The Present Crisis of Capitalism, Its Short and Long Term Implications

A talk given to actists @ the Left Labor Project, January 6, 2009.

The title for my talk I was given is too ambitious by far but I think the intent is to have a discussion of where we are in economic-political history and that is what I shall offer starting with two ways of looking at the coming year(s) for the economy. The predictions for 2009 come in two persuasions. The economists views generally speaking are summed up by the Financial Times as "Whatever happens, 2009 will not be pleasant" and it will be "a year to forget." The Economist greeted the New Year in its January 3rd issue with an Economic Focus "Diagnosing Depression." enlightening us that since the word seemed to be "popping up more often" it would explain criteria for distinguishing a depression from a recession the latter being a decline in real GDP that exceeds 10% or one that lasts more than three years. Since this one began in December 2007 we are off to a good or perhaps bad start. Previous bad recessions in 1973-75 and 1981-2 each lasted 16 months. No one believes this one will be shorter. Yesterday the Federal Reserve announced their shock at how bad things have gotten in the last month. If history has lessons for us it is that financial crises, even ones as bad as the one we have on for years not months, unemployment rises and output falls by large amounts.


On the other side are forecasts from people selling stock. They predict recovery to occur at the end of 2009. Some economists agree. However such reassurance comes from many of the same folks who said a nationwide fall in American house prices was impossible and that financial innovation had made the financial system more resilient, so The Economist was not altogether impressed by the optimists. Nor am I for reasons to which I now turn.


There is cause to think the problems in the financial sector remain grim despite the huge amount they have received from taxpayers and that there are few sources of growth in the private economy. Consumers are strapped and business won’t invest until recovery has begun. The model is broken. Default rates are rising for auto loans, credit cards, and other forms of borrowing. Commercial real estate which expanded 40 percent in the three years after 2005 (when housing loan expansion peaked). We have reached the end of the regime of accumulation that started in the late 1970s which featured financialization – growth through massive debt creation and speculation as a defining characteristic – deindustrialization and globalization.


US-based transnational capital sought both markets and production venues elsewhere and squeezed labor harder. Money was made not only from intensifying exploitation in ways business union leaders were unprepared for since they were still looking for class cooperation when, as the head of the UAW at the time, Douglas Fraser, explained capital was waging a one-sided class war. Foreign competition from Japan and later other Asian exporters was a major factor along with U.S. producers increasingly moving off-shore and introducing more capital saving technology. For the last forty years or so the American workers’ income has stagnated, benefits and job security eroded and in the privatization, anti-tax-anti government climate public services deteriorated. Companies have increasingly maximized short term returns, corporate raiders and private buyout firms have restructured much of American industry, working people have borrowed more and personal debt grew dramatically. As Linda Bilmes and Joe Stiglitz have written "In the eight years since George W. Bush took office, nearly every component of the U.S. economy has deteriorated." We know the broad strokes if not the numbers – 5 million increase in the number without health insurance, 4 million manufacturing jobs gone, consumer debt has dubbed and nearly a fifth of homeowners owe more than their home is worth and between 2002 and 2006 the wealthiest 10% of households received 95% of all income gains. The Iraq war built on a lie will end up costing at least three trillion and we don’t count the Iraqi people killed, wounded and displaced. This was paid for with borrowed money, mostly from foreigners. One in eight Americans the USDA tells us is "food insecure," that is they don’t get enough to eat. Food banks are overwhelmed. In December 608,000 Americans, 74% more than last year are not seeking work because they think no jobs are available. They are not counted as unemployed only "discouraged. I don’t have to go on. American consumers cannot borrow any more and are actually paying down debt levels they cannot sustain as best they can. Spending is falling, unemployment will keep rising into the foreseeable future. More bubbles will burst as Americans pay down unaffordable debt and demand for energy and other raw materials and the output of manufactured goods they create continue to decline.


In the United States in 2008 two million manufacturing jobs were lost. Everywhere now manufacturing activity is falling, even in China and India, in Germany, France, Italy and Spain, in Japan and Hong Kong. While the stock market in the United States last year fell by more than it has since 1931, by 38 percent, with devastating impacts on the retirement prospects of millions of American workers this was considerably less than the losses in the rest of the world where comparable stock indices fell by 46 percent. In Iceland by 90 percent due to the financial excesses caused by deregulation and outrageous expansion of their banks’ borrowing in foreign currencies. But losses were also worse than in the U.S. in Japan, France, Italy, Sweden, South Korea, Brazil, China and India among others. It is not only in the United States that the share of gross national product that goes to wages has declined while the share going to capital has increased, this has happened in three quarters of the countries in the world according to the International Labor Organization between 1995 and 2007.


