Life and Death of the European Minotaur

I wrote this short piece for the Spanish newspaper Diagonal  on July 10th, five days after the Greek referendum. This is a rough translation – the version in Spanish can be found here.

“One cannot have democracy and gold standard at the same time,” Barry Eichengreen reminded us while analyzing the collapse of the gold standard, the fixed exchange rate regime in place just 100 years ago. The gold standard was nothing else than the sterling standard, safely founded on the constant and great economic surpluses the hegemonic power, Great Britain, obtained through its colonial empire. That monetary system imposed an ironclad fiscal discipline: if a country imported more that what it exported due to the high prices of its produce, it would run into a trade deficit. This would inevitably trigger a debt crisis, which could only be adjusted by lowering the wages of the working class, often below subsistence level. As such, the very stability of the gold standard was based on the structural repression of European workers and colonial subjects, who were not organized to resist such periodical devaluations. When workers and colonial subjects fought for European countries to become mass democracies, the gold standard, Eichengreen concludes, was doomed.

It is a cliché to say so but it is the case: as Marx said, history repeats itself, first as a tragedy, then as a farce. In the current farce, Great Britain’s role is played by Germany, while the gold standard is played by the euro, instituted at the beginning of the nineties under the triumphant ideology of that time, neoliberal capitalism. Under the euro, just like one hundred years ago, deficit-running governments could no longer devalue their currencies but to obey fiscal discipline “carrying out the necessary structural reforms” in Eurocratic jargon, that is, repressing wages and dismantling social benefits. The first workers to suffer Eurocratic austerity were, ironically, the Germans, with the harsh Schröder Hartz IV reforms in the 2000s: tough wage repression, epitomized by the rise of precarious mini-jobs, translated into succulent corporate profits. It is an economic law, Varoufakis reminds us in spite of Schäuble: such surpluses would have its complementary converse in southern European deficits, inevitably unleashing credit bubbles (of the private kind in Spain and Ireland; public in Italy and Greece) like tsunamis due to the peculiar financial architecture of the euro. Who mediated these enormous inflows of European money in the South so irresponsibly, obtaining uncontestable political power in the process? In Greece it was what Varoufakis called “the triangle of sin”, an unholy alliance of oligarchs between bankers, developers and media, in which we should include politicians (and the regional cajas de ahorros, in the Spanish case). It is no coincidence that these interest groups are the most “pro-European”, defending the Yes in the late Greek referendum: they are the ones who can lose the most.

The 2008 Wall Street meltdown involved the unilateral default of many debts to German banks, who had become hugely and irresponsibly exposed to the US housing bubble: for instance, Deutsche Bank owned 10% of the empty houses of Baltimore and other US cities. In this adverse context, the flow of international credit froze and the first to suffer it is, obviously, the weakest link in the financial architecture of the euro: the Greek government, which by the end of 2010 declared itself unable to repay its debts to its creditors, mainly German and French banks (and, by extension, its savers) and institutional funds (like insurance companies and pension funds). A contagion effect is feared regarding other southern European economies, explaining the tremendous fluctuations in the prices of its sovereign bonds.

The European financial system -above all, Franco-German- seems in danger and needs to be rescued: between 2011 and 2012 the European Central Bank would lend a trillion of euros at 1% to European banks (above all, Spanish and Italian banks) in order to let credit flow, yet without success. At the same time, indebted countries would be used as SPV-like financial instruments in order to repay European debt: in these bailouts (Ireland, 85 bn; Portugal, 79 bn; Spain, 100 bn), European taxpayers would lend them in order to pay to private creditors, while indebted countries would contribute the interests. Thus, out of the 284 bn dollars Greece received since 2010, only 8% reached the Greek population. In exchange, these countries would be forced to cut their deficits via wage repression, privatization and dismantlement of the welfare state, depressing internal demand and plunging the south of Europe in a deep economic recession. At a huge human cost (which in Spain involved evicting half a million of families, but leaving the national oligarchies unscathed), the troika calculated that the indebted government would be soon able to reach primary surpluses in order to repay its debts, something that most economists soon acknowledged to be completely unfeasible.

What would happen instead is to turn the skyrocketing Greek debt, now most of it in the hands of European taxpayers, into completely unpayable. A classical case of socialization of losses, but this time as an undercover bank bailout: only in this way and appealing chauvinistically to national stereotypes like lazy and spendthrift southern Europeans, the troika could disguise the harsh reality to their own electorates: facing the umpteenth structural crisis of capitalism, their politicians and bankers had cheated them. However, the peculiar management of the European crisis, led by a ECB without a democratic mandate, has recently translated into constant capital flight, but in the reverse direction than the 2000s, unleashing a debt bubble in the north (in particular, Denmark, Norway, and Netherlands) and depoliticizing their electorates, just as it happened in southern Europe during the boom.

