portfolio of proposals on sustainable ages about the so-called Local Agenda 21. I would stress the importance of the issue, its impact on the social debate: while the 19th century witnessed social debate focused on class struggle, the latter part of the 20th century has been polarized on the ecological risks –which are no longer tied to a specific place of origin but their nature, pose a threat to all forms of life on the planet. That was precisely the widespread thesis at Stockholm-72 by Barbara Ward and Rene Dubos in their book ”Only One Earth”. With themes already raised earlier, in 1972, by Philippe Saint Marc in his unforgettable book “Socialisation de la nature” (Socialization of Nature, now exhausted, even in French).

In other words, the ecological risks are above classes, to the point that, even sarcastic tone has been said that “poverty is hierarchic, while smog is democratic”. The ultimate consequence lays on the social dynamics of ecological threats that has overcome the traditional debates on income or social position – fighting the global warming, the Kyoto Protocol and the future Copenhagen Protocol.

In 1993 the Expert Group on the Urban Environment and the European Commission launched the first phase of the Sustainable Cities Project for the period 1993-1996, in order to (1) contribute to further reflection on sustainability, (2) encourage a wide exchange experiences and (3) circulate best practices of local sustainability. In the long term, the idea of making recommendations on local and regional issues of Member States and the European Union itself. This, in line with what was requested in 1991 at a resolution of the Council of Ministers of the EC.

Once constituted, the EGUE worked over three years in developing a European Sustainable Cities Report, with the help of Euronet, who played the role of scientific and technical secretariat. The EGUE was organized in a number of specialized committees on:

• Social integration
• Mobility and urban access
• Planning and public spaces
• Dissemination (i.e. Distribution of projects between the public)
• Sustainable Social Systems
• Leisure, tourism and environment quality
• Technical management of cities
• Holistic urban management
• Urban Regeneration (Rehabilitation of neighborhoods and housing)

With so many nuances in plain view, the Report group focused on the relationship between institutional and environmental aspects in order to estimate the chances of local governments. Somewhat transcendent, against the attitude of state or semi-federal lands, as German Länder, Spanish Autonomous Communities and most of regional governments that hold so much power and sometimes behave as new centralist outbreaks. These bodies take up often resources more than anything needed by cities for multitasking – that anyone but they must assume, mostly in extremis.

The above circumstances require a thorough review of public policies to make them less authoritarian, rational and supportive, bearing that as a result of the ecosystems theory, the city is a complex whole, characterized by continuous change and development processes. In this approach, aspects such as energy consumption, waste generation, traffic and public transport are relevant.

But the EU obviously was not the only to deal with the issue and some experiences deserve to be stressed by far. Beginning with 1987, when eleven European cities (that number has grown to fifty so far) founded the Healthy Cities Programme for the World Health Organization OMS/WHO, intended for improving health conditions and interactive environment.

Furthermore in 1990, the United Nations Centre for Human Settlements – Habitat (UNCHS), started its own program of sustainable cities, aiming to provide developing countries with better systems for planning and environmental management.

Also in 1990, representatives from more than 200 local authorities around the world founded the International Council of Initiatives on Local Environment (ICLEI), promoting sustainable future, while counting with the sponsorship of the United Nations Environment Programme (UNEP). The ICLEI, which is based on the UN HQ in New York, is a local network for exchanging experiences, disseminating best examples of environmental do. ICLEI also promotes the Model Communities Program of Local Agenda 21 – a matter under discussion shortly below.

In August 1991, 130 cities have signed the Toronto Declaration on World Cities and Environment committed to develop sustainable development plans –incidentally, Canada, with Toronto and Montreal, is one of the most active countries on the issue at hand.

Meanwhile, in May 1992, 45 cities participate in the World Urban Forum – relied to the United Nations Conference on Environment, signed the Commitment of Curitiba (Brazil) in defense of sustainable urban development. A document outlining the guidelines for action to follow when developing plans for sustainable development, always in collaboration with authorities and citizens.

