US Interstate Transfers and the Euro Crisis

by Nathaniel Cline and David Fields

It is recognized among heterodox economists that the fiscal crisis some Eurozone countries faced (and are facing) is the result not of internal fiscal excess but of fundamental imbalances made worse by the adoption of a common currency. Indeed, as Wynne Godley pointed out (in several pieces) long ago, European structural payment imbalances will not be automatically corrected by market forces. In this case a common currency without centralized fiscal powers will potentially exacerbate the balance of payments problems of member countries. Some countries will be permanently outsold, and under the current arrangements, are forced to make large income adjustments to resolve their balance of payments.

As a result, many (even in the mainstream) have suggested that a common fiscal union would resolve the problems these countries face. Comparisons have been made to the US whose member states enjoy a common currency with a substantial federal fiscal system that redistributes funds among the states. Residents of states pay taxes to the federal government and states receive government expenditures (through federal programs, grants, salaries, and other means). However the payments states receive are decided upon different ground than the taxes they pay. Thus a state like Mississippi pays very little in taxes, but receives a substantial amount of government spending. In contrast, states like Minnesota pay in to the system much more than they receive.

In normal times this prevents large balance of payments crises from emerging between states. Mississippi is thus permitted a higher average growth rate than would otherwise be implied by their balance of payments.

It is misleading however to assume from these large transfers that simple fiscal transfers between states would resolve Europe's fiscal problems. In a recent presentation to the Eastern Economic Association, Dave Fields and I argued that in fact, the US did not respond to the crisis by transferring large amounts of money between states as it does in normal times.

The key point was that US federal government went into deficit to transfer money to states as a whole. The relevant transfer in the crisis was then not among states, but between states and the federal government. What is needed then is a Euro deficit which would finance all member states, and not necessarily transfers between say Germany and Greece in the middle of a crisis.

The degree of interstate transfers in the US is shown below. Note that between 2004 and 2007 it appears that the federal government is actually a net drag on the states. This is likely not quite correct because the expenditures in the chart do not count expenditures which cannot easily be allocated among states (like for instance federal interest payments).

The Degree of Interstate Transfers 2004-1013

Source: Expenditures provided by the Pew Fiscal Federalism Initiative, tax data from the IRS, author's calculations

The issue can be seen clearly too if the transfers are broken down by state as is done in the chart below. One can see that by 2009, only a few states remained net contributors to the system while the others all became net recipients (including by the way both California and Texas). 

Fiscal Transfers Between the States 2008-2009

Source: Expenditures provided by the Pew Fiscal Federalism Initiative, tax data from the IRS, author's calculations

The Urban Fiscal Crisis as Neoliberal Shock Therapy: A Cartalist Fiscal-Sociological Approach

An article of mine has been posted by The Hampton Institute, A Working-Class Think Tank. From the intro:

My attempt is to suggest that, although laudatory, the neo-Marxist contributions to fiscal sociology put forward by James O'Connor's (2002 [1973]) The Fiscal Crisis of the State and Erik Olin Wright's (1977) Class, Crisis, and the State ultimately fail to accurately explicate the contradictions concerning the logic of capital during times of urban economic duress. I incorporate a dialectically materialist framework that manifests the interconnections between urban governance, capital accumulation and the structure of the state, with an emphasis on what I call a Cartalist sociological approach to money as an institution of social power to make my argument. The empirical backdrop is the United States, and the aim is to reassess the theoretical significance of the so-called 'fiscal crisis of the state' and its effect on the American urban built environment, in order to reconsider the broad historical contingencies that lead to the transformation from the so-called Keynesian managerial metropolis to the 'neoliberal city' (Harvey, 2009). I emphasize that the transformation was more the result of a deliberate policy by the federal government, so as to set in motion a set of institutional rigid social, political, and economic constraints (structural reforms is the euphemism) to enhance the process of rent-seeking, empirically manifested by the process of austerity & gentrification. 

Read rest here; a preliminary analysis was posted on NK here

More on The Sociology of Development - Reposted by Hampton Institute

More on The Sociology of Development: Towards A Re-articulation of Dependency Theory see here. For the original post see here.

