Part 7

Part 7: Economic perspectives

Over the course of the narrative we have identified two distinct periods since the Second World War. The first was the golden age of the post-War boom which came to an end with the recession of 1973-4. The second was the more difficult period thereafter, sometimes called the neoliberal era. That period came to an end in 2008 in the Great Recession, with wholesale state intervention in the economy aimed at saving capitalism. We are entering a new era. What will be its characteristic features? We seem to be entering a period of what may be permanent slower growth and higher unemployment – an age of austerity.

Chapter 7.1: What the crisis has cost so far and what it will cost in the end

Any assessment of what the crisis has cost us needs to end with the words ‘so far.’ If the ruling class get their way we could be paying for their crisis for years and years. Here are some findings.

Reinhart and Rogoff

In the book This Time is Different, Reinhart and Rogoff have made a quantitative analysis of hundreds of financial crises going back to the run on Florentine banks in 1340, and tried to factor in the effect of additional factors,. The authors are orthodox economists. They see financial crises (as they call them) as often caused by accidental factors rather than inevitable under capitalism. They chronicle the financial fluctuations and panics without perceiving them as just the form of appearance of a crisis of capitalism, as the Great Recession undoubtedly was and is.

 

They are emphatic that the costs of a banking crisis cannot be reduced to the direct costs of bailing out the banks (which are huge). In this they are right. They explain:

 

“This nearly universal focus on opaque calculations of bailout costs is both misguided and incomplete. It is misguided because there are no widely agreed-upon guidelines for calculating these estimates. It is incomplete because the fiscal consequences of banking crises reach far beyond the more immediate bailout costs. These consequences mainly result from the significant adverse impact that the crisis has on government revenues (in nearly all cases) and the fact that in some episodes the fiscal policy reaction to the crisis has also involved substantial fiscal stimulus packages.”  (p.164)

 

Despite these words of warning from serious number crunchers, we shall try to give a preliminary measure of what the crisis has cost us all, or at least drive home the seriousness of the situation facing working people everywhere in the future.

 

Reinhart and Rogoff differentiate between the general run of post-World War II crises, and what they call Great Depression crises, of particular severity, which are of course the nearest comparison with what we are grappling with today. They show that the big ones last an average of 4.1 years rather than 1.7 years. (p.234)

 

They also take up the fiscal legacy of crises, and work out the historical average real public debt in the three years following a banking crisis as 186.3% of what it was in the year of the crisis (an average 86%  increase). (p.232)

 

As regards crises involving sovereign default, debt restructuring and near default avoided by international bailout packages they see an average 15% decline in GDP from peak to trough, with the effects lasting for more than five years.

 

So this is a summary of their conclusions on the consequences of ‘Great Depression’ crises:

 

  • At least four years of austerity
  • Public debt almost doubling
  • A 15% fall in GDP over more than five years

 

This is what is in store for us based on past experience. This is the likely cost of the Great Recession, a classic crisis of capitalism.

 

Andrew Haldane

 

We are all appalled at the enormous amounts stumped up to save the banks from their own stupidity. But this is peanuts compared with the total costs we are likely to incur. Andrew Haldane has calculated that:

 

“World output is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms that translates into losses of $4 trillion” (for the world economy) “and £140 billion” (for Britain). These are losses for just one year!

 

“As” (evidence given in Haldane’s paper) “shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP.” If this is right the crisis has lost us between one and five year’s output for ever. Haldane goes on:

 

“Put in money terms, that is output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers ‘astronomical’ would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. ‘Economical’ might be a better description.”

He calls his paper The $100 billion question, and finds out the title he dreamed up is a gross underestimate. The cost of the crisis to Britain alone could eventually be as much as the fruits of the economic activities of more than 60 million people for five years.

Christopher Dow

Christopher Dow also demonstrates that losses to GDP in major recessions can be grievous and longstanding.  His book looks in detail at five major recessions in the UK over the last century. He shows in Major recessions that output fell by 10.6% in 1920-21, 12.6% in 1929-33, 8.1% in 1973-5, 10.6% in 1979 and 12.4% in 1989-93.

Moreover he emphasises it is unlikely that, in a major recession, after experiencing the shock the economy will just bounce back into action as if nothing had happened. This is called a V-shaped recession, and some optimists are hoping that is what we will experience in the near future. In fact it is already clear that the recession has done permanent damage to future growth prospects and that the economic outlook is far from sunny:

“The asymmetric shape of a major recession is held to result from two mechanisms. First it is easier to shatter confidence than to restore it…Second, a major recession of demand results in a downward displacement of the path of capacity growth.” (Major recessions, p.374)

In other words the economy will be permanently shunted on to a lower and slower flight path. Losses from the crisis will be correspondingly bigger. Dow divides the 1920-95 time frame of his book into three periods: the interwar period, the post-War boom and the time from 1973 to 1995. He shows the difference in growth patterns between the golden age and the other two periods is that during the post-War boom the country experienced no serious recessions. Such recessions in effect hole the economic ship below the water line and reduce growth prospects for a whole generation:

“The three major recessions since 1973, taken together, could well have reduced output to 25 per cent below what it would otherwise have been, and thus could have reduced government tax revenue in real terms, as compared with the previous trend, on at least this scale.” (ibid p.403)

These major recessions hit the government finances too (as Reinhart and Rogoff also noted). Government debt thus fell much slower after 1975, despite the bonanzas of North Sea oil and privatisation receipts: “The main reason” (why the debt ratio ceased to fall as rapidly) “was that, chiefly because of the big recessions, nominal debt now started to rise considerably more rapidly.” (ibid p.410)

The Reinharts

Carmen M. Reinhart and Vincent R. Reinhart summarise their conclusions in After the Fall, written in August 2010. This is all part of a body of work by the Reinharts and Kenneth Rogoff that attempts to analyse the present crisis in the light of the past. They draw similar conclusions to Dow from a wider international body of evidence. They compare the situation to that of the Great Depression.

 

“Our main results can be summarized as follows:

 

“Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. The median post-financial crisis GDP growth decline in advanced economies is about 1 percent…

 

“What singles out the Great Depression, however, is not a sustained slowdown in growth as much as a massive initial output decline. In about half of the advanced economies in our sample, the level of real GDP remained below the 1929 pre-crisis level from 1930 to 1939. During the first three years following the 2007 U.S. subprime crisis (2008-2010), median real per capita GDP income levels for all the advanced economies is about 2 percent lower than it was in 2007…” (It’s still lower in most countries after four years in 2011 – MB)

 

“In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher. In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009…

 

“The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.”

 

Lower growth for a decade; a collapse in output; unemployment significantly higher for ten years. We face a future of austerity as far ahead as the eye can see.

 

  • A comparison with the past, and an analysis of      present trends, show that we face a decade of austerity.

 

An age of austerity

 

In their book This Time is Different Carmen Reinhart and Kenneth Rogoff deal with the shape of the recovery. As they comment, “V-shaped recoveries in equity prices are far more common than V-shaped recoveries in real housing prices or employment” (p.239). This is unfortunate, since most of us are much more interested in our chances of a job and our living standards than the price of shares. We can rule out a V-shaped recovery as a serious prospect already from the slow pace of recovery. All the serious economists see doom and gloom ahead for years to come.

 

It seems the world economy will be faced with being knocked down onto a lower and slower flight path for the indefinite future on account of the crisis. This is quite apart from the crushing burden of state debt inflicted by the Great Recession. In The Age of Deleveraging, Gary Shilling notes that with deleveraging comes slow economic growth. He details nine reasons why real GDP will rise only about 2% annually in the years ahead  —  far below the 3.3% growth it takes just to keep the unemployment rate stable. Shilling had been notable in earlier years (for instance in Irrational Exuberance, 2000) in warning against the prevailing market euphoria. He has got it right in the past.

Shilling shows that the private sector is now definitely suffering a hangover on account of previously bingeing on credit. Saving will become the order of the day for households and firms. This is already happening. Meanwhile the banks are recapitalising. This amounts to unwinding all the excess leverage of the previous decade. Protectionism may grow under such gloomy conditions. Finally vicious cuts in government spending will further depress the outlook. His forecast is that the end of the spree will cut 1.5 percentage points off the 3.7% GDP growth rate of the relatively prosperous 1982–2000 years. He concludes, “These nine economic growth-slowing forces make 2.0% annual advances in real GDP in coming years reasonable, maybe even optimistic.”

Growth of 2% a year is not enough to restore full employment. In the summer of 2011 even that figure looks optimistic.

  • The world economy has been      permanently weakened. It will not just bounce back into full recovery.

What chance of a boom?

At the time of writing (the summer of 2011) the world economy has technically been in recovery for more than two years. For this reason the prospect of a double dip recession is receding. The obvious weak point that could challenge this prognosis is the fate of the Euro, discussed separately.

At the same time it must be recognised that the world economy, after a weak and lopsided boom, has suffered the most severe recession since the Second World War. It is severely weakened as a result. A recovery is under way, but there is no sign of a return to full employment. Where might a full recovery come from?

For most capitalist countries the condition of their economy is similar. This is the picture:

  • Consumption is reviving from the depths of 2008-9. Its      growth is severely constrained by the fact that households are      deleveraging, paying off debts rather than running up more credit. This      process of trying to getting back in the black is likely to continue for some      years Consumers have been burned by the speculative dance and then by the      recession.
  • Government spending cuts, which are likely to      maintain mass unemployment for years to come, will further hurt      consumption. As we pointed out earlier, consumption is the least volatile      element of national income. A real revival of consumption is likely to come      on the back of a boom elsewhere in the economy, probably in the investment      sector. But…
  • Investment is flat on its back and likely to remain so. Though      profits have revived, capacity utilisation in the USA is only running at      75%. Capital destruction has a way to go before a big investment boom will      start. British firms also have cash coming out of their ears that they      have no plans to invest.
  • Exports. ‘Export or die’ was the old motto. Countries      can export their way out of trouble. No doubt for some capitalist nations      exports will provide a fillip. But one country’s export is another’s      import. For the system as a whole exporting is a zero sum game.

The plans to cut public spending will further harm investment and consumption, since all the elements of national income are interdependent. Cuts will slow the recovery.  This is not the perspective for a healthy boom.

