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It does not happen very often that I write a book review, but Wolfgang Streeck’s book that describes the capitalist crisis from a European perspective is so amazing and so thorough in its analytic approach that I am very much inclined to bring it closer to the reader. Streeck’s goal is to explain the interconnected financial and economic crisis that comes at the heels of the decades-long neoliberal policies, which transformed the “Keynesian political-economic institutional system of postwar capitalism1 into a neo-Hayekian economic regime2” (p.5). Streeck points out that the state plays an important role in the handling of the crisis, and that contrary to the claims of the Varieties of Capitalism literature (arguing that capitalist countries pursue different economic policies, see Hall and Soskice 2001), there is a common trend among all western developed nations (p.XII)
So what does the economic crisis consist of? It consists of four interrelated crises (see pp.6-10):
- banking crisis: Banks across the world benefited from deregulation by extending credit to ever more people (also see Polillo 2013), leading to default and banks no longer extending credit to each other, which leads to crisis, which the government and central bank address with massive bailouts.
- state fiscal crisis: bank bailouts, current fiscal commitments in social spending and infrastructure spending, recession-induced unemployment spending, lowered tax revenues and tax cuts for the rich predictably lead to more government borrowing. Growing state debt leads to panic in the financial markets, which induces government officials to pass austerity measures targeted at social programs that precipitate a real economic crisis (see discussion of consolidation state below, and O’Connor’s 1973 theory on state fiscal crisis)
- real economic crisis: banking and liquidity crisis, government austerity, and lower business and consumer confidence lead to economic stagnation and high unemployment. Even with all the liquidity that is provided by the central banks, there is a lack of borrowing in the real economy that prolongs the crisis.
- legitimation crisis: capitalists only want to make investments if they are confident in receiving economic returns that they desire. During certain periods, they don’t want to make investments (‘investment strike’) resulting in unemployment and economic crisis. But business confidence is not merely a function of economics (i.e. amount of profits received), but of class politics (i.e. competition with government and workers for status, resources and power). During the heyday of post-war Keynesianism in the 1960s, the workers went on several strike waves, which really concerned capitalists. Kalecki (19433) had argued that capitalists are unwilling to invest if the unemployment rate gets too low, because then workers become too demanding and bid up wages, and so capitalists go on an investment strike even if they remained profitable after the wage hikes (see Streeck pp.21-26).
Given these interlinked and interdependent crises, what can the state do? Streeck’s basic argument is that all the government has been able to do to prevent full-scale economic collapse is to implement policies that are temporarily useful, but soon outlive their usefulness due to high political and economic costs. Governments in all developed capitalist countries are in effect buying time (which is the title of the book) to delay a big economic crisis, but are really in no position to really prevent it. Here are their tools available (p. XIV and pp.32-46):
- Inflation: This was the preferred policy tool of governments during the 1970s. By injecting more cash into the economy, and creating what Keynes had called a ‘money illusion’, the government was hoping to re-establish a social consensus by satisfying business’ interest for profit and workers’ interest for wage gains. As companies hiked prices, unionized workers went on strike and demanded higher wages. This development led predictably to a wage-price spiral and economic stagnation. The simple trade-off between inflation and unemployment (Philipps curve) was replaced by both increasing inflation and unemployment. Central banks became worried by this development, and the US Federal Reserve under chairman Paul Volcker brought in deflationary policies during a high-interest rate regime beginning in the late-1970s. In the 1980s, the political rise of Thatcher and Reagan led to the assault on labor unions, deindustrialization, the weakening of workers’ collective bargaining power and thus the end of rising wages. Inflation control was established via restrictive monetary policies as much as by a smashing of organized labor. In any case, inflation as a means to restore economic stability was abandoned (to the benefit of creditors).