More on The Sociology of Development: Towards A Re-articulation of Dependency Theory

The sociology of development as a field of study, a structure of knowledge, providing an interpretive grid through which to render impoverished regions of the world intelligible has its roots after the completion of Second World War with the crystallization of ‘Modernization theory', which constituted an ideation that societies are understood to move from social positions of tradition to modernity polar ends of an evolutionary continuum. At some point, incremental changes give way to a qualitative jump into modernity, marked by the essence of industrialism. In this sense, the Third world is perceived to be below the threshold of modernity, with a preponderance of traditional-like features such as an extended kinship social structure and, due to the lack of progress towards political differentiations, similar to that of Western forms of democratization, strict hierarchical sources of authority, altogether negating the possibilities to move beyond disintegrated autarkic primary economic activities (Parsons, 1964).

The development of a high extent of differentiation: the development of free resources which are not committed to any fixed, ascriptive groups; the development of wide non-traditional, “national,” or even super-national group identifications; and the concomitant development, in all major institutional spheres, of specialized roles and of special wider regulative or allocative mechanisms and organization, such as market mechanisms in economic life, voting and party activities in politics, and diverse bureaucratic organizations and mechanisms in most institutional spheres (Eisenstadt (1973: 23).

According to Rostow (1960), all societies can be placed along a linear continuum from undeveloped to developed along a ‘stages of economic growth’ path, derived from an extensive study of Western economic development. In ‘traditional society’, the first stage, it is deemed that economic output is limited because of inaccessibility to innovative technology. At the second stage, ‘the preconditions for take-off, modern science, attributed to “Western Europe of the late seventeenth and early eighteenth centuries” (Rostow, 1960, p. 6) ensues new innovations in production in agriculture and industry, fostering widespread education, entrepreneurship, and institutions capable of mobilizing industrial capital; capitalistic investments increase, especially in transport, communication and raw materials. Nevertheless, despite the development of some modern manufacturing, traditional social structures and production techniques remain:

In many cases, for example, the traditional society persisted side by side with modern economic activities, conducted for limited economic purposes by a colonial or quasi-colonial power (Rostow, 1960, p.7)

Rostow’s third stage is ‘the Take-off’, in which traditional barriers to economic growth, like the effect of a dual economy, are overcome. At this point, capital investment increases rapidly and new industries expand exponentially, as does an ‘entrepreneurial class’—economic growth becomes a normal condition” (Rostow, 1960, p. 36). At the fourth stage, ‘the Drive to Maturity’, technology becomes more complex and what produced is now less a matter of economic necessity, and more a question of consumer choice. This leads to the final fifth stage of high consumption, in which economic sectors specialize in the manufacturing of highly sought after consumer durables and basic life needs are mutually satisfied. In a play on Marx, Rostow’s analysis suggests that the West, which “is more developed industrially only shows, to the less developed, the image of its own future’ (Marx, 1954, p. 19). The assumption is that capitalism is a historically progressive system, which is transmitted from the privileged economically advanced countries to the rest of the world by a continual process of destruction and replacement of pre-capitalist social structures (Palma, 1978).

The problem with modernization theory is that it is quite ahistorical, with respect to the global capitalist exploitation. 'Modernization’ theory can, and has been, be interpreted as a ‘blame the victim’ approach to problems affecting the ‘Third World’. Rostow ignores the external influences like colonialism that contributed to social in the Third World. Rostow’s, and for most of ‘modernization’ theory, the unit of analysis is the nation-state of the ‘Third World’, emphasizing internal dynamics, sectors and sub-sectors, combined with the causal role of technology. As such, conclusions drawn from this approach are that all nations, regardless of the history of imperialism, colonialism, etc., should be able to modernize with emulation of more developed economies and their diffusing of highly advanced technology.

Paul Baran and Paul Sweezy, in Monopoly Capital (1960), building on the path-breaking work of Michel Kalecki and Joseph Steindl, assess the degree to which monopoly, as measured by the market concentration ratio of large capitalist firms (corporations) in economically advanced countries, ensues an inverse of Marx’s famous hypothesis that the ‘laws of motion’ of capitalist development in produces a ‘tendency for the surplus to fall. Rather, the economic surplus, defined as the gap, at any given level of economic activity—effective demand in Keynesian terminology—, between what is produced and the socially necessary costs of producing it, under monopoly capitalism has a tendency to rise (Baran & Sweezy,1966, pp. 9, 52-57).

