Tim Taylor: China and Currency Manipulation [feedly]

China and Currency Manipulation

Tim Taylor
http://conversableeconomist.blogspot.com/2019/08/china-and-currency-manipulation.html

Treasury Secretary Steve Mnuchin has "determined that China is a Currency Manipulator" (with capital letters in the press release) The overall claim is that one major reason for China large trade surpluses is that China is keeping is exchange rate too low. This low exchange rate makes China's exports cheaper to the rest of the world, while also making foreign products more expensive in China, thus creating China's trade surplus.

The claim is not particularly plausible.  Indeed, a cynic might point out that if currency manipulation was the main trade problem all along then, then Trump has been wasting time by playing around with tariffs since early 2018. For perspective on the exchange rate issue, let's start with the Chinese yuan/US dollar exchange rate in the last 30 years.

Up to about 1995, the exchange rate shown here is not an especially meaningful number, because during that time China had an "official" exchange rate set by the government and an "unofficial" exchange rate set in markets. The official rate had a much stronger yuan than the unofficial rate, so when the two rates were united in 1995,  there is a steep jump upward in the exchange rate graph, as the yuan gets weaker (that is, it takes more yuan to buy a US dollar).

From about 1996-2005, the straight horizontal line on the graph is strong evidence that the Bank of China was keeping its exchange rate fixed.  Starting in mid-2005, China stopped holding its exchange rate fixed, and the yuan become stronger, moving from about 8.2 yuan/dollar in early 2005 to 6.8 yuan/dollar by mid-2008.  Since then, the yuan has shifted up and down, falling as low as about 6.1 yuan/dollar at times, but then often rising back up to about 6.8 yuan/dollar.

It's useful to compare the yuan exchange rate with China's balance of trade. Here's a figure based on World Bank data showing China's trade balance since 1990.  Back in the 1990s, China's trade surplus was usually positive, but also typically less than 2% of GDP. When China joins the WTO in 2001, its exports take off and so does its trade surplus, hitting 10% of GDP in 2007. It would be highly implausible to attribute this jump in China's trade surplus to currency manipulation, because the first figure shows that China's exchange rate is unchanged during this period. It is also highly implausible to attribute this rise to more Chinese protectionism, because China's giant trade surpluses resulted from higher exports, not lower imports.

But then China's extraordinary trade surplus soon went away. By 2011 China's trade surplus was under 2% of GDP; in 2018, it's under 1% of GDP. Thus the Trump administration complaint that China is using an extraordinarily weak exchange rate to power very large Chinese trade surpluses has not been plausible since 2011, and is even less plausible since 2018.

So how did the US Treasury decide in August 2019 that China was now manipulating its currency? Treasury is required by law to publish a semiannual report, "Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States."

At the time of the October 2018 report, exchange rate was about 6.9 yuan/dollar. The report did not find that China was acting like a currency manipulator at that time. As it points out, the IMF agreed with this view, as did other outside economists. For example, the Treasury wrote:

"Over the last decade, the RMB has generally appreciated on a real, trade-weighted basis. This appreciation has led the IMF to shift its assessment of the RMB in recent years and conclude that the RMB is broadly in line with economic fundamentals."

That report also offers a macroeconomically odd complaint. It acknowledges that China's overall trade surplus in 2018 was near-zero, but then complains that China's trade position is "unevenly spread"--that is, China has a trade surplus with some countries like the US, but a nearly offsetting trade deficit with other countries. Treasury wrote:

Since then, China's current account surplus has declined substantially, falling to 0.5 percent of GDP in the four quarters through June 2018. However, it remains unevenly spread among China's trading partners. In particular, China retains a very large and persistent trade surplus with the United States, at $390 billion over the four quarters through June 2018.

So China was on warning that even if its overall trade balance was near-zero, the US was only focused on the bilateral trade balance. The next Treasury report arrives in May 2019, when the exchange rate was still 6.9 yuan/dollar, as it had been at the time of the October 2019 report. Again, Treasury does not find that China is a currency manipulator. However, in the exchange rate graph above you can see a little dip in the yuan/dollar exchange rate in March 2018, as the yuan becomes a bit weaker for a short time. Treasury warns:

Notwithstanding that China does not trigger all three criteria under the 2015 legislation, Treasury will continue its enhanced bilateral engagement with China regarding exchange rate issues, given that the RMB has fallen against the dollar by 8 percent over the last year in the context of an extremely large and widening bilateral trade surplus. Treasury continues to urge China to take the necessary steps to avoid a persistently weak currency.

Again, the focus is on China's bilateral trade surplus with the US. There's another interesting hint here, which is that Treasure is urging "China to take the necessary steps to avoid a persistently weak currency." This phrasing is interesting, because it isn't a complaint that China is intervening to make its currency too weak; instead, it's a complaint that China should be intervening more to prevent its currency from being weak. It's a complaint that China is not being enough of a currency manipulator in the way the Trump administration would prefer.

Before the announcement from Mnuchin, the exchange rate in August 2019 was still about 6.9 yuan/dollar--that is, what it had been in May 2019 and October 2019. But now, this exchange rate was evidence that China was "Currency Manipulator." In fact, the recent Treasury press release links to the May 2019 report, which did not find that China was manipulating its currency, in support of the finding that China was manipulating its currency.

The May 2019 report sets out three standards that Treasury will supposedly be looking at when thinking about currency manipulation. First is whether the country has a bilateral trade surplus with the US of more than $20 billion, which China does. Second is whether the country has an overall trade surplus of more than 2% of GDP, which China doesn't.  IMF statistics find that China's trade surplus in 2018 was 0,4% of GDP; moreover, the IMF finds that China is headed for a trade surplus in the next few years. Third is whether the country is intervening regularly in foreign exchange markets. As the Treasury report points out, Bank of China foreign exchange operations are shrouded in secrecy, but the evidence suggests that China's foreign exchange reserves haven't moved much since early 2018, or are perhaps a bit down overall, which is not consistent with the theory that the Bank of China has been buying lots of US dollars to keep the yuan exchange rate weak.

