Tuesday, December 8, 2015

TTIP and the crisis of financialized capitalism, or: cornucopia for some instead of prosperity for al

TTIP and the crisis of financialized capitalism; or, cornucopia for some instead of prosperity for all

What the bourgeoisie therefore produces, above all, are its own grave-diggers.
Its fall and the victory of the proletariat are equally inevitable.

– Karl Marx & Friedrich Engels, Communist Manifest, 1848

The 11th round of negotiations has ended, the 12th is due somewhere early 2016. If formal announcements are anything to go by, 'jobs and growth' is no longer the slogan with which the European Commission tries to sell an increasing skeptical audience its push for a new trade treaty with the US, better known as the Transatlantic Trade and Investment Pact (or TTIP for short). The assumed benefits have of recent become predominantly geopolitical, while the feared costs in the form of lower standards and loss of sovereignty through secret arbitrage courts are increasingly addressed by European negotiators. Under the reign of viceroy Malmström, which began in October last year, transparency has become the key word. In a desperate attempt to regain the trust of the European electorate, Malmström has insured that her claims that TTIP will not lead to deteriorating consumer protection (gmo, chloride-cleaned chickens, Round-up, etc.) nor to loss of sovereignty can actually be checked on her website where most of the relevant documents (though not all and not in full) are regularly (albeit with a delay) published.

But in a post-democratic context it is the positive meme that matters. And that story has radically changed since the appointment of Malmström as commissioner in the new Juncker-led cabinet. Whereas her predecessor, the arrogant Karel de Gucht, strongly emphasized the economy as the key beneficiary of TTIP, Malmström has gradually shifted towards a geopolitical storyline. Apparently, the deconstruction by NGOs and academics of the many economic reports that the European Commission had lined up to back its story of long term economic gains has effectively destroyed any aura of certainty around the earlier economic claims. While the battle of the econometric models, due to the uncertainties surrounding their main variables and correlations, was not won conclusively by either of the two camps, it did at least succeed in demolishing the absoluteness and hence the usefulness of those claims for political purposes.

So the second defense line has now become a geopolitical one. The story goes like this. The rise of China and India (Brazil and Russia having disappeared from the BRIC) will over time erode the market-making powers of the US and the EU. To constitutionalize their current hegemonic positions in the field of product and process standardization, regulation and global governance, TTIP provides the EU and the US with an excellent and unique opportunity to determine the rules of the game for the long term future and will hence give American and European multinationals corporations crucial competitive advantages over their emerging competitors. What is at stake here is the infrastructural power of the West, in Michael Mann's terminology.

As DeVille and Siles-Brügge have argued in their excellent book on the discourse of TTIP, this narrative depends crucially on the 'mode of regulatory cooperation', as they call it, that will result from the negotiations. The authors distinguish four such modes. The first one is full harmonization, meaning that the EU and the US will decide on a new set of market rules which will fully harmonize product and process requirements in the two markets. The model here is the Common Market, which is partially still under construction. Given the costs involved (both parties will have to completely overhaul their existing market infrastructure), this outcome is not in the cards. Instead, the negotiators aim for the less ambitious (and less costly) mode of mutual recognition, basically accepting each others markets rules as if they are functionally equivalent. It comes in two tastes, substantive recognition and procedural recognition. The first refers to the mutual acceptance of regulatory standards, whereas the second merely requires that two products have been similarly tested even though the standards may differ. Finally, the regulatory standards can be either applied ergo omnes, meaning applicable to all (both insiders and outsiders), or bilateral, in which case outsiders still face the hurdle of double testing.

Mutual recognition
Regulatory standards
Conformity testing
Ergo omnes
Probability of being included in TTIP
Ruled out
High in some sectors
Chance of Global standards
Effect on Domestic Standards
Race to the top
Race to the bottom
      + ambitious         ………………………………………………………..............................................            – ambitious

Source: DeVille & Siles Brügge 2015: 56

As the figure above indicates there is a tradeoff here. The more substantial the outcome, the higher the chance that TTIP will set the global tone. And vice versa, the less ambitious the outcome, the less likely it is that it will become the global standard. Judging on what is known about the negotiation results, the most probable outcome is a combination of mutual recognition of standards in some sectors and of procedures (conformity testing) in others. Contrary to the official storyline, this will not add up to global standards. And will hence not ensure the perpetual hegemony of the West – it's stated aim. In fact, as DeVille & Siles-Brügge stress, it may well be perceived as unfair competition by non-Western firms, resulting in future backlashes that could hurt EU and US interests rather than benefit them. Or may incentivize outsiders to establish competing standards. The flip side, of course, is that the fear of NGOs and citizens that TTIP will imply a race to the bottom in terms of product regulation, is overblown too. As was the case with De Gucht's 'jobs and growth story', the 'global standards story' too is at the end of the day a tale of much ado about nothing. TTIP is neither going to set global standards, nor is it going to result in a race to the bottom.