Since aggregate levels of effective demand for total output determine the level of economic activity, crises of capital accumulation are inevitable if the monopoly sector cannot sustain its power via sufficient investment opportunities to absorb its accumulating share of the total surplus produced. Rather than let this insufficiency put downward pressures on potential profits as a whole, various stabilizing factors are set in motion, which include classical Keynesian government deficit spending, research & development (although risky without reliable forecasts potential spillover effects), waste (as evidenced by a sales effort, i.e. consumerism), or imperialism—the last of which provides the foundations for the dependency theoretical approach to economic development.

In this sense, for an understanding of the fundamental division between economically advanced countries and impoverished ones, it is requisite to place attention to the extent to which foreign investment acts as an outlet for investment-seeking surplus generation. Unlike Lenin’s theory of imperialism, foreign investment is a method of extracting wealth, not a channel through which surplus is directed, ensuing underdevelopment (Baran & Sweezy, pp. 104-105). Underdevelopment is a thus process by which monopoly capital in economically advanced nations exploit economically weaker countries by exporting capital to the extent that profits produced (from the production of cheaper consumer goods or raw materials via lower wages in these countries, for example) are repatriated. It is the process by which the expropriation of “foreign sources of supply and foreign markets, ena[ble] [the agents of] monopoly capital to buy and sell on specially privileged terms” (Baran & Sweezy 1966, p. 201), ensuring, caeteris paribus, their positions of power in the world are sustained. The result is that economically weaker countries suffer the retardation of the requisite forces to spawn autonomous and dynamic process of self-governance of the conditions that constitute independent social/political/economic coordination, planning and control.

The argument is that (Baran & Sweezy, pp. 9,178-179) monopoly capitalism is tantamount to the degree to which large capitalist firms in economically advanced countries have as their counterpart the “exploitation of much of the rest of the world” and, as a result, constitute international relations as a “hierarchical system with one or more leading metropolises, completely dependent colonies [even if not name, certainly in practice] at the bottom, and many degrees of superordinate and subordination in between […] [t]hese features are of crucial importance to the functioning of both the system as a whole and its individual components […] (Baran & Sweezy, 1966, pp. 178-179). As such, “we cannot hope to formulate adequate development theory and policy for the majority of the world’s population who suffer from [impoverishment] without first learning how their past economic and social history gave rise to their present underdevelopment” (Frank, [1966] 1969). Underdevelopment is neither an original nor traditional social position. Hence, it cannot be assumed that the contemporary position of the Third World can be understood as solely a reflections of its internal historically specific social, political, economic, and organizational characteristics. The process by which monopoly capital in economic advanced countries extract surplus from less-developed countries through capital exports limits the latter’s ability to achieve the status of the former. Thus, 'modernization theory' is utterly unsatisfactory, for such an approach

[…] in all its variations, ignores the historical and structural reality of the underdeveloped countries. This reality is the product of the very same historical process and systemic structure as is the development of the now developed countries’ (Frank 1969, p. 47).

To suggest that social, political, and economic advancement of the underdeveloped world can be generated by the diffusion of what is deemed modernizing institutions, values, etc. is fundamentally erroneous. If development fails to occur, it is not because within the Third World there are mere obstacles to diffusion because of innate poverty arising from some form Gerschenkronian ‘backwardness’, but due to the net outflow of vital resources, whether natural, monetary, human, technological etc. The implication is that underdevelopment is not because of the “the survival of archaic institutions”, or some inability to contract some ‘modern man’ (Inkles, 1969) syndrome; on the contrary, it is generated by the same capitalist development that led to the domination by economic advanced countries, that is, “the development of capitalism itself” (Frank, [1966] 1969). Capitalism, hence, is an operation that cements a peripheral latifundium system, via the constant forces of ‘primitive-accumulation', what Myrdal (1957) defined as international ‘backwash’ effects, that reproduces a cleavage between ‘town and country’, centre and periphery, on a tremendously enlarged basis (cf. Bukharin & Lenin, 1929).

