Today’s Economic Crisis in Historical Perspective
The superlatives of the global economic meltdown of 2008 are, well, superlative. Professor Noriel Roubini of New York University says the current crisis is "the largest leveraged asset bubble and credit bubble in history." The International Monetary Fund says, "In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period."
The crisis of 2008 is frequently compared to past crises, and increasingly to the stock market crash of 1929 and the Great Depression of the 1930s. Merrill Lynch Chief Executive John Thain recently said he does not expect the global economy to recover quickly from the credit crisis and that the environment more closely resembles the advent of the Great Depression in 1929 than recent slowdowns. Long-forgotten images of breadlines and homeless families have sprouted in the media. 60 percent of US voters polled in October said another depression is likely within a year.
Such historical comparisons can help provide perspective on contemporary situations, but they can also be misleading if they don’t include the differences as well as the similarities. For labor and social movements, there is much to learn at this time of crisis from crises past. But there are also significant differences which we ignore at our peril – and which may allow us opportunities for action that did not exist in the past.
Character and extent of the current crisis
A few statistics give a flavor of the depth of the current crisis.
According to Reuters, between January and September, 2008, the stock market index for "emerging markets" lost nearly 55 percent of its value and the index for "developed markets" lost 42 percent. The S&P 500 of US stocks lost half its value from its October, 2007 peak, marking what the Financial Times calls "without question, the worst bear market since the 1930s." It adds that "the only historical precident for the kind of deflation predicted by the bond market came in the 1930s."
Ten million Americans are out of work, nearly 3 million more than a year ago. The official unemployment rate rose to 6.5 percent in October, its highest rate in 14 years. Goldman Sachs predicts it will reach 9 percent in 2009.
7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those losing their homes. As of September 30, one-fifth of American homes with mortgages were "underwater" — worth less than was owed on their mortgages.
National and global efforts to counter the crisis have included cuts in interest rates, support for money markets, and recapitalization of banks. Their total cost as of mid-November has been estimated at more than $4 trillion.
Economists predictions – for whatever they’re worth – have lost their once-unmitigated optimistic faith in the economic system. Martin Wolf of the Financial Times says that despite government efforts, "a long and deep global slowdown is still likely." James Kwak of Baseline Scenario says "Wealth is likely to decline further. Under any scenario, we will see many personal, corporate and perhaps even national bankruptcies." Kenneth S. Rogoff, a former chief economist at the IMF and now a Harvard professor adds, "We’re entering a really fierce global recession. . . . It’s a very dangerous situation. The danger is that instead of having a few bad years, we’ll have another lost decade."
Capitalism has been the most dynamic economic system in history, but it has a peculiarity: No matter how great the need for houses, clothes, food, or other products, those who control the means of production won’t produce them unless they can make a profit doing so. As a result, the history of capitalism has been marked by periods of economic crisis and stagnation in which millions of people suffered unemployment and poverty while the resources that they could have used to produce the things they need lay idle.
These periods can be long or short, modest or severe. Capitalist economies have a regular business cycle in which every decade or so economic growth is punctuated by recession. These can be little more than periods of readjustment that allow a return to growth – part of what the economist Joseph Schumpeter called capitalism’s "creative destruction." Some other contractions, however, also stabilize – but at levels that result in massive unemployment of material and human resources. Such a peculiar state of affairs is possible because markets are regulated only by the pursuit of private profit, not by a matching of resources and human needs. If production isn’t profitable, the wealthy individuals and institutions who own the means of production have no incentive to produce.
Since 1900, the US experienced depressions and recessions in 1903, 1907, 1911, 1914, 1921, the whole decade of the 1930s, 1949, 1954, 1957, 1961, 1970, 1982, 1990, and 2002.
The "gold standard" for economic downturns remains the Great Depression of the 1930s. From 1929 to 1933, manufacturing output in the US dropped 39 percent and unemployment reached 25 percent. In the 1982 recession, U.S. unemployment reached 10.8%, the highest since World War II. In the Asian crisis that started in 1998, 20 million people in Indonesia lost their jobs in a year as the unemployment rate rose from less than 5 percent to more than 13 percent, and the population living in absolute poverty quadrupled to a hundred million.
Some downturns seem to limit themselves, laying the basis for a return to economic growth. But others go on until major structural changes of some kind make renewed growth possible.
In spite of New Deal programs and occasional blips of growth, the Great Depression of the 1930s lasted a decade and was only brought to an end by the huge government-induced increase in production during World War II. The "stagflation" of the early 1970s was terminated by the rapid shift to globalization, with its abandonment of the Bretton Woods system’s support for national economies, liberalization of global investment rules, structural adjustment policies for the third world, restructuring of global corporations, exploding flows of global hot money, and creation of the "global production line." The so-called Asian financial crisis of the late 1990s was ended by regularizing huge purchases of Asian manufactured goods by the U.S., paid for by equally huge Asian purchases of U.S. Treasury bonds.