Does that mean that NGOs and citizens can rest in peace and trust Malmström and her sherpa's on their blue eyes to do the right thing? Definitely not. Product standards, consumer safety and national sovereignty is not all that is at stake here. The real issue is that capitalism is currently not working for citizens and TTIP is only going to make that worse. In a nutshell: workers are not consuming because they do not earn enough, while firms are not investing although they earn so much. With only slight exaggeration one could say that we are in the midst of a deep underconsumption/overaccumulation crisis that has been going on for the best part of three decades now. So it clearly antedates the Great Financial Crisis (GFC) and ultimately caused it. Since the GFC heralded the end of the debt-driven-real-estate-inflating growth model that many economies since the early 1990s had been experimenting with (the Netherlands included), the GFC has ripped apart as it were the veil of wealth that had kept the underlying crisis conditions from view. This is the key exhibit.

It comes from a 2012 ILO-commissioned paper written by the political economist Engelbert Stockhammer and gives the share of GDP that is paid to workers in three countries (Japan, US and Germany) as well aggregate figures for high-income OECD countries (Advanced) between 1970 and 2010. What it shows is that workers have increasingly been drawing the short end of the stick and have taken home less and less from the value added they annually produce, implying that ever more ends up as profit and dividend in the silk lined pockets of managers and shareholders. The share of GDP that is being paid out as wages in the West (including Japan) has dropped gradually but inexorably from a little over 75 percent to 65 percent.

The effects have been huge and dismal – and, due to a crisis that ended the narcotics of real estate bubbles ­– now threaten to do seriously harm to the legitimacy of global capitalism, as is reflected in electoral flights away from the 'extreme' middle that has acted as the main cheerleader of globalization, the public outcry over corporate tax evasion as well as migration, and a flurry of authors, covering the full political spectrum, who have written about capitalism as being for the few, not the many. A couple of simple, straightforward datapoints may serve to illustrate the perverse outcomes of financialized capitalism:
  • ·      Real average hourly wages in the US have flatlined; while a worker earned $ 18.76 per hour in 1972, in 2011 hourly wages were more or less the same: $ 19.47;
  • ·      Real disposable household income in the Eurozone too has flatlined: in Spain they increased between 2000 and 2013 with five percentage points, in France with 15 percentage points, and in Germany with ten percentage point, while in Italy and the Netherlands they declined with ten and five percentage point respectively (see figure below);

  • ·      Reflecting the anesthetics of what is called privatized Keynesianism, gross household debt expressed as a percentage of disposable income has skyrocketed, especially in places like Denmark and the Netherlands, where wage moderation to aid the international competitiveness of the export industries has been offset with the wealth effect of debt financed real estate bubbles (see figure below);

  • ·      Global corporate profits, squeezed in the late seventies, have recovered across the board in the 1980s and 1990s, and have maintained momentum, despite the Asian debt crisis of 1997, the ICT bubble and 9/11 in 2001 and the Great Financial Crisis of 2007/8;
  • ·      Corporate investment is at an all time low, reflecting the combined pressures on disposable income of consumers of a wage squeeze (see above), a deleveraging squeeze (since the Great Financial Crisis) and a tax squeeze, as workers have been forced to fill the hole blown in the balance sheets of states by insolvent banks through tax hikes and cutbacks ('austerity') while large firms, through tax evasion on an industrial scale, largely duck their tax responsibilities;
  • ·      Multinationals sit on unprecedented cash reserves, to the tune of $ 3.16 trillion, most of which is being kept in tax havens like Ireland, Luxembourg and the Netherlands, and is increasingly invested in money market funds, which play a key role in the global shadow banking system that provides day-to-day funding to the large global banking conglomerates;
  • ·      These reserves increasingly serve financial engineering and financial arbitrage goals, instead of financing real (brownstone and/or greenfield) investments;
  • ·      Mergers and acquisitions, partially in the form of infamous 'inversions' meant to shift headquarters to low tax jurisdictions without paying 'exit taxes', have again reached record levels; so far 2015 has seen $ 4.2 trillion worth of M&A's, generating handsome rewards for investment bankers, and are on course to breach again the former, 2007, record (see figure below) (of course, academic research has time and time again demonstrated that most M&A's are value destroying, rather than value creating);

  • ·      Share buy backs – another popular destination for corporate cash reserves – have also reached record levels after the GFC; the aggregate value of share buy backs of firms included in the S+P 500 is due to reach approximately $ 1 trillion, again breaking the earlier record, that of 2014 (sic!);
  • ·      The result is rapidly increasing income inequality in a growing number of OECD countries, reaching again levels that were last seen in the beginning of the 20th century, reversing decades of increasing equality due to war, destruction, expropriation, the success of the redistributive welfare state and politically enforced progressive taxation, as Piketty has so powerfully demonstrated in his 2014 bestseller (see figure below).