For those with eyes to see, it should be apparent that trade deficits and surpluses rise and fall as a a result of large-scale macroeconomic factors, including national levels of consumption, savings, and investment.  I won't belabor this point here, because I've tried to explain it a few times: for example, see "Misconceptions about Trade Deficits" (March 30, 2018), "Some Facts about Current Global Account Balances" (August 7, 2018), and "US Not the Source of China's Growth; China Not the Source of America's Problems"(December 4, 2018).

Understanding the actual drivers of trade balances explains why raising tariffs for a year and watching the US trade deficit got larger, rather than smaller. China's yuan/dollar exchange rate is at a level where its overall trade balance is near-zero, and according to the IMF, headed for a modest trade deficit in the next few years. Thus, the IMF is unlikely to back the Trump administration argument that the Bank of China is manipulating its exchange rate. But if the Trump administration bludgeons China into having a substantially stronger exchange rate, what happens next?

A strong exchange rate for one currency necessarily means a weaker exchange rate for other currencies: for example, if it takes fewer yuan to buy a dollar, it necessarily takes more dollars to buy a yuan. By arguing for a stronger yuan exchange rate, the Trump administration is apparently trying to devalue its way to prosperity by arguing for a weaker US dollar exchange rate,  This makes it easier to sell US exports abroad, but the lower buying power for the US dollar also means that, in effect, everything which is imported by consumers and firms will cost more.  Economies with floating exchange rates, like the US, are built to absorb short- and even medium-term fluctuations in exchange rates without too much stress. But in effect, the current Treasury policy is to advocate that China take steps to produce a permanently weaker US dollar--and thus benefit exporters at the cost of higher prices for importers--until the bilateral US trade deficit with China is eliminated.  

 -- via my feedly newsfeed

Desperate Britain Has No Leverage for U.S. Deal, Summers Says - Bloomberg

Desperate Britain Has No Leverage for U.S. Deal, Summers Says

by Eddie Spence



https://www.bloomberg.com/news/articles/2019-08-06/desperate-britain-has-no-leverage-for-u-s-deal-summers-says

Trump’s China Shock [feedly]

Trump's China Shock
https://www.nytimes.com/2019/08/05/opinion/trumps-china-shock.html

I didn't know that the Dow was going to drop 750 points, so my latest column is El Paso-related. Probably the right choice anyway, because US-China is moving so fast that anything in the print paper would be out of date.

But it does look as if I should try to explain (a) what I think is happening (b) why the markets are going so nuts. By the way, given Mnuchin's declaration just a few minutes ago that China is a currency manipulator, tomorrow's market action should be … interesting.

So here's the thing: neither Trump's tariff announcement last week nor, especially, the depreciation of China's currency today should objectively be that big a deal. Trump slapped 10 percent tariffs on $200 billion of Chinese exports, which is a tax hike of 0.1 percent of US GDP and 0.15 percent of Chinese GDP.

In response, China let its currency drop by about 2 percent. For comparison, the British pound has dropped around 9 percent since May, when it became clear that a no-deal Brexit was likely.


So why are these smallish numbers such a big deal? Mostly because we've learned things about the protagonists in this trade conflict, things that make a bigger, longer trade war seem a lot more likely than it did even a few days ago.

First, Trump really is a Tariff Man. Some naïve souls may still have been hoping that he would learn something from the failure of his trade policy so far. More sensible people hoped that he might do what he did with NAFTA: reach a new deal basically the same as the old deal, proclaim that it was totally different, and claim a great victory.

But no: it's pretty clear now that he refuses to give up on his belief that trade wars are good, and easy to win; his plan is to continue the beatings until morale improves. What may have looked like temporary tariffs designed to win concessions now look like permanent features of the world economy, with the level of tariffs and the range of countries facing them likely to expand over time.

Second, China is clearly signaling that it's not Canada or Mexico: it's too big and too proud to submit to what it considers bullying. That slide in the renminbi wasn't a concrete policy measure as much as a way of saying to Trump, "talk to the hand" (no doubt there's a good Chinese expression along these lines.)

Incidentally — or maybe it's not so incidental — while there are many valid reasons to criticize Chinese policy, currency manipulation isn't one of them. China was a major currency manipulator 7 or 8 years ago, but these days if anything it's supporting its currency above the level it would be at if it were freely floating.



And think for a minute about what would happen to a country with an unmanipulated currency, if one of its major export markets suddenly slapped major tariffs on many of its goods. You'd surely expect to see that country's currency depreciate, just as Britain's has with the prospect of lost market access due to Brexit.

In other words, the Trump administration in its wisdom has managed to accuse the Chinese of the one economic crime of which they happen to be innocent. Oh, and what are we going to do to punish them for this crime? Put tariffs on their exports? Um, we've already done that.

So how does this all end? I have no idea. More important, neither does anyone else. It looks to me as if both Trump and Xi have now staked their reputations on hanging tough. And the thing is, it's hard to see what would make either side give in (or even to know what giving in might mean.)

At this rate, we may have to wait for a new president to clean up this mess, if she can.
 -- via my feedly newsfeed

PK: S, a yuan currency war...

So, A Yuan Currency War

Paul Krugman

On Monday night the U.S. Treasury designated China a currency manipulator. This was deeply ironic to those of us who follow such things.

After all, Treasury shied away from calling China on its currency policy back in 2010, when the accusation was actually true, and the deliberate undervaluation of the renminbi, China's currency, was doing real harm at a time of mass unemployment. As best I could tell — and I was talking to people with some inside information at the time — the Obama administration decided that accusing China of currency foul play, although it would have been accurate, would be counterproductive.

For while currency manipulation is illegal under international agreements, there isn't any clear remedy. The Obama administration therefore feared that it would face a nasty choice: look ineffective by accusing China of sin, then doing nothing about it, or respond with tariffs that might set off a destructive trade war.