Likewise, the scheme of Urban Management UNDP (United Nations Development based in Nairobi) and the World Bank (1993) should be mentioned.

To complete the list of proposals made on sustainable cities, a mention is necessary conc. the Urban Program OECD (1994), aimed to improve knowledge on ecosystems in urban areas, evaluate examples of good work, and measure the effectiveness of local authorities policies and other public institutions, private or volunteer at various levels of government. Within the Urban Program, the Ecological Cities Project deserves specific mention in this analysis (will shape a further article).

In the same line of initiatives for sustainable cities, the EU Member States committed themselves at the Lisbon European Council in June 1992 to develop national plans of implementation of Local Agenda 21. An action plan born in the United Nations Conference on Environment held in Rio de Janeiro in 1992 (Earth Summit) and later developed at European level in the Aalborg Charter where the fundamental notes of the process of Local Agenda 21 were adopted:

• Sustainability, as an idea of preservation of natural capital. This requires that the consumption of natural resources, water and renewable energy does not exceed the capacity of natural systems to replenish them – and the speed at which we consume nonrenewable resources do not exceed the rate of replacement by sustainable renewable resources. Environmental sustainability also means that the rate of emitted pollutants does not go beyond the regeneration capacity of air, water and soil on which they work. Environmental sustainability also means the maintenance of biodiversity, public health and air quality, water and soil at levels sufficient to sustain human life and welfare, as well as the flora and fauna.
• Working within ecosystems, with regards to their capacity, and always linking the systems created by humans with natural ecosystems, and taking them as management models.
• Citizen participation. Sustainable development means making important decisions between conflicting objectives and major changes in the way of life of communities and therefore can not be imposed from above.

The collaboration of citizens is a direct consequence of the principles of partnership and shared responsibility in terms of:

• Acceptance and social support to the Plan.
• Assumption of commitments and responsibilities on the part of society.
• Acceptance of certain actions and proceedings which entail some sacrifice in the population, it was an overall context would be difficult to raise and take politically.

Anyhow, the impact of Local Agenda 21 has not reached its potential, which is enormous. In a way, because the municipalities fear citizens who might assume progressive grasp on cities – that is, jeopardizing hierarchies.

Sustainable Cities for Freedom and Environment (1)

An Overview on Urban Developmental Evidences

Matters of environment and nature conservation are to be considered when planning and developing construction projects.

The policy approach on sustainable cities is essential because in the process of urban development there can be no operations as often happened in the past, improvised, or at the mercy of powerful real estate groups, without taking into account the most basic in terms of sustainability. Then there is the new context, revealing that in 2008 more than half of the 6,700 million human beings, in a trend of (still) population growth living in cities, so that the quality of life for most inhabitants of the earth depends on whether or not those cities are sustainable. Moreover, in 2050 there will be 9,000 million inhabitants in the planet – 70 percent of them will be urban.

There is no civilization without cities, because since humans became sedentary in the Neolithic, human settlements began to better provide satisfaction to the needs of their communities. And over time, these early settlements became towns, centers of attraction and stimulus for social mobilization as well as for commercial exchange of ideas, and personal relationships. Ultimately, as stated by Marsilio Ficino in the fifteenth century, the city is not made only of stone but also and above all, human beings organized to co-exist indefinitely.

In this direction, the city is “the place of a particular human group,” according to historian Marc Bloch. As the philosopher Claude Lefort, in an essay on urban civilization in Europe, explained well how, at the end of the Middle Ages – then next to coming into the Renaissance – European cities formed broad areas of trade and freedom.

On that path slowly and around the birth of the market, an emerging social class, the bourgeoisie was creating a new order in Europe that would eventually undermine the feudal power: serfs emancipating from the masters found protection in urban habitat increasingly free. The expression of this change is summarized by Max Weber, “town air makes free.”

That freedom of the city, as Lefort writes, means the dissolution of personal dependence ties of feudalism, and the possibility, therefore, to change one’s condition: promoting work, the capacity of initiative, education and other opportunities. This direction (urban development as a critical element of progress in Europe) explains the significant leap forward, which the Renaissance involved for a great number of issues.

