'Catastrophic Gradualism', Inequality & Democracy

 If you want more social equality don't support 'Stop the War'
by Brian Bamford

ACCORDING to Walter Scheidel, a historian specialising in the ancient world and author of 'The Great Leveler' (2017), rising inequality ought to be expected in current circumstances.  This represents a version of what George Orwell called 'Catasrophic Gradualism' writ large, because what Mr. Scheidel is suggesting is that mass violence and wars are the only forces that can seriously decrease economic inequality.  

It seems that historically inequality declines when carnage and disaster strike, and conversely increases when peace and stability return.   Today, the violence that reduced inequality in the past seems to have diminished, and that no doubt is a good thing. But it consequently casts serious doubt on the prospects for a more equal future.

To get an idea of the current relative level of inequality, Paul Mason in a review of Mr. Scheidel's book in The Guardian wrote:
'the escalating wealth share of the top 1% in the US has only just reached where it was in 1929.  And the ratio of Bill Gates’s wealth pile to that of the average US citizen is roughly the same as that of the richest Roman aristocrats in AD400.' 

The prospects for greater equality are not good because the market economies in industrial societies that do not experience revolution, catastrophe or total war are prone to generate the high levels of inequality we are currently approaching.  Thus Scheidel concludes that these catastrophic levellers are 'gone for now, and unlikely to return any time soon.  This casts doubt on the feasibility of future levelling.'

Against this pessimistic scenario Paul Mason has hopefully argued:  '....[that historically in the last half century amid these dreadful] realities [up] grew social democracy – which is actually something very new in history, if placed between the extremes documented in Scheidel’s book. Social democracy wishes to suppress inequality in a controlled, consensual way, using the very state the elite has fashioned to entrench it; heading off pestilence, state failure and violent revolution. The vast wealth being generated in the highly technologically efficient society of the 21st century must, contrary to Scheidel, offer the possibility of an even greater redistributional space in which social democracy can operate.'

Martin Wolf, the economist writing in the Financial Times on the 20th, December, is equally anxious arguing that if governments don't get a grip of inequality then  'One possible development is the sort of  "plutocratic popularism" that has become such a signal feature of the US-the country that did, should we recall, ensure the survival of liberal democracy during the turmoil of the previous century.  The future could then consist of a stable plutocracy, which manages to keep the mass of the people divided and docile.'

George Orwell may have been considering something of this kind of pessimistic vision when he wrote his essay called 'Catestrophic Gradualism' for the Common Wealth Review, in November 1945.  'The Great Leveler' is really the latest version of what Orwell called 'catestrophic gradualism'.

In 1945, Orwell wrote:  'According to this theory, nothing is ever achieved without bloodshed, lies, tyranny and injustice, but on the other hand no considerable change for the better is to be expected as the result of even the greatest upheaval.  History necessarily proceeds by calamities, but each succeeding age will be as bad, or nearly as bad, as the last.  One must not protest against purges, deportations, secret police forces and so forth, because these are the price that has to be paid for progress: but on the other hand “human nature” will always see to it that progress is slow or even imperceptible.  If you object to dictatorship you are a reactionary, but if you expect dictatorship to produce good results you are a sentimentalist.'

Orwell knew then that it was possible to use the kind of thinking Mr. Scheidel is now using, to apply a kind of post-factor justification for Stalin or even Henry VIII.  George Orwell presents the case thus: 
'Naturally this argument is pushed backward into history, the design being to show that every advance was achieved at the cost of atrocious crimes, and could not have been achieved otherwise. The instance generally used is the overthrow of feudalism by the bourgeoisie, which is supposed to foreshadow the overthrow of capitalism by Socialism in our own age.  Capitalism, it is argued, was once a progressive force, and therefore its crimes were justified, or at least were unimportant.'

Thus if we take Henry VIII and telescope history up to the present, and using this post-facto approach, as Orwell joking proposes we might say:
'Henry VIII made possible the rise of capitalism, which led to the horrors of the Industrial Revolution and thence to a cycle of enormous wars, the next of which may well destroy civilisation altogether. So, telescoping the process, we can put it like this: “Everything is to be forgiven Henry VIII, because it was ultimately he who enabled us to blow ourselves to pieces with atomic bombs”.'