One common thread running throughout this work is that, though there have been common trends and laws of motion at work as long as the capitalist system has been in existence, history does not repeat itself exactly. With all the qualifications it might be worth looking at the 1973-4 crisis and its aftermath as a guide to perspectives for the future. There was never a complete recovery of economic health after 1974 and the recession was followed only five years later by another serious downturn. A similar pattern to the 1970s could well occur only a few years down the line once the economy has, it seems, successfully recovered. The twin crises of that period seriously brought the continued existence of capitalism into question.

Since the collapse of Stalinism after 1989 capitalism has seemed to the overwhelming majority of the population to be the only game in town. Whatever the political consequences of the Great Recession, and they have by no means been played out yet, the massive waste and injustice we have seen is bound to have produced a profound questioning of the system in the minds of millions of working people all over the world.

  • The economy is in slow      recovery. This is fragile.
  • Another recession soon would      have devastating consequences.

Growing out of debt?

It is argued that, when the economy gets going again, all the economic difficulties like government deficits will disappear. How do countries cut down the public debt? In theory they could just grow out of debt. If GDP grows and the debt remains the same size, then it gets progressively smaller as a proportion of GDP. It’s happened before.

In all the major capitalist countries the national debt sank quite dramatically after the Second World War because the economy grew. That is not the prospect that confronts the capitalist world now. We are confronted by years of austerity. It is quite possible that we will face another, even more serious, recession in a few years time. Full employment and the prosperity of yore seem to have gone for good. In a situation of slow and halting growth at best, the major capitalist countries will not be able to grow out of debt.

In any case the G20 meeting in June 2010 committed the governments involved to wage war on their national debt rather than concentrate on growing. The present round of global cuts, which is aimed at reducing the government deficit and debt, risks strangling the recovery by creating more redundancies and cutting living standards.

Take the case of Britain. Martin Wolf explains that the national debt to GDP ratio Britain confronts at present is by no means unprecedented. The average debt to GDP ratio has been 112% for the whole period from 1688 (when the debt was founded) to the present. (Financial Times 21.10.10) Yet the Tory dominated coalition is ringing the alarm bells as the ratio creeps up to 75% of national income. In fact the coalition’s austerity policies are likely to hamstring and constrain economic growth further, and slow the repayment of the debt as a result.

Every other capitalist government is trying to do the same, outdoing one another in their attempts to load austerity upon their citizens. For some capitalists, the public sector provides an important market. For the system as a whole, public expenditure makes capitalism more stable by providing a floor below which economic activity cannot plunge. It maintains a modest level of spending throughout the economy, pays wages and buys in services. Now the Tories in Britain and the rest of the G20 governments want to smash that floor.

But the fundamental problem for all the main capitalist countries is that capitalism continues to be in crisis. The recession is (technically) over. The crisis goes on. All the authoritative commentators we quoted in earlier in this Chapter see that problems stretch ahead for years to come. After the heart attack it has just suffered we cannot expect miracles of athleticism from the system in the future.

  • Capitalism grew out of its public debt burden in the      past. Slow growth in future means it won’t do so this time.

The BRICs

Commentators have noted that large parts of the world appear to have made a complete recovery from the great Recession. That is particularly the case for China which, after consciously adjusting policy to a sudden loss of export markets as a result of the recession, stormed ahead with growth rates of 8-10% p.a. as if nothing had happened. India, Brazil and other ‘emerging economies’ are also growing strongly. (The term is used for what were formerly called less developed countries.)

Our concern is principally with the heartlands of modern capitalism. These are still the metropolitan countries – the USA, European Union and Japan. Together these three are responsible for more than 60% of world of world output. Their fate is by and large the fate of world capitalism. The peripheral capitalist economies are mainly dependent upon them for markets and for growth prospects. By contrast China, by far the biggest, most important and most dynamic of the emerging economies is responsible for just 8% of global production.

To turn briefly to the case of China, there is a widespread misperception that the country is totally dependent on export earnings to explain its astonishing growth record. In effect China is seen as a vast sweat shop used by private capitalist firms from the advanced capitalist countries to export to the rest of the world. If this were the case then China would be completely dependent upon the performance of rest of the world economy and would grind to a halt in the case of economic crisis. This has not happened.

There are two things wrong with the conventional picture. First economic growth is powered by Chinese firms, mainly publicly owned. Secondly investment in China is the driving force of economic take-off, not exports to the rest of the world. Though China is integrated into the international division of labour, the Great Recession has shown that the country is pursuing its own trajectory, not helplessly dependent upon events in the advanced capitalist countries.

Jonathan Anderson (in Is China export-led?) estimates net exports as being responsible for about 9% of GDP. The Chinese authorities themselves announce that investment has made up about 40% of national income in recent years. The Chinese Xinhua News Agency announced recently that, “Investment accounted for 92.3 percent of China’s Gross Domestic Product (GDP) growth in 2009.” Anderson’s 2007 paper gave advance notice that China’s economic performance would not be totally dependent on that of the advanced capitalist countries.

The development of the so-called BRICs (Brazil, Russia, India and China) has been trumpeted as a phenomenon of great importance. But it deserves separate analysis. In passing it might be mentioned that we have sympathy with the view that the concept of the BRICs is a ‘broker’s fantasy’. Thank you, Alex Callinicos (Bonfire of illusions, p.116). Even if the BRICs are really a unified economic phenomenon, and their rise is preordained and irresistible, that would be a secular trend rather than a fundamental factor in the present cyclical crisis of capitalism, which is our principal object of study.

In fact Brazil and Russia are wholly dependent on commodity exports for their recent spurt of growth. China seems set to become the biggest exporter of manufactures in the world. India has a huge home market, but seems very dependent on the export of services to the advanced capitalist countries. To be sure, all these countries are growing quite fast by historic capitalist standards, but all for different reasons. Combined and uneven development is after all a basic feature of capitalist growth and development.

  • The BRICs are important in their own right, but      world economic development is still dominated by the imperialist      heartlands.

Chapter 7.2: Problems ahead

The destruction of capital

Marx was well aware that capitalism destroys capital continually and remorselessly as it accumulates. Never let it be said that capitalism uses resources efficiently. It advances by destroying the value of the means of production in its path.  This devaluation or moral depreciation of capital occurs because of the continuous rise in productivity spurred on by competition between capitalists. So machinery, and other fixed capital, has to be scrapped as it has become out of date long before it is worn out. If constant capital cannot allow the capitalist to compete with rivals who have retooled with the latest equipment, then it has to go

Marx quoted Babbage, a polymath who wrote extensively on the role and importance of machinery in the nineteenth century, with a startling example of this depreciation. “The improvements…which took place not long ago in frames for making patent-nets were so great, that a machine, in good repair, which had cost £1,200, sold a few years after for £60.” (Marx-Engels Collected Works Volume 33, p.350).

All this did not benefit the workforce one jot. Equipment had to be worked 24 hours a day by shifts of  workers to transfer all the value out of that expensive constant capital to the tulle (the final product)  before the machine became scrap metal. As Marx comments on this process:

“John Stuart Mill says in his Principles of Political Economy: ‘it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being.’ That is, however, by no means the aim of the application of machinery under capitalism…The machine is a means for producing surplus value.” (Capital Volume I, p.492)

Under capitalism innovation can often prove to be the ruin of the inventor:

“The far greater cost of operating an establishment based on a new invention as compared to later establishments arising from its very bones. This is so very true that the trail-blazers generally go bankrupt, and only those who later buy the buildings, machinery, etc., at a cheaper price, make money out of it. It is, therefore, generally the most worthless and miserable sort of money-capitalists who draw the greatest profit out of all new developments of the universal labour of the human spirit and their social application through combined labour.” (Capital Volume III p.199)

Here is a more recent example of the process that Marx called moral depreciation:

“From 1977 to 1984, venture capital firms invested almost $400 million in 43 different manufacturers of Winchester disk drives…including 21 startup or early stage investments….During the middle part of 1983, the capital markets assigned a value in excess of $5 billion to 12 publicly traded, venture capital based hard disk drive manufacturers…However by 1984 the value assigned to those same 12 manufacturers had declined..to only $1.4bn.”  (Sahlman and Stevenson Capital Market Myopia, cited in Railroading Economics by Michael Perelman, pp.54-5)

It seems that even this regular destruction of the productive forces is not enough in the event of a crisis. As the Communist Manifesto declares, in a slump:

“The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises.” (Communist Manifesto, p.8)

Take the case of the boom that crashed in 2001. Earlier we reported Robert Brenner’s account of the massive build up of overcapacity in the ICT sector:

“Between 1995 and 2000, industrial capacity in information technology quintupled, accounting by itself for roughly half of the quadrupling of the industrial capacity that took place in the manufacturing sector as a whole, which also smashed all records. As a consequence the gain in profitability deriving from the increased productivity growth was counterbalanced by the decline in profitability that resulted from growing over-supply” (What is Good for Goldman Sachs is Good for America, p.31)

What happened to all this surplus capital? It has disappeared as surely as if the earth had opened to swallow it up. The Financial Times reckoned after the debacle that only 1 or 2% of the fibre optic cable buried underground had ever been turned on (cited in Chris Harman – Zombie capitalism, p.286). The inflated share prices of new technology firms set up during the boom also went south. Their resources disappeared for a song in sales of bankrupt assets. Many of these firms had never paid a dividend and never would.

The classic statement of the need for more capital to be destroyed in a crisis in order for the recovery to come is from Andrew Mellon, US Treasury Secretary after the Wall Street crash; “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he ranted. “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, lead a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Joseph Schumpeter was another advocate of ‘creative destruction’  Business cycles, he declares, “Are not like tonsils, separate things that might be treated by themselves but are, like the beat of the heart, of the essence of the organism that displays them.” (Business Cycles, quoted in Perelman-Railroading economics, p.60) In other words, just put up with it.

The greatest and most wanton destruction of capital in human history took place as a result of the Second World War. The War was followed by an enormous secular boom, based precisely on this capital destruction.

Of course the political conditions for the survival of capitalism after 1945 had first to be established. “The political failure of the Stalinists and the social democrats, in Britain and Western Europe, created the political climate for a recovery of capitalism.” (Ted Grant – Will there be a slump?)

