Wednesday, May 21, 2008

Tax against tyranny.

The governments of the world can be seen as belonging to either of two categories. There are those that depend on taxes for their spending and there are those that do not. And the extent of its dependence on taxes will largely determine the form of a particular government.
The collection of taxes has never been popular. And introducing new taxes has more than once brought down a government, or led to revolt and even revolution. Taxing the nation means taking a part of the wealth produced. But the part appropriated should not be excessive, as overtaxing inhibits investments and growth. So that a short term gain from an increase in the tax rate contradicts the long term gain due to increased wealth being taxed at the same rate. The necessary “fine tuning” of the tax rate and the consensual disapproval of taxes in general often result in governments having to pay their budget deficits with borrowed money. This inveterate borrowing in turn allows governments, in a bid to restore lost popularity, to cut taxes for certain strategic sectors of society. However, borrowing relies on the lender’s confidence in the borrower’s future capacity to pay. This also applies to government borrowing but, as the limits of debt are poorly defined (1), the lender’s reaction often comes too late, after the limits are passed.
Deciding who bears the burden of financing the state is a fundamental function of parliamentary representation. The question of who is taxed, how and how much is (or should be) a subject of great importance in electoral debates. On a par with law and order, education and welfare, war and peace, that is with all the different ways of spending what is reaped. Fair taxation is essential to the notion of res publica, the idea of a commonwealth shared by all citizens. And so, refusing taxation has proved to be the most effective, perhaps the only way of opposing tyranny. Unless, of course, the tyrant ensures that refusal is impossible.
Communist regimes managed to eliminate taxation by a total control of production, exchange and finance, with government expenditures as an integral part of the process. The highly centralised planning put in place by the communists was inherent to the mechanical age. Coal and steel are best produced in a planed and centralised manner. For this reason, the totalitarian economies were fairly successful for a while, but they were totally unable to adapt to the electronic age. The decentralised nature of electronic software production, the garage start-ups and the high school entrepreneurs quietly pushed state control of production into the landfills of history. Initiative and inventiveness can neither be planed nor extorted.
The top down control of bureaucratic tyranny could not survive in a changed environment. But military tyranny is as thriving as ever, because warlords only need guns and ammunition to maintain their dominion. The rest can be procured by force. And, in the same way, tyrants are able to rule by might, when they do not depend on civil society for their incomes. An army can buy the arms it needs to impose its will thanks to “blood” diamonds, coltan, copper, oil, etc. If the Burmese generals stopped receiving royalties for gas, oil and timber, they would fade away almost over night. But, as no one wants to give up their consumption of gas, oil and tropical timber, it just won’t happen (2). And, to make tyranny even easier, Burma is ethnically divided. So the army just looks after its own and can oppress or neglect the other inhabitants. In the same way, dozens of corrupt cliques are in power all around the world, funded by the royalties they receive.
Beginning with the Magna Carta, English history is a tale of rulers submitting to the will of the people in exchange for badly needed cash. And, to a large extent, it was George III’s need of money and Lord North’s intransigence that led to the Declaration of Independence and the birth of the United States of America. And, in France, Louis XVI’s empty coffers obliged him to assemble the Three Estates that deposed and then beheaded him. These nations are justly proud of their rebellious past and of their forefathers’ brave stands against tyranny. But what of to-day? What pressure can be brought to bear by the taxpayers on a government that grants rebates and borrows all it needs on the world’s currency markets? Powerless at home and hooked to minerals and fossil fuels abroad, what remains of our heritage?

1. The capacity to repay depends on excess income, the part that is over and above the cost of the necessities of life. When incomes are stable, increased borrowing means reduced spending on necessities. But it is always difficult to assess how far the reduction can go.
2. During the Cold War, dictators were funded to put down the reds or the imperialist puppets, depending on which side was paying. Nowadays, funding is essentially commercial, with a few exceptions due to the War on Terror. And events in Iraq have demonstrated once again that it is easier and cheaper to payroll a tyrant than to subdue a nation.

Wednesday, May 07, 2008

China’s paper feet.