The improvement of former European cities did contrast with what happened elsewhere, e.g. Chinese cities, which became the nucleus of the bureaucracy and the mandarin feudal organization, which of course did not prevent the Celestial Empire becoming the greatest world power for centuries – something often ignored by the prevailing Euro centrism. But the gaps above mentioned prevented China from setting up a large middle class and therefore they avoided the necessary industrial revolution to operate there in the eighteenth century.

From an everyday approach, the city can be qualified as a place to live, grow, work, study and live together in society; thus – according to Roberto Camagni – becoming significant sets, autonomous socio-economic entities. In this regard, management and improvement of quality of life for residents requires a specific spatial planning; on vital issues such as infrastructure, urban planning, public transport, landfill management, solid waste collection and energy management , CO2 emissions, and always transcendental subject of the marginalization of certain social groups.

Prevention through environmental impact assessment (EIA)

In the direction above pointed, the sprawl of cities tends to set conurbations (Giddens dixit) or megalopolis, as happened in the United States firstly with San-San (San Francisco / San Diego), Chipitts (Chicago / Pittsburgh) or BosWash ( Boston / Washington). On the other hand, the provision of advanced services, the concentration of scientific and technical qualifications, and expertise of the workforce and the existence of large consumer markets as well, have a decisive influence on the emergence of new international centers (international hubs) that operate on a continental scale and in some cases even worldwide. Providing distinction between knowledge hubs (knowledgehubs), capital cities (established capitals), or new capitals (re-invented capitals).

From the viewpoint of conceptual development, urban sustainability is based on the definition, widely accepted that it was first built in the Brundtland Report, World Commission on Environment and Development, 1987:

Sustainable development is one that meets current needs without compromising the ability of future generations to meet their own problems.

Another complementary definition, offered by the IUCN – World Conservation Union (Environment Program of United Nations and World Wide Fund for Nature, 1991) pointed that:

Sustainable development means improving the quality of life with respect to the limits of ecosystems.

More specifically, sustainability involves a number of essential criteria:

• There is no infinite growth with finite resources: it is necessary to acknowledge limits to the expansion in material terms, in order to prevent the destruction of ecosystems and the overall deterioration of the biosphere.

• In production, you have to incorporate such damages to the biosphere as costs, treating, at business and government as particularly sensitive part of the profit and loss account, or budgets, respectively.

• It requires the systematic use of environmental impact assessment (EIA), for reasons that can be summarized by “prevention is better than cure”.

• It is important that government admin and private organizations have their respective environmental budgets, where evaluate annually the ecological balance – to assess whether or not they are generating natural capital reductions.

• The development model must be ecological, permeating all sectoral intervals as patterns of respect for nature.

Biblio:

Marc Bloch, La Société féodale (Feudal Society), Albin Michel, Paris, 1998.

Claude Lefort, L’Invention démocratique (The Democratic Invention), Paris, Fayard, 1981.

Claude Lefort, Europe as an urban civilization, Revue ‘Esprit’, Paris, 2004

Max Weber, General Economic History, Cosimo, New York, 1986

Roberto Camagni, Economia Urbana, Barcelona, 2005

Negative externalities and taxes: a contribution to the debate on “junk food”

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Alcohol and cigarette products are usually subject to high taxes. This occurs because the economic theory acknowledges that the price of these products does not reflect the true social cost of consumption.

Thus, a Pigovian tax [1] is applied to neutralize the externalities [2] caused by these products in both consumers and society.

Barcelona · Array of fruits and vegetables at La Boqueria Market

In this regard, developed countries have begun to consider the option of raising the tax burden of the food low in nutrients and high in saturated fats and carbohydrates, also called junk food as a way to lighten the deficit and in turn combat obesity [3]. If implemented successfully in the case of tobacco or alcohol, why do not tax the junk food and improve the way consumers make decisions about their diet?