Grant goes on, “The effects of the war, in the destruction of consumer and capital goods, created a big market (war has effects similar to, but deeper than, a slump in the destruction of capital). These effects, according to United Nations’ statisticians, only disappeared in 1958.”

The War of course physically destroyed capital physically. A slump destroys the value of capital. In doing so, it should prepare the conditions for a new upturn.

Throughout the Great Depression productive forces, not to mention people’s livelihoods and lives, were recklessly squandered as part of this ‘healing’ process. But capitalism was not cured till the Second World War broke out. The 1930s saw capitalism in mortal danger. The ruling class felt thereafter that it could not stand idly by and wait for the interminable time it took for the system to heal itself through deflation. Since the Second World War the capitalist class has intervened actively in the economy to stop it hitting rock bottom.

They have done so for two reasons: politically it was too dangerous to leave things alone. The working class would draw the conclusion in increasing numbers that capitalism was a failed system. The other reason they have intervened is because there is no reason to believe capitalism need ever necessarily recover from a serious and prolonged bout of deflation.

  • Capitalism continuously devalues capital as it      accumulates.
  • Marx observes that this process cheapens the      elements of constant capital, and it is a factor offsetting the tendency      for the rate of profit to fall.
  • In a recession further capital destruction is needed      in order to prepare the conditions for a new boom.
  • The Second World War, by destroying capital on the      grand scale, prepared the conditions for the post-War boom.

Deflation

Deflation is what happens when the Mellons of the world allow the rest of world capitalism to go hang, by allowing capital destruction without limit. It does not offer a healing process. This was discovered by Irving Fisher during the 1930s. Fisher is famous principally for coming out with possibly the most ludicrous prediction in the entire canon of neoclassical economics, when he declared in 1929, “Stock prices have reached what looks like a permanently high plateau.”

Haunted by this comment thereafter, he developed the theory of debt-deflation in order to try to restore his credibility as an economist. In effect, he claimed, capitalism in crisis can go into a vicious circle of decline. As the economy slides down, incomes fall and wealth declines. But debts maintain their value. If prices are actually falling (as they were at about 10% a year in the worst years of the Great Depression) then debtors have to shell out more and more of their earnings to pay for the debts they built up in the good years. The debts become insupportable. They consume the debtors, who lose everything with no salvation in sight.

Deflation causes other distortions. If prices are falling, why keep your money in a bank? Savings will be worth more next year than this year even if you keep them in a sock. On the other hand interest rates demanded by the banks are high enough to discourage capitalists who want to borrow in order to invest. If nominal rates are just 1% and prices are falling by 10% annually, then the real rate of interest is about 11% a year.

That means the government cannot stimulate the economy by means of monetary policy. Small businesses and struggling farmers in particular crave lower interest rates as a lifeline. How can the government engineer negative nominal interest rates to keep real rates low when prices are falling?

Also people are more likely to hang on to their money as its purchasing power grows year by year rather than spending it, just when the economy could really do with a buying splurge to expand the market.

For all these reasons the economy will not reach a stable state where, in Mellon’s words, ‘all the rottenness has been purged out of the system’. Deflation will instead take the economy, “With hideous ruin and combustion, down / To bottomless perdition, there to dwell”, like Satan in Paradise Lost (Book I, lines 46-7).

If the capitalists have the tools to stop deflation happening, then they will intervene. The question is: can they? What effect will their policies have?

The Japanese deflation

Evidence of the effects of deflation, and of the ineffectiveness of government policy intended to prevent it, comes from Japan. In the 1950s and 1960s the Japanese economy achieved rates of growth higher than any capitalist economy had ever attained before. Competitors saw Japan as sweeping all before it on the world economy, conquering one export market after another.

In the 1980s it became clear that Japan was afflicted by a financial bubble. Its origins do not concern us here but it was associated, like the more recent bubble, with artificially low interest rates. Japanese banks had their arms twisted to lend more money. The loans were often secured by land as collateral. This was the prime cause of the land price bubble after 1985. More lending increased the demand for land, so its price went up. So people borrowed still more money to buy land, in order to borrow even more.

The bubble became particularly evident in property prices. The Nikkei share index was also in the stratosphere. Towards the end of the 1980s the total price of real property in Japan was reckoned to be worth more than the land in the whole of the rest of the world!

There had been a steady fall in the rate of profit even before the bubble burst. One reason for this was the enormous increase in costs caused by soaring rents and the rising price of land that had to be paid for by capitalists. In the end a rise in interest rates in late 1989 was enough to prick the bubble. Share prices collapsed. Land prices collapsed.

Huge debts, incurred during the bubble, remained unpaid and unpayable. The banks, massively overextended, began to deleverage, screwing the rest of the economy down as they went. The panic began on December 31st 1989. More than a decade of stagnation followed.

Over the next few years asset prices fell in Japan as much as they had done worldwide in the Great Depression. House prices fell to a tenth of their top level. Commercial property was worth a hundredth of what it had been in the bubble. Over the decade the Nikkei lost three quarters of its ‘value.’ From a peak of 40,000 it was down to15,000 in 1992 and 12,000 by 2001.

The marvellous Japanese industrial machine continued to function, but the country never again achieved the growth rates of earlier decades, despite successive rounds of fiscal stimulus. The government spent 100 trillion yen in ten years. All this stimulus achieved was to ratchet up the national debt. The Japanese central bank also tried monetary policy. Interest rates stood at just 0.5% by 1995.

The whole debt-deflation mechanism described by Irving Fisher continued to grind away at the ‘Japanese economic miracle’. Investment was stagnant – no higher in 2002 than it had been in 1990.

So deflation can be a disaster. Once the process of deflation has begun, government policy can be ineffective to reverse it, as the Japanese experience shows. That is why governments intervene to try to prevent it starting.

  • The      Japanese experience shows that government policy can be completely      ineffective in the face of deflationary pressures.

The deflation/inflation dilemma

There is also a downside to the government intervening in order to offset the worst effects of the downturn and the danger of deflation, as they did at the end of 2008.

Quite simply capital is preserved, not destroyed. So capitalism is not healed, healthy and ready to gallop in the next steeplechase of boom and slump. The progress of recovery is slow. It continually demands stimuli such as injections of credit in order to get moving. Credit produces bubbles. This is one reason for the super-bubble in modern capitalism that Soros mentions. (Soros-The crash of 2008 and what it means)

In order to prevent the economy collapsing the government may intervene by allowing the pumping up of credit, for instance by cutting interest rates. As quickly as one bubble bursts, another is blown up. The bursting of the house price bubble after 2006 was inevitable. Yet, as soon as the banks got up off the floor, they have been pumping money on to the stock exchanges of the ‘emerging’ economies. Countries such as Brazil and India have been growing quite strongly as of the summer of 2011 and their stock markets bounced back. They have been aided by a flow of funds from the advanced capitalist countries where profitable investment opportunities are harder to find. Here are some warning signs from the Financial Times.

Bubble fears as emerging markets soar by Stefan Wagstyl and David Oakley (07.10.10): “Robert Zoellick, World Bank president, has talked of currency ‘tensions’ and ‘the risk of bubbles’. The IMF, in its global financial stability report, said: ‘The prospect of heavy capital inflows would be destabilising.’”

Emerging markets at risk from a gigantic bubble by Peter Tasker (18.10.10): “The degree of euphoria surrounding some emerging economies is already troubling. The Indian and Indonesian stock markets are trading at price earnings ratios of over 40 times, based on ten-year average earnings.” (That means it would take forty years to get your money back.)  “You would surely need a hundred years of fortitude to buy Mexico’s recently-issued 100-year bond at a yield of 5.6 per cent. Bubble and bust in China, on which the world is now so dependent for growth and optimism, would likely tank the commodities markets, set off a second round of deflation, and end the emerging markets boom in the most spectacular way possible.”

These people are incurable. Is it the case that ‘here we go again’?

  • The process of deflation associated with massive destruction of capital can become a vicious circle from which capitalism cannot escape.
  • If the      government intervenes to try to prevent deflation, they may prevent      adequate capital destruction that will eventually prepare the way for a full      recovery.
  • If capital      is not destroyed thoroughly a new speculative bubble can be blown and a      tendency to inflation created.

Regulating capitalism?

Joseph Stiglitz is one of the few economists who consistently predicted the crash. Stiglitz attributes the Great Recession to a combination of recklessness and a failure to regulate that recklessness (Freefall, Penguin 2010). Stiglitz has been right before and been ignored before. He is right this time and all the signs are that he will be ignored again.

The deregulatory drive attained an unstoppable momentum with the complete ideological victory of neoliberalism. Regulation was seen as cramping the style of capitalism red in tooth and claw.

After the Second World War global capital flows were carefully regulated in all the major capitalist countries. These regulations were progressively torn up as the post-War boom proceeded. The US Glass-Steagall Act that regulated the banks (passed as part of Roosevelt’s New Deal) was swept away in 1999 under Clinton’s Presidency. A wall of money and massive Congressional lobbying removed the last obstacle to unfettered freedom of finance. Arguably that paved the way for the present disaster.

Has capitalism got a death wish? Why not re-regulate when evidence of the damage caused by deregulation is all around? It needs repeating that the capitalist system is anarchic. The capitalist class does not work to a strategic plan. They respond to stimuli. Profit is their key stimulus. In an atmosphere of euphoria, all constraints are swept aside. As one broker explained, while the herd is making money you have to be part of that herd.  Because the capitalist class is the ruling class, they usually get what they want. When they wanted deregulation they got it, whether it was good for their system or not.

Regulation is only implemented when it doesn’t damage the essential interests of the financiers.  The handcuffs that Roosevelt apparently imposed on the US banks in 1933 in the form of the Glass-Steagall Act didn’t really hurt at all, for the simple reason that the banking system had already largely collapsed or was in a coma. By that time 9,000 banks had gone to the wall in the USA.

Roosevelt’s banking acts introduced a system of federal deposit insurance, a guarantee for depositors that their money would be safe. The acts separated high street banks, which were severely restricted in the risks they could take with depositors’ money, from investment banks, which remained uninsured and in principle would be allowed to go to the wall. The investments banks were by this time flat on their backs. Risk taking was the last thing on their minds in 1933. Survival was all-important. Roosevelt’s initiatives sound bold. Really he was bolting the stable door after the horse had bolted.