- Rise in state debt (fiscal crisis): This is one of the central pillars in Streeck’s argument. Governments wanted to pay for social programs and different types of investments, again, to calm social conflicts, but they did not want to tax people (since that creates a current social conflict)4, so they borrowed money from capital markets to do it. Thankfully, governments deliberately liberalized capital markets right around the 1970s, allowing governments to tap into capital of investors from other countries (also discussed in Krippner 2011). Government borrowing en masse went well for a little more than a decade. By the early-1990s, the western governments made an about-face after facing the ire of investors and bond markets. Sweden entered a major financial crisis after having deregulated their banks and allowing them to go bust on a housing bubble, and thereafter began fiscal consolidation (austerity). My native Austria abandoned Keynesian-style state spending and since joining the European Union (which had the deficit-limiting Maastricht criteria) entered a path of fiscal consolidation, budget cutting, and privatization of state firms by the mid-1990s (Unger 2006). The United States put Bill Clinton in charge, who enforced budget cuts and created a massive federal budget surplus by the end of the 1990s.
- Rise in private debt: State fiscal consolidation in the 1990s would have been economically disruptive, so the government deregulated private capital markets, which led to a borrowing spree of consumers. In the US, the rise of the government primary surplus went hand in hand with an increase in private household indebtedness. In fact, that was the whole secret behind the booming 1990s (beside the tech bubble)! The same policy was in place in Britain and Scandinavia. In the US, there was a mild recession in 2001, but thankfully the Federal Reserve lowered interest rates, Bush fought two wars without paying for it from taxes (again, from borrowed money), and the deregulated banking industry handed out ever more subprime mortgages to unqualified low-income house buyers. This house of cards came crashing down in 2008, after which most western countries went back to a rise in public debt as the private sector is deleveraging. The rising government debt is associated with the bank bailout and austerity measures. The rise in debt is associated with the increasing control and power of finance (see Hilferding 1910; Harvey 2005; Peet 2011)
- Central bank purchase of public debt and bank liabilities: This point has not really been explored by Streeck, because it is relatively new and has only been pursued since the 2008 crisis. The balance sheet of the Federal Reserve and the European Central Bank have expanded enormously in order to calm the markets. Financial news media reports in the last few years have been more focused on the central bank than ever, as the debate of ‘tapering’ produced shivers among some investors, who thought that the Fed adding cash to the party was essential to keep the stock and bond market buoyant. A Congressional report resulting from a Fed audit shows that the Fed had handed out $16 trillion (!) in revolving loans to big financial institutions and foreign central banks to prevent a complete financial meltdown (Sanders 2011). The ECB played a huge role in calming the bond markets as they added over a trillion euros in low-interest loans to otherwise ailing banks, who then lent it out to the European crisis economies (Greece, Portugal, Spain etc.) at slightly higher interest rates (compared to very high bond interest rates previously). But calming the markets is only one half of the story. The other is to get the economy started again, which a few years on has certainly not happened in Europe and only haphazardly in the US. Streeck indicates the possibility of exhaustion of the central bank strategy in the near future. Marx proverbial saying of capitalism buying another lease of life has never been truer than today.
The role of the state has been moving in different stages (pp.70-78):
- Tax state: By the early twentieth century, the government began to play a greater role in society, which may be considered the externality of a growing private market system (e.g. providing a welfare state), and that has to be financed by taxation (Wagner 1892). But Schumpeter (1919) warned of the limits of the viability of the tax state, as with the capitalist mode of production.
- Debt state (see above)
- Consolidation state (see below)
Given the current government debt crisis, the government is now moving onto austerity and fiscal consolidation. The politics of the consolidation state in the EU runs along the following lines (pp.152-4):
- The ‘markets’ should be spared from the cost of rescuing insolvent states (e.g. Greece, Ireland). Instead ordinary citizens have to foot the bill with higher taxes and fewer government services. Debt service comes before public service.
- Ailing banks should not be nationalized, but rescued with public funds from governments and central banks.