Hence, perhaps we should merely yawn when we hear on the news of the mountains of corpses in the Middle East and suicide bombers from Isis exploding like rockets in the Afghan capital.  Afterall, perhaps it is just the mechanicanisms of history working its magic, and if it means violence well, according to Walter Scheidel, if you want equality the more universal the social violence the better.  Perhaps we should cancel our subscriptions to 'Stop the War'.

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Report warns of 'Wages Theft' in Tory Britain!

During the eleven years that Margaret Thatcher served as the British Prime Minister of a Conservative government (1979-1990), many people bought into the idea that trade unions were an irrelevance and an anachronism in a modern society. Thatcher told voters that if they bought their council house and a few shares in ‘British Gas’, they could become middle-class and a capitalist overnight. She called it “popular capitalism.”

Since Thatcher’s ‘conservative revolution’, we have seen trade union membership fall from 13m in the late 1970s to around 6m today. Part-time and temporary work, self-employment (up by a quarter), and zero hours contracts, have flourished, and today account for 43% of the UK workforce. Pay in these areas also lags behind the pay of those in full-time occupations. Changes in employment law have also made it more difficult for workers to take industrial action and have eroded the bargaining power of labour. Despite the fact that the unemployment rate is said to be at its lowest since 1975, real incomes are falling and inequality is growing.   

 Although the Bank of England estimates that the wage premium associated with trade union membership, adds between 10 to 15% to pay, most people in Britain today, are likely to be paid by the task or the hour and will not be members of a trade union.  

The decline of trade unions in the UK over the last 30 years has coincided with a giant leap in inequality. A recent United Nations report revealed that the UK has some of the highest levels of hunger and deprivation among the world’s richest nations. UNICEF have stated that one in three children in this country, suffer ‘multi-dimensional poverty’ in housing, social activities, and food. It shouldn’t require a doctorate in economics, to realise that if workers don’t or can’t exercise their industrial clout to squeeze employers, then there is little incentive for employers to improve pay and conditions. It is generally recognised even by the IMF that union members tend to be better paid and that collective bargaining yields better results for workers.

A recent report ‘Unpaid Britain’, published by Middlesex University Business School, spells out our prevalent ‘wages theft’ has become within many sectors of the British economy, which tend to be non-unionised. The research based on data from ‘employment tribunals’, the ‘insolvency service’, the ‘Labour Force Survey’, ‘ACAS’ and the ‘CAB’,  was  used to estimate the scale of deliberately unpaid work in Britain today. The report found that UK workers were cheated out of at least £1.5bn a year in holiday pay, (there is no penalty on an employer for failing to pay) in spite of being entitled to 28 days holiday a year under the ‘European Working Time Directive’ (which they’re often unaware of) for full-time workers, or the equivalent of 12.o7% of average pay, for those who work variable hours. One-in-12 doesn’t get a pay slip as required by law and £1.2bn in wages is unpaid annually.

The Citizens Advice Bureau (CAB), say they have experienced a doubling of cases of wages theft between 2014 and 2017, with about 9,000 workers asking for help to recover unpaid wages and 75,000, having problems with pay and entitlements in the last year. The report says that many employers simply pockets workers wages because they can do so with impunity, due to a lack of enforcement by the authorities, or because workers who undertake variable hours, often do not get a pay slip or find it difficult, to keep track of the hours worked to prove what they are owed. Researchers found that other employers known as ‘phoenix businesses’, are going into administration owing debts and then reappearing shortly after, using a different name.

The report says that the cost incurred by workers to go to an Employment Tribunal, often prevents workers from seeking to recover unpaid wages. Since Employment Tribunal fees were introduced by Vince Cable, the Liberal Democrat minister in the Cameron coalition government in 2013, individual workers taking employers to a tribunal has fallen by 67%.  Clearly, having rights and being able to exercise them are two completely different things in Britain.

The neo-liberal capitalist model of business, as espoused by Thatcher and Regan in the late 1970s, sought to smash the trade unions and the collective bargaining power of labour, so as to turn British workers into doormats for billionaires, and to introduce ‘flexible working’ like zero hour contracts and the ‘gig’ economy. Likewise, Thatcher’s anti-union laws were also used to place legal hurdles in the way of workers in order to make it more difficult for them to take industrial action, in order to get better pay and conditions from their employers.

