The financial crisis at the local level
In the third segment of Senior Editor Paul Jay’s discussion with Leo Panitch, Leo explains how the credit crunch will affect state and municipal governments. Leo points out that the Great Depression had its roots in the bankruptcy of state and municipal governments, offering that in such a situation the national government must intervene to keep the states and municipalities solvent. Leo advocates for a hybrid of increased taxation and deficit spending to finance this, adding finally that a real solution requires more than a change in policy, but a change in deep structures.
PAUL JAY, SENIOR EDITOR: Welcome back to the next segment of our interview with Leo Panitch, professor of political science at York University in Toronto and author of American Empire and the Political Economy of International Finance. Thanks for joining us again, Leo. So a couple of days ago, Governor Schwarzenegger in California talked about the possibility of a bankrupt California. And if that’s true, one can imagine cities and states across the country, and perhaps across Canada as well, going into crisis. What’s that about? And what can be done about it?
LEO PANITCH, PROFESSOR, POLITICAL ECONOMY, YORK UNIVERSITY: Well, people who have been watching The Real News earlier this year, they would have had the jump on this, because I remember you and I talking about this early on in the year, and we were talking about the next big shoe to drop would be, insofar as the housing prices fall, states and municipalities, one of their main sources of income is property taxes. And when that tanks, the ability of states to balance their budget and municipalities to balance their budget also tanks, and their ability, therefore, to sell their bonds tanks. And that’s what’s happening, and it’s happening in a big way. It was happening at the time we talked back then to such an extent that Schwarzenegger actually let prisoners out of jail early in order to cut back on prison expenditure. This is, you know, Schwarzenegger of all people—law and order.
JAY: So what can be done?
PANITCH: So, well, a very radical move is needed here. One needs to go back to remember that the Great Depression really began with municipalities defaulting on their debt, and closing down relief, etcetera. The only thing that can be done is for the federal state to guarantee the bonds at state and local levels, and to guarantee that it will back up a default in any of those. And that would overcome this problem. This is a very radical step.
JAY: Why? Why is it so radical?
PANITCH: Well, because it means that the federal state is taking on a responsibility for spending that would be done by local aldermen and councilors, many of whom they would see as irresponsible, unconstrained, etcetera, etcetera, in the usual balance-the-budget kind of way. And this has a lot to do with what has really been the populist essence to the neoliberal era, to the Reaganite movement, to the free market ideology. It’s never been about getting the state out in the sense of backing up capital; it’s been about cutting taxes. That’s been oriented, of course, substantively towards the rich, towards capitalists, towards the wealthy, and so on. Very true. But it’s had this great appeal to people who come to define politics, democracy, their vote in terms of "Will I pay $100 less a year in taxes or a maximum $1,000 less in taxes?"—the ordinary working person. So if you look at the presidential debates, the vice presidential debates, the Canadian election debate, so much of it was bound up with "I will not increase your taxes." And the irrationality of this is staggering, in the sense of if, you know, municipalities are going to go bankrupt, are people really saying that they will not pay $100 more in taxes? And the mentality of it is irrational. But the notion is democracy’s about "I use my vote to pay as little as possible," when they, you know, will pay $100 more to Rogers at the bat of an eye without even fighting it, or a cable company.
JAY: Or Time Warner or Comcast.
PANITCH: Or Time Warner. Yes, exactly.
JAY: But isn’t there a point that if the federal state, the American state, is going to defend Treasury bonds, perhaps even if under critical circumstances defend even some state or municipal bonds, at what point does that backing up by the state meaningful if they don’t raise taxes?
JAY: ‘Cause you can’t just print money and say, "We’re now backing up the bond."
PANITCH: Well, let’s remember that during the Second World War you had enormous deficits, the highest in history, and nobody was calling the States’ bonds at that moment, because of the enormous deficit, when it came to a major project like that. Moreover, when you have a major recession or a depression, where do capitalists or anybody have to put their money that’s safe? In public debt. Right? You know, back in the 1930s, everybody was screaming that Roosevelt was a socialist, all the capitalists, for his union reforms and welfare reforms. They were lending money to the state. They were lending money to all the agencies he’d created to build all the infrastructure, etcetera, etcetera. And that’s going to happen again if states are prepared to take this on. That’s not to say that there shouldn’t be a massive redistribution of wealth through the tax system. Bernie Saunders, the American congressman, in the face of the bailout, was saying you could raise $300 billion by imposing a surtax, a 10 or 20 percent surtax, on all incomes above $500,000, and I totally agree with him, but it doesn’t go far enough. They’ve done away with the estate tax, as they call it in the United States, the wealth tax. We ought to have a wealth tax. I mean, after the enormous inequalities that have grown in wealth over the last 30 years, there ought to be a very major wealth tax.