Only a year ago the bankers were hate figures, reviled by millions for ruining innocent people’s lives with their mad and incompetent gambling. Though not a complete picture of the nature of the present capitalist crisis, this was all substantially true so far as it went. It is incredible the extent to which the capitalist press and opinion formers have tried to use the fiscal crisis of the state – an inevitable phase in the capitalist crisis – to switch the blame away from the bankers and on to the public debt and the public sector. They have been partially successful in this, at least for a period of time. In a crisis consciousness can change rapidly, and it can and will turn around again just as quickly.

Only a year ago the cry went up, ‘never again!’ Never again would the banks hold the rest of us to ransom. They should not be allowed to be ‘too big to fail.’ As we have pointed out the problem was that the banks were really too interconnected to fail and too important to capitalism to fail. There was the rub. The banks could blackmail the rest of the capitalist class with all too plausible stories of complete economic meltdown

The call for re-regulation of the footloose and fancy free financial institutions that were the trigger for the crisis faces stiff resistance from vested interests. Reinhart and Rogoff actually attribute the frequency and seriousness of financial crises to financial liberalisation. “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously, as they did in the 1990s, but historically.” (This Time is Different p.155)

In the USA the biggest slap on the wrists to a bank has been applied to Goldman Sachs. The bank admitted to misleading customers on the quality of mortgage backed securities. They have been fined $550m. This is the loss of just two weeks’ profits. (Dominic Rushe-Resurgent Wall Street winning lobby battle, Guardian 27.06.11) It doesn’t hurt at all.

All over the world the bankers have evaded regulation and have been restored to their privileged position. The City of London has grown too big and parts of it are ‘socially useless’, commented Adair Turner, Chair of the Financial Services Authority, in exasperation. Right first time, Lord Turner. Still they got their way. Froud, Moran, Nilsson and Williams describe in detail (Opportunity lost, in Socialist Register 2011, pp.98-119) how the financiers ran rings round the New Labour ministers. While critical of the Macmillan Committee of 1931, the Radcliffe Committee of 1959 and the Wilson Committee of 1980 (all on finance) the authors observe how, in the Wigley (2008) and Bischoff (2009) Reports:

“Non-City groups were not included or consulted in the information gathering, problem-defining phase or subsequently in the drafting of the two reports about the benefits of finance.” (p.109)

In effect the City investigated itself, with not even a token trade unionist on the Committees.  Not surprisingly, it gave itself a clean bill of health. Bischoff decided that finance represented value for money. How?

“Bischoff added up taxes paid and collected by finance without considering the costs of bailing out the financial system.” (ibid p.210) This is the sort of dodgy accounting that brought the banks, and the rest of the economy, to the brink of ruin in the first place!  After this sleight of hand, no wonder the report concluded, “Financial services are critical to the UK’s future.”

The banks continue to be effectively unregulated. Though the article is fascinating as a description of how the British establishment works, the complete success of finance capital in shredding any proposed regulatory restrictions is mainly on account of  the spinelessness of Gordon Brown and Alistair Darling as representatives of New Labour. They were all hapless creatures of the establishment who could not conceive of an alternative to the rule of finance capital. In this respect they behaved like establishment politicians all over the world, as servants to the big banks and to capitalism.

So the banks got away scot free. This is true of the upper management, those who were solely responsible for the catastrophic decisions that led to the credit crunch. But there have been mass redundancies among ordinary bank workers in the UK and elsewhere over the past year. Those who have lost their jobs are the ordinary working class finance workers who had no part in the crazy revels of the speculative boom. They are the ones to pay the price.

The Tory-led government has continued the traditions of New Labour in grovelling to finance capital. They have effectively ditched the Walker Review on pay and bonuses in the banking sector. Their proposal for a bankers’ levy has been trimmed back and is likely to garner just 0.1% of bank profits.

It seems that capitalism as a whole could benefit from curbing the ‘animal spirits’ of the financial entrepreneurs. All the major capitalist powers swore in 2008 not to let the guilty bankers off the hook. It has become quite clear by 2011 that the financial interests have been able to fend off these pressures to behave themselves and face regulatory restrictions down.

Here’s how. In the USA lobbying has been intense. Gillian Tett quotes Larry Summers, Obama’s chief economic adviser, as estimating that, “The financial sector is currently funding an average of four lobbyists, to the tune of $1m or so, for every member of the House (including those who have nothing to do with finance)” (Financial Times 29.10.10). If this is not outright corruption, then it comes close. This is how political decision-making is arrived at in a capitalist democracy.

Bank profits are back. Bonuses are back. The rest of us look to years of austerity in the future, but the banks have been saved. Governments lumbered the people with huge public debts, largely to bail out the banks and because of the disastrous effects the banks’ conduct has had on the rest of the economy. All over the world they have now foresworn intervening in the financial arena and are letting the banks carry on exactly as they did before.

  • Regulating the banks has been abandoned. They are      back in the driving seat.

Protectionism?

We know that the Great Depression was made worse by the tendencies to protectionism that became manifest as the economic crash proceeded. The protectionist legislation, such as the Smoot-Hawley Act raising tariffs on imports which was passed in the USA in 1930, was not the cause of the Great Depression. It came too late for that. But protectionism did make the crisis worse.

If capitalism grows and world trade grows, then a rising tide raises all boats. But in a crisis the national ruling class does not only turn on ‘its own’ working class. It also tries to foist the burden onto other countries. And that makes it worse for everyone.

“As long as everything goes well competition acts…as a practical freemasonry of the capitalist class, so that they all share in the common booty …But as soon as it is no longer a question of division of profit, but rather of loss, each seeks as far as he can to restrict his own share of this loss and pass it on to someone else.” (Capital Volume III, p.361)

So far we have not seen an equally serious protectionist trend as happened in the 1930s. Indeed we have heard loud declarations as to the virtues of free trade and the need for all capitalist nations to work together and co-operate. Beware! This might be taken as a warning signal. We always hear these exhortations from the great and the good, specially on the eve of a trade war.

The form that the tendency to protectionism may take is currency manipulation rather than tariff barriers, as happened in the 1930s. The financial press has been running headlines about ‘currency wars’ all through the past year. Arguments, spats and sabre-rattling between the trading nations will continue. We have also seen attempts to manipulate currencies between the USA and China, while the US Congress has approved measures that may be regarded as covert protectionism.

In late 2010 the US Fed decided to launch a second round of quantitative easing (printing money). They injected a further $600bn into the economy, even though they didn’t know whether the first stimulus had ‘worked’. Trade rivals believe that pumping out dollars will depreciate the US currency, make US goods cheaper and their own products dearer on world markets and thus provide the USA with an unfair trade advantage. They are not happy.

If the world economy continues to recover, then the protectionist voices will become less strident for the time being. National antagonisms, which occur because of the combined and uneven development of world capitalism, will be a continued source of friction. In particular the global imbalance between China and the USA will remain a secular feature of the world economy and a permanent source of conflict. But the decisive difference with the 1930s is that world trade has now turned up and therefore a full-scale trade war is unlikely this time around.

  • Protectionist voices will fade if and when the      recovery develops, but, like the recovery, that process will be slow.

The fate of the Euro

The fate of the Euro remains insecure. Economic trends are not inexorable forces. They can be interfered with and reversed by human action, in particular by government, which is an important economic player in the twenty-first century. Here we discuss the role of ‘mistake’ and apparently accidental factors in politics and human affairs.

Marx did not have a problem in recognising the part played in economic events by mistaken ideas and stupid people. He cited the Bank Acts of 1844 and later which were based on an erroneous economic theory – the quantity theory of money – and a mistaken application of the theory to the constitution of the central bank. As a result of these factors, whenever a crisis broke out the Bank Acts had to be suspended. At first sight this seems to suggest that the root of the problem of the governance of the Bank of England was an inadequate understanding of political economy. This interpretation would be one of the purest subjective idealism. The problem of the malfunctioning Bank Acts in turn was really rooted in conflicts of interest between the policy-makers of the time.

Likewise we have been critical of the way the leading European Union decision-makers have responded to the Euro crisis that blew up in Greece and then in Ireland. We do not wish to give the impression that the situation was not resolved more decisively just because Merkel, Sarkozy and the others were a bit thick. The problem was that they were concerned above all with the national interests of Germany and France and not that of the EU as a whole. Capitalism is an anarchic system. Different capitalists have different interests from one another. That means that even the members of the ruling class may disagree with one another. So it is difficult, and may be impossible, for them to agree on a common policy.

Merkel may have seemed unwise when she has raised in public the question of Irish and Greek bondholders taking a ‘haircut’ (loss). Certainly the bond markets took fright as a result, and that made it much more difficult for the Eurozone leaders to implement the Irish and Greek ‘rescues’. But the question of default is a genuine dilemma for the Eurozone decision-makers. There is no one right course for capitalism to follow, and in any case the European powers may have conflicting interests on the question.

Merkel was reacting to a possible action in the German constitutional court and problems within her own struggling coalition. These parochial interests were more important to her than the future of the Euro, because they were about her survival as a political leader. That is typical. There were occasions in 2010 and 2011, and they may recur in the future, when the chaotic nature of the decision-making process in the Eurozone, could take the Euro to the brink of shipwreck.

The Euro is a unique institution. It is a currency without a country. A government, even under capitalism, has ways of influencing the level of economic activity within their economy and therefore of safeguarding its national currency.  As we’ve noted these economic levers are usually listed as fiscal and monetary policy. Fiscal policy within the EU is nationally determined. There is no common Eurozone wide or EU wide fiscal policy. Despite continual allegations of waste of EU funds, the Europe Union disposes of few resources and employs relatively few workers. At one time it had fewer employees than Kent County Council. It disburses considerable regional and agricultural subsidies to the member countries, but that is another matter.

When a government, like that of the USA, implements an expansionary fiscal policy by cutting taxes or spending more money, that may be expected to have an impact throughout the country. That cannot happen at present within the Eurozone. Instead of being able to pursue an active fiscal policy, Eurozone members are constrained in principle by rules on the maximum deficit and government debt they may run.