Now that private creditors are no longer exposed to a Greek default, a Grexit is increasingly more feasible. This time, contagion is no longer economic through the yield spread, but political: European elites have demonstrated that they have no problems imposing massive suffering on the population via currency union. Southern Europeans contemplate now a choice between submission and democracy. Thus, in the dilemma between democracy and the euro that Eichengreen evokes, Spain and other southern European countries may ultimately choose democracy. But, lest we repeat Marx’s farce once again, this time it entails carrying out authentic “structural reforms”, that is: to get rid of our national “triangles of sin”.

How to Justify Teaching the Worst of Economics to Non-Economists

miracle-at-blackboardBeing an Economics PhD student in a heterodox department gives me the privilege of taking courses in a range of different schools of thought within the discipline. In the Economics department, most of us take the stance that it is imperative to understand the mainstream in order to criticize them effectively. We go to great lengths to learn about the nuances of Neo-classical Economics, general equilibrium theory, and New-Keynesian Economics. Meanwhile, we also have full courses devoted to non-mainstream approaches, such as Post-Keynesian and Marxian Economics. We are aware of the ideological underpinnings of a lot of mainstream theory, and many of us see this as a motivation to challenge the discipline.

Now, the difficulty arises when we are to teach one introductory course in ‘Economics’ to non-economists and we know that this is likely to shape their outlook on Economics as a discipline. How much time do you then devote to mainstream models, the criticism of mainstream models, and alternative models?  Continue reading How to Justify Teaching the Worst of Economics to Non-Economists

The Value of an Algorithm

This article is cross-posted from Vulgar Economics.

Last week, I was lucky enough to catch my colleague Adam Hayes presenting his new research on cryptocurrencies. Adam has produced three papers from this research, all of which you can download here.

For the uninitiated, cryptocurrencies are a form of electronic payment that operate on an anonymous peer-to-peer network. The ‘coins’ used in these networks each have a unique numerical code that conforms to an algorithm and exist in a user’s digital ‘wallet’ – a registry of coins for a particular user that is anonymous apart from its own identifying numerical code. Coins are generated endogenously through a decentralized process called ‘mining.’ Mining involves allocating a portion of digital memory to solving an algorithm generated by the network which are designed to yield a certain quantity of coins at a fairly regular interval.

What Adam shows in his papers is that the value of cryptocurrencies when pegged to Bitcoin – the first and most popular cryptocurrency – generally reflect those currencies’ marginal cost of production in terms of electricity generation. Furthermore, Adam insists that cryptocurrencies are no longer money (he allows that they may have been at one point) even though to me they bear a strong resemblance to Marxian commodity money.

Video: NSER Celebration with Ben Fine and Anwar Shaikh

On February 10th The New School Economic Review celebrated its 10 year anniversary with talks by Professors Ben Fine (School of Oriental and African Studies) and Anwar Shaikh (The New School). Ben Fine spoke on the topic “Is Economics Fit for Purpose: An Ethical Conundrum” and Anwar Shaikh on the topic “Consumer and Production Behavior: From Micro to Macro Without Utility Function or Rational Choice“. Introductions were made by Dean Milberg and the NSER editors.

Continue reading Video: NSER Celebration with Ben Fine and Anwar Shaikh

Editor’s Picks

Smothered by a Boom in Banking

“Ideally, finance should propel an economy by helping create jobs and wealth for a broad portion of the population. But clearly, there’s a point when finance sucks too much oxygen out of the room, leaving the rest of us gasping for air.”

Does the growth of finance, or the acceleration of already gargantuan banks becoming even bigger, help the economy, or does it smother, suffocate, and drown it?

This intriguing article from Gretchen Morgensen of the New York Times explains the findings of a recent, compelling paper entitled “Why Does Financial Sector Growth Crowd Out Real Economic Growth?” from Stephen G. Cecchetti of Brandies University and Enisse Kharroubi of the B.I.S.

The gist of the paper is as such: Banks tend to lend the majority of their money to projects that have assets capable of being pledged as collateral, but the industries with such assets tend to be of the lesser-productive sort, leaving many promising research-and-development start-ups deficient in appropriate financial lending. So the likely-unproductive enterprises are afforded the bulk of banking assistance from the financial system while the likely-productive and innovative start-ups are left behind with no helping hand, which creates the capacity of the financial sector to perpetuate the growth of the unproductive while stagnating the productive.

Drooping Green Shoots

A recent project done at The New School for Social Research based on the Congressional Budget Office study of income distribution shows that the rising income and wealth inequality is one the biggest problem in U.S. and will probably be one of the most critical political issues in the near future.

The project results show that the top 1% generate most of the household saving and hold substantial wealth, mostly from interest and dividends along with proprietors’ incomes (i.e. lawyers’ fees and big farmers’ subsidies and sales) and equity. In the last decade, this group earned an average of more than $2 million per year.