Viewed from this standpoint, dependency theory is a manifestation of what David Harvey (1978, 2007) defines as ‘accumulation by dispossession’ by virtue of which dialectical forces of motion and contradiction generate vast disparities of wealth and power on a worldwide scale. The world economy is reproduced as a world-system (Wallerstein, 1979) of ‘unequal exchange’ (Emmanuel, 1972; Amin 1974, 1976), in which ‘underdevelopment’ ensues peripheral internal long-run stagnation (Bornschier & Chase-Dunn, 1985, pp. 39-40). The terms of trade for the periphery fall precipitously – this is the Prebisch-Singer hypothesis (Prebisch 1950). As Samir Amin (1976, p. 292) notes, “whereas at the center growth means development, making the economy more integral, in the periphery growth does not mean more development, for it dis-articulates the economy. Since the imbalance of international trade defines the mechanisms by which capital is drained from former colonized countries, there is no way for peripheral countries in the world economy to ‘catch up’ in Rostowian fashion (p. 383).

Nevertheless, the social facts that constitute the particular social conditions for the constant negation of a ‘just price’ in international trade ‘admits of varying interpretation’ (Frank, 1977). Case in point is the extent to which the periphery is in fact ‘peripheralized’. To suggest that the capitalist world economy simply, by definition, produces a centre-periphery polarity (Frank, 1967; Wallerstein, 1974), is to pay insufficient attention to understanding the extent to which economic development in the periphery is a convoluted association of varying social processes, rather than the mere result of a state’s homogenized world-systemic position (Gellert, 2010).

According to Cardoso and Faletto ([1967] 1970), for instance, development in the periphery, while controlling for socioeconomic income differentials, is likely if foreign capital penetration creates spillover effects. That is, partial economic growth is viable through what Peter Evans (1995) describes as the practice of an ‘embedded autonomy’-an apparent solidified social network between the state and civil society (which consists of economic elites from the centre) that creates the capacity for the state, as such, to engage in domestic Keynesian aggregate demand management. Whether this is manifested is the extent to which a peripheral country does not suffer the inability to borrow in its own currency, in which a country, most likely a developing one, supplements its domestic unit account of fiduciary reserve assets with a foreign currency. This is the exemplification of a country foregoing its national ‘monetary sovereignty’ (Mundell, 1961).

The essence of national 'monetary sovereignty' is the cartelist (or chartelist) (Goodhart, 1998) conception that emphasizes state power to establish a particular unit of account, a national currency, which allows economic calculations to take place (Ingham, 2004). In this sense, money is a means for accounting for and settling of financial debts, the most important of which are tax debts, which, in turn, regulate the level of aggregate demand, and thus determination of national income through the use of fiscal policy; it represents a [store of financial value] [...] [of which] general purchasing power is held [...] (Keynes, 1930, p. 3).

In the United States, for example, and in contrast to James O’Connor ([1973] 2002) and Erik Olin Wright’s (1979) fiscal sociological model for analyzing the intricacies of public finance, which narrowly centers on a hypothetical natural limit to fiscal policy (Wright 1979, p.157), the federal government, through open-market operations, sells government bonds, Treasury securities, which are either bought or foregone by the Federal Reserve (Fed). If the Fed commits to a policy of purchasing Treasury securities, the interest rate by which the Federal government is liable on Treasury securities held by the Fed is lowered. Symmetrically, if the Fed sells Treasury securities, the Federal Government’s interest burden, which is paid through taxes denominated in dollars, is raised. By providing a guarantee for State debt, the Fed delivers the capability for the federal government to use fiscal policy to regulate aggregate demand. Thus, the extent to which fiscal policy is an option is determined by the burden of the federal government's interest payments on Treasury securities to the Fed (cf. Lerner, 1943; Domar, 1944).

From this perspective, 'underdevelopment', or 'dependency', is the powerlessness a peripheral country to establish its own unit of account and thus is forced to variably peg its national currency to a foreign reference currency. What ensues is the inability to use monetary policy—central bank purchasing and selling of government bonds denominated in the domestic currency for purposes of controlling the money supply, and thus the cost of credit—, and fiscal policy, via deficit spending, for domestic economic needs. Since the central bank is forced to maintain a certain level reserves of the foreign reference currency such that the price of the domestic currency, in terms of the reference currency, does not change, this produces a negative money-multiplier that sets in motion an inherent deflationary bias, which, if not counteracted by capital inflows to spur aggregate demand, can lead to abrupt contraction of the monetary base, stinting any supposed progress towards economic sustainability (cf. Fields & Vernengo, 2012, 2013).