Not only that. The US has a common system of federal taxes and benefits. As a result if one state such as Michigan becomes economically depressed, the local citizens will automatically pay less tax and receive more benefits from the federal government. That will act as a bit of a cushion for the people of Michigan. These automatic stabilisers act to reduce economic volatility within the country. There is no such redistributive mechanism within the Eurozone. The message a country gets from its partners if in difficulties is, ‘you’re on your own.’

It should not be forgotten that the policy of European monetary union is driven by a hard neoliberal ideology. ‘Why should governments intervene to try to alleviate unemployment? Capitalism, left to itself, will generate the jobs. Even if it doesn’t, government intervention will only make the situation worse.’ That’s the sentiment at the top.

This nonsense is repeated in the arena of monetary policy. The European Central Bank does not have a growth target. Its sole brief is to keep inflation down. Presumably, so long as the money supply is stable, they think private capitalism will deliver optimal economic results.

The fact that the Euro has no real defences, or rather that these are being developed by the authorities on the hoof in the teeth of a crisis, makes the single currency very vulnerable. The idea of a European bond, with the whole weight of the Eurozone behind it, has been vetoed for the time being. On the other hand the ECB has been shamefacedly buying up sovereign debt in 2010 and 2011, as a clandestine way of propping up its weaker members from further attack.

Since the world economy is recovering, on the balance of probabilities the Euro should survive this crisis, though there is no doubt that some peripheral countries will remain in intensive care for some years to come. This is not a hard and fast prediction. Capitalism is an irrational system, as we have seen many times in the course of this book. Waves of speculation and what Keynes called “animal spirits” play their part and are quite capable of sweeping away the whole Euro project.

The authorities all over the world will have to take the situation seriously, as the collapse of the Euro would be a global calamity that could plunge the world economy into a double dip recession. Another serious world economic crisis in a few years ahead, which is quite possible, could sink the Euro altogether or severely reduce the area covered by the single currency.

The EU and Eurozone authorities ought to be able to manage an economic recovery in the Eurozone and European Union as a whole over the next few years, though there may well be stresses and strains. Greece, for instance, may have to be taken through an orderly default. This would involve recognition that the Greek economy could snap under the pressures imposed upon it. Default could also be the result of class struggle. The Greek working class is rightly furious at having to shoulder the burdens heaped upon them by the tax-dodging Greek ruling class. The problem involved in an orderly restructuring of Greek public debt is that this means that the French and German banks in particular will have to take a hit. The Euro presents a knotty problem that won’t go away soon.

  • The problems of the Eurozone      flow from its flawed design and architecture as well as the economic      crisis.
  • The Euro crisis remains the      most visible flashpoint for the world economy. This crisis is the one      thing that could even cause it to relapse from its present hesitant      recovery over the next couple of years.

 

 

 

 

 

 

 

 

Part 7: Economic perspectives

Over the course of the narrative we have identified two distinct periods since the Second World War. The first was the golden age of the post-War boom which came to an end with the recession of 1973-4. The second was the more difficult period thereafter, sometimes called the neoliberal era. That period came to an end in 2008 in the Great Recession, with wholesale state intervention in the economy aimed at saving capitalism. We are entering a new era. What will be its characteristic features? We seem to be entering a period of what may be permanent slower growth and higher unemployment – an age of austerity.

Chapter 7.1: What the crisis has cost so far and what it will cost in the end

Any assessment of what the crisis has cost us needs to end with the words ‘so far.’ If the ruling class get their way we could be paying for their crisis for years and years. Here are some findings.

Reinhart and Rogoff

In the book This Time is Different, Reinhart and Rogoff have made a quantitative analysis of hundreds of financial crises going back to the run on Florentine banks in 1340, and tried to factor in the effect of additional factors,. The authors are orthodox economists. They see financial crises (as they call them) as often caused by accidental factors rather than inevitable under capitalism. They chronicle the financial fluctuations and panics without perceiving them as just the form of appearance of a crisis of capitalism, as the Great Recession undoubtedly was and is.

 

They are emphatic that the costs of a banking crisis cannot be reduced to the direct costs of bailing out the banks (which are huge). In this they are right. They explain:

 

“This nearly universal focus on opaque calculations of bailout costs is both misguided and incomplete. It is misguided because there are no widely agreed-upon guidelines for calculating these estimates. It is incomplete because the fiscal consequences of banking crises reach far beyond the more immediate bailout costs. These consequences mainly result from the significant adverse impact that the crisis has on government revenues (in nearly all cases) and the fact that in some episodes the fiscal policy reaction to the crisis has also involved substantial fiscal stimulus packages.”  (p.164)

 

Despite these words of warning from serious number crunchers, we shall try to give a preliminary measure of what the crisis has cost us all, or at least drive home the seriousness of the situation facing working people everywhere in the future.

 

Reinhart and Rogoff differentiate between the general run of post-World War II crises, and what they call Great Depression crises, of particular severity, which are of course the nearest comparison with what we are grappling with today. They show that the big ones last an average of 4.1 years rather than 1.7 years. (p.234)

 

They also take up the fiscal legacy of crises, and work out the historical average real public debt in the three years following a banking crisis as 186.3% of what it was in the year of the crisis (an average 86%  increase). (p.232)

 

As regards crises involving sovereign default, debt restructuring and near default avoided by international bailout packages they see an average 15% decline in GDP from peak to trough, with the effects lasting for more than five years.

 

So this is a summary of their conclusions on the consequences of ‘Great Depression’ crises:

 

  • At least four years of austerity
  • Public debt almost doubling
  • A 15% fall in GDP over more than five years

 

This is what is in store for us based on past experience. This is the likely cost of the Great Recession, a classic crisis of capitalism.

 

Andrew Haldane

 

We are all appalled at the enormous amounts stumped up to save the banks from their own stupidity. But this is peanuts compared with the total costs we are likely to incur. Andrew Haldane has calculated that:

 

“World output is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms that translates into losses of $4 trillion” (for the world economy) “and £140 billion” (for Britain). These are losses for just one year!

 

“As” (evidence given in Haldane’s paper) “shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP.” If this is right the crisis has lost us between one and five year’s output for ever. Haldane goes on:

 

“Put in money terms, that is output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers ‘astronomical’ would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. ‘Economical’ might be a better description.”

He calls his paper The $100 billion question, and finds out the title he dreamed up is a gross underestimate. The cost of the crisis to Britain alone could eventually be as much as the fruits of the economic activities of more than 60 million people for five years.

Christopher Dow

Christopher Dow also demonstrates that losses to GDP in major recessions can be grievous and longstanding.  His book looks in detail at five major recessions in the UK over the last century. He shows in Major recessions that output fell by 10.6% in 1920-21, 12.6% in 1929-33, 8.1% in 1973-5, 10.6% in 1979 and 12.4% in 1989-93.

Moreover he emphasises it is unlikely that, in a major recession, after experiencing the shock the economy will just bounce back into action as if nothing had happened. This is called a V-shaped recession, and some optimists are hoping that is what we will experience in the near future. In fact it is already clear that the recession has done permanent damage to future growth prospects and that the economic outlook is far from sunny:

“The asymmetric shape of a major recession is held to result from two mechanisms. First it is easier to shatter confidence than to restore it…Second, a major recession of demand results in a downward displacement of the path of capacity growth.” (Major recessions, p.374)

In other words the economy will be permanently shunted on to a lower and slower flight path. Losses from the crisis will be correspondingly bigger. Dow divides the 1920-95 time frame of his book into three periods: the interwar period, the post-War boom and the time from 1973 to 1995. He shows the difference in growth patterns between the golden age and the other two periods is that during the post-War boom the country experienced no serious recessions. Such recessions in effect hole the economic ship below the water line and reduce growth prospects for a whole generation:

“The three major recessions since 1973, taken together, could well have reduced output to 25 per cent below what it would otherwise have been, and thus could have reduced government tax revenue in real terms, as compared with the previous trend, on at least this scale.” (ibid p.403)

These major recessions hit the government finances too (as Reinhart and Rogoff also noted). Government debt thus fell much slower after 1975, despite the bonanzas of North Sea oil and privatisation receipts: “The main reason” (why the debt ratio ceased to fall as rapidly) “was that, chiefly because of the big recessions, nominal debt now started to rise considerably more rapidly.” (ibid p.410)

The Reinharts

Carmen M. Reinhart and Vincent R. Reinhart summarise their conclusions in After the Fall, written in August 2010. This is all part of a body of work by the Reinharts and Kenneth Rogoff that attempts to analyse the present crisis in the light of the past. They draw similar conclusions to Dow from a wider international body of evidence. They compare the situation to that of the Great Depression.

 

“Our main results can be summarized as follows:

 

“Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. The median post-financial crisis GDP growth decline in advanced economies is about 1 percent…

 

“What singles out the Great Depression, however, is not a sustained slowdown in growth as much as a massive initial output decline. In about half of the advanced economies in our sample, the level of real GDP remained below the 1929 pre-crisis level from 1930 to 1939. During the first three years following the 2007 U.S. subprime crisis (2008-2010), median real per capita GDP income levels for all the advanced economies is about 2 percent lower than it was in 2007…” (It’s still lower in most countries after four years in 2011 – MB)

 

“In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher. In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009…

 

“The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.”

 

Lower growth for a decade; a collapse in output; unemployment significantly higher for ten years. We face a future of austerity as far ahead as the eye can see.

 

  • A comparison with the past, and an analysis of      present trends, show that we face a decade of austerity.

 

An age of austerity

 

In their book This Time is Different Carmen Reinhart and Kenneth Rogoff deal with the shape of the recovery. As they comment, “V-shaped recoveries in equity prices are far more common than V-shaped recoveries in real housing prices or employment” (p.239). This is unfortunate, since most of us are much more interested in our chances of a job and our living standards than the price of shares. We can rule out a V-shaped recovery as a serious prospect already from the slow pace of recovery. All the serious economists see doom and gloom ahead for years to come.