In return, during the first half of 2009, interesting reports have been published focused on discussing the aspects of the issue. Thus, Engelhard, Garson and Dorn (July 2009) [4] put the junk food as a major cause of obesity, with direct consequences for the economy through a decline in productivity per worker and increased costs for medical care. United States estimates that medical costs of obesity are $ 700 higher than the costs of a thin person.

However, Yaniv, Tobol and Rosin [5] argue that the implementation of taxes on junk food has technical shortcomings. For example, there are too many possibilities of interpretation to decide what products should be considered within that tax. A hamburger has high levels of fat, protein and calories but these are also necessary for metabolism. In addition, unlike the case of cigarette or alcohol, consumption of junk food does not produce a direct negative externality on the welfare of someone other than the individual’s. Therefore, we must ponder the results of these surveys further to soon begin the implementation of tax measures that directly affect the purchasing decision of consumers.

[1] A Pigouvian tax is a duty charged on a market activity to correct the market outcome, if there are negative externalities associated with the market activity.
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[2] In economics, an externality or spillover of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service.  A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision. If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it. Since consumers make a decision based on where their marginal cost equals their marginal benefit, and since they don’t take into account the cost of the negative externality, negative externalities result in market inefficiencies unless proper action is taken.
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[3] An individual is classified as obese based on his body mass index (BMI), which shows the relationship between weight and height as an indicator of body fat. An adult is classified as “overweight” if his BMI is between 25 and 25.9. If his BMI is greater than 30 he’s classified as obese.
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[4] ENGELHARD, Carolin; GARSON Arthur; DORN Stan “Reducing obesity: Policy strategies from the tobacco wars”, Urban Institute. July 2009.
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[5] YANIV, Gideon; ROSIN Odelia; TOBOL Yossef. “Junk-food, home cooking, physical activity and obesity: The effect of the fat tax and the thin subsidy”. Journal of Public Economics. June 2009.

Economics in the nude

Unempirical hypothesis in economic theory are subverting efforts to work out environmental threats

Economy stark naked

The pattern maker fathers of neoclassical economics –the current core assumption of the global market system–  were supposed to transform their scope into a scientific discipline. But what is not commonly acknowledged is that these now celebrated economists  –Jevons, Walras, Edgeworth and Pareto–  developed their hypothesis by adjusting equations from the 19th century physics that finally became outdated. Unluckily, it is clear that neoclassical economics has also become obsolete. The assumption is based on unscientific statements that are delaying the implementation of workable economic solutions for global warming and other worrisome environmental threats.

The physical theory that the creators of neoclassical economics used as a pattern was formulated in reply to the inability of Newtonian physics to rationalize the experiences of heat, light and electricity. In 1847 German physicist Hermann von Helmholtz framed the conservation of energy rule and assumed the existence of a field of conserved energy that fills all space and merges these observable facts. Later in the century James Maxwell, Ludwig Boltzmann and other physicists developed better explanations for electromagnetism and thermodynamics, but meanwhile, the economists had borrowed and changed Helmholtz’s equations.

The approach that economists employed was effortless and illogical—they replaced economic variables with physical ones. Convenience utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. Many eminent scientists warned the economists that there was definitely no basis for making these swaps. But the economists ignored such analysis and carry on claiming that they had transformed their line of work into a strictly mathematical scientific discipline.

Weirdly, the genesis of neoclassical economics in mid-19th century physics was elapsed. Successive generations of conventional economists admitted the assertion that this hypothesis was scientific. These peculiar occurrences make clear why the mathematical theories used by conventional economists are built on the following unscientific assumptions:

• The market structure is a closed circular flow between production and consumption, with no inputs or outputs.

• Natural resources are present in a domain that is separate and distinct from a closed market system, and the economic value of these resources is determined barely by the dynamics that operate within this system.

• The cost of damages to the external natural environment by economic activities must be treated as positioned outer the closed market system or as costs that cannot be built-in in the pricing mechanisms that operate within the system.

• The external resources of nature are largely boundless, and those that are not can be replaced by other resources or by technologies that diminish the exploitation of the limited resources or that depend on other resources.

