Shock Doctrine, Neo-liberalism, and Current Events

Primarily for my Comp Systems and Political Economy students (this is part one):

As previously noted here, the events in Madison, Wisconsin are not unique.  There appears to be a concerted effort to roll-back collective bargaining rights for many workers and roll-back social programs all because of a supposed  “fiscal crisis”- the idea that government budgets are out-of-control in spending.  Yet, this “fiscal crisis” is largely contrived and to the extent it exists at all, it is due not to increased spending but from reduced tax collections resulting from the Great Financial Crisis Wall St. created and repeated tax cuts, especially for the wealthy.

So what we have is a “crisis” that supposedly justifies drastic cut-backs in social support, increased privatization, and reduced tax burden on the wealthy.  If it sounds familiar, that’s because it is.  It sounds a lot like the way neo-liberal “global capitalism” was forced onto much of the world over the last 40 years.  Naomi Klein, in her book Shock Doctrine explains the strategy used, including the fact that leading neo-liberal ideologues (in the U.S. they are called “conservatives” or “libertarians” but not with much accuracy) intentionally do so.  They idea is to use any crisis, be it a natural disaster (Haiti earthquake?), or invasion (Iraq?), or revolution to force political economy changes that people might not otherwise accept.

Paul Krugman at the New York Times observes how the pattern is being applied here at home now in Wisconsin and other states:

Shock Doctrine, U.S.A.

By PAUL KRUGMAN

Here’s a thought: maybe Madison, Wis., isn’t Cairo after all. Maybe it’s Baghdad — specifically, Baghdad in 2003, when the Bush administration put Iraq under the rule of officials chosen for loyalty and political reliability rather than experience and competence.

As many readers may recall, the results were spectacular — in a bad way. Instead of focusing on the urgent problems of a shattered economy and society, which would soon descend into a murderous civil war, those Bush appointees were obsessed with imposing a conservative ideological vision. Indeed, with looters still prowling the streets of Baghdad, L. Paul Bremer, the American viceroy, told a Washington Post reporter that one of his top priorities was to “corporatize and privatize state-owned enterprises” — Mr. Bremer’s words, not the reporter’s — and to “wean people from the idea the state supports everything.”

The story of the privatization-obsessed Coalition Provisional Authority was the centerpiece of Naomi Klein’s best-selling book “The Shock Doctrine,” which argued that it was part of a broader pattern. From Chile in the 1970s onward, she suggested, right-wing ideologues have exploited crises to push through an agenda that has nothing to do with resolving those crises, and everything to do with imposing their vision of a harsher, more unequal, less democratic society.

Which brings us to Wisconsin 2011, where the shock doctrine is on full display.

In recent weeks, Madison has been the scene of large demonstrations against the governor’s budget bill, which would deny collective-bargaining rights to public-sector workers. Gov. Scott Walker claims that he needs to pass his bill to deal with the state’s fiscal problems. But his attack on unions has nothing to do with the budget. In fact, those unions have already indicated their willingness to make substantial financial concessions — an offer the governor has rejected.

What’s happening in Wisconsin is, instead, a power grab — an attempt to exploit the fiscal crisis to destroy the last major counterweight to the political power of corporations and the wealthy. And the power grab goes beyond union-busting. The bill in question is 144 pages long, and there are some extraordinary things hidden deep inside.

For example, the bill includes language that would allow officials appointed by the governor to make sweeping cuts in health coverage for low-income families without having to go through the normal legislative process.

And then there’s this: “Notwithstanding ss. 13.48 (14) (am) and 16.705 (1), the department may sell any state-owned heating, cooling, and power plant or may contract with a private entity for the operation of any such plant, with or without solicitation of bids, for any amount that the department determines to be in the best interest of the state. Notwithstanding ss. 196.49 and 196.80, no approval or certification of the public service commission is necessary for a public utility to purchase, or contract for the operation of, such a plant, and any such purchase is considered to be in the public interest and to comply with the criteria for certification of a project under s. 196.49 (3) (b).”

What’s that about? The state of Wisconsin owns a number of plants supplying heating, cooling, and electricity to state-run facilities (like the University of Wisconsin). The language in the budget bill would, in effect, let the governor privatize any or all of these facilities at whim. Not only that, he could sell them, without taking bids, to anyone he chooses. And note that any such sale would, by definition, be “considered to be in the public interest.”