Things are very different today. At this point, China's currency policy is actually fairly benign; if anything, its policies are keeping the renminbi stronger than it would be otherwise. Meanwhile, U.S. unemployment is low. There are plenty of things to criticize about China, but currency policy isn't one of them. With unerring aim, the Trump administration has decided to accuse China of the one crime of which it's innocent. Of course, this administration doesn't have to fear setting off a trade war, since it has already done that.

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Let's back up for a minute. What does currency manipulation even mean? Currencies aren't commodities like soybeans or natural gas, which have "natural" prices determined by supply and demand. Instead, we live in a world of "fiat" currencies created by governments; the supply of dollars is whatever the Federal Reserve says it should be. If a government decides for whatever reason to change the supply of money, the price of that money will change, but that's not manipulation in any meaningful sense of the word.

So what we mean when talking about currency manipulation is fairly subtle: it refers to actions governments take to keep their currencies weak so as to achieve a competitive advantage. And China was doing that back in 2010: it was buying dollars to keep its own currency weak, and imposing controls to keep foreigners from investing a lot of money in China, which would have pushed the renminbi up.

Since 2013, however, China has been doing more or less the opposite: generally selling dollars, while imposing controls on the ability of its own residents to take money out of the country. To the extent that it is manipulating its currency, it's doing so to keep the renminbi up, not down.

What China did Monday was to slightly relax its support for the currency, allowing it to fall through the symbolically important level of 7 to the dollar. So the U.S. is calling China a currency manipulator because it has, um, stopped intervening to keep its currency up. Orwellian much?

Of course, economic logic has very little to do with any of this. Trump wants China to make splashy concessions in the face of his tariffs; China let its currency slide a bit to signal that it won't be bullied. Basically, it's "Sanction me? No, sanction you!"

This isn't likely to end well.

--

John Case
Harpers Ferry, WV

Enlighten Radio

Socialist Economics

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Marx and Engels Address to the Communist League, 1850

jcase (doc is below if ya want to skip my take :) ): 

I like going back and reading the actual Marx, and trying as well to capture the historical context. Below is Marx's address to the leadership of the Communist League in 1850, and often quoted in "Marxist" critiques of bourgeois liberalism. It is a good example of remarks by Marx that are typically taken out of context, but which, even in context, contained a "mistake" a prediction and expectation not born out by longer historical experience. 1850 is also ONLY at the beginning of Marx and Engels study of Economics. So terms referencing class (bourgois, petty-bourgeois, proletarian, feudal, monarchist) are ones in common usage in 1850 republican parlance, not quite the same as Marx later used them in more precisely defined economic relations of production..

Some context: In 1850, when this piece was written, the collapse of the second French Republic was nearly complete, led by the liberal bourgeoisie [I will stick with European 'class' terms] of France who yielded to the collapse and the return of "Empire" (and a chance for the monarchists to return to power) under Louis-Napoleon Bonaparte. Marx and Engels submit their views on the political situation to the leadership of "Communist league" a party rapidly growing among wage labor, a fairly new "class" -- in very class-conscious Europe. The attempts of German republicans and communists to overthrow German Feudalism and monarchism, were taking their own tortuous path, and similar "lessons" from the French collapse were being applied. This speech was Marx's summary of what went wrong, and what had to go right for true "democracy" (interpreted as an end to capitalist rule) to be won.

Marx was right, and wrong. Right, that bourgeois --and petty-bourgeois (small biz, professionals, in that time) liberalism --- very often -- but not always -- collapses and folds in the face of reaction. Labor, although slower to rouse, once it is aroused, and united, can withstand hurricanes. They understand both sacrifice, and mercy and solidarity better..

Nonetheless, he was also wrong. The working class of that time was NOT organized or prepared enough to rule. And bourgeois classes, even after revolutions, were beset with partial victories and counter revolutions for considerable time before gaining supremacy -- but supremacy WAS gained. Structural economic changes compel a vast change in society's previous divisions of wealth and labor that may have persisted for a millenia. Cultural and even moral values must be transformed to adapt to new social relations. The truth of the matter, I submit, was that the practice of democracy in established bourgeois (predominantly capitalist) republics was much more complex in its evolution than the theories about it at its birth could possibly foresee.

This was affirmed many times by both Marx and Engels later in life -- in particular, in Letters Marx exchanged with Abraham Lincoln [who did not cave in the face of reaction] and articles written for the New York Daily Tribune during the American Civil War, and characterizations of democracy incorporated into Capital (1867).

One of Marx's most profound (to me) observations, which he ascribed to his philosophy of historical materialism, was that economic systems have material and social foundations, as well as material and social consequences, especially as the system reproduces itself over time and generations. Once the social surplus (beyond subsistence) accumulates from gradual improvements in agriculture, tools, literacy and science, capitalism emerged. No one really invented it. Knowledge, and science, presented opportunities for investment that could vastly expand that surplus, but which the feudal systems and relations could not develop. And then capitalism: Science and the rise of culture and human capital give rise to commodities (things produced for exchange) or vice versa, depending on your philosophical stance. With prices, economic relations can be measured and expressed mathematically. Never ending cycles and interactions follow. Everything is in motion and no state of being is permanent. The circulation of commodities has laws and dynamics not unlike any other force of nature. These laws appear differently to different roles in the system. Human social and legal 'laws' can adapt and constrain the natural laws, but they must also serve them, since commodities are the means of life in bourgeois society.. Thinking objectively about forces of a SOCIAL nature is difficult and approximate, since the thinker is IN the society he is trying to be objective about. Marx, like most of the early Economists, relied primarily upon philosophical and analytical rigor, plus data in the British Museum of 1860s in that heroic effort, striving to bring philosophy closer to Natural Philosophy, or science. Today we have Big Data and AI to help us.