The systemic challenge may be greater than the current discussion and certainly policy measures reflect. Dependence on unsustainable levels of debt and global capital flows reflect the stagnationist tendencies of the advanced economies and the shift in where production takes place globally, processes of combined and uneven development inherent in capitalism but which now reach crisis proportions. International negotiation and coordination is imperative but difficult. As in the Great Depression each nation’s capitalists (and their workers) will be inclined to become more intensely nationalistic. A crucial dimension of the seriousness of the situation is the foreign debt of the United States which has been running huge current account deficit and borrowing from the rest of the world at an unsustainable rate. The global imbalance is difficult to address. The U.S. must consume less. China will have to let its people consume more. The great increase in the US deficit necessary in the current crisis will increase foreign borrowing worsening the imbalance. Other big issues such as resource limits and global warming will have to be faced and will impact, or should impact how and what is produced. These too represent major crises for capitalism and need to be faced.


The damage caused by the financialization of the last three decades or so is enormous. It is likely without it stagnation would have come sooner. It was the borrowing that kept the economies growing and trade flowing. But the high leverage which allowed investment banks to borrow 97 cents for every three pennies they had in their own capital is over. The NINJA loans (no income no job or assets) for home buyers are no more. Housing will take years to recover and again not only in the United States. The hedge funds and buyout firms face redemptions and many are going belly up along with the banks which lent to them – or these banks would collapse if your tax dollars weren’t being showered on them. The subprime loans we have heard so much about some $1.5 trillion worth were packaged and leveraged to roughly $140 trillion in fictitious capital, "a global pyramid of junk" as Nomi Prins writes. The stronger banks are buying up the weaker ones, usually with federal assistance for most of the risk. And still the banks aren’t lending, companies can’t borrow, and consumer credit is being limited. Where is economic growth going to come from?


The answer of course is the government. We also wait for a new long term growth paradigm. Financialization was tried, produced speculative bubbles, and collapsed despite efforts by Paulson and Bernanke to put Humpty- Dumpty back together again. It is over as the source of economy-wide growth. The only hope on the horizon are the huge spending projects Obama has proposed. There is no choice for two reasons. If he doesn’t there will be another Great Depression and second as Christia Freeland, Financial Times chief correspondent in the U.S. wrote in a remarkable column headed "Friction over greedy bosses lets loose genie of class politics," begins "This week America discovered class warfare;" Americans have woken up to a nightmare. Their way of life, or the life they aspired to, is a dream in a very different sense than the phrase usually has conjured. There has been a lot written, especially before the election of the breakdown of trust in corporate and political leadership. David Gergen who heads the Center for Public Leadership at Harvard University wrote that "Over the last few years the trust between the public and the elites has completely collapsed." Larry Sabato, director of the Center for Politics at the University of Virginia similarly offered the opinion that "The greed and corruption of the corporate class in America is behind this public revolt." This latent but increasingly visible class hatred was a factor in electing America’s first Black president.


The election of Barack Obama and a Democratic congress changes some of this. In the incoming president’s stimulus package which gets bigger by the week as the economy sank and the departing Bush hands in pockets looked on there is hope that the crisis will be less disastrous. But while much is to be supported in his proposals they may still be too little and parts of it are misdirected. This is partly because the Republicans cling to pre-Keynesian ideas that government should not spent too much and balance budgets as quickly as possible. They are supported by Blue Dog Democrats keeping federal spending measures too low to end the crisis. If the Republicans follow their House Leader John Boehner’s lead and agree with his November 2008 statement that "We’re in tough economic times….More Washington spending isn’t the answer" they will undercut the recovery agenda. They are aware that if a real new New Deal saves us they will be out of power for decades. They must as a survival tactic for their party subvert economic recovery while seeming to stand up for principled responsible behavior.


In any case what appears (and is in fact) as a huge increase in federal spending of $760 billion (5.3% of GDP) as proposed by Obama economists is not enough. Unemployment will continue to rise over the next two years even with this stimulus and federal debt will row substantially requiring huge increases in foreign borrowing. Because American manufacturing has been decimated over recent decades much of the tax cut will be spent on imports increasing the current account balance of payment deficit. Global imbalances as I shall say more about will become central to solving what is a worldwide crisis.


