The future political economy of post-crisis Europe

Two weeks ago George Soros wrote an article where he explained the essential political dynamic of the Eurocrisis, by invoking a specific historical comparison:

There is a close parallel between the euro crisis and the international banking crisis of 1982. Then the IMF and the international banking authorities saved the international banking system by lending just enough money to the heavily indebted countries to enable them to avoid default but at the cost of pushing them into a lasting depression. Latin America suffered a lost decade. 

Today Germany is playing the same role as the IMF did then. The details differ, but the effect is the same. The creditors are in effect shifting the whole burden of adjustment onto the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center,” or “core,” and “periphery” have crept into usage almost unnoticed, although it is obviously inappropriate to describe Italy and Spain as periphery countries. In effect, however, the introduction of the euro relegated some member states to the status of less developed countries without either the European authorities or the member countries realizing it. In retrospect, that is the root cause of the euro crisis. 

Just as in the 1980s, all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. In this context the German word Schuld is revealing: it means both debt and guilt. German public opinion blames the heavily indebted countries for their misfortune.

This is precisely the argument I made two years ago. Back then I made the exact same comparison, and explained why this German approach to the resolution of the Eurocrisis put into question the very existential and moral premise of European Union:

The question is whether the Germans can get away with imposing what amounts to a structural adjustment program (SAP) on their fellow euro-zone members. In other words, are the Germans going to be allowed to do to PIIGs what the US did to Latin America in the aftermath of the 1982 debt crisis. 

That story is worth remembering in some detail. What happened in that case was that US banks, flush with petrodollars from the Middle East, had gone on a huge lending spree in the 1970s to Latin American governments, which used the money on a mixture of corrupt payoffs for rich elites and promises of social welfare for the middle classes. By the early 1980s, as interest rates skyrocketed, these countries were no longer able to service their debts. Mexico declared in 1982 that it was not going to pay, several other Latin American countries followed suit, and for a few months that winter it looked possible that the entire global capitalist banking system might implode. 

To make a very complicated story short, what happened next was that the U.S. and the IMF agreed to restructure the Latin Americans' debts, in exchange for the imposition of "structural adjustment." The SAPs contained a number of critical elements, which in principle were designed to ensure the fiscal health of the debtor governments, but which also entailed a form of national and transnational class warfare: the rolling back of state ownership of key industries; the lowering of tariff barriers; the restriction of the autonomy of unions; the curtailing of price controls on food, water and other life essentials; and the scaling back of social welfare promises. 

This process of economic restructuring is most often remembered as having been responsible for producing a so-called "Lost Decade," in which economic growth rates plummeted across Latin America. But arguably what went lost was something much bigger than a mere decade of productivity. In fact, the SAPs ultimately involved the wholesale abandonment of an entire social-political vision, namely the promise of "development" as a process of building "social modernist" welfare states akin to those enjoyed in the Global North. In other words, it spelled the end of a certain kind of social dream, a certain kind of political ideal -- the dream that they would one day converge with the wealth and lifestyle of the North. 

Now, the U.S. bankers and politicians could get away with destroying this dream in part because they themselves didn't really believe in that dream any longer (if indeed they ever had); in part because the U.S. people felt no political or social solidarity with the Latin Americans; and in part because Latin American elites were disunified in their response to the demands of Washington and New York. 

By contrast, the whole point of the European Union is supposed to be about pan-continental political solidarity in the name of building social welfare states. Furthermore, the social democratic nature of all the European governments means that throwing the middle classes under the banking bus is anathema - especially if it's "our" (Greek, Spanish, etc.) middle classes and "their" (German, French) banks. 

So that's the key question: Is the European Union a fundamentally socially democratic institution? a collection of social and political equals who will stand together in a time of hardship? If that's the case, then the Germans will have to pay. Or alternately, will the Germans succeed in getting the taxpayers and social service consumers in the PIIGs to pay? In which case the beautiful dream of pan-European solidarity will be revealed as a lie, and it's hard to see how the European Union survives as a political project.

