Greeks have spoken, finally, with a resounding "no," to another conditional bailout from the European Union. On Sunday, July 5th, with a vote of 61% to 39%, they said "oxi" to five years of crippling unemployment, poverty and debt that have been imposed on them by the failed policies of the Troika of the European Commission, European Central Bank (ECB) and International Monetary Fund.
Politicians and economists across the globe will predictably interpret it as a vote against austerity and in favor of government profligacy that justifies ever-rising budget deficits to preserve and create jobs. After all, the government deficits around the world have been extraordinarily high in the name of job creation ever since 1981.
The Greek referendum is actually a vote against monopoly capitalism that now pervades the globe and has impoverished the poor and the middle class for decades, while enriching the rich beyond imagination. According to a United Nations report issued in 2014, just 85 people own more than half the world's wealth. How did this all come about?
Monopoly or crony capitalism is an economic system dominated by giant firms that charge high prices, pay low wages and extract huge productivity from their employees. The system differs from competitive capitalism, wherein smaller firms compete vigorously in terms of price, quality, and customer care. Crony capitalism flourishes through relentless and frantic mergers among large and profitable firms, leading to ever-growing labor productivity along with stagnant wages. Government profligacy makes it even stronger by raising its profits, which give it greater control over politicians hungry for campaign donations.
Let us look at the process through the prism of supply and demand for goods and services. When supply exceeds demand, there are overproduction and hence layoffs that lead to unemployment and poverty. Supply derives from labor productivity and demand from wages. If productivity rises and wages don't, supply rises while demand stagnates, resulting inevitably in overproduction and hence joblessness. Thus, poverty and unemployment arise not from austerity or low government spending but from a growing gap between productivity and wages. And the chief culprit for this growing gap is monopoly capitalism.
Crony capitalism unleashed the Great Recession in the United States in 2007. By 2009, the recession had spread to the world and the Greek economy was in a free fall, requiring assistance from the European Union and the IMF. The Troika of European Commission, IMF and ECB then bailed Greece out, while imposing flawed policies on the nation. Greece's own monopoly capitalism had already raised the wage-productivity gap, needing huge government spending by the Greek Government to maintain supply-demand balance inside the nation. In this milieu, the Troika demanded a 25% cut in wages, and a sharp reduction in the budget deficit. The results had to be catastrophic.
As a numerical example, suppose supply at current prices is worth $500, demand or spending equals $300 and the budget deficit equals $200. Then
Supply = $500 = Total Spending = $300 + $200,
so that the supply-demand balance has been maintained with the help of the budget deficit, because then total spending and supply both equal $500. Now suppose the Troika forces a wage cut of $100 and a deficit reduction of $50; then spending will fall by $150, because consumer spending depends mostly on wages, especially in a serious recession. With a spending decline of 150, production falls to the level of demand, so now
Supply = Total Spending = $350.
Supply is the same thing as GDP, and when production falls, unemployment is bound to rise further. This is the process that transformed the Greek recession into a depression, with joblessness now exceeding 25%, and wages in a free fall.
Politicians and the economic establishment frequently see wage cuts as a cure-all for joblessness. Such thinking is flawed and must be discarded. The culprit is monopoly capitalism, which is akin to a gorilla that must be tamed to restore the fortunes of the poor and the middle class.
In terms of soaring poverty, the US economy is in the same boat as Greece. American poverty is now the worst in more than 50 years. Instead of monumental government deficits, we need to generate competition in various industries, so that wages catch up with productivity. But generating competition is easier said than done, but it can be accomplished by the president. And he can quickly do this without recourse to Congress by using existing laws.