Thus, if any form of government spending is to be engaged, an 'underdeveloped' country has to issue bonds that are not denominated in its own currency. This amounts to the attraction of external commercial loans with the faith of the country's financial markets by foreign investors used as collateral. As such, country risk is most likely going to exist. If confidence is lost in the strength of the country's financial markets, leading to a spread over bonds like US treasury securities, if the foreign reference currency is the dollar, for example, interest rates on domestic foreign currency denominated bonds are likely to rise, making government spending very costly, which removes any form of domestic capacity to spur public investment as an effective countercyclical policy in the face of economic downturns. This has been essentially the case of Argentina before the 2001–2002 crisis, and of the European periphery since the intensification of the Greek crisis in 2011.

Balance of payments constraints can be quite unsupportable, spawning self-fulfilling financial collapses. Moreover, they altogether constitute an ideological mask that normalizes the advance of global cosmopolitan money-capitalist power to dictate the terms of domestic democratic politics (Ingham, 2008). As such, the extent to which a country is 'peripheralized', is the degree to which its creditworthiness is essentially evaluated in terms of the degree to which the state takes steps toward lowering the social wage for the benefit of multinational corporations from the centre (or core).

***This is a work in progress and I would like to thank Matias Vernengo, Brett Clark, & Al Campbell for their assistance.***