Soros's analysis from two weeks ago makes precisely the same point about what the outcome of imposing such a structural adjustment program will be for the comity of European nations:

The European Union that will emerge from this process will be diametrically opposed to the idea of a European Union that is the embodiment of an open society. It will be a hierarchical system built on debt obligations instead of a voluntary association of equals. There will be two classes of states, creditors and debtors, and the creditors will be in charge. As the strongest creditor country, Germany will emerge as the hegemon. The class differentiation will become permanent because the debtor countries will have to pay significant risk premiums for access to capital and it will become impossible for them to catch up with the creditor countries. 

The divergence in economic performance, instead of narrowing, will become wider. Both human and financial resources will be attracted to the center and the periphery will become permanently depressed. Germany will even enjoy some relief from its demographic problems by the immigration of well-educated people from the Iberian Peninsula and Italy instead of less qualified Gastarbeiter from Turkey or Ukraine. But the periphery will be seething with resentment.

Is that really the Europe the Germans want? Or maybe it's just the only Europe they're willing to pay for.

The future of economic growth and democracy

My friend Jay Ulfelder has just offered up a provocative blogpost over at Dart Throwing Chimp, his must-read blog on democratization and political forecasting. His argument, in essence, is that while development theorists have struggled mightily to specify the causal relationship between development (more specifically, economic growth) and democracy, the historical co-evolution of national democratic institutions and sustained economic growth is, at a high level, inarguable. It's just very, very hard to pin down. Ulfelder suggests that Eric Beinhocker’s recent book, The Origin of Wealth, which uses complexity theory to explain the history of development, may offer a way forward for establishing the relationship between these two megavariables.

In ruminating on this topic, Ulfelder suggests that one way to conceptualize different modes of political organization is as different forms of "social technology," each of which is optimized for different sorts of social (that is, political) functions. What democracy-as-social-technology is uniquely optimized for, from this perspective, is allowing large, distributed groups of people to solve problems collectively and consensually in the context of barriers to communication over the geography and population in question. It's also very good at securing legitimacy from populations no longer overawed by the leadership cadre's supposedly divine appointment. He quotes Henry Farrell and Cosma Rohilla Shalizi to explain why:

Democracy can do this better than either markets and hierarchies, because it brings these diverse perceptions into direct contact with each other, allowing forms of learning that are unlikely either through the price mechanism of markets or the hierarchical arrangements of bureaucracy. Furthermore, democracy can, by experimenting, take advantage of novel forms of collective cognition that are facilitated by new media.

Beinhocker's book is on my to-read list, so I won't weigh in on the value of complexity theory to development theory — though it's certainly more promising than the handwave that modernization theorists used to make about how democracy and industrialization "went together because in some sense they had to go together" — but I would sound two notes of caution about any conclusions we may be able to reach about the relationship between economic growth and democracy.

The first note of caution is that, even if we can establish what the historical relationship has been between economic growth and the "technology" of democracy, this doesn't necessarily mean that the relationship will hold going forward. We shouldn't fall into the Whig/teleological trap of assuming that because these two variables have been correlated for this particular historical phase ("modernity," which in this sense can be said to start in the 19th century), that they are necessarily going to be correlated in later and more advanced phases. It might be true that the benefits to collective problem solving that democracy offers is what works best in a smokestack economy, but that in a few decades, when computing power can directly "read" minds (obviously I'm speaking both speculatively and metaphorically) it will be possible to aggregate preferences without the mediating step of the ballot. Post-democratic political legitimacy will be secured more by performance than by process. (There are people who argue that the Chinese are encouraging the use of microblogging site Weibo precisely because they believe that social media can allow them to monitor public opinion directly and in real time — and also because it can help them to identify and suppress malcontents.)

In fact, Ulfelder's conceptualization of democracy as a form of "technology" suggests that democracy is likely to be eventually superseded by a better technology, since almost all technologies eventually become obsolete. Pace Fukuyama, democracy is no more "the end of history" than steam trains were "the end of transportation." Just as coal-fired steam engines offered the best mode of locomotion until the internal combustion engine was developed, so may democracy have been the best mechanism for political preference aggregation in an pre-cybernetic era. In sum, the democratic-capitalist moment may only be an episode, not the final stage: past returns as no guarantee of future results, as the saying goes.