• There is no biophysical limit to the expansion of market systems.

If the environment preservation crisis did not be there, the fact that neoclassical economic theory grants a consistent base for running economic activities in market systems could be considered as adequate justification for its common purpose. But since the crisis does exist, this speculation can no longer be considered as useful even in pragmatic or utilitarian terms for the reason that it fails to meet what must now be regarded as a deep-seated prerequisite of any economic theory  –the point to which this theory permits economic activities to be harmonized in environmentally responsible conducts on a global extent. Because neoclassical economics does not even recognize the costs of environmental harms and the limits to economic growth, it represents one of the utmost obstacles to fight climate change and other threats to the planet. It is imperative that economists work out new theories that will take all the concepts and realities of our global system into account.

A few number of economists over the past two decades, including such top personalities as Kenneth J. Arrow, have expressed doubts about the effectiveness of neoclassical economic hypothesis. However, the most express challenges to obvious postulations in this theory have been made by the game theorists. Such as, these academics have challenged the supposition that economic actors are absolutely rational, act upon fixed decision-making rules and are unable of making dreadful choices. In conservative neoclassical economic theory, the natural laws of economics supposedly find out the best possible outcome of a cost-effective process and economic actors lack of all evident human characteristics. This theory presupposes as well that the sphere of economy is established and static and that economic actors are completely rational entities who do not talk back. When getting through the box of human bias, the game logicians have been obliged to conjecture a growing number of unplanned variables to justify the decision-making of individual economic actors. And this enlightens why the history of game theory is marked by a recurrent regression into the incredible complexities of language and culture. As the economist R. Sugden states it [1]:

“There was a time, not long ago, when the foundations of rational-choice theory appeared firm, and when the job of the economic theorist seemed to be one of drawing out the often complex implications of a fairly simple and uncontroversial system of axioms. But it is increasingly becoming clear that these foundations are less secure than we thought, and that they need to be examined and perhaps rebuilt. Economic theorists may have to become as much philosophers as mathematicians.”

This explains why the United Nations Framework Convention on Climate Change (1992) failed to protect the climate system, why the Convention on Biological Diversity (1992) did not even begin to reduce losses in biodiversity, and why the U.N. Convention to Combat Desertification (1994) did not slow, much less, reverse this process. However,   the cooperation of the most part of economists and environmental scientists  –that the world needs without delay–  may occur when both recognize the unique opportunity they have to look after the existence of current mankind and the future existence of its descendents by resolving the crisis in the global environment.

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[1] Robert Sugden, “Rational Choice: A Survey of Contributions from Economics and Philosophy,” Economic Journal 101:4 July, 1991, p. 783.

Guru of protectionism Emmanuel Todd urge us to protect and survive

(Translated from my French blog  “Résident de la République” )

The financial crisis is convulsing politics in unexpected ways. The triumph of an inexperienced black liberal senator in the US presidential election may yet be counted as the first surprise of many. What else could be in store?

Emmanuel Todd, the French historian, made a name for himself by predicting the collapse of the Soviet Union. He has been canvassing into his crystal ball again. In his latest book, Après la démocratie (After Democracy), he brings to mind the alarming possibility of a post-democratic Europe reverting to ethnic disasters and dictatorship.

The author’s starting point is incredulity that a politician as “vacuous, violent and vulgar” as Nicolas Sarkozy could ever have been elected president. As interior minister, Mr. Sarkozy proved he was ill-suited to high office by inflaming social tensions during the riots in France’s troubled suburbs, Mr. Todd argues. Mr. Sarkozy’s first months in power have only confirmed this judgment. As incompetent in economics as in diplomacy, the hyperactive Mr Sarkozy is going nowhere fast, the author contends, rather like a cyclist pedalling away on an exercise bike.