Now, after 160 years, capitalism is quite advanced and mature. Not like 1850. But still expanding throughout the world everywhere commodities are traded. Its contradictions and tendencies toward imperial and nationalistic collisions, and extreme inequality, have been seen by all. World wars have been fought over expanding market powers and contests over resources and populations. Despite the passage of 160 years some of the same fundamental questions reassert themselves.

It is worth noting that The Chinese Communist Party is the principle remaining proponent and practitioner of Marx's "wrong" line, although updated and modified to reflect the following principle: iManage the bourgeois/commodity era as a necessary stage of historical development, but with the Communist ideal as a guiding vision toward a world freed (mostly) of commodities and ruled by character, aspiration and reputation. That "line", thus, has not been completely refuted

Here is a Zen version of the PRC: Like the Tyger (https://www.poetryfoundation.org/poems/43687/the-tyger) of Blake's vision,
we can ask of capitalism, "what immortal hand or eye dare framed thy fearful symmetry". But if we do not ride it until it has exhausted its furies and strengths, it will eat us.Unfortunately he is the only ride through the forest.

Marx and Engels Address to the Communist League, 1850

https://www.marxists.org/archive/marx/works/1847/communist-league/1850-ad1.htm

Brothers!

In the two revolutionary years of 1848-49 the League proved itself in two ways. First, its members everywhere involved themselves energetically in the movement and stood in the front ranks of the only decisively revolutionary class, the proletariat, in the press, on the barricades and on the battlefields. The League further proved itself in that its understanding of the movement, as expressed in the circulars issued by the Congresses and the Central Committee of 1847 and in theManifesto of the Communist Party, has been shown to be the only correct one, and the expectations expressed in these documents have been completely fulfilled. This previously only propagated by the League in secret, is now on everyone's lips and is preached openly in the market place. At the same time, however, the formerly strong organization of the League has been considerably weakened. A large number of members who were directly involved in the movement thought that the time for secret societies was over and that public action alone was sufficient. The individual districts and communes allowed their connections with the Central Committee to weaken and gradually become dormant. So, while the democratic party, the party of the petty bourgeoisie, has become more and more organized in Germany, the workers' party has lost its only firm foothold, remaining organized at best in individual localities for local purposes; within the general movement it has consequently come under the complete domination and leadership of the petty-bourgeois democrats. This situation cannot be allowed to continue; the independence of the workers must be restored. The Central Committee recognized this necessity and it therefore sent an emissary, Joseph Moll, to Germany in the winter of 1848-9 to reorganize the League. Moll's mission, however, failed to produce any lasting effect, partly because the German workers at that time had not enough experience and partly because it was interrupted by the insurrection last May. Moll himself took up arms, joined the Baden-Palatinate army and fell on 29 June in the battle of the River Murg. The League lost in him one of the oldest, most active and most reliable members, who had been involved in all the Congresses and Central Committees and had earlier conducted a series of missions with great success. Since the defeat of the German and French revolutionary parties in July 1849, almost all the members of the Central Committee have reassembled in London: they have replenished their numbers with new revolutionary forces and set about reorganizing the League with renewed zeal.

This reorganization can only be achieved by an emissary, and the Central Committee considers it most important to dispatch the emissary at this very moment, when a new revolution is imminent, that is, when the workers' party must go into battle with the maximum degree of organization, unity and independence, so that it is not exploited and taken in tow by the bourgeoisie as in 1848.

We told you already in 1848, brothers, that the German liberal bourgeoisie would soon come to power and would immediately turn its newly won power against the workers. You have seen how this forecast came true. It was indeed the bourgeoisie which took possession of the state authority in the wake of the March movement of 1848 and used this power to drive the workers, its allies in the struggle, back into their former oppressed position. Although the bourgeoisie could accomplish this only by entering into an alliance with the feudal party, which had been defeated in March, and eventually even had to surrender power once more to this feudal absolutist party, it has nevertheless secured favourable conditions for itself. In view of the government's financial difficulties, these conditions would ensure that power would in the long run fall into its hands again and that all its interests would be secured, if it were possible for the revolutionary movement to assume from now on a so-called peaceful course of development. In order to guarantee its power the bourgeoisie would not even need to arouse hatred by taking violent measures against the people, as all of these violent measures have already been carried out by the feudal counter-revolution. But events will not take this peaceful course. On the contrary, the revolution which will accelerate the course of events, is imminent, whether it is initiated by an independent rising of the French proletariat or by an invasion of the revolutionary Babel by the Holy Alliance.

The treacherous role that the German liberal bourgeoisie played against the people in 1848 will be assumed in the coming revolution by the democratic petty bourgeoisie, which now occupies the same position in the opposition as the liberal bourgeoisie did before 1848. This democratic party, which is far more dangerous for the workers than were the liberals earlier, is composed of three elements: 1) The most progressive elements of the big bourgeoisie, who pursue the goal of the immediate and complete overthrow of feudalism and absolutism. This fraction is represented by the former Berlin Vereinbarer, the tax resisters; 2) The constitutional-democratic petty bourgeois, whose main aim during the previous movement was the formation of a more or less democratic federal state; this is what their representative, the Left in the Frankfurt Assembly and later the Stuttgart parliament, worked for, as they themselves did in the Reich Constitution Campaign; 3) The republican petty bourgeois, whose ideal is a German federal republic similar to that in Switzerland and who now call themselves 'red' and 'social-democratic' because they cherish the pious wish to abolish the pressure exerted by big capital on small capital, by the big bourgeoisie on the petty bourgeoisie. The representatives of this fraction were the members of the democratic congresses and committees, the leaders of the democratic associations and the editors of the democratic newspapers.