The second note of caution is a more general one, and it has to do with the ecological sustainability of endless growth. If indeed democracy has in part been a helpful mechanism for enabling sustained growth, it's also true that sustained growth has been a critical factor for sustaining democracy. In fact, modern democracies find the idea of sustained non-growth or even shrinkage literally inconceivable. Arguably, it is only a growing pie that allows democratic politics not to turn uncivil and even murderous. A growing pie allows for politics to be about dividing spoils -- which is something democracy is good for. But democracy may in fact be a very bad way to deal with a stagnant or shrinking resource pool, since tyrannical majorities are likely to arrogate shrinking shares to themselves. One reason why James Madison's dark fears about the tyranny of the majority were never realized may be that the US has managed to sustain economic growth almost continuously since its inception, thus curbing majoritarian redistributionist impulses. Correspondingly, if you believe (as I do) that finding a process that can stop the human species from completely strip-mining of the planet is the single most urgent task facing humanity, then this analysis of the relationship between democracy and the "growth imperative" is dispiriting, for it suggests that only an authoritarian solution can possible prevent the headlong, democratically elected decision to destroy the planet for short-run fun times.

A truly dark possibility emerges from the conjunction of these two cautionary notes. It may well be that democracy is a legacy technology that is growing increasingly ossified over time and is destined to be replaced by other social technologies that are more suitable for sustaining economic growth. In which case we may end up with a situation in which the strip-mining of the planet actually accelerates, even as the democratic values and institutions which we hold dear are slowly (or perhaps quickly) eclipsed.

Plutocratic Insurgency

I recently engaged in a private exchange with leading 4GW thinker Robert Bunker on the question of how to periodize what he calls "plutocratic insurgency." Here are a few notes I took in the course of that exchange. The point of departure for this sort of an inquiry is to ask what the JohnGaltification of society would actually look like in practice—what would it seriously mean for the wealthy to opt out of participation in the collective institutions that make up society?

This is not an abstract exercise. One of the most important global trends of the last few decades has been the tendency of wealthy elites to hole themselves up in walled off enclaves. These islands of elitism are designed to be largely self-sufficient in their ability to deliver health care, food, security, education, entertainment, etc. to their residents, even as they sit amid seas of social misery. (Mike Davis has spent a good portion of his career chronicling this sort of thing, starting in Los Angeles with City of Quartz, and examining it as a global phenomenon in collections like Dead Cities and Evil Paradises.)  From the point of view of the denizens of such communities, the primary function of the wider society is to serve as a source of cheap, servile labor, and as a well of resources to be looted. Gated communities, in turn, are merely an example of a broader pattern, in which economic, social, or political enclaves are carved out of a national state and enabled to play by a fundamentally different set of rules from the surrounding territory.

In themselves the creation of such enclaves do not amount to a plutocratic insurgency. Rather, plutocratic insurgency arises wherever you see financial and economic elites using such enclaves as staging areas for making war on public goods. This is what I take to be the defining political-economic feature of plutocratic insurgency: the attempt on the part of the rich to defund the provisioning of public goods, in order to defang a state which they see as a threat to their prerogatives. (Conceptually, plutocratic insurgencies thus need to be separated from kleptocracies—the latter involve the using the institutions of state to loot the population, whereas the former wish to neutralize those institutions in order to facilitate private sector looting. In practice these may overlap or co-mingle.)

Before discussing the periodization of this phenomenon, it's worth noting that the idea of plutocratic insurgency on its face is paradoxical, perhaps even oxymoronic: shouldn't plutocrats be the folks most invested in the perpetuation of a system which has them at the top? Why would the system's biggest beneficiaries want to make war on the system? The answer lies in part in the rise of an ideology—or perhaps more accurately, a narrative—that has allowed society's winners to imagine their success not as being the result of either the luck or the skill to work the system for their maximum personal benefit, but on the contrary as having been arrived at by pure dint of their own rebellion against the system. So when did this weird phenomenon begin to take hold?