Yet Mr. Sarkozy’s election is a symptom of the sickness of French democracy rather than its cause. Once, French politics was neatly defined by its ideological divisions: the Communists represented the secular, internationalist, working class; the Gaullists represented nationalist, conservative, Catholic values. But the collapse of religion and ideology has destroyed that framework, leaving behind a politically atomized society wide open to manipulation by the likes of Mr. Sarkozy or Silvio Berlusconi in Italy. Tough economic times will only tempt such populist politicians to stoke public fears of immigration and to adopt ever more authoritarian ways.

However, the author is equally scathing about France’s opposition Socialists, a party of cosseted bureaucrats who have betrayed the workers they once represented. French civil servants do not have to worry about the corrosive effects of globalization because their own jobs cannot be sent offshore.

Mr. Todd paints a picture of a collusive political-media elite that benefits from globalization while being disconnected from the people who suffer from it. As arrogant as the aristocracy on the eve of the 1789 revolution, this elite blithely ignores the views of voters whenever it suits them. French voters rejected the European Union’s constitutional treaty, but a modified version was later adopted by parliament. Britain’s voters protested massively against the war in Iraq, but the government sent in the troops regardless.

Ordinary workers blame cheap-wage China for killing jobs and compressing wages. Instead, France’s leaders scapegoat Muslim immigrants and target militant Islam, justifying an unpopular intervention in Afghanistan. Employees want Europe to protect their jobs but, in spite of his increasingly protectionist rhetoric, Mr. Sarkozy – and the opposition Socialist party – still adhere to the free-trade dictates of the EU and the World Trade Organization.

In Mr. Todd’s reductionist view, globalization is simply the exploitation of cheap workers in China and India by US, European and Japanese companies. He is therefore an unabashed champion of European protectionism. Erecting trade barriers would increase European wages which, in turn, would increase demand and boost trade, he argues. The “social asphyxia” that is sucking the breath out of democracy would disappear.

The British, whose very identity is wrapped up in free trade, will never buy protectionism, Mr. Todd suggests, but Germany and the rest of the EU could be persuaded.

At times, Mr. Todd’s anger outstrips his analysis. Too many questions are left hanging. Does globalization not benefit western consumers? Why would Germany, one of the great exporting nations, turn its back on free trade? Has Mr. Sarkozy not performed well in the crisis? But there is no doubt that the intellectual assault on free trade is intensifying. Mr. Todd’s book is a passionate assault in that war of ideas!

A tip: Do not run to buy it at the bookstore. Although some assumptions are attractive at first sight, the overall analysis, on an anthropological and demographic basis (Emmanuel Todd’s “primary business”), confines often to correlations too hastily constructed and argued quickly. Todd’s argument boiled down to something like: After democracy = “After sarkozysm” too simplistic to my liking. If you are interested in the future of democracy, rather try Wendy Brown, professor of political science at the University of Berkeley (Edgework: Critical Essays on Knowledge and Politics Out of Politics and History). This time, the analysis is all the more exciting and not a French framed one. Of course, keep in mind Colin Crouch’s classic Postdemocracy.

Related Posts: “After Democracy,” Emmanuel Todd: French Society in Crisis.

Put an end to the crisis is not so easy

The social relations are tightened. Extra benefits, windfall, stock options, golden/early retirements and other premiums do not pass anymore. What was previously accepted or tolerated, especially when the economy brought jobs, no longer works, more than ever when social plans come to pass.

It is a simple but worrisome observation. One can easily recognize the persistence of the dreadful conditions on companies’ financial position within the United States and the Euro area as well. There’s all but evidence: evolution of the notes granted for the credit to companies, bankruptcies, lesser productivity, etc… The reasons are well-known: credit becomes more and more expensive, much more difficult to obtain and the production in the manufacturing sector moves back more quickly than employment, even if everywhere the companies react very quickly by reducing their enrollment.

The situation could appear even more severe in the Euro area than in the United States because the profitability and the self-financing rate of the companies are furthermore polluted there. The American companies made large efforts to reduce costs. Europe is likely to be more damaged by a later growth return. China seems to be the foremost country to recover such a growth, followed next by the US and Mexico, and later on Asia except for Japan. Japan and Europe eventually at the end, because public reflation plans are definitely less important in both areas.