If this sounds to you like a perfect setup for cronyism and profiteering — remember those missing billions in Iraq? — you’re not alone. Indeed, there are enough suspicious minds out there that Koch Industries, owned by the billionaire brothers who are playing such a large role in Mr. Walker’s anti-union push, felt compelled to issue a denial that it’s interested in purchasing any of those power plants. Are you reassured?

The good news from Wisconsin is that the upsurge of public outrage — aided by the maneuvering of Democrats in the State Senate, who absented themselves to deny Republicans a quorum — has slowed the bum’s rush. If Mr. Walker’s plan was to push his bill through before anyone had a chance to realize his true goals, that plan has been foiled. And events in Wisconsin may have given pause to other Republican governors, who seem to be backing off similar moves.

But don’t expect either Mr. Walker or the rest of his party to change those goals. Union-busting and privatization remain G.O.P. priorities, and the party will continue its efforts to smuggle those priorities through in the name of balanced budgets.

Michigan IS Wisconsin – Just Different Tactics

Rick Snyder, Michigan governor, claims “Michigan is not Wisconsin”.  People take this to mean Snyder doesn’t want to bust unions. That’s wrong. What Snyder means is he’s going to use a different strategy than Walker in Wisconsin.  Walker is a bare-knuckle street fighter. Snyder hires a hit-man. Snyder smiles, tells you what you want to hear, lies about his priorities, and then has his hit-men crush you. Snyder claims he wants to negotiate with unions and isn’t out to “bust the unions”.  So far, Rick Snyder has largely gotten a free pass compared to Scott Walker in Wisconsin. The national news media concentrates on Wisconsin and the protests are largest there. But part of the attention in Wisconsin is because in Wisconsin the power grab to end collective bargaining rights has been so blatant, so clear.  It’s made great theater. And the media love theater.

In Michigan, the effort to end bargaining rights and to bust unions is apparently just as strong, but it’s more subtle, more sophisticated. In Wisconsin, you only have to read a single proposed bill to see that they want to end collective bargaining rights. In Michigan, you have to connect the dots to see the pattern.

First off, there are over 40 anti-union bills that have been introduced in the Michigan legislature since January 1 that have consequences for unions.  In some cases, it’s not just public employee unions under assault, it’s private unions too. In Michigan there isn’t one bill that does the big repeal of rights. It’s lots of bills each chipping away at one right or another. In one case, the bill doesn’t repeal collective bargaining rights for the private sector in all Michigan, just in to-be-named-later “zones”. In another bill, a specific work rule bargaining right is over-ruled for teachers. It’s the death of collective bargaining by a million cuts.

If all these bills pass, and there’s no indication from Snyder that he would veto any of them, they mark a significant roll-back of collective bargaining rights in Michigan.  But there’s a hidden strategy that’s even bigger.  Many of the bills are about increasing the autocratic powers of “emergency financial managers”.  In Michigan “emergency financial managers” are appointed by the Governor and state Treasurer. These emergency financial managers are appointed to take-over the management of local school boards, cities, counties, or townships that encounter financial difficulties. Emergency financial managers are not accountable to local residents or voters at all. They report only to the governor. Further, emergency financial managers have the powers to unilaterally revoke all union contracts and negotiations. Snyder and the Republicans are moving swiftly to increase the already hefty power of these emergency financial managers. A spokesman for the Republican majority leader in the legislature claims these bills are not about busting unions but about “protecting municipalities from bankruptcy.  From The Detroit News:

“We’re not out to destroy anything, we’re out to help everybody,” Marsden said.

“That plan is aimed at keeping municipalities from falling into bankruptcies that will cost people jobs.

But if the objective is to protect municipalities from bankruptcy, why are the biggest budget cuts aimed at revenue sharing and schools?  Right now “emergency financial managers” seem only like a hypothetical to most residents and voters. After all there are only 4-5 such financial managers in the state.  Detroit Public Schools and the cities of Pontiac, Ecorse, and Highland Park have them (there maybe another one or two, I’m not sure). But after the budget is implemented there will be a LOT of cities and school districts in serious financial trouble. Then the governor appoints his emergency financial managers. Then the union contracts can be nullified.  All without legislation.

Wisconsin gets the attention and Walker takes the heat.  Meanwhile, Snyder moves quietly, counting on people not connecting the dots until it’s too late and it’s done.  It’s important to maintain collective bargaining.