After their defeat all these fractions claim to be 'republicans' or 'reds', just as at the present time members of the republican petty bourgeoisie in France call themselves 'socialists'. Where, as in Wurtemberg, Bavaria, etc., they still find a chance to pursue their ends by constitutional means, they seize the opportunity to retain their old phrases and prove by their actions that they have not changed in the least. Furthermore, it goes without saying that the changed name of this party does not alter in the least its relationship to the workers but merely proves that it is now obliged to form a front against the bourgeoisie, which has united with absolutism, and to seek the support of the proletariat.

The petty-bourgeois democratic party in Germany is very powerful. It not only embraces the great majority of the urban middle class, the small industrial merchants and master craftsmen; it also includes among its followers the peasants and rural proletariat in so far as the latter has not yet found support among the independent proletariat of the towns.

The relationship of the revolutionary workers' party to the petty-bourgeois democrats is this: it cooperates with them against the party which they aim to overthrow; it opposes them wherever they wish to secure their own position.

The democratic petty bourgeois, far from wanting to transform the whole society in the interests of the revolutionary proletarians, only aspire to a change in social conditions which will make the existing society as tolerable and comfortable for themselves as possible. They therefore demand above all else a reduction in government spending through a restriction of the bureaucracy and the transference of the major tax burden into the large landowners and bourgeoisie. They further demand the removal of the pressure exerted by big capital on small capital through the establishment of public credit institutions and the passing of laws against usury, whereby it would be possible for themselves and the peasants to receive advances on favourable terms from the state instead of from capitalists; also, the introduction of bourgeois property relationships on land through the complete abolition of feudalism. In order to achieve all this they require a democratic form of government, either constitutional or republican, which would give them and their peasant allies the majority; they also require a democratic system of local government to give them direct control over municipal property and over a series of political offices at present in the hands of the bureaucrats.

The rule of capital and its rapid accumulation is to be further counteracted, partly by a curtailment of the right of inheritance, and partly by the transference of as much employment as possible to the state. As far as the workers are concerned one thing, above all, is definite: they are to remain wage labourers as before. However, the democratic petty bourgeois want better wages and security for the workers, and hope to achieve this by an extension of state employment and by welfare measures; in short, they hope to bribe the workers with a more or less disguised form of alms and to break their revolutionary strength by temporarily rendering their situation tolerable. The demands of petty-bourgeois democracy summarized here are not expressed by all sections of it at once, and in their totality they are the explicit goal of only a very few of its followers. The further particular individuals or fractions of the petty bourgeoisie advance, the more of these demands they will explicitly adopt, and the few who recognize their own programme in what has been mentioned above might well believe they have put forward the maximum that can be demanded from the revolution. But these demands can in no way satisfy the party of the proletariat. While the democratic petty bourgeois want to bring the revolution to an end as quickly as possible, achieving at most the aims already mentioned, it is our interest and our task to make the revolution permanent until all the more or less propertied classes have been driven from their ruling positions, until the proletariat has conquered state power and until the association of the proletarians has progressed sufficiently far – not only in one country but in all the leading countries of the world – that competition between the proletarians of these countries ceases and at least the decisive forces of production are concentrated in the hands of the workers. Our concern cannot simply be to modify private property, but to abolish it, not to hush up class antagonisms but to abolish classes, not to improve the existing society but to found a new one. There is no doubt that during the further course of the revolution in Germany, the petty-bourgeois democrats will for the moment acquire a predominant influence. The question is, therefore, what is to be the attitude of the proletariat, and in particular of the League towards them:

1) While present conditions continue, in which the petty-bourgeois democrats are also oppressed;
2) In the coming revolutionary struggle, which will put them in a dominant position;
3) After this struggle, during the period of petty-bourgeois predominance over the classes which have been overthrown and over the proletariat.

1. At the moment, while the democratic petty bourgeois are everywhere oppressed, they preach to the proletariat general unity and reconciliation; they extend the hand of friendship, and seek to found a great opposition party which will embrace all shades of democratic opinion; that is, they seek to ensnare the workers in a party organization in which general social-democratic phrases prevail while their particular interests are kept hidden behind, and in which, for the sake of preserving the peace, the specific demands of the proletariat may not be presented. Such a unity would be to their advantage alone and to the complete disadvantage of the proletariat. The proletariat would lose all its hard-won independent position and be reduced once more to a mere appendage of official bourgeois democracy. This unity must therefore be resisted in the most decisive manner. Instead of lowering themselves to the level of an applauding chorus, the workers, and above all the League, must work for the creation of an independent organization of the workers' party, both secret and open, and alongside the official democrats, and the League must aim to make every one of its communes a center and nucleus of workers' associations in which the position and interests of the proletariat can be discussed free from bourgeois influence. How serious the bourgeois democrats are about an alliance in which the proletariat has equal power and equal rights is demonstrated by the Breslau democrats, who are conducting a furious campaign in their organ, the Neue Oder Zeitung, against independently organized workers, whom they call 'socialists'. In the event of a struggle against a common enemy a special alliance is unnecessary. As soon as such an enemy has to be fought directly, the interests of both parties will coincide for the moment and an association of momentary expedience will arise spontaneously in the future, as it has in the past. It goes without saying that in the bloody conflicts to come, as in all others, it will be the workers, with their courage, resolution and self-sacrifice, who will be chiefly responsible for achieving victory. As in the past, so in the coming struggle also, the petty bourgeoisie, to a man, will hesitate as long as possible and remain fearful, irresolute and inactive; but when victory is certain it will claim it for itself and will call upon the workers to behave in an orderly fashion, to return to work and to prevent so-called excesses, and it will exclude the proletariat from the fruits of victory. It does not lie within the power of the workers to prevent the petty-bourgeois democrats from doing this; but it does lie within their power to make it as difficult as possible for the petty bourgeoisie to use its power against the armed proletariat, and to dictate such conditions to them that the rule of the bourgeois democrats, from the very first, will carry within it the seeds of its own destruction, and its subsequent displacement by the proletariat will be made considerably easier. Above all, during and immediately after the struggle the workers, as far as it is at all possible, must oppose bourgeois attempts at pacification and force the democrats to carry out their terroristic phrases. They must work to ensure that the immediate revolutionary excitement is not suddenly suppressed after the victory. On the contrary, it must be sustained as long as possible. Far from opposing the so-called excesses – instances of popular vengeance against hated individuals or against public buildings with which hateful memories are associated – the workers' party must not only tolerate these actions but must even give them direction. During and after the struggle the workers must at every opportunity put forward their own demands against those of the bourgeois democrats. They must demand guarantees for the workers as soon as the democratic bourgeoisie sets about taking over the government. They must achieve these guarantees by force if necessary, and generally make sure that the new rulers commit themselves to all possible concessions and promises – the surest means of compromising them. They must check in every way and as far as is possible the victory euphoria and enthusiasm for the new situation which follow every successful street battle, with a cool and cold-blooded analysis of the situation and with undisguised mistrust of the new government. Alongside the new official governments they must simultaneously establish their own revolutionary workers' governments, either in the form of local executive committees and councils or through workers' clubs or committees, so that the bourgeois-democratic governments not only immediately lost the support of the workers but find themselves from the very beginning supervised and threatened by authorities behind which stand the whole mass of the workers. In a word, from the very moment of victory the workers' suspicion must be directed no longer against the defeated reactionary party but against their former ally, against the party which intends to exploit the common victory for itself.