• Amin, Samir. 1972. "Underdevelopment and dependence in black Africa: Historical origin." Journal of Peace Research 9(2): 105-119.
• Amin, Samir. 1974. "Accumulation and development: a theoretical model." Review of African Political Economy 1(1): 9-26.
• Amin, Samir. 1976. Unequal Exchange. Brighton, UK: Harvester.
• Baran, Paul and Paul Sweezy. 1966. Monopoly Capital: An Essay on the American Economic and Social Order. New York: Monthly Review Press
• Block, Fred. 1981. “The Fiscal Crisis of the Capitalist State.” Annual Review of Sociology 7:1-27
• Bomschier, Volker, and Christopher K. Chase-Dunn. 1985. Transnational Corporations and Underdevelopment. New York: Praeger
• Bukharin, Nikolaĭ, and Vladimir Il'itx Lenin. 1929. Imperialism and world economy. Vol. 4. New York: International Publishers
• Cameron, Angus. 2008. “Crisis? What Crisis? Displacing the Spatial Imaginary of the Fiscal State.” Geoforum 39: 1145-1154
• Campbell, John L. 1993. “The State and Fiscal Sociology.” Annual Review of Sociology 19: 163-185
• Cardoso, Fernando H., and Enzo Faletto. 1967[1970]. Dependência e desenvolvimento na América Latina. Rio de Janeiro: Zahar.
• Cox, Kevin R. 2004. “Globalization and the Politics of Local and Regional Development: The Question of Convergence.” Transactions of the Institute of British Geographers 29: 170-194
• Devine, Joel A. 1983. “Fiscal Policy and Class Income Inequality: The Distributional Consequences of Governmental Revenues and Expenditures in the United States, 1949-1976.” American Sociological Review 48(5): 606-622
• Domar, Evsey D. 1944. "The burden of the debt and the national income." The American Economic Review 34(4): 798-827.
• Dymski, Garry A. 1990. “Money and Credit in Radical Political Economy: A Survey of Contemporary Perspectives.” Review of Radical Political Economics 22(2-3):38-65
• Dymski, Gary A. 2005. “Poverty and Social Discrimination: A Spatial Keynesian Approach.” Pp. 230-250 in Reimagining Growth: Towards a Renewal of Development Theory, edited by Silvana De Paula and Gary A. Dymski. New York: Zed Books.
• Ebner, Alexander. 2006. “Institutions, Entrepreneurship, and the Rational of Government: An Outline of the Schumpeterian Theory of the State.” Journal of Economic Behavior & Organization 59: 497-515.
• Eisenstadt, Shmuel N. 1973. Traditional Patrimonialism and Modern Neopatrimonialism. Beverly Hills: Sage Publications
• Fields, David, and Matías Vernengo. 2012. “Hegemonic Currencies during the Crisis: The Dollar versus the Euro in a Cartelist Perspective.” Review of International Political Economy
• Fields, David, and Matías Vernengo. 2013. "Dollarization." Wiley-Blackwell Online Encyclopedia of Globalization.
• Emmanuel, Arghiri. 1972. Unequal Exchange: An Essay on the Imperialism of Trade. New York: Monthly Review Press
• Evans, Peter. 1995. Embedded Autonomy: States and Industrial Transformation. Princeton: Princeton University Press.
• Flacks, Richard and Gerald Turkel. 1978. “Radical Sociology: The Emergence of Neo-Marxian Perspectives in US Sociology.” Annual Review of Sociology 4: 193-238
• Frank, Andre Gunder. 1966. The development of underdevelopment. Boston: New England Free Press
• Frank, Andre Gunder. 1969 “The Development of Underdevelopment.” Monthly Review
• Frank, André Gunder. 1977. "Long Live trans-ideological enterprise! The Socialist Economies in The Capitalist International Division of Labor." Review (Fernand Braudel Center): 91-140.
• Gellert, Paul K. 2010. "Extractive regimes: toward a better understanding of Indonesian development." Rural Sociology 75(1): 28-57.
• Goodhart, Charles. 1998. “The Two Concepts of Money.” European Journal of Political Economy, 14(3): 407-432
• Harvey, David. 1978. “The Urban Process under Capitalism: A Framework for Analysis.” International Journal of Urban and Regional Research 2(1-4): 101-131
• Harvey, David. 2007. "Neoliberalism as creative destruction." The Annals of The American Academy of Political and Social Science 610(1): 21-44
• Ingham, Geoffrey. 1984. Capitalism Divided? London: Macmillan.
• Ingham, Geoffrey. 1996a. “Money is a Social Relation.” Review of Social Economy 54(4): 507-529
• Ingham, Geoffrey. 1996b. “Some Recent Changes in the Relationship Between Economics and Sociology.” Cambridge Journal of Economics 20: 243-275
• Ingham, Geoffrey. 1998. “On the Underdevelopment of the ‘Sociology of Money’.” Acta Sociologica 41(10): 3-18
• Ingham, Geoffrey. 1999. “Capitalism, Money, and Banking: A Critique of Recent Historical Sociology.” British Journal of Sociology 50(1): 76-96
• Ingham, Geoffrey. 2000. “Class Inequality and The Social Production of Money.” in Renewing Class Analysis, edited by Rosemary Crompton, Fiona Devine, Mike Savage, and John Scott. Oxford: Blackwell Publishers.
• Ingham, Geoffrey. 2003. “Schumpeter and Weber on the Institutions of Capitalism: Solving Swedberg’s ‘Puzzle’.” Journal of Classical Sociology 3: 297-311
• Ingham, Geoffrey. 2004. The Nature of Money. Cambridge UK: Polity Press
• Inkles, Alex. 1969. “Making Men Modern: On the Causes and Consequences of Individual Change in Six Dveloping Countries.” American Journal of Sociology 75(1): 208-224
• Keynes, John Maynard. 1930. A Treatise on Money: Vol. 1. London: Macmillan
• Lerner, Abba P. 1943. “Functional Finance and the Federal Debt.” Social Research 10(1): 38-51
• Marx, Karl. 1954. Capital, Vol. 1. Moscow: Progress Publishers
• Mundell, Robert  A. 1961. “A Theory of Optimum Currency Areas.” American Economic Review 51(4): 657-665
• Myrdal, Gunnar. 1957. Economic theory and underdeveloped countries. London: Duckworth
• O’Connor, James. 2002. The Fiscal Crisis of the State. New Brunswick, NJ: Transaction Publishers.
• Palma, Gabriel. 1978. “Dependency: a formal theory of underdevelopment or a methodology for the analysis of concrete situations of underdevelopment?” World Development 6(7): 881-924.
• Parsons, Talcott. 1964. “Evolutionary Universals in Society.” American Sociological Review 29(1)3: 339-357
• Prebisch, Raul. 1950. "El Desarrollo Económico de la América Latina y sus principales problemas." Revista de Economía Argentina 48(379-380): 17-24.
• Rostow, Walt Whitman. 1960. The stages of economic growth: A non-communist manifesto. London: Cambridge University Press.
• Smart, Barry. 2012. “Fiscal Crisis and Creative Destruction: Critical Reflections on Schumpeter’s Contemporary Relevance.” Journal of Classical Sociology 12(3-4): 526-543
• Wallerstein, Immanuel. 1979. The capitalist world-economy. Vol. 2. London: Cambridge University Press.
• Wright, Erik Olin. 1979. Class, crisis and the state. London: Verso
• Vernengo, Matias. 2006."Technology, finance, and dependency: Latin American radical political economy in retrospect." Review of Radical Political Economics 38(4): 551-568.