While the ideological origins of the plutocratic insurgency can be traced to the foundation of the Mont Pelerin Society, it really starts to gain cultural visibility with the corporate raiders of the 1980s, guys who thought of themselves not as the leading lights of the empire, but rather as "barbarians at the gates" (a term Henry Kravis had no problem embracing at the time). These guys didn't see themselves as the system's ultimate winners, but rather as iconoclasts who were being rightfully rewarded for destroying entrenched, unproductive rent-seekers. What began to surface in the 1980s has only gained momentum with the growing financialization of the US economy.

On the one hand, then, an ideology of rebellion and success through the undermining of "the takers." The flip side is a material point: the very wealthy today are so rich that they can effectively afford to buy for themselves the sorts of goods which previously required a state to provide. The result is a phenomenon whereby many plutocrats today see no reason to contribute anything to their host societies, and indeed actively make war on the idea that citizenship imbues them with any economic or social responsibilities. (People as different as Stephen Schwartzman and Sheldon Adelson fit this bill, as do the Koch brothers.) In sum, plutocratic insurgency is another way of characterizing the most ideologically ambitious bleeding edge of what sometimes gets terms "Neoliberalism" or "Thatcherism," or "Reaganism." "There's no such thing as society," Thatcher famously declared, thus issuing the cri de coeur of insurgent plutocrats everywhere.  

Beyond the United States, the critical event for the rise of the global plutocratic insurgency was the ideological collapse of state socialism, which everywhere on earth shifted the Overton Window dramatically to the right. Not only was the threat of left-wing grabs largely neutralized by socialism's implosion, but counterrevolutionaries on the right were emboldened by this collapse to attempt to roll back even the moderate, liberal forms of the welfare state. Arguably the most successful plutocratic insurgency in history was staged by the so-called oligarchs who arose from the ruins of the Soviet collapse. These were (mainly Jewish*) men who had started their business careers in the dark-gray corners of the Soviet "second economy," learning how to profit by sharp and ruthless dealing that took state strictures as opportunities rather than limits. Aided by useful idiots like Jeffrey Sachs, they grabbed the vast majority of the state-owned assets that Yeltin was selling off in a drunken fire sale designed to ensure that Communism could never again return to Russia. Eventually, in the Aughts, the former KGBers led by Vladimir Putin would stage a counter-insurgency and defenestrate most of the first generation oligarchs. What the rise of Putin signalled was the end of the Russia's plutocratic insurgency, and the reassertion of the state's interests as prior to those of the wealthy.

It might seem like the story laid out here is a liberal, perhaps even a Marxist one. While it's true that liberals have long fretted about the "secession" of the rich, increasingly conservatives are also getting alarmed. Ultimately, however, I don't think this is really a liberal or conservative matter. It's a question of national and social coherence as such: do people living together in a contiguous territory feel themselves somehow to be "in the same boat," willing to share responsibilities and risks collectively? Those engaged in the plutocratic insurgency answer that question with a defiant "No!" The plutocratic insurgency from above thus mirrors the deviant globalization insurgency from below, and taken together they embody the contemporary crisis of the nation-state.

* UPDATE:  I should clarify the significance of the dramatic overrepresentation of Jews among the first-generation Russian oligarchs, including Boris Berezovsky, Vladimir Gusinsky, Alexander Smolensky, Mikhail Khodorkovsky, Mikhail Friedman, Vitaly Malkin, and others. First, Jewishness was not incidental to these men becoming oligarchs in the first place. While many late Soviet Communist Party members were enriching themselves with bribes, official anti-semitism made it almost impossible for Jews to get ahead within the formal Communist hierarchy. The most effective (and perhaps only) way for Soviet Jews to get ahead commercially, therefore, was by participating in the organization of the "second" (black market) economy. Unsurprisingly, therefore, ambitious Jews were overrepresented among those involved in the second economy, particularly in and around Moscow. This made them well-positioned to take advantage as the state economy collapsed. The biographies of most of the aforementioned oligarchs conform broadly to this pattern. Second, the Jewishness of the oligarchs also helps explain the course of their eventual removal from the apex of the post-Soviet economy. The fact that these oligarchs were Jewish helps account not only for why their appropriation of former state assets was widely perceived by the (anti-semitic) Russian public and elite establishment as illegitimate, but also for why there was little domestic Russian outcry when Putin threw them out of the country or into jail.