 

It seems the world economy will be faced with being knocked down onto a lower and slower flight path for the indefinite future on account of the crisis. This is quite apart from the crushing burden of state debt inflicted by the Great Recession. In The Age of Deleveraging, Gary Shilling notes that with deleveraging comes slow economic growth. He details nine reasons why real GDP will rise only about 2% annually in the years ahead  —  far below the 3.3% growth it takes just to keep the unemployment rate stable. Shilling had been notable in earlier years (for instance in Irrational Exuberance, 2000) in warning against the prevailing market euphoria. He has got it right in the past.

Shilling shows that the private sector is now definitely suffering a hangover on account of previously bingeing on credit. Saving will become the order of the day for households and firms. This is already happening. Meanwhile the banks are recapitalising. This amounts to unwinding all the excess leverage of the previous decade. Protectionism may grow under such gloomy conditions. Finally vicious cuts in government spending will further depress the outlook. His forecast is that the end of the spree will cut 1.5 percentage points off the 3.7% GDP growth rate of the relatively prosperous 1982–2000 years. He concludes, “These nine economic growth-slowing forces make 2.0% annual advances in real GDP in coming years reasonable, maybe even optimistic.”

Growth of 2% a year is not enough to restore full employment. In the summer of 2011 even that figure looks optimistic.

  • The world economy has been      permanently weakened. It will not just bounce back into full recovery.

What chance of a boom?

At the time of writing (the summer of 2011) the world economy has technically been in recovery for more than two years. For this reason the prospect of a double dip recession is receding. The obvious weak point that could challenge this prognosis is the fate of the Euro, discussed separately.

At the same time it must be recognised that the world economy, after a weak and lopsided boom, has suffered the most severe recession since the Second World War. It is severely weakened as a result. A recovery is under way, but there is no sign of a return to full employment. Where might a full recovery come from?

For most capitalist countries the condition of their economy is similar. This is the picture:

  • Consumption is reviving from the depths of 2008-9. Its      growth is severely constrained by the fact that households are      deleveraging, paying off debts rather than running up more credit. This      process of trying to getting back in the black is likely to continue for some      years Consumers have been burned by the speculative dance and then by the      recession.
  • Government spending cuts, which are likely to      maintain mass unemployment for years to come, will further hurt      consumption. As we pointed out earlier, consumption is the least volatile      element of national income. A real revival of consumption is likely to come      on the back of a boom elsewhere in the economy, probably in the investment      sector. But…
  • Investment is flat on its back and likely to remain so. Though      profits have revived, capacity utilisation in the USA is only running at      75%. Capital destruction has a way to go before a big investment boom will      start. British firms also have cash coming out of their ears that they      have no plans to invest.
  • Exports. ‘Export or die’ was the old motto. Countries      can export their way out of trouble. No doubt for some capitalist nations      exports will provide a fillip. But one country’s export is another’s      import. For the system as a whole exporting is a zero sum game.

The plans to cut public spending will further harm investment and consumption, since all the elements of national income are interdependent. Cuts will slow the recovery.  This is not the perspective for a healthy boom.

One common thread running throughout this work is that, though there have been common trends and laws of motion at work as long as the capitalist system has been in existence, history does not repeat itself exactly. With all the qualifications it might be worth looking at the 1973-4 crisis and its aftermath as a guide to perspectives for the future. There was never a complete recovery of economic health after 1974 and the recession was followed only five years later by another serious downturn. A similar pattern to the 1970s could well occur only a few years down the line once the economy has, it seems, successfully recovered. The twin crises of that period seriously brought the continued existence of capitalism into question.

Since the collapse of Stalinism after 1989 capitalism has seemed to the overwhelming majority of the population to be the only game in town. Whatever the political consequences of the Great Recession, and they have by no means been played out yet, the massive waste and injustice we have seen is bound to have produced a profound questioning of the system in the minds of millions of working people all over the world.

  • The economy is in slow      recovery. This is fragile.
  • Another recession soon would      have devastating consequences.

Growing out of debt?

It is argued that, when the economy gets going again, all the economic difficulties like government deficits will disappear. How do countries cut down the public debt? In theory they could just grow out of debt. If GDP grows and the debt remains the same size, then it gets progressively smaller as a proportion of GDP. It’s happened before.

In all the major capitalist countries the national debt sank quite dramatically after the Second World War because the economy grew. That is not the prospect that confronts the capitalist world now. We are confronted by years of austerity. It is quite possible that we will face another, even more serious, recession in a few years time. Full employment and the prosperity of yore seem to have gone for good. In a situation of slow and halting growth at best, the major capitalist countries will not be able to grow out of debt.

In any case the G20 meeting in June 2010 committed the governments involved to wage war on their national debt rather than concentrate on growing. The present round of global cuts, which is aimed at reducing the government deficit and debt, risks strangling the recovery by creating more redundancies and cutting living standards.

Take the case of Britain. Martin Wolf explains that the national debt to GDP ratio Britain confronts at present is by no means unprecedented. The average debt to GDP ratio has been 112% for the whole period from 1688 (when the debt was founded) to the present. (Financial Times 21.10.10) Yet the Tory dominated coalition is ringing the alarm bells as the ratio creeps up to 75% of national income. In fact the coalition’s austerity policies are likely to hamstring and constrain economic growth further, and slow the repayment of the debt as a result.

Every other capitalist government is trying to do the same, outdoing one another in their attempts to load austerity upon their citizens. For some capitalists, the public sector provides an important market. For the system as a whole, public expenditure makes capitalism more stable by providing a floor below which economic activity cannot plunge. It maintains a modest level of spending throughout the economy, pays wages and buys in services. Now the Tories in Britain and the rest of the G20 governments want to smash that floor.

But the fundamental problem for all the main capitalist countries is that capitalism continues to be in crisis. The recession is (technically) over. The crisis goes on. All the authoritative commentators we quoted in earlier in this Chapter see that problems stretch ahead for years to come. After the heart attack it has just suffered we cannot expect miracles of athleticism from the system in the future.

  • Capitalism grew out of its public debt burden in the      past. Slow growth in future means it won’t do so this time.

The BRICs

Commentators have noted that large parts of the world appear to have made a complete recovery from the great Recession. That is particularly the case for China which, after consciously adjusting policy to a sudden loss of export markets as a result of the recession, stormed ahead with growth rates of 8-10% p.a. as if nothing had happened. India, Brazil and other ‘emerging economies’ are also growing strongly. (The term is used for what were formerly called less developed countries.)

Our concern is principally with the heartlands of modern capitalism. These are still the metropolitan countries – the USA, European Union and Japan. Together these three are responsible for more than 60% of world of world output. Their fate is by and large the fate of world capitalism. The peripheral capitalist economies are mainly dependent upon them for markets and for growth prospects. By contrast China, by far the biggest, most important and most dynamic of the emerging economies is responsible for just 8% of global production.

To turn briefly to the case of China, there is a widespread misperception that the country is totally dependent on export earnings to explain its astonishing growth record. In effect China is seen as a vast sweat shop used by private capitalist firms from the advanced capitalist countries to export to the rest of the world. If this were the case then China would be completely dependent upon the performance of rest of the world economy and would grind to a halt in the case of economic crisis. This has not happened.

There are two things wrong with the conventional picture. First economic growth is powered by Chinese firms, mainly publicly owned. Secondly investment in China is the driving force of economic take-off, not exports to the rest of the world. Though China is integrated into the international division of labour, the Great Recession has shown that the country is pursuing its own trajectory, not helplessly dependent upon events in the advanced capitalist countries.

Jonathan Anderson (in Is China export-led?) estimates net exports as being responsible for about 9% of GDP. The Chinese authorities themselves announce that investment has made up about 40% of national income in recent years. The Chinese Xinhua News Agency announced recently that, “Investment accounted for 92.3 percent of China’s Gross Domestic Product (GDP) growth in 2009.” Anderson’s 2007 paper gave advance notice that China’s economic performance would not be totally dependent on that of the advanced capitalist countries.

The development of the so-called BRICs (Brazil, Russia, India and China) has been trumpeted as a phenomenon of great importance. But it deserves separate analysis. In passing it might be mentioned that we have sympathy with the view that the concept of the BRICs is a ‘broker’s fantasy’. Thank you, Alex Callinicos (Bonfire of illusions, p.116). Even if the BRICs are really a unified economic phenomenon, and their rise is preordained and irresistible, that would be a secular trend rather than a fundamental factor in the present cyclical crisis of capitalism, which is our principal object of study.

In fact Brazil and Russia are wholly dependent on commodity exports for their recent spurt of growth. China seems set to become the biggest exporter of manufactures in the world. India has a huge home market, but seems very dependent on the export of services to the advanced capitalist countries. To be sure, all these countries are growing quite fast by historic capitalist standards, but all for different reasons. Combined and uneven development is after all a basic feature of capitalist growth and development.

  • The BRICs are important in their own right, but      world economic development is still dominated by the imperialist      heartlands.

Chapter 7.2: Problems ahead

The destruction of capital

Marx was well aware that capitalism destroys capital continually and remorselessly as it accumulates. Never let it be said that capitalism uses resources efficiently. It advances by destroying the value of the means of production in its path.  This devaluation or moral depreciation of capital occurs because of the continuous rise in productivity spurred on by competition between capitalists. So machinery, and other fixed capital, has to be scrapped as it has become out of date long before it is worn out. If constant capital cannot allow the capitalist to compete with rivals who have retooled with the latest equipment, then it has to go

Marx quoted Babbage, a polymath who wrote extensively on the role and importance of machinery in the nineteenth century, with a startling example of this depreciation. “The improvements…which took place not long ago in frames for making patent-nets were so great, that a machine, in good repair, which had cost £1,200, sold a few years after for £60.” (Marx-Engels Collected Works Volume 33, p.350).