2. To be able forcefully and threateningly to oppose this party, whose betrayal of the workers will begin with the very first hour of victory, the workers must be armed and organized. The whole proletariat must be armed at once with muskets, rifles, cannon and ammunition, and the revival of the old-style citizens' militia, directed against the workers, must be opposed. Where the formation of this militia cannot be prevented, the workers must try to organize themselves independently as a proletarian guard, with elected leaders and with their own elected general staff; they must try to place themselves not under the orders of the state authority but of the revolutionary local councils set up by the workers. Where the workers are employed by the state, they must arm and organize themselves into special corps with elected leaders, or as a part of the proletarian guard. Under no pretext should arms and ammunition be surrendered; any attempt to disarm the workers must be frustrated, by force if necessary. The destruction of the bourgeois democrats' influence over the workers, and the enforcement of conditions which will compromise the rule of bourgeois democracy, which is for the moment inevitable, and make it as difficult as possible – these are the main points which the proletariat and therefore the League must keep in mind during and after the approaching uprising.

3. As soon as the new governments have established themselves, their struggle against the workers will begin. If the workers are to be able to forcibly oppose the democratic petty bourgeois it is essential above all for them to be independently organized and centralized in clubs. At the soonest possible moment after the overthrow of the present governments, the Central Committee will come to Germany and will immediately convene a Congress, submitting to it the necessary proposals for the centralization of the workers' clubs under a directorate established at the movement's center of operations. The speedy organization of at least provincial connections between the workers' clubs is one of the prime requirements for the strengthening and development of the workers' party; the immediate result of the overthrow of the existing governments will be the election of a national representative body. Here the proletariat must take care: 1) that by sharp practices local authorities and government commissioners do not, under any pretext whatsoever, exclude any section of workers; 2) that workers' candidates are nominated everywhere in opposition to bourgeois-democratic candidates. As far as possible they should be League members and their election should be pursued by all possible means. Even where there is no prospect of achieving their election the workers must put up their own candidates to preserve their independence, to gauge their own strength and to bring their revolutionary position and party standpoint to public attention. They must not be led astray by the empty phrases of the democrats, who will maintain that the workers' candidates will split the democratic party and offer the forces of reaction the chance of victory. All such talk means, in the final analysis, that the proletariat is to be swindled. The progress which the proletarian party will make by operating independently in this way is infinitely more important than the disadvantages resulting from the presence of a few reactionaries in the representative body. If the forces of democracy take decisive, terroristic action against the reaction from the very beginning, the reactionary influence in the election will already have been destroyed.

The first point over which the bourgeois democrats will come into conflict with the workers will be the abolition of feudalism as in the first French revolution, the petty bourgeoisie will want to give the feudal lands to the peasants as free property; that is, they will try to perpetrate the existence of the rural proletariat, and to form a petty-bourgeois peasant class which will be subject to the same cycle of impoverishment and debt which still afflicts the French peasant. The workers must oppose this plan both in the interest of the rural proletariat and in their own interest. They must demand that the confiscated feudal property remain state property and be used for workers' colonies, cultivated collectively by the rural proletariat with all the advantages of large-scale farming and where the principle of common property will immediately achieve a sound basis in the midst of the shaky system of bourgeois property relations. Just as the democrats ally themselves with the peasants, the workers must ally themselves with the rural proletariat.

The democrats will either work directly towards a federated republic, or at least, if they cannot avoid the one and indivisible republic they will attempt to paralyze the central government by granting the municipalities and provinces the greatest possible autonomy and independence. In opposition to this plan the workers must not only strive for one and indivisible German republic, but also, within this republic, for the most decisive centralization of power in the hands of the state authority. They should not let themselves be led astray by empty democratic talk about the freedom of the municipalities, self-government, etc. In a country like Germany, where so many remnants of the Middle Ages are still to be abolished, where so much local and provincial obstinacy has to be broken down, it cannot under any circumstances be tolerated that each village, each town and each province may put up new obstacles in the way of revolutionary activity, which can only be developed with full efficiency from a central point. A renewal of the present situation, in which the Germans have to wage a separate struggle in each town and province for the same degree of progress, can also not be tolerated. Least of all can a so-called free system of local government be allowed to perpetuate a form of property which is more backward than modern private property and which is everywhere and inevitably being transformed into private property; namely communal property, with its consequent disputes between poor and rich communities. Nor can this so-called free system of local government be allowed to perpetuate, side by side with the state civil law, the existence of communal civil law with its sharp practices directed against the workers. As in France in 1793, it is the task of the genuinely revolutionary party in Germany to carry through the strictest centralization. [It must be recalled today that this passage is based on a misunderstanding. At that time – thanks to the Bonapartist and liberal falsifiers of history – it was considered as established that the French centralised machine of administration had been introduced by the Great Revolution and in particular that it had been used by the Convention as an indispensable and decisive weapon for defeating the royalist and federalist reaction and the external enemy. It is now, however, a well-known fact that throughout the revolution up to the eighteenth Brumaire c the whole administration of the départements, arrondissements and communes consisted of authorities elected by, the respective constituents themselves, and that these authorities acted with complete freedom within the general state laws; that precisely this provincial and local self-government, similar to the American, became the most powerful lever of the revolution and indeed to such an extent that Napoleon, immediately after his coup d'état of the eighteenth Brumaire, hastened to replace it by the still existing administration by prefects, which, therefore, was a pure instrument of reaction from the beginning. But no more than local and provincial self-government is in contradiction to political, national centralisation, is it necessarily bound up with that narrow-minded cantonal or communal self-seeking which strikes us as so repulsive in Switzerland, and which all the South German federal republicans wanted to make the rule in Germany in 1849. – Note by Engels to the 1885 edition.]

