Several doctrines for the same shock

April 25, 2011

"Shock doctrine" is a term coined by left-wing author Naomi Klein to describe how business and political leaders have exploited disasters of all kinds--man-made and natural, economic and political--as an opportunity to impose further free-market reforms in the interests of reinforcing their power and profits. Eric Toussaint, author of Your Money or Your Life: The Tyranny of Global Finance and president of the Committee for the Abolition of Third World Debt, looks at the circumstances surrounding the use of the shock doctrine in the current economic crisis.

DURING THE first phase of the world economic crisis (2007-2009), the governments of the countries most affected by the crisis, starting with the U.S., have taken strong measures, drawing upon lessons of the first months following the Wall Street crash in October 1929. Back then, the lack of state intervention to support both the financial system and demand led to very grave consequences in terms of recession and bankruptcy, then to political and social radicalization.

In reaction to the impact of the 1929 "laissez-faire" response, a certain number of measures were taken in the North to cushion the impact of the financial crisis: massive aid to banks, injection of an enormous mass of liquidities to keep credit and trade from drying up, lowering the interest rates of the US Federal Reserve followed by the Bank of England and the European Central Bank.

Measures were also taken to limit the erosion of the public's income and consumption. Social stabilizers were implemented--for example, several programs to guarantee income or provide a substitute income independent of economic activity, such as extended unemployment insurance in the U.S. In several countries, these schemes were extended for several months to expand their social safety net role.

Barack Obama with Vice President Joe Biden
The temporary resort to stimulus economic measures in industrialized countries like the U.S. has come to an end

Recovery plans consisted of increasing public spending to make up for the fall in private spending. In this context, some people imagined that in the face of the crisis, the governments led by Barack Obama, Gordon Brown, Nicolas Sarkozy, José Luis Zapatero, José Socrates or even Angela Merkel and Silvio Berlusconi would make a Keynesian turn: A structural increase in public spending, concessions to wage-earners, strict rules imposed on financial firms, a halt to the privatization wave or even resort to long-term nationalizations.[1] This didn't happen.

In hindsight, it is reasonable to think the "social shock absorbers" described above were only implemented temporarily, merely in order to soften the recession and limit the risks of potential social unrest due to the crisis provoked by the combined effect of bankers' appetite for maximizing profits and several decades of neoliberal policies.

In fact, in 2008, parties in power and editorialists at major financial media were afraid that awakening public opinion to a radical critique of capitalism would lead to a popular mobilization in favor of revolutionary changes. This distress was particularly keen when, in Greece, the right-wing New Democracy government rapidly resorted to austerity measures, provoking a social explosion in December 2008 and leading to its stinging electoral defeat in the early legislative elections in October 2009.


AS FOR the former Soviet-bloc countries that have become part of the European Union--in particular, those that have joined since 2004--the shock doctrine was applied without shock absorbers from 2008. The IMF presence of the previous 10 to 15 years strengthened and facilitated this orientation, though not without provoking large social mobilizations in certain countries.

In Iceland, which is not a European Union member, the shock doctrine was applied swiftly, provoking a very broad popular mobilization and a major political crisis that brought down the government and led to the rejection of a foreign debt repayment scheme in a referendum.

To avoid such an outcome, the U.S., Germany, Spain, Britain and France made stimulus expenditures in 2008-2009. By taking such action, the governments put off implementation of shock doctrine--that is, the use of a major psychological shock (such as one provoked by a large-scale crisis, a natural disaster or a terrorist attack) to bring in a new wave of neoliberal reforms and brutal economic measures that would be unthinkable in normal times.

Government leaders of these countries (supported by the European Commission in that continent) thus combined bank and insurance company bailouts with setting up a few social shock absorbers--and to succeed in calming down social discontent against bankers, government leaders themselves spoke out against the bad apples at the head of some private financial institutions. They even criticized a certain type of rogue capitalism, and some of them called for putting capitalism on new foundations.

Moreover, they did everything the could to avoid bringing up the risk of a massive increase in public debt, so as not to attract attention to its main cause: the exorbitant cost of bank bailouts, without the establishment of any public controls on the financial sector nor any measures to recover the funds the holdings of the banks' major shareholders.

The implementation of the shock doctrine in these countries came later, starting in 2010, after it was applied in the most fragile countries in the debt chain and the Euro zone--Greece, Ireland and Portugal, to start with.

Today, while governments vie with each other to impose ever more brutal and dramatic austerity, it is fundamental for public opinion to know exactly how we wound up in such a situation: Running headlong to keep up with the demands of the financial markets, the governments of the most industrialized countries have made their own citizens foot the bill.

Since the bank bailouts required investments that are very risky for immediate profits on the one hand, and tax policies that great favor the richest on the other, the consequence is that everyone outside the wealthy is paying more and more for the consequences of the world crisis and of congenitally unegalitarian capitalism.

In other words, the victims of the crisis wind up having to foot the bill for those who caused it. This explains why millions of people experience this as a deep injustice. Such a sense of injustice could trigger a powerful response.


Notes

1. The U.S., British, Netherlands and some other governments did undertake some isolated nationalizations in 2007-2008, but with the sole aim of preventing an utter failure of the financial and real estate sectors.

Translated by Marie Lagatta. First published at the Committee for the Abolition of Third World Debt website.

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