In his book ‘POSTCAPITALISM’, the author and journalist, Paul Mason, says that many people fail to grasp the true meaning behind ‘austerity’, believing it to be seven years of spending cuts or what occurred in Greece. He asserts that the real austerity project is about driving down wages and living standards in the west for decades, until they meet those of the middle-classes in China and India on the way up. To make his point, Mason, refers to a speech given by Tidjan Thiam, the CEO of Prudential, at the Davos Forum in 2012, who said that unions were the “enemy of young people” and that the minimum wage, was “a machine to destroy jobs”, along with workers’ rights and decent wages, which stood in the way of capitalism’s revival and had to go.
 
The recent General Election which resulted in a hung parliament and a Conservative minority government showed that many British voters are getting sick of Tory one-sided austerity and they desire a change. Rather than spend another five years in the dungeons, they want to see investment in Britain’s infrastructure, services, education, housing and decent jobs. Labour’s left-wing socialist manifesto was popular and offered many voters hope and the prospects of something better for themselves and their children. According to pollsters, nearly 13 million people voted Labour including 52% of middle-class professionals under 35 and 70% of younger people in the “DE” social category, classed as “most working class.” This is encouraging, but it seems highly unlikely, that Jeremy Corbyn, will be in Downing Street by Christmas even after securing 40 percent of the popular vote. This week, Labour lost an amendment which called on MPs to lift the cap on public sector pay of 1% which has been in place since 2010. While austerity is imposed on public sectors workers, to cap their pay, it isn’t when it comes to the pay of MPs. Two years ago (2015), MPs were given a 10% rise followed by a 1.4% deal in 2016. When you hear the phrase ‘national interest’, always ask whose interest we are talking about.

Demystifying the financial crisis - Gillian Tett and Paul Mason!

Since the financial meltdown in 2008, there have been a number of books that have been written with a view to demystifying the reasons for the crisis and to countering some of the fraudulent explanations that have been put forward by vested interests aimed at creating obfuscation. Two  books which are well worth reading in my view, are Gillian Tett's 'Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe' and Paul Mason's, 'Why It's Kicking Off Everywhere: The New Global Revolutions'.

Gillian Tett is an assistant editor at the Financial Times and was the deputy editor of the influential Lex Column. She has a PhD in social anthropology from Cambridge. In her book, Tett explains that 2008 financial crisis was not trigggered by a war, a widespread recession or any external economic shock. It was self-inflicted and was caused by 'hubris, greed, and regulatory failure', savings imbalances, as well as "excessively loose monetary policy, which stoked the credit bubble." She also makes the point that bankers like 'opacity' because it reduces scrutiny and confers power on the few with 'the ability to pierce the vail.'

At the beginning of her book, Tett explains the idea of 'derivatives' and how they work. She points out that though derivatives (a contract whose value derives from an asset - a bond, a stock, or a quantity of gold) are as old as the idea of finance itself, the modern era of derivative trading started in 1849 when the Chicago Board of Trade, allowed the buying and selling of 'futures' and 'options' on agricultural commodities. This allowed farmers to buy futures before the harvest, on the price their wheat would bring, in  order to hedge against low prices in the event of a bumper crop. It also allowed speculators to take on the risk of losses that farmers feared, in the hope of big pay offs. As she explains, derivatives are a 'dance with time' which allow investors to protect themselves against furture price swings or to make high-stake bets on price swings.

In the late 1970s, derivatives came into the world of finance after foreign currencies became free-floating following the collapse of the Bretton Woods system of credit controls which pegged the value of foreign currencies to the dollar. Accordingly, investors looked for ways in which to hedge against the impact of high interest rates and the fluctuation in exchange rates. One way of doing this, was to buy derivatives offering clients the right to purchase currencies at specific exchange rates in the future. This allowed investors and bankers to speculate on the level of rates in the future.