But market segments differences are quite dissimilar. The bad situation of the American automobile industry is enough to enlighten, both large manufacturers and outside contractors as well.

Some people say that the companies face a hardest choice: either to preserve employment or profitability at all cost. What figures state is serious to a great extent: companies do not preserve employment but neither do they recover their financial profitability. The particularity of the crises is that they place the economic actors in a situation where their freedom of choice –their good judgment- is reduced to nothing or next to nothing

“After Democracy,” Emmanuel Todd: French Society in Crisis

I have just read the book. And it is a rather surprisingly pessimistic  –and surprisingly (to my mind) reactionary–   assessment of the state of politics and society in Europe.  In particular, Todd apparently emphasizes the socially stabilizing value of religion and calls for protectionist trade barriers.

Democracy is on the road to ruin. Religious values (Christianity, Communism …) have collapsed. Free-marketism and its corollary, globalization, are slowly destroying society. And to make matters worse, the French have elected as their leader a president who is “incapable of exercising power”. A man who, once in power, immediately aligned himself with the United States, like “a rat rushing to scurry onto a sinking ship”.

That, in a few words, is the thesis of this fulgent, fulsome, and flat-footed book, as Emmanuel Todd was caught flat-footed by the financial crisis that would “re-presidentialize” Nicolas Sarkozy. Nor did he predict that the “Bushist America” he curses would elect Barack Obama.

At once independent-minded and upset (emporté), Emmanuel Todd is not any more lenient towards the Socialists. He accuses the Socialist Party (PS) of having betrayed the values of the left by converting to capitalism. In Ségolène Royal’s popularity he discerns signs of “rot [décomposition]” in the politic body. And he blames “cynical careerism” for the promotion of the Socialist Pascal Lamy to the head of the World Trade Organization as well as that of Dominique Strauss-Kahn as director of the International Monetary Fund.

This is a point to which he comes back often: the Socialist elites are of the same ilk as Nicolas Sarkozy. Historian, demographer and sociologist, he sees in their patent complicity the explanation for the ideological void that France has sunk into. With “a rise in the power of antidemocratic forces” as the consequence.

The exploration of this ideological void is at the heart of his exposition. The crumbling away of the great religious faiths, explains Emmanuel Todd, aggravates the decline of politics. But this decline is also due to a rise in the level of knowledge — a disturbing statement for those who believe that education automatically improves democracy. That was true yesterday. But times change. The increasing number of graduates with higher levels of education, notes Emmanuel Todd, has reshuffled the deck by creating a category of individuals impervious “to the strong affiliations that used to structure the nation, the public, the social domain”.

Add to this gloomy picture the temptation to fill the religious and ideological void he denounces with calls to reclaim identity: the castigation of Islam, the creation of a ministry of national identity, the “ethnicization” of a national myth… One begins to understand why this book is titled After Democracy.

Which democracy is supposedly at risk of disappearing. Emmanuel Todd does not rule out a “coup d’Etat”, the temptation to which he perceives in Henri Guaino, Nicolas Sarkozy’s special counsel. Similarly, he suspects the Socialists of wanting to “withdraw the right to vote from the people, or to at least to seriously limit its practice”.

At times one wonders if he is joking, but he is not the type. Emmanuel Todd is convinced that the free market and globalization, considered by France’s elite to be a foregone conclusion, have disintegrated French democracy.

The solution flows from the source: abandon globalization and institute a salvational protectionism at the borders of Europe. Thanks to such a reasoned protectionism, French wages, pulled down to the bottom by Chinese workers, will rise again. National cohesion will come out of it re-strengthened. And democracy —at last! — will find its colors again.

Sprinkled with cutting judgments, this exposition often vacillates between essay and satirical tract, in the process losing its force. Above all, Emmanuel Todd is too presumptuous. If the solutions that he argues for were the panacea, we would follow them without hesitation. Unfortunately…

Related Posts: Guru of protectionism Emmanuel Todd urge us to protect and survive.