In many ways, the current economic meltdown resembles the many downturns that have marked capitalism throughout its history. Investment becomes unprofitable, so production slows, even though people’s real needs remain unmet. Lenders worry whether creditors can pay their loans back, so they reduce lending, leading to a financial crisis. As production is cut back, large numbers of people lose their jobs. Mass unemployment leads to falling real wages. People lose their homes and fall into poverty. Income from taxes falls, so governments lay off workers and cut back services. And each of these tends to reinforce the others in a "downward spiral."
Globalization One major difference from historic economic downturns is the globalization of the economy and the related neoliberal dismantling of nation economic regulation. While trade and empire have been normal parts of capitalism in the past, the ability of capital and production to move around the world without restriction is qualitatively different.
Globalization therefore makes the challenge of dealing with the meltdown qualitatively different. The huge flows of capital across national borders lead to large- scale currency crises. National and international neoliberal policies have disabled the capacity of nations to set their own monetary policy. The dismantling of the Bretton Woods system of global currency exchange rate regulation and its replacement by floating exchange rates has undermined international cooperation to maintain economic growth.
Globalization has similarly undermined the effectiveness of "Keynesian" national economic stimulation, as experience has shown time and time again. For example, stimulation of the British economy in 1986 led not to higher domestic output but increased imports and inflation. The huge Japanese expansionary public spending initiative of the late 1990s had little long- term effect, except perhaps in buoying the stock market in the US. In short, economic stimulus may create jobs and buying power — but often in countries other than those where the stimulus is applied. Whatever Americans bought with their "stimulus checks" this year, much of it was undoubtedly made in China, not in the US. This casts grave doubt on the effectiveness of conventional national economic stimulus — including those currently being planned in Washington — to address the current economic downturn.
Financialization "Bubbles" of large-scale financial speculation are a common feature of the lead-up to economic crashes – witness the stock market boom of the late 1920s that preceded the great stock market crash of 1929 and the dot.com bubble and bust of the 1990s. But the extent of financialization in the current economy may well be unprecedented. According to Martin Wolf of the Financial Times, "The US itself looks almost like a giant hedge fund. The profits of financial companies jumped from below 5 per cent of total corporate profits, after tax, in 1982 to 41 per cent in 2007." Between 1980 and 2007, the ratio of US gross financial debt to gross domestic product increased from 21 percent to 116 per cent. The market in credit derivatives in September, 2008 was valued at $62 trillion — more than the world’s annual gross domestic product.
Global warming Humanity faces a threat far more dangerous than economic meltdown: climate change. All the misery of all past depressions combined would be a small matter compared to the effects of global warming. Indeed, Sir Nicolas Stern, former Chief Economist of the World Bank, estimates that the direct economic consequences of climate change – leaving aside the social and environmental effects – will be a depression greater than the Great Depression of the 1930s and a financial cost higher than the Depression and the two world wars combined. There is simply no equivalent in the history of past economic downturns, or past history of any sort.
Climate change and climate protection will interact with economic meltdown in a variety of sometimes- contradictory ways. Depressed economies will use less energy, directly reducing global greenhouse gas emissions. But the falling price of fuels will undermine energy conservation and alternative energy investment. Economic hard times are likely to undermine efforts to raise the price of greenhouse-gas emitting fuels by carbon taxes or by "putting at price on carbon" with cap-and-trade programs. Political support is likely to grow for "green jobs," but not for raising taxes for climate protection measures.
Globalization from below
Economic globalization gave birth to a new convergence of global social forces known variously as the global justice movement, the anti-globalization movement, global civil society, or globalization from below. People all over the world developed asymmetrical strategies of linking across the borders of nations and constituencies to become a counter power to the advocates of corporate-led globalization. From the closing of global WTO negotiations in the "Battle of Seattle" to the creation of the World Social Forum to the demonstrations against the US attack on Iraq – the largest coordinated global demonstrations in history — they have created a movement that some in the media even called "the world’s other superpower."
Globalization from below provides a potential global alternative actor that did not exist in past crises. True, there have been a variety of socialist and communist movements that promoted economic alternatives. But these were generally either loose linkages of national political parties or "vanguard" organizations ultimately controlled by and in the interests of one state. Globalization from below has the potential to develop a global alternative that represents global human interests and to promote it at multiple levels.
A start has already been made. A group of social movements and NGOs met in October in Beijing and developed the sketch for a "transitional program for radical economic transformation." It laid out alternatives that are "practical and immediately feasible" that put the "well-being of people and the planet at their center." This requires "democratic control over financial and economic institutions." It includes proposals for finance, taxation, public spending and investment, international trade and finance, environment, and agriculture and industry. It proposes to use the forthcoming World Social Forum in Belem, Brazil at the end of January, 2009 as a venue for developing ways to start implementing this program.
Globalization, financialization, and global warming suggest that the current meltdown will not be self- limiting. Global structural change will be required to end it. Mainstream institutions appear preoccupied with trying to save the system in its present form, and are therefore proposing little in the way of structural change. But the movement for globalization from below may be able to formulate alternatives that address common human needs and can therefore appeal for support at many levels from the local to the global.