4th Qtr 2010 GDP Revision

First revision to the 4th qtr 2010 GDP results are out.  I’ll outsource the reporting and commentary to Mark Thoma and Ryan Avent:

Fourth quarter GDP was revised downward:

A disappointing day, by Ryan Avent: …let me draw your attention to two stories… First, America’s fourth quarter GDP growth has been revised down:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.8 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent…

The downward revision to the percent change in real GDP primarily reflected an upward revision to imports and downward revisions to state and local government spending and to personal consumption expenditures (PCE) that were partly offset by an upward revision to exports.

And Britain’s economy shrank by more than initially thought:

Britain’s economy shrank more than initially estimated in the fourth quarter, complicating the task of the Bank of England as a split deepens among policy makers on whether to withdraw stimulus.

Gross domestic product fell 0.6 percent from the previous three months, compared with an initial estimate for a 0.5 percent drop, the Office for National Statistics said today in London. The statistics office said its “best estimate” for the impact of cold weather on the data remains 0.5 percent. The slump was led by construction and investment.

The American data helps explain labor market figures that looked unusually bad given growth. In both cases, the fiscal and monetary authorities should be asking themselves whether they’ve overestimated the performance of these economies and their ability to handle big, and largely unnecessary, short-term budget cuts.

Though certainly better than lower growth, a 2.6% growth rate is not much progress. It’s basically treading water, though barely. To “recover” what was lost in the recession, including lost jobs, we need to grow much faster than that. Unfortunately for the millions of unemployed, problems at the state and local level are far from over, there are other headwinds working against growth as well (e.g. the prospect of higher oil prices, the end of the stimulus package), but policymakers have moved on to other things. And worse, the main topic presently, cutting the budget, works against the employment and output growth.

The comment I’ve seen on the overall trend is lifted from “Goldilocksisableachblonde” in from Thoma’s blog:

“It’s basically treading water…”

In aggregate , that’s accurate. When you break it down by income groups in the population , you’ve got a bunch who are treading water , a few walking on water , and the rest are drowning.

 

Iceland Shows Banks Are Not Too Big To Fail

Few nations were hit harder initially by the financial crisis in 2008 than Iceland. It’s economy had grown rich around four very large (relative to Iceland) banks that were players in the big global casino financial industry expansion.  In the U.S., U.K., and most other large developed countries governments responded with large bank-bailout packages.  The economic logic is that the banks and the banking system is too interconnected, too large, and too important to let it fail.  There’s a part of this argument that has economic truth.  To the extent that the creditors (depositors) of a bank are ordinary citizens and businesses in the country, letting a bank fail will have disastrous macroeconomic consequences.  But this is only true to the extent that these ordinary depositors get wiped out and lose their deposits.  Depositors were in large part not protected in 1929-33 when banks failed across the U.S. and that led to worsening of the Great Depression. It also led to the creation of Federal Deposit Insurance Corporation.  The FDIC is still on the job protecting little depositors (and our economy).

But in the Great Global Financial Crisis, the U.S. government didn’t just try to rescue the little depositors, it rescued the banks themselves.  There’s a huge difference. In rescuing the banks as corporations, the government rescued the large wealthy depositors who should have known better. They rescued the shareholders who selected the managers that caused the banks to get in trouble. They rescued the very management teams that had just failed so spectacularly.  At the time, the argument made by the government for rescuing the banks was that they were “too big to fail”.  This little phrase, often abbreviated as TBTF, came to be a short-hand logic for bailing out the banks.

The problem is that the economic justification for a “bailout” calls for protecting the little, ordinary depositors, not the banks.  In practice, that’s what FDIC does. It “rescues” the little depositors when the bank fails.  It lets the bank and it’s management fail. But the Bush and Obama administrations did not do that. Instead they bailed out the banks and the bank shareholders, arguing there was no alternative.

Iceland, however, shows there was an alternative. Iceland rescued (guaranteed) deposits by ordinary Icelanders and let the banks themselves fail. It has worked pretty well. Much better than Ireland’s approach that rescued the banks themselves. From the New Zealand Herald by way of Daily Bail:

Unlike other nations, including the US and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to US$209 billion, 11 times gross domestic product.

The crisis almost sank the country. The krona lost 58 per cent of its value by the end of November 2008, inflation reached 19 per cent in January 2009, GDP fell 7 per cent that year and the Prime Minister resigned after nationwide protests.

But with the economy projected to grow 3 per cent this year, Iceland’s decision to let the banks fail is looking smart.

  • “Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”