JAY: Well, is there any rational, realistic way, other than some kind of tax increase, to deal with the panic?
PANITCH: Well, I think there can be both deficits. People do not have to be afraid of it. It was ridiculous to see every Canadian politician promising there wouldn’t be a deficit. It’s not anything they can control anyway, and pandering to this irrationality around "I mustn’t have a small increase in my taxes." But more than that, I entirely agree with you that insofar as one doesn’t want to be beholden to have the public debt overburdening a particular government, there also ought to be a massive redistribution of wealth in the society passing through the state sector, passing through the government sector, definitely.
JAY: Is there a point where the world financial system or China and Russia and Europe and the Gulf states say that "We can’t trust the American system any longer, and we don’t trust the American Treasury bond, we don’t trust this financial system, and we’re going to have to take whatever the hit is and come up with something else"?
PANITCH: It’s conceivable, but they are so integrated that it’s a bit like saying, "Is there some point at which Nova Scotia doesn’t trust the Bank of Canada?" It’s integrated in that way. They have been so anxious for the American state to act, to bail out. And so, you know, when one hears they’re spending too much money, they’re going to pull their money out, etcetera, they were the ones who were screaming, "We need this trillion dollar bailout." It’s irresponsible of the American state not to be doing it. We’re dependent on the American state to do it. And they understand very well that this is a very integrated political system globally which coordinates the management of global capitalism.
JAY: But for the American state to then say, "Okay, we’re going to back state bonds, municipal bonds," the potential debt that that could create, doesn’t that then force the American state, for the sake even of preventing a continuing panic around the world, to say, "We’re going to raise taxes in order to back up this backing-up"?
PANITCH: Absolutely. They would need to both raise taxes but also have access to a great deal of private capital in the world that is going to have and does have no safer place to put their money than into US Treasury bonds. And that’s why US Treasury bonds now, people are buying them, virtually getting no interest on them, and are happy to hold them, ’cause it’s the one thing that they’re sure of.
JAY: Now, we’re talking as if there’s rationality behind all of this. And a lot of people thought there could never be an invasion of Iraq, ’cause there was nothing rational about that. And the more I grow older, the more I say to myself, never underestimate the role of banality and stupidity in the making of history. We’re not seeing that much rationality right now. And if we’re not seeing some more rational solutions, what are we likely to see out of this?
PANITCH: Well, rational in who’s terms?
JAY: Well, even in terms of just keeping the system going, you know, with kind of things as is.
PANITCH: Yeah. I mean, you saw irrationality within the framework of keeping the system going when American congressmen didn’t vote for what Paulson had produced. A lot of them didn’t vote ’cause they thought, "Well, I can vote against it. It’s going to pass anyway. And then I can go to my constituents and say, ‘I voted against it. Don’t blame me.’"
JAY: You had others like Kucinich saying use the opportunity to have a more profound solution.
PANITCH: You had others who voted on principle, and you had others voting not understanding that this was as serious a problem as it was.
JAY: What Nader was saying was interesting, was that you actually had a point where you had some real leverage on Wall Street, "you" being the public interest, and could have used this opportunity—if you’re going to bail them out, bail out under certain conditions.
PANITCH: Sure. You could have, had the treasury not been the type of capitalist organization it is, had the Federal Reserve not been the type of capitalist organization that it is, and had the Democratic Party not been the kind of capitalist organization it is, had the American Democratic presidential candidate not been as dependent for funding on Wall Street as he is, had he not had among his advisors so many Wall Street and Goldman Sachs executives.
JAY: Who helped create this crisis in the first place.
PANITCH: You could have had it if you have a different balance of forces in the United States, if you have the development of the kinds of movements that either transform the Democratic Party or create a new type of party outside of it, part of its agenda being to reorganize the American state so that it is really democratic rather than phonily democratic in the sense that it is. Yes, you could have had that. That’s not to say people shouldn’t be calling for it. I admire those who do. I just think one also needs to understand this isn’t about a change in policy; it’s about a change in deep structures.
JAY: In the next segment of our interview, let’s talk a bit about how we got here. Please join us for the next segment of our interview with Dr. Leo Panitch.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.