All this did not benefit the workforce one jot. Equipment had to be worked 24 hours a day by shifts of  workers to transfer all the value out of that expensive constant capital to the tulle (the final product)  before the machine became scrap metal. As Marx comments on this process:

“John Stuart Mill says in his Principles of Political Economy: ‘it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being.’ That is, however, by no means the aim of the application of machinery under capitalism…The machine is a means for producing surplus value.” (Capital Volume I, p.492)

Under capitalism innovation can often prove to be the ruin of the inventor:

“The far greater cost of operating an establishment based on a new invention as compared to later establishments arising from its very bones. This is so very true that the trail-blazers generally go bankrupt, and only those who later buy the buildings, machinery, etc., at a cheaper price, make money out of it. It is, therefore, generally the most worthless and miserable sort of money-capitalists who draw the greatest profit out of all new developments of the universal labour of the human spirit and their social application through combined labour.” (Capital Volume III p.199)

Here is a more recent example of the process that Marx called moral depreciation:

“From 1977 to 1984, venture capital firms invested almost $400 million in 43 different manufacturers of Winchester disk drives…including 21 startup or early stage investments….During the middle part of 1983, the capital markets assigned a value in excess of $5 billion to 12 publicly traded, venture capital based hard disk drive manufacturers…However by 1984 the value assigned to those same 12 manufacturers had declined..to only $1.4bn.”  (Sahlman and Stevenson Capital Market Myopia, cited in Railroading Economics by Michael Perelman, pp.54-5)

It seems that even this regular destruction of the productive forces is not enough in the event of a crisis. As the Communist Manifesto declares, in a slump:

“The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises.” (Communist Manifesto, p.8)

Take the case of the boom that crashed in 2001. Earlier we reported Robert Brenner’s account of the massive build up of overcapacity in the ICT sector:

“Between 1995 and 2000, industrial capacity in information technology quintupled, accounting by itself for roughly half of the quadrupling of the industrial capacity that took place in the manufacturing sector as a whole, which also smashed all records. As a consequence the gain in profitability deriving from the increased productivity growth was counterbalanced by the decline in profitability that resulted from growing over-supply” (What is Good for Goldman Sachs is Good for America, p.31)

What happened to all this surplus capital? It has disappeared as surely as if the earth had opened to swallow it up. The Financial Times reckoned after the debacle that only 1 or 2% of the fibre optic cable buried underground had ever been turned on (cited in Chris Harman – Zombie capitalism, p.286). The inflated share prices of new technology firms set up during the boom also went south. Their resources disappeared for a song in sales of bankrupt assets. Many of these firms had never paid a dividend and never would.

The classic statement of the need for more capital to be destroyed in a crisis in order for the recovery to come is from Andrew Mellon, US Treasury Secretary after the Wall Street crash; “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he ranted. “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, lead a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Joseph Schumpeter was another advocate of ‘creative destruction’  Business cycles, he declares, “Are not like tonsils, separate things that might be treated by themselves but are, like the beat of the heart, of the essence of the organism that displays them.” (Business Cycles, quoted in Perelman-Railroading economics, p.60) In other words, just put up with it.

The greatest and most wanton destruction of capital in human history took place as a result of the Second World War. The War was followed by an enormous secular boom, based precisely on this capital destruction.

Of course the political conditions for the survival of capitalism after 1945 had first to be established. “The political failure of the Stalinists and the social democrats, in Britain and Western Europe, created the political climate for a recovery of capitalism.” (Ted Grant – Will there be a slump?)

Grant goes on, “The effects of the war, in the destruction of consumer and capital goods, created a big market (war has effects similar to, but deeper than, a slump in the destruction of capital). These effects, according to United Nations’ statisticians, only disappeared in 1958.”

The War of course physically destroyed capital physically. A slump destroys the value of capital. In doing so, it should prepare the conditions for a new upturn.

Throughout the Great Depression productive forces, not to mention people’s livelihoods and lives, were recklessly squandered as part of this ‘healing’ process. But capitalism was not cured till the Second World War broke out. The 1930s saw capitalism in mortal danger. The ruling class felt thereafter that it could not stand idly by and wait for the interminable time it took for the system to heal itself through deflation. Since the Second World War the capitalist class has intervened actively in the economy to stop it hitting rock bottom.

They have done so for two reasons: politically it was too dangerous to leave things alone. The working class would draw the conclusion in increasing numbers that capitalism was a failed system. The other reason they have intervened is because there is no reason to believe capitalism need ever necessarily recover from a serious and prolonged bout of deflation.

  • Capitalism continuously devalues capital as it      accumulates.
  • Marx observes that this process cheapens the      elements of constant capital, and it is a factor offsetting the tendency      for the rate of profit to fall.
  • In a recession further capital destruction is needed      in order to prepare the conditions for a new boom.
  • The Second World War, by destroying capital on the      grand scale, prepared the conditions for the post-War boom.

Deflation

Deflation is what happens when the Mellons of the world allow the rest of world capitalism to go hang, by allowing capital destruction without limit. It does not offer a healing process. This was discovered by Irving Fisher during the 1930s. Fisher is famous principally for coming out with possibly the most ludicrous prediction in the entire canon of neoclassical economics, when he declared in 1929, “Stock prices have reached what looks like a permanently high plateau.”

Haunted by this comment thereafter, he developed the theory of debt-deflation in order to try to restore his credibility as an economist. In effect, he claimed, capitalism in crisis can go into a vicious circle of decline. As the economy slides down, incomes fall and wealth declines. But debts maintain their value. If prices are actually falling (as they were at about 10% a year in the worst years of the Great Depression) then debtors have to shell out more and more of their earnings to pay for the debts they built up in the good years. The debts become insupportable. They consume the debtors, who lose everything with no salvation in sight.

Deflation causes other distortions. If prices are falling, why keep your money in a bank? Savings will be worth more next year than this year even if you keep them in a sock. On the other hand interest rates demanded by the banks are high enough to discourage capitalists who want to borrow in order to invest. If nominal rates are just 1% and prices are falling by 10% annually, then the real rate of interest is about 11% a year.

That means the government cannot stimulate the economy by means of monetary policy. Small businesses and struggling farmers in particular crave lower interest rates as a lifeline. How can the government engineer negative nominal interest rates to keep real rates low when prices are falling?

Also people are more likely to hang on to their money as its purchasing power grows year by year rather than spending it, just when the economy could really do with a buying splurge to expand the market.

For all these reasons the economy will not reach a stable state where, in Mellon’s words, ‘all the rottenness has been purged out of the system’. Deflation will instead take the economy, “With hideous ruin and combustion, down / To bottomless perdition, there to dwell”, like Satan in Paradise Lost (Book I, lines 46-7).

If the capitalists have the tools to stop deflation happening, then they will intervene. The question is: can they? What effect will their policies have?

The Japanese deflation

Evidence of the effects of deflation, and of the ineffectiveness of government policy intended to prevent it, comes from Japan. In the 1950s and 1960s the Japanese economy achieved rates of growth higher than any capitalist economy had ever attained before. Competitors saw Japan as sweeping all before it on the world economy, conquering one export market after another.

In the 1980s it became clear that Japan was afflicted by a financial bubble. Its origins do not concern us here but it was associated, like the more recent bubble, with artificially low interest rates. Japanese banks had their arms twisted to lend more money. The loans were often secured by land as collateral. This was the prime cause of the land price bubble after 1985. More lending increased the demand for land, so its price went up. So people borrowed still more money to buy land, in order to borrow even more.

The bubble became particularly evident in property prices. The Nikkei share index was also in the stratosphere. Towards the end of the 1980s the total price of real property in Japan was reckoned to be worth more than the land in the whole of the rest of the world!

There had been a steady fall in the rate of profit even before the bubble burst. One reason for this was the enormous increase in costs caused by soaring rents and the rising price of land that had to be paid for by capitalists. In the end a rise in interest rates in late 1989 was enough to prick the bubble. Share prices collapsed. Land prices collapsed.

Huge debts, incurred during the bubble, remained unpaid and unpayable. The banks, massively overextended, began to deleverage, screwing the rest of the economy down as they went. The panic began on December 31st 1989. More than a decade of stagnation followed.

Over the next few years asset prices fell in Japan as much as they had done worldwide in the Great Depression. House prices fell to a tenth of their top level. Commercial property was worth a hundredth of what it had been in the bubble. Over the decade the Nikkei lost three quarters of its ‘value.’ From a peak of 40,000 it was down to15,000 in 1992 and 12,000 by 2001.

The marvellous Japanese industrial machine continued to function, but the country never again achieved the growth rates of earlier decades, despite successive rounds of fiscal stimulus. The government spent 100 trillion yen in ten years. All this stimulus achieved was to ratchet up the national debt. The Japanese central bank also tried monetary policy. Interest rates stood at just 0.5% by 1995.

The whole debt-deflation mechanism described by Irving Fisher continued to grind away at the ‘Japanese economic miracle’. Investment was stagnant – no higher in 2002 than it had been in 1990.

So deflation can be a disaster. Once the process of deflation has begun, government policy can be ineffective to reverse it, as the Japanese experience shows. That is why governments intervene to try to prevent it starting.

  • The      Japanese experience shows that government policy can be completely      ineffective in the face of deflationary pressures.

The deflation/inflation dilemma

There is also a downside to the government intervening in order to offset the worst effects of the downturn and the danger of deflation, as they did at the end of 2008.

Quite simply capital is preserved, not destroyed. So capitalism is not healed, healthy and ready to gallop in the next steeplechase of boom and slump. The progress of recovery is slow. It continually demands stimuli such as injections of credit in order to get moving. Credit produces bubbles. This is one reason for the super-bubble in modern capitalism that Soros mentions. (Soros-The crash of 2008 and what it means)

In order to prevent the economy collapsing the government may intervene by allowing the pumping up of credit, for instance by cutting interest rates. As quickly as one bubble bursts, another is blown up. The bursting of the house price bubble after 2006 was inevitable. Yet, as soon as the banks got up off the floor, they have been pumping money on to the stock exchanges of the ‘emerging’ economies. Countries such as Brazil and India have been growing quite strongly as of the summer of 2011 and their stock markets bounced back. They have been aided by a flow of funds from the advanced capitalist countries where profitable investment opportunities are harder to find. Here are some warning signs from the Financial Times.

Bubble fears as emerging markets soar by Stefan Wagstyl and David Oakley (07.10.10): “Robert Zoellick, World Bank president, has talked of currency ‘tensions’ and ‘the risk of bubbles’. The IMF, in its global financial stability report, said: ‘The prospect of heavy capital inflows would be destabilising.’”