The middle class mean income is around $160,000; their main source of income being labor compassion (approximately 70% of their total income). Although these households have positive saving rates, there’s a significant income disparity between this group’s income and that of 1%, the latter being ten-fold higher.

The unfortunate bottom households are highly dependent on labor income with a mean level of income $55,000 per year. Data show that this group’s saving rate is negative and after the recession a two third of their income came from transfers.

An income comparison on these three income groups is shown in Palma ratios, which clearly shows a significant gap in income distribution. Income and wealth inequality pose a serious threat to the economic growth and stability and demand for new thinking and reformation of the U.S. Tax system ensuring that everyone is contributing their fare share.

Cooperative Economics: An Interview with Jaroslav Vanek

In this 1995 interview, Jaroslav Vanek, leading authority on and advocate of labor-managed firms (i.e. worker cooperatives) and economic democracy, explains his influences, the basics of his theory and his outlooks for post-Soviet Russia and the US. For Vanek, worker-run cooperatives suggest a dialectical synthesis between non-private ownership of the means of production and democratic principles.

As Foley notes, the ideological tenets underlying capitalism are based on the notion that the market is a separate sphere detached from social relations. For Richard Wolff, this ends up in a justification of vertical authoritarian hierarchies in the workplace, which force the citizens of a liberal democracy to become mere passive subjects (that is, “free laborers” in the Marxian sense) precisely in the site where they expend the most (labor-)time in their lives.

The surrender of democracy in the workplace to the principle of the pursuit of profit is not only unethical, but also sets the virulent unstabilizing forces in motion that Marx already identified in his much celebrated treatise. Therefore, worker-run cooperatives, profit sharing, or collective decision-making in the workplace constitute alternative socio-economic practices to the core problem of private ownership of the means of production, but still without replacing the authoritarianism of the capitalist firm by a centralized state.

Political Economy of Varoufakis-Schäuble negotiations

As soon as the battle between Greece and its creditors ended, with the two sides agreeing to a four-month extension of Greece’s financial bailout, the battle over who had won began.
James Surowiecki

Certainly, Eurozone negotiations, written in a technocratic language of “creative ambiguity”, are quite difficult to interpret, even among the very actors who sign the agreements. For Schäuble and most of the European establishment, “Greece had relented” and agreed to continue the pro-austerity, recessionary measures of the former government. For Draghi, significant divergences with the former agreement had emerged, which left important leeway to the Syriza cabinet to reverse recessionary austerity and were to be closely supervised. For Varoufakis, the Memorandum of Understanding and the troika were now dead: by ditching the draconian (according to Eichengreen) primary surplus target of 4.5% and being able to implement their own policies, Greece had finally recovered its sovereignty.

Last Friday the German Bundestag approved the 4-month extension. Hardliner Schäuble declared: “For all Greece’s sacrifices which I have always acknowledged, pensions, wages & living standards still higher than other € states“. For the southern European, such a bold statement can only be regarded as straightforward psychopathy: over 44 percent of the Greek population had an income below the poverty line in 2013 according to estimates by the Public Policy Analysis Group of the Athens University of Economics and Business (AUEB). Incidence of breast cancer among Greek women has skyrocketed: many of them cannot pay for any surgery so they are simply left with the tumor inside them to die in agony.

In the case of Spain, please watch the following video to note how “austerity” and “debt repayment” look like: last week in Madrid six riot police vans and a bulldozer appeared with no judge order and no notification in order to demolish the fifty-year-old home of three families, including elderly and children, which were to be left homeless in the street. Protesters tried to resist the eviction peacefully – which according to newly passed legislation can be considered an act of terrorism. The journalist who was recording the eviction was also arrested, since the legislation also bans recording police interventions.

Spaniards and Greeks have become privileged witnesses of the smooth functioning of the efficient market. It may not be a coincidence then that most of victims of evictions are diagnosed with post-traumatic stress disorder – just like in a situation of war.

Continue reading Political Economy of Varoufakis-Schäuble negotiations

Editor’s Picks

Sraffa’s Contributions to Economics: A Crash Course

Over at Naked Keynesianism, Matias Vernengo has compiled a list of resources to help you wrap your head around Sraffa – particularly his out of print book Production of Commodities by Means of Commodities. Vernengo’s resources take you through how Sraffa formalized his own labor theory of value, his critique of the Marshallian system, as well as his role in the Capital Controversy.

Problems that Prompted Willacy County Prison Riots Were Well-Known

In protest of terrible medical care and sanitation, thousands of prisoners began a strike on Saturday, refusing to show up for breakfast or work. As the strike wore on, the prisoners – mostly undocumented immigrants being held on low-level offenses – converged on the recreation yard and set fire to three tents, rendering the for-profit detention facility more uninhabitable than it had been. This follows at least two other protest incidents at the facility in recent years, and for now it appears to be the last.