Capitalism has again become a giant exploitation machine. Slurping up value by the rich and powerful is again its modus operandus, instead of trickling it down upon the poor and vulnerable, as the legitimating neoliberal narrative would like to have it. Prosperity for all has been replaced by cornucopia for some. The academic literature provides four broad explanations for this sorry state of affairs: skill-biased technological change, retrenchment of the welfare state, globalization and financialization. The first and most popular suggests that technological innovations has made the production of goods and services more knowledge intensive and has hence put a premium on (the small contingent of) workers with more human capital while workers with less human capital (the largest contingent) see their wages shrink. Its popularity is easy to understand: first because it is based on a meritocratic worldview in which each gets what (s)he deserves given his/her merit and second because the remedy is more and better education for all – a no-brainer for both the left and the right.

The second suggests that due to decreasing employment protection, the costs of hiring and firing has declined, resulting in more job mobility, more labour market competition and hence downward pressures on wages. Globalization has a similar effect due to the increased ability of employers to outsource and offshore activities to low wage labour markets or jurisdictions. Finally, financialization works through the increasing dependence of firms' profits on financial engineering and financial (and fiscal) arbitrage. As productive employment starts to become less relevant for firms, the internal allocation of resources becomes increasingly biased towards workers with financial skills, resulting again in a redistribution of value added away from average workers. The popularity of these latter three explanations, especially among the mainstream trained economists that people the government buildings in Washington, Brussels, London and Amsterdam is noticeably less, due to their emphasis on power, recourse inequalities and rent extraction, 'things' that do not loom large in the universe of neoclassical economics.

A growing number of academic studies have recently confirmed that skill-biased technological change has less leverage on the story than earlier thought. In fact, in a recent blog for the New York Review of Books, Paul Krugman declared the story as good as dead: 'In short, a technological account of rising inequality is looking ever less plausible, and the notion that increasing workers’ skills can reverse the trend is looking less plausible still.' Instead most of the explanatory power comes from the other three stories. Welfare state retrenchment together with globalization and, especially, financialization explain well over six of the 10 percentage point drop that the average wage share has experiences between 1970 and 2010, as the figure below from the same Stockhammer paper clearly illustrates.

What this is all about is a radical shift in the power balance between organized capital (large employers and employer organizations) and organized labour (trade unions). Confronted with a huge profit squeeze in the late 1970s, states in cahoots with well positioned business elites have forcefully pressed for a series of rule changes which have radically weakened the bargaining power of trade unions. Both welfare state retrenchment (read: decreasing employment protection) and the deregulation (and later: harmonization) of market rules, which is what globalization is all about, have contributed to the erosion of labor unions on the hand and the extension of the exit options of organized capital on the other.

The gradual erosion in disposable income at the level of households and of effective demand at the level of national economies and regions that this caused, has next seduced firms to dabble in financial engineering (share buybacks, playing the financial markets, increasing leverage) and fiscal arbitrage (using transfer pricing, interest rate deductibility and discrepancies between tax systems to minimize the effective tax rate), redistributing value away from line workers to rent extractors in the head office.

This is what is at the core of the underconsumption/overaccumulation crisis that has again been laid bare by the Great Financial Crisis. At root it is a crisis of asymmetrical bargaining power, whose resolution either requires shoring up the power resources of organized labour or diminishing the exit options of capital through capital controls or other instruments that limit the mobility of capital. TTIP is doing neither. In fact, by constructing an even larger common market, TTIP may be expected to do the reverse. That is why it should be opposed. Not only by progressives, xenophobes and anti-globalists. But also by conservatives, neoliberals, libertarians and even capitalists. If only to save capitalism from itself.


  1. Capitalism should be stopped, I Agree, it is the mother of all evil! Thank you for your excellent explenation and usefull insights in this very dificult matters and "not for the faint of hart" who like to see how economic thruth is written.

  2. Moet het nog gaan lezen maar attendeer op het kleine schoonheidsfoutje van de titel die moet eindigen op all en niet al, lijkt mij.