Polls show two-thirds of Americans support new spending to stimulate the economy but 56 % worry government will spend too much. Republicans use this as a bargaining chip with Obama to push his program toward tax cuts which benefit the affluent and especially business tax cuts which it is claimed will stimulate investment. But new orders for manufacturing are at their lowest level since the end of WW II. With no growth and expectations of continued falling sales there will be little new investment this way. The money spent on public needs does produce jobs and increases spending. Mitch McConnell the Republican leader in the Senate wants aid to cities and states to be loans not grants, a way to keep the amount down when the need to maintain their spending should be obvious. Retailers are practically giving stuff away to cut their inventories after the worst holiday season in memory and the conservatives cling to their "government is the problem" mantra of low spending and lower taxes. While liberals worked to use government to save capitalism yet again the left perhaps grateful that Bush is gone and reformers are back in. But unless there is working class pressure the center will cave to the right on important matters pertaining to the priorities of ordinary citizens.


If there is concern with too large deficits they could pay for the spending with serious tax reform, returning the share the rich pay to what it was before Ronald Reagan for example. Such taxes collected from the upper one percent could go a long way to simulating growth since the rich do not spend it but the money recycled to cutting payroll taxes for example would be spent by workers and give an incentive for employers since it would lower their labor costs (Kuttner, 2009:14). Republicans would see this as class warfare of course but the argument could be made it is a pragmatic policy for increasing spending without increasing the deficit. Of course it could be argued that some serious class struggle is exactly what is needed in the face of the catastrophe the greed of capital has produced.


The Obama strategy proposals do suggest a new, if still conceived of a as temporary regime of accumulation in government-led industrial policy and public investment. It is too early to tell how radical the intervention will be but as I say there are political constraints that would have to be overcome and Obama’s preference for bipartisan cooperation are not encouraging. He has already agreed to tax cuts which make no sense as a priority use of $300 billion to get conservative support. Compared to Paulson who moved to save the banks without "punishing" them, that is the stockholders and top executives or forcing them to start lending again and offered little else (the dud banks should have been shut down or nationalized for real) the Obama activism is admirable. It also reflects a new way, or rather a return to an older way of thinking about government functions. It is New Deal employment creation with the rationale of investing for the future rather than income redistribution. Certainly there is need for school building repair, infrastructure spending and broadband expansion. Energy efficiency in federal buildings (the government is the largest real estate owner in the country) would save money for tax payers and energy of course and could be a model for similar efforts by others. The letting public facilities decay is scandalous of course and rehabilitating the public purpose is an important change in direction. They are necessary. So are assistance to local and state governments and help to people without health care, those losing their income and their homes. The logic is smart government to meet obvious need as well as stimulate growth. It will not be enough but it is a start.


There is much to be undone and repaired. Consider health care. Peter Orszag, Obama’s head of the White House Office of Management and Budget is calling for comprehensive health reform as the "key to our fiscal future." That is, he is not saying it is an expensive program but people need it. He is saying health care reform is necessary to save money, not by spending less but by spending more and changing health care delivery so that it does not consume the future federal budget. He wants to prevent higher spending unrelated to better outcomes, digitizing health records to save tens millions of dollars in the future, and bringing real efficiencies rather than cutting needed health care services. We shall have to see what happens but it is a better approach than slashing Welfare State services. But again this is a time when more could be done to push the balance of class forces between capital and labor and to expose what the logic of capital costs us.


It is unlikely there will be more radical steps to challenge the causes of ill health. The government will still subsidize high fructose corn syrup and hydrogenated oil so that bigger bottles of Coke can continue to be sold cheaply along with potato chips, creating obesity and the diabetes epidemic. The Department of Agriculture will sponsor unhealthy lunch programs. Industrial hog farms will be subsidized to pollute the surrounding area without proper regulation of waste disposal, the energy and toxic chemical intensive industrial farming will go unchallenged, and the rest. The ecological crisis cannot be put on hold waiting for recovery. The cancer causing pollutants industry creates will not be controlled unless there are popular movements which offer a broad critique of the degradations of capitalism and specific analyses sector by sector of the harm it does. There must be a socio-environmental alternative to the current growth paradigm and yes to militarism hurts in so many ways one of which is it misdirects attention from human needs here and abroad.