Knowledge Isn’t Power

Paul Krugman presents yet another take-down of the skills gap argument in his all-too recent about-face on human capital theory. In particular, Krugman highlights the interplay between technological advancement and productivity as well as the apparent lack a relationship between education and wages.

Conversation on Al Jazeera about the massive wave of evictions in Spain

PAH and Marea Granate on Al Jazeera: Spanish tenants take on Wall Street landlords. 02/10/15 from MareaGranate NYC on Vimeo

Last Wednesday I had the opportunity to participate in a conversation on Al Jazeera to talk about the current massive wave of evictions in Spain, with Michele Ducher, a Spanish citizen under the threat of eviction, Santi Mas de Xaxàs, activist of the Plataforma de Afectados de la Hipoteca (PAH, Anti-Eviction Platform) and Sebastien Gay, real estate economist (University of Chicago). Since the outburst of the bubble in 2007, 500,000 evictions have taken place in Spain. Everyday families with children are kicked out of their homes and thrown to the streets by police in riot gear and left with no job, no shelter and a huge debt to be re-paid – since Spanish mortgage law allows banks to demand full re-payment of the debt (contracted at the height of the bubble) while seizing the home at a 40-50% discount. Psychologists have been diagnosing post-traumatic stress disorder to many evictees.

This is the full effect of austerity on Spanish society: foreign debt in 2011 was 284% of the GDP, of which only 67% was public. During the mis-management of the Euro-zone crisis, the debt burden was transferred to public hands through extensive bailouts of the financial system. Thus in Spain one has many banks that have been nationalized with taxpayers’ money evicting these very taxpayers from homes that, in fact, they now own. In economic jargon one would call this  a “smooth and efficient cleaning of the balance sheets”, conveniently forgetting that housing is a human right according to the UN.

Why southern European political elites are inflicting such degree of economic pain in their populations may seem perplexing (for blatantly undemocratic) to the outsider – and even to many locals. However, one must understand that the current corrupt and clientelar regimes ruling in southern Europe are the historical outcomes of the logic of the Cold War, when Nazi collaborationists suddenly became the allies of the West while the fighters for democracy were totalitarian Communists to be despised, persecuted, exiled or ostracized. Following the Truman doctrine, the US and the UK would support the fascists in the Greek civil war and consented to the Greek military dictatorship of 1967-74. In Italy, the NATO would engage in stay-behind terror operations that killed 400 people in order to blame the left and prop up Andreotti’s corrupt Christian Democracy. In Spain, the staunchly anti-communist stance of the fascist regime would easily compensate for its ruthless crimes against humanity.

In Spain, the housing market was institutionally constructed by the reactionary Francoist regime as an effective tool to manufacture political consensus over a majorly red society. A professional class of constructors/developers was created ad hoc through generous subsidies of the state and would eventually integrate within the financial system (and the political regime) during the sixties. In 1957, José Luis de Arrese, fascist minister of Housing, stated: Queremos un país de propietarios, no de proletarios [We want a country of homeowners, not of proletarians]. After the transition to democracy, financialization would only replace the state with the market as a source of capital for constructors and developers.

In a financialized world, national elites compete at a global level to capture the volatile flows of international capital through a variety of laissez-faire policies: financial deregulation, inflation control, currency stability, trade liberalization, wage repression, privatization… In such an asset-price Keynesianism (Brenner), the spatial-temporal fix of capital (in Harvey’s words) allows political elites, the mediators of these inflows, to lead and rule a trickle-down gift economy, effectively postponing class conflict until an eventual crash. This was the case of Greece, Portugal and Italy -through public debt- and Spain and Ireland -through private debt. In other words, southern European political elites are among the most enthusiastic implementers of austerity because their actual power lies critically in their intermediation of the constant inflow of European money.

Political Economy of the Spanish Housing Bubble, 1998-2008
Political Economy of the Spanish Housing Bubble, 1998-2008 (or the Pentagon of Sin, in Varoufakis’ terms)

NSER Volume 7: Past Present Future

We’re very pleased to deliver to you our tenth anniversary seventh volume Past Present Future.

Download Full Issue

Front Matter

Papers in Celebration of Anwar Shaikh: Laws of Production 40 Years On

Proceedings of the Colloquium Titled The State Of Worldly Philosophy at the New School held on February 20, 2014

Back Matter

Write it Like You Mean it

At a time of grave economic consternation, John Maynard Keynes distractedly found himself defending his own trade proposal to staunchly neoclassical economists who were, naturally, in direct opposition.

Keynes was well aware of the reasoning which supported the free-trade fundamentalists— to a certain extent, he used to be one of them. He was trying to save the economy, but as much as he needed to convince people he was correct in his assessments, he needed to convince people that he fully understood theirs.
Continue reading Write it Like You Mean it