We have seen how the next upsurge will bring the democrats to power and how they will be forced to propose more or less socialistic measures. it will be asked what measures the workers are to propose in reply. At the beginning, of course, the workers cannot propose any directly communist measures. But the following courses of action are possible:

1. They can force the democrats to make inroads into as many areas of the existing social order as possible, so as to disturb its regular functioning and so that the petty-bourgeois democrats compromise themselves; furthermore, the workers can force the concentration of as many productive forces as possible – means of transport, factories, railways, etc. – in the hands of the state.

2. They must drive the proposals of the democrats to their logical extreme (the democrats will in any case act in a reformist and not a revolutionary manner) and transform these proposals into direct attacks on private property. If, for instance, the petty bourgeoisie propose the purchase of the railways and factories, the workers must demand that these railways and factories simply be confiscated by the state without compensation as the property of reactionaries. If the democrats propose a proportional tax, then the workers must demand a progressive tax; if the democrats themselves propose a moderate progressive tax, then the workers must insist on a tax whose rates rise so steeply that big capital is ruined by it; if the democrats demand the regulation of the state debt, then the workers must demand national bankruptcy. The demands of the workers will thus have to be adjusted according to the measures and concessions of the democrats.

Although the German workers cannot come to power and achieve the realization of their class interests without passing through a protracted revolutionary development, this time they can at least be certain that the first act of the approaching revolutionary drama will coincide with the direct victory of their own class in France and will thereby be accelerated. But they themselves must contribute most to their final victory, by informing themselves of their own class interests, by taking up their independent political position as soon as possible, by not allowing themselves to be misled by the hypocritical phrases of the democratic petty bourgeoisie into doubting for one minute the necessity of an independently organized party of the proletariat. Their battle-cry must be: The Permanent Revolution.

--

John Case
Harpers Ferry, WV

Enlighten Radio

Socialist Economics

Facebook

Re: Your post about cashiers

Hey guys! A while back you wrote a post that talked about cashiers: http://economics.enlightenradio.org/2016/09/

In your post, you mentioned cashier careers. I work at Zippia and we have a cashier career map that might be a great addition to the post as a way of helping your readers understand what it's like to work as a cashier:
https://www.zippia.com/cashier-jobs/#career-paths

I thought it might be worth linking to in your post. For instance, you could say: "Cashier career paths are quite lucrative, and cashiers entering the field can expect to move onto senior positions in less than 10 years in most cases."

Take care,
Kristy

--
Kristy Crane
Public Relations
Zippia.com

Zippia is a resource site for job seekers who want to empower their career aspirations with knowledgeable data. We've been featured in USA Today, Forbes, Fortune, CNBC and the NY Times, among other leading publications.

Dan Little: Pervasive organizational and regulatory failures [feedly]

The always fascinating, and illuminating, sociologist, Dan Little

Pervasive organizational and regulatory failures
http://understandingsociety.blogspot.com/2019/08/pervasive-organizational-and-regulatory.html

It is intriguing to observe how pervasive organizational and regulatory failures are in our collective lives. Once you are sensitized to these factors, you see them everywhere. A good example is in the business section of today's print version of the New York Times, August 1, 2019. There are at least five stories in this section that reflect the consequences of organizational and regulatory failure.

The first and most obvious story is one that has received frequent mention in Understanding Society, the Boeing 737 Max disaster. In a story titled "FAA oversight of Boeing scrutinized", the reporters give information about a Senate hearing on FAA oversight earlier this week.  Members of the Senate Appropriations Committee questioned the process of certification of new aircraft currently in use by the FAA.

Citing the Times story, Ms. Collins raised concerns over "instances in which FAA managers appeared to be more concerned with Boeing's production timeline, rather than the safety recommendations of its own engineers."

Senator Jack Reed referred to the need for a culture change to rebalance the relationship between regulator and industry. Agency officials continued to defend the certification process, which delegates 96% of the work of certification to the manufacturer.

This story highlights two common sources of organizational and regulatory failure. There is first the fact of "production pressure" coming from the owner of a risky process, involving timing, supply of product, and profitability. This pressure leads the owner to push the organization hard in an effort to achieve goals -- often leading to safety and design failures. The second factor identified here is the structural imbalance that exists between powerful companies running complex and costly processes, and the safety agencies tasked to oversee and regulate their behavior. The regulatory agency, in this case the FAA, is under-resourced and lacks the expert staff needed to carry out in depth a serious process of technical oversight.  The article does not identify the third factor which has been noted in prior posts on the Boeing disaster, the influence which Boeing has on legislators, government officials, and the executive branch.