- Insolvent states have to be prevented from unilaterally declaring bankruptcy and/or rescheduling debt
- If devaluation of debt is necessary, this has to be done gently and over the long term, so big investors have ample time to hedge against it. (This is also referred to as ‘financial repression’, or high inflation and low-interest policies resulting in a negative real interest rate coupled with requiring banks to purchase government bonds to chip away the debt gradually. This policy naturally expropriates savers. See Reinhart and Sbrancia 2011)
The clear pattern that emerges here is that the state priority is to protect the interests of the ‘Marktvolk'(the people of the market) and hurt those of the ‘Staatsvolk’ (general citizenry) (pp.79-90). The power of the Marktvolk is generated from their transnational origin. They are bound by no nation state and can attack currencies and alter government bond interest rates of countries with the push of a button, implying that governments are restrained in their fiscal decisions by the discipline of the market.5 Their power also derives from the legal claims they have over state debt. The political power of the financial markets is in part reflected by the fact that many leading European officials are hand-picked from former Goldman Sachs executives (Foley 2011). The citizenry, however, is bound to the nation state and can be punished with higher taxes. Periodic elections have the capacity to hold leaders accountable, as we can see with the Greek parliamentary elections where anti-austerity and leftist Syriza party is poised to make huge gains. They technically have control over politics via public opinion and pay taxes to keep the government going. In that case, state leaders are put into a dilemma, because
[d]emocratic debt states must maneuver between their two categories of stakeholders, keeping them both at least sufficiently happy that they do not withdraw their loyalty or… their confidence (p.83).
But the Staatsvolk is losing out, because democratic organization and participation has been declining, as is reflected in the weakening of labor unions and lower levels of voter turnout.
The irony of all of this is that even as governments give capitalists and investors all that they asked for, including but not limited to
- weakened organized labor
- low inflation
- cuts in the welfare state
- public debt to subsidize capitalists
- high unemployment (and low wage labor demands)
- deregulation, especially in finance
- privatization (e.g. public-private initiatives in Britain and the US to allow more profitable opportunities for the private sector)
resulting in restored levels of profit, they have done nothing to restore economic growth and the vitality of the capitalist system. The original legitimation crisis resulting from restive organized labor and interventionist state governments was replaced by a new legitimation crisis enforced by the European Union resulting from austerity and restriction in effective demand.
Ironically, the road to EU monetary integration has been paved by an initial commitment to economic liberalization as staked out by Friedrich Hayek (1939). Hayek argued that the creation of a transnational federation inevitably leads to more liberalization, because many regulating functions that take place on a national level can not be transferred to the federation level, because there is a weaker sense of solidarity among federation members than fellow countrymen. As monetary policy is shifted to the federation, independent national central banks will cease to exist or at least will lose their function. Nation-state level regulation to protect workers or businesses is hindered by competition with other federation countries, which is inherent in a federation. High national taxes will result in capital flight, so national government will restrain from pursuing this option (Streeck, pp.98-103).6
Streeck finds that expanding markets and restricting democratic rights is precisely what EU policy has been all about.
The EU thus became a machine for the liberalization of European capitalism, enabling (and sometimes compelling) governments to impose any manner of pro-market reforms against the resistance of their citizens (p.105).
The common currency binds the hands of national governments, and forces them down the path of liberalization and internal devaluation, i.e. wage cuts, social service cuts and more flexible labor markets (p.106). Those demands become the most acute during economic crises, when rising budget deficits lend more credence to EU officials, who want “structural reform”, i.e. deregulation, liberalization and less employment protection for workers (pp.133-4).
Streeck leaves no doubt about the outcome and the goals of capitalists:
All that capital still wants from people is that they give back to the market- perhaps not all at once, but certainly step by step and not too slowly either- the social and civil rights they fought for and won in historic struggles. In the early twenty-first century, capital is confident of being able to organize itself as it pleases in a deregulated finance industry. The only thing it expects of politics is its capitulation to the market by eliminating social democracy as an economic force. (p.159)
He, thus, advocates “destructive opposition” since there is no other choice.7 The regular methods of public opinion and voting in elections have not been capable of reversing neoliberal policies, since both center-left and center-right governments essentially carry out the same economic policies. He does not specify what destructive opposition and committing to irrational acts entail. Street protests? Petitions? Riots? There is a big sociological literature on protest and activist movements (Edwards 2014; literature on social movement theory) and social revolutions (Skocpol 1979; Goldstone 1991; Tilly 2005), but that is of no concern to Streeck, the capitalism scholar. He does talk about the importance of scholars and intellectuals like himself to point out the absurdity of the system, and make the public and policymakers understand that “[t]he first obligation of democracies is to their own citizens” and that the state can dissolve debt contracts (see Iceland’s, Rappaport 2011, and Argentina’s, Rosenheck 2014, debt default).