Tett also looks at the role played the firm J.P. Morgan who devised the 'credit derivatives' which were later dubbed 'weapons of financial mass destruction'. In June 1994, bankers from J.P. Morgan, met at the Boca Raton Hotel in Florida to discuss ways to develop new financial products. The idea of the credit derivative - 'Synthetic Collateralized Debt Obligations' (CDO's)  and 'Credit Default Swaps' (CDS), emerged from this meeting. It was claimed that credit derivatives could be used to control future risks or to allow banks to place bets on whether a loan or bond might default in the future. It was also claimed that credit derivates would make markets more efficient because they would disperse risk.

In her analysis of the U.S. sub-prime scandal, Tett says that after 2000, the Chairman of the U.S. Federal Bank, Alan Greenspan, cut interest rates rates from 6% in 2001, to 1% in 2003, following the collapse of the internet bubble in 2000. This led to an explosion of borrowing, but in the spring of 2004, the U.S. Fed raised interest rates to 4% by the end of 2005. She points out that in 2000 the amount of non-conforming mortgages (sub-prime loans) sold, was small at around $80bn dollars but by 2005, this had increased to $800bn dollars. Indeed, almost half of the mortgage-linked bonds in the U.S. were based on sub-prime loans. As higher interest rates started to kick in, defaults on risky mortgages started to increase in 2006, even though U.S. economy was growing strongly and there was low unemployment. As Tett points out, at the time, there was some confusion as to why the default rate was rising when the U.S. economy was doing reasonably well. Moreover, because house prices had been rising rapidly (average U.S. house prices at the peak of 2006, were double what the historic trend line said they should be), borrowers and lenders had not worried about the risk of default because it had been assumed that borrowers could refinance their loans as their homes increased in value or sell their homes at a profit, to pay off their loans. But as house prices stalled even in more proseperous areas, and as deafaults increased, borrowers abandoned their mortgages and their homes.

What is also highly significant, is that many lenders had taken out CDS contracts where the buyer pays a regular fee to the seller, in exchange for a guarantee that they will be compensated in the case of default on a stipulated piece of debt. As Tett observes: "The CDS market had turned into a vast, opaque spider's web, linking together banks and shadow banks and brokers alike, with unfathomable trades and fear." By mid 2005, there were $12 trillion dollars worth of CDS contracts in the market which were equivalent to the size of the U.S. economy.

If some people at the top of the banking system were bamboozled by what was going on, including treasury officials, not everbody was. When Ronden Barber, a statistical expert working for the Royal Bank of Scotland (RBS), expressed worries that the bank's financial models were 'significantly underpricing' the risk attached to 'super-senior' debt, he was asked to leave the bank.

Jim Chanos, founder of the hedge-fund group 'Kynikos', told a German official that it was not hedge-funds he should be concerned about but the banks. He told him that 'leverage' at the banks (the use of borrowed capital for an investment expecting the profits to be greater than the interest repayable) was surging because the banks were holding "huge piles of opaque credit assets on their books which no one understood.Also, strange CDO's and special investment vehicles were springing up with all manner of tentacles into the banks." He told the official that it was the "regulated bits of the system he should worry about" and told him that his own fund, had taken on numerous 'short positions'(the sale of borrowed stock/assets in the expectation its value will fall) on the share price of most large investment banks and insurers.

What should be particularly worrying for both investors and depositors, is Tett's observation that "Few managers sitting at the top of the investment banks had much idea what their traders were doing let alone whether their models were accurate enough." According to Tett, this was because people working within the banks, were working in what she calls 'Silos', which she defines as 'self contained realms of activity and knowledge that only experts in those areas can fully understand." She points out that credit derivatives had not dispersed risk but had concentrated it and concealed it and had become 'horribly complex'. Not only had the banks become "too big to fail" they had become "too interconnected to ignore." At the time the financial sector exploded, there were $60,000 billion in outstanding CDS's in the market as a whole. Also, a staggering proportion of mortgage based debt which had been given a AAA rating by credit rating agencies, was worthless junk - 'toxic debt'.  The U.S. treasury official, Robert Steel, told J.P.Morgan officials that the financial system had become infected with the banking equivalent of 'mad cow disease'. Yet in a speech given in March 1999, U.S. Fed Chairman, Alan Greenspan (a devotee of the cult of Ayn Rand), had told his audience:

"By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives."