 A second relevant story (on the same page as the Boeing story) refers to charges filed in Germany against the former CEO of Audi who has been charged concerning his role in the vehicle emissions scandal. This is part of the long-standing deliberate effort by Volkswagen to deceive regulators about the emissions characteristics of their diesel engine and exhaust systems. The charges against the Audi executive involved ordering the development of software designed to cheat diesel emissions testing for their vehicles. This ongoing story is primarily a story about corporate dysfunction, in which corporate leaders were involved in unethical and dishonest activities on behalf of the company. Regulatory failure is not a prominent part of this story, because the efforts at deception were so carefully calculated that it is difficult to see how normal standards of regulatory testing could have defeated them. Here the pressing problem is to understand how professional, experienced executives could have been led to undertake such actions, and how the corporation was vulnerable to this kind of improper behavior at multiple levels within the corporation. Presumably there were staff at multiple levels within these automobile companies who were aware of improper behavior. The story quotes a mid-level staff person who writes in an email that "we won't make it without a few dirty tricks." So the difficult question for these corporations is how their internal systems were inadequate to take note of dangerously improper behavior. The costs to Volkswagen and Audi in liability judgments and government penalties are truly vast, and surely outweigh the possible gains of the deception. These costs in the United States alone exceed $22 billion. 

A similar story, this time from the tech industry, concerns a settlement of civil claims against Cisco Systems to settle claims "that it sold video surveillance technology that it knew had a significant security flaw to federal, state and local government agencies." Here again we find a case of corporate dishonesty concerning some of its central products, leading to a public finding of malfeasance. The hard question is, what systems are in place for companies like Cisco that ensure ethical and honest presentation of the characteristics and potential defects of the products that they sell? The imperatives of working always to maximize profits and reduce costs lead to many kinds of dysfunctions within organizations, but this is a well understood hazard. So profit-based companies need to have active and effective programs in place that encourage and enforce honest and safe practices by managers, executives, and frontline workers. Plainly those programs broke down at Cisco, Volkswagen, and Audi. (One of the very useful features of Tom Beauchamp's book Case Studies in Business, Society, and Ethics is the light Beauchamp sheds through case studies on the genesis of unethical and dishonest behavior within a corporate setting.)

Now we go on to Christopher Flavelle's story about home-building in flood zones. From a social point of view, it makes no sense to continue to build homes, hotels, and resorts in flood zones. The increasing destruction of violent storms and extreme weather events has been evident at least since the devastation of Hurricane Katrina. Flavelle writes:

There is overwhelming scientific consensus that rising temperatures will increase the frequency and severity of coastal flooding caused by hurricanes, storm surges, heavy rain and tidal floods. At the same time there is the long-term threat of rising seas pushing the high-tide line inexorably inland.

However, Flavelle reports research by Climate Central that shows that the rate of home-building in flood zones since 2010 exceeds the rate of home-building in non-flood zones in eight states. So what are the institutional and behavioral factors that produce this amazingly perverse outcome? The article refers to incentives of local municipalities in generating property-tax revenues and of potential homeowners subject to urban sprawl and desires for second-home properties on the water. Here is a tragically short-sighted development official in Galveston who finds that "the city has been able to deal with the encroaching water, through the installation of pumps and other infrastructure upgrades": "You can build around it, at least for the circumstances today. It's really not affected the vitality of things here on the island at all." The factor that is not emphasized in this article is the role played by the National Flood Insurance Program in the problem of coastal (and riverine) development. If flood insurance rates were calculated in terms of the true riskiness of the proposed residence, hotel, or resort, then it would no longer be economically attractive to do the development. But, as the article makes clear, local officials do not like that answer because it interferes with "development" and property tax growth. ProPublica has an excellent 2013 story on the perverse incentives created by the National Flood Insurance Program, and its inequitable impact on wealthier home-owners and developers (link). Here is an article by Christine Klein and Sandra Zellmer in the SMU Law Review on the dysfunctions of Federal flood policy (link):

Taken together, the stories reveal important lessons, including the inadequacy of engineered flood control structures such as levees and dams, the perverse incentives created by the national flood insurance program, and the need to reform federal leadership over flood hazard control, particularly as delegated to the Army Corps of Engineers.

Here is a final story from the business section of the New York Times illustrating organizational and regulatory dysfunctions -- this time from the interface between the health industry and big tech. The story here is an effort that is being made by DeepMind researchers to use artificial intelligence techniques to provide early diagnosis of otherwise mysterious medical conditions like "acute kidney injury" (AKI). The approach proceeds by analyzing large numbers of patient medical records and attempting to identify precursor conditions that would predict the occurrence of AKI. The primary analytical tool mentioned in the article is the set of algorithms associated with neural networks. In this instance the organizational / regulatory dysfunction is latent rather than explicit and has to do with patient privacy. DeepMind is a business unit within the Google empire of businesses, Alphabet. DeepMind researchers gained access to large volumes of patient data from the UK National Health Service. There is now regulatory concern in the UK and the US concerning the privacy of patients whose data may wind up in the DeepMind analysis and ultimately in Google's direct control. "Some critics question whether corporate labs like DeepMind are the right organization to handle the development of technology with such broad implications for the public." Here the issue is a complicated one. It is of course a good thing to be able to diagnose disorders like AKI in time to be able to correct them. But the misuse and careless custody of user data by numerous big tech companies, including especially Facebook, suggests that sensitive personal data like medical files need to be carefully secured by effective legislation and regulation. And so far the regulatory system appears to be inadequate for the protection of individual privacy in a world of massive databases and largescale computing capabilities. The recent FTC $5 billion settlement imposed on Facebook, large as it is, may not suffice to change the business practices of Facebook (link).

(I didn't find anything in the sports section today that illustrates organizational and regulatory dysfunction, but of course these kinds of failures occur in professional and college sports as well. Think of doping scandals in baseball, cycling, and track and field, sexual abuse scandals in gymnastics and swimming, and efforts by top college football programs to evade NCAA regulations on practice time and academic performance.)  

 -- via my feedly newsfeed