If we are not vigilant the infrastructure will be built in public-private partnerships giving control to private investors as has been happening and contracts given out Halliburton-style. How infrastructure projects are done matters. There is no reason the federal government following the privatization of so many functions once done by government employees but now outsourced to the likes of Halliburton to rebuild our infrastructure on such a model. Indeed it has a name, "the Infrastructure Privatization paradigm." It is seen as a win-win for cash strapped governments, the banks and other private investors looking for a new long term inflation linked (raise tolls and user fees when costs go up to keep income high) asset class. Infrastructure offers a combination of hard assets and visible long-term earning streams. The Carlyle Group has a team raising a billion dollar fund to focus on U.S. infrastructure, such as rail, airports, water assets, as well as schools and hospitals. There are many other such entrepreneurial endeavor. GE and Credit Suisse have a new global fund to invest in power plants, pipelines, airports, railroads and toll roads. GE can contract many parts of the deal to its other divisions which can provide inputs and systems for the infrastructure projects. Governments contracting with such providers will know less about the details and costs than the providing consortia. Such arrangements have long been pushed on developing countries by the World Bank and other funders. As in the instances of other aspects of neoliberalism first demanded of weaker developing nations which have become part of the policy givens in the United States and some other advanced economies such a new paradigm is coming unless there is a reassertion of the capacities of the public sector here. As Jenny Anderson reported in the New York Times not long ago, "Reeling from more exotic investments that imploded during the credit crisis, Kohlberg Kravis Roberts, the Carlyle Group, Goldman Sachs, Morgan Stanley and Credit Suisse are among the investors who have amassed an estimated $250 billion war chest much of it raised in the last two years to finance a tidal wave of infrastructure projects in the United States and overseas." Norman Y. Mineta, a former secretary of transportation was hired by Credit Suisse as a senior adviser to such deals. Other former public servants are lining up for such positions as intermediaries between private and public at handsome remuneration. Given growing public deficits, like third world countries Let us hope and work to see that America will not give away its roads, bridges and airports in exchange for the promise of better maintenance by the private sector. The taxpayer will get immediate relief and long term dependence on for profit owners. There will be pressure on the Obama administration to not "undermine the free market with too much government control."


Financialization as an accumulation strategy has failed and brought on what began as the subprime crisis and then a financial crisis and is now a general global economic crisis of massive proportions. Neoliberalism has failed as a way to control the developing world and the US and the other countries of the core now face increasingly powerful countries of the global south who will not accept the IMF and WTO rules applied to their disadvantage. But these people are not simply going away. The money changers will ave to be driven from the temple. It is not clear at all that this is Obama’s intention. His economic team is composed of the people who led the deregulation which created the financial crisis. Obama may be the vanguard of a new global Keynesianism and global social democracy in an effort to relegitimate a now widely discredited capitalism. Certainly multilateralism is better than Bush unilateralism and talking to enemies better than threats and violence as the responses of choice, environmental sustainability surely a better goal than refusing to sign up for even modest efforts like the Kyoto Treaty.


Up to now Blairism and other Third Way social democratic accommodations to corporate globalization have been as discredited as the harsher versions of neoliberalism. The Europeans social democrats while criticizing US-style capitalism have moved to incorporate its logic so that their capitalists will not be left behind. The current crisis has to some degree ironically raised their stock as they reverse course and strengthen the state as an economic actor, picking up the rhetoric of progressive government involvement and it is surely the case that government will have to get capitalism out of the crisis it has created for itself and us. The question is what pressure will there be from labor and the left for more basic change if the recovery does not come in the next year or eighteen months and I do not think it will. Can Obama be pushed like FDR was? What are the demands? What are the organized vehicles for pressure? The left has been down so long it is not clear we know the answers to these questions but if the crisis is deep and long as in the 1930s movements will develop and demands will be articulated. We need to speed up the process. Obama will have a honeymoon period but if things do not get better soon more forceful socialization needs to be demanded. People before profits will confront capital’s demand that growth can only come by giving them more first. It is this logic which will have to be challenged by the sort of progressive political movement of the kind that pushed Roosevelt in the 1930s.


William K. Tabb is Professor Emeritus, Queens College, City University of New York.  He is the author of The Amoral Elephant: Globalization and the Struggle for Social Justice in the Twenty-First Century (Monthly Review Press, 2001) among other publications.




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