Not only did Greenspan believe that credit derivatives would make the markets more efficient, he was a leading voice against the regulation of credit derivatives. As Tett says: "Freed from all external srutiny, bankers could do almost anything they wished."

Whereas Gillian Tett's book, takes a more mirco perspective on the financial crisis, looking at the role played by banks with a view to unravelling the intricacies of investment banking, Paul Mason's book, (Mason is the economics editor for BBC Newsnight), takes a more macro perspective of the financial meltdown and the reasons for the global unrest. Chapters in the book deal with the 'Arab Spring'; 'Syndicalism and the 'Great Unrest' of 1910-14'; the use of technology and social media in the explanations for social unrest in this country and abroad; the historical parallels of 1848, the Paris Commune of 1871; as well as the British student occupations, and the French collective, the 'Invisible Committee' and the pamphlet 'The Coming Insurrection'.

Mason's account for the reasons for the 2008 financial crisis, can be summarised as follows:

1) Between 1989-2009, the world's labour force doubled from 1.5bn to 3bn through migration and outsourcing as the labour market became global. The move from the farm to factory in China and the developing world, combined with the entry of the former Soviet bloc into the global economy, effectively doubled the amount of labour available to capital and halved the ratio of capital to labour. The impact on wages was startling. In the 2000s real wages fell in the U.S., Japan, Germany, and across many of the West's heartland countries. The shortfall between stagnating wages and consumption growth was met by credit.

2) There was an uncontrolled expansion of credit from 2000. Government's encouraged lending which became detached from reality.

3) The credit boom was caused by a mismatch between savings generated in export orientated countries, Japan, China, Germany, and the debt fueled consumption in Anglo-Saxon countries.

4) Excess credit fueled asset price inflation in housing, technology stocks, commodities, and financial assets.

5) Complex debt vehicles were created such as credit derivatives, a shadow banking system, and off balance sheet entities, which concealed toxic debts.

6) A massive rise in global imbalances, saw saving in the west dry up while savings in the east piled high. Why invest savings in home markets when capitalism is global? According to Mason, this is probaly the most single disrupting factor.

7) The collapse of Lehman Bros in 2008, unleashed toxic debts into the economic system. Credit dried up as well as output and trade and stock market values collapsed as well as exports. "A slump on the scale of the 1930s, was halted by the intervention of the state who quarantined trillion of dollars of bad loans inside the balance sheets of government's.

Although Mason acknowledges that greed, regulatory failure, and the investment decisions of some of the major banks, were in part responsible for the 2008 economic crisis, he believes that the root cause of the crisis was globalization and the monopolization of wealth by a global elite. However, he contends that what is needed, is a 'new and more sustainable form of globalization' rather than a retreat behind national barriers.  He argues that globalization did drag one billion people out of rural poverty into urban slums by creating an extra 1.5 billion extra workers, provided life changing technologies, and offset the decline in prosperity for rich workers in the developed world by providing unlimited access to credit. It also made the rich in every country richer, and inequality greater. According to Mason, as austerity bites, there is a danger of increased nationalism and protectionism and globalization being replaced by competing economic blocks, as it was in the 1930s, as well as a wave of resistance to wage cuts and austerity.

Sir Mervyn King, the previous governor of the Bank of England, may well have blamed the banks for causing the financial crisis which occurred on his watch, but it isn't the bankers that are paying for the financial meltdown that they helped to bring about. The rich have offloaded the costs of the financial crisis onto the backs of ordinary working people who have never heard of a credit default swap or a credit derivative. In the UK, 77% of the budget deficit is being recouped by public expenditure and benefit cuts and only 23% is being repaid by tax increases of which, more than half, is accounted for by the rise in VAT.  In the U.S., the deficit is being recouped by cutting healthcare for the poor, the pensions for the elderly and the minimum wage. In 2011, President Obama agreed to make $2.5 trillion in spending cuts mostly on infrastructure and welfare payments to the poor. In the UK, at a time when the Cameron Tory government have introduced their 'bedroom tax' and council's face the loss of a third of their budget by 2015, the rich are being given tax cuts. As from April, anyone earning over £1 million a year, will get an annual tax cut of at least £42,295.00.  As the Greek slave and fable author Aesop said : "We hang the petty thieves and appoint the great ones to public office."