Over the past twenty years, China has applied the ideal model for the accumulation of capital. A model inaugurated in modern times by England during the industrial revolution, when the cotton-mills put out of work the millions of Indians who were spinning by hand, as had their ancestors since prehistoric times (cotton was originally cultivated in the Indus valley). A model that can counterbalance for a time the inherent contradiction of capitalism, by exporting consumption and importing investments. Instead of distributing value as wages to the workers, so that they may consume the produce of their labour, the produce is exported and consumed by others, and its value returns in the form of investments. China exports consumer goods and, in exchange, imports raw materials and technology. This means that other nations export raw materials and technology and, in exchange, import consumer goods. The Chinese do not consume goods they have produced, whereas other nations consume goods they have not produced. This is the perfect situation and China has benefited from it on an unprecedented scale. But, now that the consumer nations are in trouble, how will China manage a slump.
Raw materials and technology are investments that need the transforming power of labour and the value added by work to be consumable. Entering the production process, they acquire or transmit value until the final consumer stage. For example, machines and plastic pellets are exported by the US to China, and toys are imported back. But the toys contain the value of the machines, the pellets and the work applied in making them (for simplicity’s sake this work includes the buildings, the energy supply, etc.). So that the value of the toys produced is always superior to that of the machines and pellets. Value for value some of the toys stay in China. And, for the same investment in machines and pellets, the US gets fewer toys, albeit at a lower price than those produced at home. And, being cheaper, the imported toys take over the home market.
When the toys were made in the US, a certain investment in machines and pellets resulted in a certain amount of toys. Now that the investments are exported, less toys are imported value for value, as they contain the value added by work. To maintain the amount of toys supplied, the exported investment musts increase constantly to compensate the difference in value. The making of toys is outsourced to China and those employed to make them in the US lose their jobs. But the production of machines and pellets must increase, and so the workers change jobs, from making toys they pass to making machines and pellets. Except that these productions are less labour intensive, so that only a few keep an industrial job and the rest can only provide services.
The entrepreneur (this one represents a whole sector) does not see things this way. He exports machines and pellets and imports cheap toys of the same value, and he puts the local production out of business with low prices they cannot match. As long as his business is expanding, he exports a growing quantity of machines and pellets and imports all the toys produced. The growth in exports compensates the difference in value explained above. This continues until he controls all the market. At which point growth in the production of machines and pellets for export stops. But, as soon as the exported investments stop growing, the value of the toys exceeds the value of the investment and a part of the toys stay in China. But the Chinese, who have no use for them and no demand, sell these extra toys on the world market in competition with the entrepreneur at the origin of the process. Hence the obligation to control the whole production, and hence the continual succession of lawsuits over copyrights. And, as the value of the machines and pellets he exports is insufficient, he pays the difference in currency.
Outsourcing the production of toys leads to a trade deficit, because the value of the toys produced exceed that of the machines and pellets. But the deficit also applies to supply and demand for toys on the US market. As more value is coming in than is going out, more value is being consumed than is being produced. The importer pays the difference with currency. The consumer pays the difference with credit and debt. So the consumer borrows to buy toys, and the entrepreneur passes on this debt to the Chinese in the form of currency (a promise to pay). And the currency is used to buy US Treasury bonds, thereby filling the budget deficit. So the consumer’s borrowing pays the government’s overspending, and the Chinese are holding the paper. But, now that consumer borrowing is waning and governments are overspending more than ever, the Chinese may become wary of bonds and prefer stocks. And that leaves no one to refund the treasury deficit. However, not even the Chinese would consider leaving the US Treasury out on a limb. Though interest rates will have to rise considerably to make the T-bonds attractive enough in an inflationary situation.
China’s sovereign funds will be obliged pick up the US Treasury’s debt, but this will not be enough to regenerate consumer demand. So that China will export less consumer goods. Will the Chinese close factories, or can they turn production around and open up the Chinese market to mass consumption? Will they try to deal with mass unemployment, or can they distribute wealth by increasing wages and allowing the work force to consume the produce of its labour? Can the Chinese consumer take the place of the failing consumers of the world? An improbable solution, as the two options are not equally practicable. The unwritten laws that regulate the accumulation of capital only allow the first choice. Capitalism has a time for expansion and a time for concentration. And the function of recessions is to condense the dispersed wealth of growth, gathering it into a few hands.
As China reduces exports for lack of demand, imports will diminish accordingly. Fewer toys need fewer machines and pellets. And so it will be the world over. We are about to witness the first slump of the post-Cold War era. The first depression to have a really global dimension. And the world’s financial system is so overstretched, with debts piled on debts like a house of cards that it could collapse quite suddenly. Ever since the start of the subprime crisis last summer and the subsequent credit crunch, the official discourse has repeated endlessly that the “fundamentals are sound”. It assures us that there is no reason for alarm because the upheaval concerns exclusively certain banks or, at the very worse, the banking system. Those who govern our destinies may believe their own spin, or it may be wishful thinking or, more likely, a voluntary misrepresentation. But it is gradually becoming apparent that those assurances are false, and that over borrowing is universal. Governments as well as house-owners, consumers and investors, all have borrowed far more than they should and their spending spree has left a wide paper-trail all around the planet. Far too much paper for it to keep its value. Can this gigantic structure built on consumer debt weather a category 5 financial storm? Or will stagnation and inflation bring down the Chinese colossus, with fatal consequences for the declining euro and dollar empires? Will its paper foundations turn out to be quite worthless?