The depression is caused by excessive debt for many and excessive wealth for a few. Too many people believe their options are few and the future is closed.

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Power Politics and Economic Growth by John S Veitch

The financial meltdown occuring in the USA and around the world is a direct result of business interests being given free reign by the political class. Of course the main contributors to the election funds of the politicians are those same business interests. The problem started to get out of hand we can now see in the 1970's, and the first real sign that we were on a wrong track was perhaps the 1987 stockmarket collapse.

Whitehorse Village - China
In China, the much praised economic development, is based on the promise that people will be given job opportunities and that in return for cooperation life will improve. So for instance in Whitehorse village people were asked to vacate their traditional land so that modern housing, shops, schools and industrial premises can be built. They were promised new homes and that their children would go to the new school. Many of them expected to find new employment in the new industrial area. No compensation is paid.

Two years later the building was well advanced. Lots of new people came into the area to live. The new people took the new jobs and their children were the ones accepted in the new school. The promise to the village people wasn't being honoured. It's suspected that the people who are being settled are closer to the Communist Party leadership than the local villagers.

Maheshwar Dam Project - India
Arundhati Roy gives us another example from India. A big hydro dam project is planned on the Naramada River in central India. There are 30 big dams, 135 medium size dams and hundreds of minor dams in the completed scheme. When politicians talk about the scheme, they speak of the need for electrical power and for water for agriculture. This is a big hit scheme where many people, none of them locals, expect to make a lot of money. In 1993, the concession for the project was awarded to S. Kumars, one of India's leading textile magnates, making Maheshwar the first privately financed hydroelectric dam in India. S. Kumars having no experience in dam building engaged the Ogden Energy Group and later Enron to give the project a chance of success.

In 2001 the project was in trouble. It now seems that Enron introduced no American funding into the project, borrowing all the money inside India, or having it guaranteed by the government. Besides Enron had trouble of it's own. Two German companies and a Portuguese company looked at the project. They all chose not to get involved. The project apparently ground to a halt. The German utilities exposed fraud in the documentation supporting the economic reasons for the dam project.

Arundhati Roy explains that there are 61 villages and 50,000 people in the area to be flooded. S. Kumars completely misrepresented the number of people affected and economic value of their property. There was never any intention to meet the obligation of paying promised compensation.

Wrong Policy Advice
Funds for "development" are usually offered on a conditional basis. For instance using "advisers" from the sponsor country might be a condition. These advisers often cost far too much to employ and their advice is usually poor and often biased. Ernesto Siroll tells this sort of story in "Ripples from the Zambezi". In the worst cases the objective is to sell a lot of "assistance" on credit and create an ongoing political obligation to support the sponsor nation. John Perkins writes about this in "Confessions of an Economic Hit Man".

Joseph Stiglitz says, "For seventy-five years the standard prescription for an economy facing recession has been expansionary fiscal policy - spending money on education and especially infrastructure." He goes on to talk about the policy of the IMF, which in country after country has insisted that when facing recession governments reduce expenditure and sell state assets. Every economist knows that is the wrong strategy, so we might ask why the "wrong solution" is offered, and which countries benefit from that?

Economic Reforms - 1980's
Readers will be familiar with free market advocacy of the Chicago School of economists, the Thatcher years in the UK, and the economic reforms of the Reagan years in the USA. In New Zealand, possibly leading the pack, politicians were putting this same philosophy into effect. I was in favour of the changes. The old system was trapped by subsidies and regulations and had become outdated.

The New Zealand Experience - Rogernomics
Many state assets were sold into private hands. We had little idea what the market value of these assets should be, and they were sold at a fraction of their real value to people who were insiders. Subsidies to farmers and to industry were stopped. Social welfare benefits were slashed. There were TEN very painful years, but we thought of it as the price of becoming economically viable again. Public support for the reforms was maintained for almost 10 years.

The results are a disappointment. There was new wealth created, but it was captured by a small group. Income disparity increased significantly. The proportion of people living in poverty rose sharply. The social indicators in New Zealand, that we had previously been so proud of, all moved in the wrong direction, increased crime, increased poverty, and worse health care.

We discovered that selling government assets is a way for politicians to avoid future obligations falling on the government, obligations for capital works, or obligations to provide future funding. We were told that private industry would be more efficient and that the prices for services would be lower. Experience has taught us that private industry has a different set of priorities. Under investment in the enterprises continued to be a fact. Prices increased, and profits suddenly appeared, but the source was reduced service. Staff were dismissed. Some of the assets were stripped away for cash returns. The problems remain, and when the new private owners get into trouble they come back to government for help. The idea that private enterprise is more efficient than government enterprise is an ideological red herring. Either can be efficient, and either can be inefficient. They each have different priorities. In both cases the first order of the day is to protect the business, not to serve the public.

Growing Unequal
There are 30 Countries in the OECD. In countries with high disparity of incomes between rich and poor, there is very little social mobility between generations. The three countries with the highest inequality of income distribution are USA, Mexico and Turkey. Growing inequality of incomes breeds social resentment, and questions the value of the democratic system. In Sweden, Denmark and Norway the incomes of the top 10% are only SIX times that of the bottom 10%. For the OECD as a whole the average income of the top 10% is NINE times greater than the bottom 10%. In the USA this difference is SIXTEEN times. In Mexico, TWENTY-FIVE times.

Progressive income taxes, free education and public health services, and direct payments to households with children are proven ways to reduce the income inequality.

Failure of Leadership
In the year 2000 it was common to hear Americans say things like; "We're number one, baby" or "The USA is the greatest country in the world". What's more, across the world there might have been general agreement about that, the USA seemed to be a place with an "open future"..

In 2009, few people think like that. So how did the future close? In my view, flag waving and national enthusiasm after the 911 attacks encouraged racism and religious discrimination. Long standing principles were denied for short term objectives.

The loss of respect for truth had further unfortunate effects. There is a long record of fraud and malpractice by politicians and members of the business elite who are never bought to trial. When governments choose to apply or ignore the law in a biased way the concept of the "rule of law" is diminished. When politicians choose to deny science for political reasons, when they promote a lie as the "truth" when they offer contracts to their friends and deny others, confidence in the system is eroded. In this environment it's not surprising that it became common place for real estate agents, bank executives, lawyers and executives at Fannie Mae and Freddy Mac, to massaged some numbers and issue some shady loans, as they found new ways to increase the size of their personal bonuses.

Add to this millions of dollars missing inside the Pentagon, and civilian contractors in Iraq and Afghanistan taking money for work they never did, and the issuing of government contracts to "friends of the government" on a cost plus basis. Finally we have a meltdown of the financial sector in the USA, which is now spreading around the world. The curtain has been lifted on the "efficiency" of the free market system.

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