The Urban Fiscal Crisis as Neoliberal Shock Therapy: Towards A Cartalist Fiscal-Sociological Approach

Capital Accumulation and Urbanization

There is a symbiotic, interdependent, codeterminous relationship between the process of capitalist accumulation and urbanization. Capitalist accumulation presupposes a ceaseless process of material investment to uphold and enhance effective demand to such an extent that the capitalist system does not fold under the logic of its own pretenses. What is primarily relevant to the interests of the capitalist class, is what contributes to a ‘productive’ material investment’, which directly or indirectly endlessly expands the inherent basis for the production of surplus value (profit), and its realization.

Urbanization refers to the ‘constitution of specific spatial forms of human association’ that is characterized by a qualitatively distinct concentration of social activities (Castells, 1972[2002]). Under capitalism, spatial forms of concentrated social activity take the form of particular ‘built environments’ (Harvey, 1978), which represent ‘spatial practices’ (Lefebvre, 1991) of capitalist production. The ‘habitus’, or ‘life’ of a city, is determined to the extent to which it has the capacity to ensure that that the logic of capital accumulation perseveres without negative externalities, either internal or external.

Neo-Marxist Fiscal Sociology and ‘The Fiscal Crisis of the State’

To ensure a relatively ideal geographical space of production, circulation, exchange and consumption is manifested, what is requisite is stable macroeconomic coordination.  This includes a range of state expenditures, which can usefully be divided into investments directed towards the qualitative improvement of labour power (e.g. investment in education and health by means of which the capacity of the laborers to engage in the work process will be enhanced), investment in science and technology (the purpose of which is to harness science to production and thereby to contribute to the processes which continuously revolutionize material productive forces), and investment in co-optation, integration and repression of the labour force by means of ideological, military and various other tools by which the state has a ‘monopolization over the means of violence’ (Harvey, 1978).

Only [a] sociology [of public finance] can show how social conditions [of the built environment] determine public needs and the manner of their satisfaction by more direct or indirect means, and how ultimately the pattern and evolution of society determine the shaping of the interrelations between public expenditure and public revenue. (Goldscheid, [1925] 1958: 202)

This presupposes a critical analysis of the social struggles over public finance; the social processes that underlie fiscal policy have extensive influences on the nature of economic organization (Schumpeter, 1954: 6-7) since they reflect ‘the immanent contradiction between capitalist economy and [a] socially productive [...] economy’ (Goldscheid, [1925] 1958: 202). James O’Connor’s ([1973] 2002) The Fiscal Crisis of the State and Erik Olin Wright’s (1977) Class, Crisis, and the State together provide a unique fiscal sociological framework for analyzing the intricacies of public finance concerning capital accumulation and the urban built environment.

Following O’Connor and Wright, we can divide the state budget into three categories that correspond to Marx’s reproduction schema: Social Capital Expenditure corresponds to Marx’s value category of constant capital, which consists of expenditures on capitalist means of production that include physical economic infrastructure, research and development, and outlays on various forms investment that enhance the productivity of labor power; Social Consumption Expenditures correspond to Marx’s value category of variable capital, which corresponds to reproduction of labor power, and consists of state investments on labor training services, housing, education, health (medicare/medicaid), and various forms of social insurance, e.g. publicly funded pensions; and Social Legitimization Expenditures, which are outlays that serve to legitimate the capitalist social structure, and serve as a Keynesian source of aggregate demand management.

The fundamental quality of the O'Connor/Wright model fiscal sociological model is that it assumes that specific institutions are what create the space for constant capitalist production and realization of surplus value.  Specific elements of public spending condition the level of stability for capitalists to make reasonable calculations about expected rates of return on investment. In this sense, there is a direct connection between urbanization and growth in public spending, as states socialize a large share of the costs of urban investment projects. Hence, as long as the state, through various types of expenditures provide for a favorable geographical environment for capital accumulation, the capitalist tends to expand vigorously.