But where do we go from here? Streeck touches on three ideas toward the end of the book (pp.177-88):
- More democracy in Europe: I found Streeck to be really vague in this proposal. What he meant was a return of more and influence to the individual nation-states that have to figure out what kind of economic policy suits them best rather than a one-size fits-all liberalization regime.
- Currency devaluation: One concrete proposal of more national sovereignty is his idea to allow the Eurozone countries to abandon the euro and return to their old currency to allow monetary policy that fits the needs and interests of the countries. That would be a real alternative to internal devaluation and austerity, but might contain other risks like higher costs in cross-national trade. Even in the pre-euro era, many governments believed that there had to be some kind of monetary order, which after the end of the Bretton Woods system was the European Monetary Union, which was a currency peg of European currencies to the German D-Mark. Though I agree with Streeck that currency devaluation beats current policies, it is questionable whether that is the best of all options.
- European Bretton Woods: Streeck wants a restoration of the Bretton Woods fixed but adjustable exchange rate system (but without US dollar backing), which provides some financial stability, but giving each country ample freedom to change their currency within bands according to their needs. This seems to be a stronger framework and can address some of the problems I addressed in (2). There have been some experiments in the 1970s around a European Bretton Woods system with a 2.25% band. The pattern consisted of D-Mark revaluation and other currencies’ devaluation, but lacked the predictability, and so the EU devised the European Monetary System in 1979, which was imperfect as we can see with the speculative attacks by investors like George Soros against the Italian lira and the British pound. That move encouraged further monetary integration. The difficulty of effective monetary policy is summarized in the Mundell Trilemma. The EU countries sacrificed monetary independence for free capital movements and a fixed exchange rate, but the hoped for abatement of speculative attacks only happened on the currency level, but did not happen in government debt as heavy speculative attacks against high-debt countries following the financial crisis around 2011 and 2012 sent government bond interest rates soaring until the ECB came in and added liquidity into the financial system.
While I think that Streeck did an unarguably superb job in describing the problem plaguing the advanced capitalist countries, I am of the opinion that the solutions that he is thinking about only scratch the surface. Why? He diagnosed the problem to be that of a fundamental crisis of the capitalist economic system in that a serious crisis of legitimacy among businesspeople and investors makes it exceedingly difficult for policymakers to find good solutions such that they only resort to short-term policies to buy time and delay the crisis (inflation, debt, more debt, central bank money printing).
Now, why would currency devaluation and a new Bretton Woods system make much of a difference? These policies are at best going to buy a few more years, but will not reconcile the conflicting interests between Staatsvolk and Marktvolk. I don’t doubt that the European institutional framework needs to be more democratic, but if we compare the EU to the US or Japan, they don’t have the peculiar European currency problem, and yet they suffer from similar problems of massive growth slowdown, sky-rocketing profits in the private sector, wage stagnation, record indebtedness in the state and private household sector, and growing inequality. So something else must be at work here besides the Hayekian liberalization straight-jacket.
If we consider the main problem of the capitalist economy today to be the lack of market confidence, then Streeck and other scholars should demand at the very least some kind of Marshall Plan with the expressed purpose of creating full employment followed by expressly pro-labor union policies to put a dent on extreme levels of inequality and level the playing field in favor of workers.8 Streeck seems overall to be very imprecise about what he considered to be democratic policy-making, and, strangely, restricted its definition to the ability of national governments to control their own currency.