Given the inherent ‘anarchy’ of capitalism, however, it is not a social fact that potential social transformations will not eventually contradict the institutional structure. If public spending is unable to overcome the doubling over of contradictions that arise from the process of capitalist development, uneasiness and uncertainty predominate. As the capitalist state assumes the responsibilities for maintaining capitalist economic growth and social stability through social capital, consumption, and legitimation expenditures, it dialectically contradicts its mode of operation as such policies “become progressively increasingly out of proportion to the requirements of [capital] accumulation” (Wright 1979: 157). The increasing pertinence of fiscal policy outweighs the state’s capacity to finance it through tax receipts, especially if social consumption legitimization expenditures take more of the state’s fiscal outlays.

Cities in the United States are permitted to issue bonds, to be bought by private investors, particularly by financial institutions, in order to cover budget shortfalls. Finance capital, yet, does not make funds available, for any economic activity if it competes with ‘laws of motion’ of capital accumulation (O’Connor, [1973] 2002: 193-4). As such, balanced-budget requirements ensure that city governments are more-or-less dependent on banks and other financial institutions, so that the proper scope of city government is largely enmeshed in ensuring that the urban political economy fosters ‘business confidence.' This guarantees that borrowing finances social capital, consumption, and legitimation expenditures that strictly serve to expand the productiveness of the capitalist economy, so that tax revenue from the potential increased income/output can immediately offset original debt incurred.

Bond-rating agencies evaluate the creditworthiness of city governments, which, in the United States are privately administered (e.g. Moody’s, S&P, and Fitch). Ratings are based on assessments of a city government’s financial history (past and current public debt), its administrative structure and history (whether there is evidence of government malfeasance, lack of accountability, or mismanagement), and the potential for extensive urban economic vitality (whether growth is likely to occur). The threshold that the rating agencies police is whether or a bond is rated as ‘speculative’ or ‘investment’ grade’ Speculative-grade bonds resemble a city’s relative incapability of being 'fiscally prudent', with respect to keeping finances limited to capitalist growth with high tax revenues. As such, the ‘politics of creditworthiness’ not only will determine how expansive a city’s loan will be, but essentially will the affect the general nature, scope, and functionality of city government.

In theory, the federal government of the United States can provide resources to help city governments escape the predicaments of ‘fiscal crisis’ by way of the US Federal Reserve purchasing bonds issued by city governments. Given the unique political structure and regulatory divisions between the local and federal level in the United States, however, institutional constraints make this source of urban fiscal support highly unlikely. More importantly, it is contended, the use of such monetary policy is inherently inflationary (O’Connor, [1973] 2002: 192), as this implies an ever increasing growth in the money-supply, creating a classic problem of too much money chasing too few goods, which only adds further fiscal strain to cities (Block, 1981). Thus, the only means by which the federal state can assist is through federal fiscal transfers from accumulated federal tax revenue (Friedland, Fox Piven, & Alford, 1984: 284; Block 1981). This policy instrument, however, is also limited, as it is argued that the capacity for the federal to engage in fiscal transfers is measured by the degree to which federal taxes are matched by federal fiscal transfers (Block, 1981).  Hence, what prevents the federal government in providing much needed fiscal transfers to cities stems from the same problem faced by the cities. The O’Connor/Wright neo-Marxist fiscal sociological model presupposes a ‘mettalist conception of money'.

From a cartelist perspective, the US is a monetary sovereign, and, as such, the federal government can easily provide necessary fiscal assistance to cities. The reason it chooses not to is not an economic problem, but rather more of a social and political issue reflecting conflict between financial & industrial capitalists and the working class. Rising federal fiscal assistance would give more strength to working-class militancy, potentially doubling over the contradiction of inflationary wage-price spirals. Federal fiscal retrenchment (austerity) pushed on cities forces municipalities to transform the uses of public debt into enhancing the value of commercial property. The urban built-environment becomes a marketable space for gentrification (yuppieville). Through ‘civic booseterism’ by way of the promotion of urban government sponsored beautification initiatives, cities encourage, it is assumed, the attraction of wealthy residents and associated boutique businesses into the urban built-environment, so as to accumulate potential tax revenues such that the city can be perceived as being in good financial standing, per commercial lenders and associated credit-rating agencies. Tax abatements, land giveaways to various sorts of financial and industrial capital and lax or nonexistent zoning became the modus operandi for cities, setting in motion a ‘spatial fix’ of urban neoliberal governmentality.