Yet, there is a broader set of policy ideas that have to be available to produce more democratic outcomes, such as Piketty’s (2014, Chapter 15) idea to raise a wealth tax, which may be as low as 1% on assets above 1 million euros, or a financial transaction tax estimated to be 0.5% of GDP (Piketty, p.651n38). The German trade federation argues that a small wealth tax can generate 200 to 250 billion euros in revenues to finance a New Deal infrastructure investment program across Europe (DGB 2012, p.9). Then there is the possibility of reneging debts, which Streeck did mention, though only as a general proposal without much detail (e.g. how much of a hair cut is realistic and desirable?) Another idea, which Streeck disputes in the spirit of Hayek, is a centralized EU that pursues democratic goals, which is the best way to prevent self-defeating internal competition and race-to-the-bottom among nation-states.
Left-wing intellectuals can choose among two major thrusts in terms of policy:
- Do whatever it takes to restore market confidence via state regulation, state investment and a leveling in political power between workers’ and capitalists’ interests. This is what Streeck referred to as ‘Keynesian policy’.
- Do something else entirely to transcend the profit-based capitalist system and its associated contradictions. Though I will concede that it is by no means clear what transcending capitalism means. State-controlled socialism? Libertarian, worker-centered socialism (or anarcho-syndicalism)? A combination of the two? Wallerstein and Collins (2013) have thought about what that could imply, though I think they were better at pointing out possible causes of the collapse of the current system rather than a replacement with a workable new system to govern human affairs.
Despite the aforementioned shortcomings, Streeck’s book provides excellent insights into the problems and contradictions of democratic capitalism, which in itself is a significant scholarly contribution which is all too often neglected in the very small-scale and highly focused research projects that occupy contemporary political scientists, economists and sociologists.
Some scholars might argue that problems in political economy have become so complicated that even the most erudite scholars have no choice but to restrict themselves to smaller empirical and theoretical problems without making grand generalizations which can easily be refuted and lack substance. But I would disagree with that position. Treading carefully in the footsteps of thinkers like Marx, Schumpeter or Ricardo provides a solid methodological framework to think about big economic questions, which, of course, have to be critically evaluated in every new historical context containing different actors and data points.
In my opinion, it is not the lack of scholarly comprehension, but the fear of violating social norms and politically permissible views, which deter and discourage the more critical social scientific inquiry a la Streeck. One of Streeck’s favorite sociologists is C. Wright Mills, who not coincidentally produced uproar in the US of the 1950s after attacking the entire elite power structure of the country during the height of the McCarthy era (see Elwell 2002). It might be true that the emperor wears no clothes, but it is still discomforting to point it out to him.9
I conclude with one more methodological note: Streeck is by training a sociologist, who is absorbed with the problems of capitalism, and takes trouble with fellow sociologists, whose insights neglect broader historical and economic inquiries. This critique is not necessarily confined to sociologists, but includes other social scientists as well, such as economists, as Piketty (op.cit., pp.30-33, 573-5) described.10 Streeck noted in his preface,
More often than not I missed the kind of worldly realism to be found in a book such as C. Wright Mills’s The Power Elite; and to this day I soon become bored with sociology from which histories, local colour and the exotic, often absurd, side of social and political life are absent. Although I therefore travel light in terms of theory, my theme here- the financial and fiscal crisis of the wealthy capitalist democracies- does require me to connect with the rich theoretical tradition of political economy. This is because, unless the sociology of social crises and the political theory of democracy learn to conceive of the economy as a field of social-political activity, they inevitably fall wide of the mark, as does any conception of the economy in polity and society that leaves out of account their present capitalist form of organization. After what has happened in 2008, no one can understand politics and political institutions without closely relating them to markets and economic interests, as well as to the class structures and conflicts arising from them. (p.XV)
The kinds of questions that readers of Streeck are left with depend very much on the intellectual and ideological preferences of the reader. What is the future of the euro? What is the future of Europe? What is the future of the consolidation state? What is the future of debt accumulation? What is the future of economic growth? How do we reawaken capitalists’ ‘animal spirit’ of investing in the real economy? What can we do to make Europe more democratic? How will the Staatsvolk and Marktvolk dilemma resolve itself? Others might ask, how can we accelerate Hayekian-style liberalization, deregulation and privatization? How can we achieve liberalization with the least amount of social resistance? But more broadly speaking, what is the future of capitalism itself?