Emerging markets at risk from a gigantic bubble by Peter Tasker (18.10.10): “The degree of euphoria surrounding some emerging economies is already troubling. The Indian and Indonesian stock markets are trading at price earnings ratios of over 40 times, based on ten-year average earnings.” (That means it would take forty years to get your money back.)  “You would surely need a hundred years of fortitude to buy Mexico’s recently-issued 100-year bond at a yield of 5.6 per cent. Bubble and bust in China, on which the world is now so dependent for growth and optimism, would likely tank the commodities markets, set off a second round of deflation, and end the emerging markets boom in the most spectacular way possible.”

These people are incurable. Is it the case that ‘here we go again’?

  • The process of deflation associated with massive destruction of capital can become a vicious circle from which capitalism cannot escape.
  • If the      government intervenes to try to prevent deflation, they may prevent      adequate capital destruction that will eventually prepare the way for a full      recovery.
  • If capital      is not destroyed thoroughly a new speculative bubble can be blown and a      tendency to inflation created.

Regulating capitalism?

Joseph Stiglitz is one of the few economists who consistently predicted the crash. Stiglitz attributes the Great Recession to a combination of recklessness and a failure to regulate that recklessness (Freefall, Penguin 2010). Stiglitz has been right before and been ignored before. He is right this time and all the signs are that he will be ignored again.

The deregulatory drive attained an unstoppable momentum with the complete ideological victory of neoliberalism. Regulation was seen as cramping the style of capitalism red in tooth and claw.

After the Second World War global capital flows were carefully regulated in all the major capitalist countries. These regulations were progressively torn up as the post-War boom proceeded. The US Glass-Steagall Act that regulated the banks (passed as part of Roosevelt’s New Deal) was swept away in 1999 under Clinton’s Presidency. A wall of money and massive Congressional lobbying removed the last obstacle to unfettered freedom of finance. Arguably that paved the way for the present disaster.

Has capitalism got a death wish? Why not re-regulate when evidence of the damage caused by deregulation is all around? It needs repeating that the capitalist system is anarchic. The capitalist class does not work to a strategic plan. They respond to stimuli. Profit is their key stimulus. In an atmosphere of euphoria, all constraints are swept aside. As one broker explained, while the herd is making money you have to be part of that herd.  Because the capitalist class is the ruling class, they usually get what they want. When they wanted deregulation they got it, whether it was good for their system or not.

Regulation is only implemented when it doesn’t damage the essential interests of the financiers.  The handcuffs that Roosevelt apparently imposed on the US banks in 1933 in the form of the Glass-Steagall Act didn’t really hurt at all, for the simple reason that the banking system had already largely collapsed or was in a coma. By that time 9,000 banks had gone to the wall in the USA.

Roosevelt’s banking acts introduced a system of federal deposit insurance, a guarantee for depositors that their money would be safe. The acts separated high street banks, which were severely restricted in the risks they could take with depositors’ money, from investment banks, which remained uninsured and in principle would be allowed to go to the wall. The investments banks were by this time flat on their backs. Risk taking was the last thing on their minds in 1933. Survival was all-important. Roosevelt’s initiatives sound bold. Really he was bolting the stable door after the horse had bolted.

Only a year ago the bankers were hate figures, reviled by millions for ruining innocent people’s lives with their mad and incompetent gambling. Though not a complete picture of the nature of the present capitalist crisis, this was all substantially true so far as it went. It is incredible the extent to which the capitalist press and opinion formers have tried to use the fiscal crisis of the state – an inevitable phase in the capitalist crisis – to switch the blame away from the bankers and on to the public debt and the public sector. They have been partially successful in this, at least for a period of time. In a crisis consciousness can change rapidly, and it can and will turn around again just as quickly.

Only a year ago the cry went up, ‘never again!’ Never again would the banks hold the rest of us to ransom. They should not be allowed to be ‘too big to fail.’ As we have pointed out the problem was that the banks were really too interconnected to fail and too important to capitalism to fail. There was the rub. The banks could blackmail the rest of the capitalist class with all too plausible stories of complete economic meltdown

The call for re-regulation of the footloose and fancy free financial institutions that were the trigger for the crisis faces stiff resistance from vested interests. Reinhart and Rogoff actually attribute the frequency and seriousness of financial crises to financial liberalisation. “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously, as they did in the 1990s, but historically.” (This Time is Different p.155)

In the USA the biggest slap on the wrists to a bank has been applied to Goldman Sachs. The bank admitted to misleading customers on the quality of mortgage backed securities. They have been fined $550m. This is the loss of just two weeks’ profits. (Dominic Rushe-Resurgent Wall Street winning lobby battle, Guardian 27.06.11) It doesn’t hurt at all.

All over the world the bankers have evaded regulation and have been restored to their privileged position. The City of London has grown too big and parts of it are ‘socially useless’, commented Adair Turner, Chair of the Financial Services Authority, in exasperation. Right first time, Lord Turner. Still they got their way. Froud, Moran, Nilsson and Williams describe in detail (Opportunity lost, in Socialist Register 2011, pp.98-119) how the financiers ran rings round the New Labour ministers. While critical of the Macmillan Committee of 1931, the Radcliffe Committee of 1959 and the Wilson Committee of 1980 (all on finance) the authors observe how, in the Wigley (2008) and Bischoff (2009) Reports:

“Non-City groups were not included or consulted in the information gathering, problem-defining phase or subsequently in the drafting of the two reports about the benefits of finance.” (p.109)

In effect the City investigated itself, with not even a token trade unionist on the Committees.  Not surprisingly, it gave itself a clean bill of health. Bischoff decided that finance represented value for money. How?

“Bischoff added up taxes paid and collected by finance without considering the costs of bailing out the financial system.” (ibid p.210) This is the sort of dodgy accounting that brought the banks, and the rest of the economy, to the brink of ruin in the first place!  After this sleight of hand, no wonder the report concluded, “Financial services are critical to the UK’s future.”

The banks continue to be effectively unregulated. Though the article is fascinating as a description of how the British establishment works, the complete success of finance capital in shredding any proposed regulatory restrictions is mainly on account of  the spinelessness of Gordon Brown and Alistair Darling as representatives of New Labour. They were all hapless creatures of the establishment who could not conceive of an alternative to the rule of finance capital. In this respect they behaved like establishment politicians all over the world, as servants to the big banks and to capitalism.

So the banks got away scot free. This is true of the upper management, those who were solely responsible for the catastrophic decisions that led to the credit crunch. But there have been mass redundancies among ordinary bank workers in the UK and elsewhere over the past year. Those who have lost their jobs are the ordinary working class finance workers who had no part in the crazy revels of the speculative boom. They are the ones to pay the price.

The Tory-led government has continued the traditions of New Labour in grovelling to finance capital. They have effectively ditched the Walker Review on pay and bonuses in the banking sector. Their proposal for a bankers’ levy has been trimmed back and is likely to garner just 0.1% of bank profits.

It seems that capitalism as a whole could benefit from curbing the ‘animal spirits’ of the financial entrepreneurs. All the major capitalist powers swore in 2008 not to let the guilty bankers off the hook. It has become quite clear by 2011 that the financial interests have been able to fend off these pressures to behave themselves and face regulatory restrictions down.

Here’s how. In the USA lobbying has been intense. Gillian Tett quotes Larry Summers, Obama’s chief economic adviser, as estimating that, “The financial sector is currently funding an average of four lobbyists, to the tune of $1m or so, for every member of the House (including those who have nothing to do with finance)” (Financial Times 29.10.10). If this is not outright corruption, then it comes close. This is how political decision-making is arrived at in a capitalist democracy.

Bank profits are back. Bonuses are back. The rest of us look to years of austerity in the future, but the banks have been saved. Governments lumbered the people with huge public debts, largely to bail out the banks and because of the disastrous effects the banks’ conduct has had on the rest of the economy. All over the world they have now foresworn intervening in the financial arena and are letting the banks carry on exactly as they did before.

  • Regulating the banks has been abandoned. They are      back in the driving seat.

Protectionism?

We know that the Great Depression was made worse by the tendencies to protectionism that became manifest as the economic crash proceeded. The protectionist legislation, such as the Smoot-Hawley Act raising tariffs on imports which was passed in the USA in 1930, was not the cause of the Great Depression. It came too late for that. But protectionism did make the crisis worse.

If capitalism grows and world trade grows, then a rising tide raises all boats. But in a crisis the national ruling class does not only turn on ‘its own’ working class. It also tries to foist the burden onto other countries. And that makes it worse for everyone.

“As long as everything goes well competition acts…as a practical freemasonry of the capitalist class, so that they all share in the common booty …But as soon as it is no longer a question of division of profit, but rather of loss, each seeks as far as he can to restrict his own share of this loss and pass it on to someone else.” (Capital Volume III, p.361)

So far we have not seen an equally serious protectionist trend as happened in the 1930s. Indeed we have heard loud declarations as to the virtues of free trade and the need for all capitalist nations to work together and co-operate. Beware! This might be taken as a warning signal. We always hear these exhortations from the great and the good, specially on the eve of a trade war.

The form that the tendency to protectionism may take is currency manipulation rather than tariff barriers, as happened in the 1930s. The financial press has been running headlines about ‘currency wars’ all through the past year. Arguments, spats and sabre-rattling between the trading nations will continue. We have also seen attempts to manipulate currencies between the USA and China, while the US Congress has approved measures that may be regarded as covert protectionism.

In late 2010 the US Fed decided to launch a second round of quantitative easing (printing money). They injected a further $600bn into the economy, even though they didn’t know whether the first stimulus had ‘worked’. Trade rivals believe that pumping out dollars will depreciate the US currency, make US goods cheaper and their own products dearer on world markets and thus provide the USA with an unfair trade advantage. They are not happy.

If the world economy continues to recover, then the protectionist voices will become less strident for the time being. National antagonisms, which occur because of the combined and uneven development of world capitalism, will be a continued source of friction. In particular the global imbalance between China and the USA will remain a secular feature of the world economy and a permanent source of conflict. But the decisive difference with the 1930s is that world trade has now turned up and therefore a full-scale trade war is unlikely this time around.

  • Protectionist voices will fade if and when the      recovery develops, but, like the recovery, that process will be slow.

The fate of the Euro

The fate of the Euro remains insecure. Economic trends are not inexorable forces. They can be interfered with and reversed by human action, in particular by government, which is an important economic player in the twenty-first century. Here we discuss the role of ‘mistake’ and apparently accidental factors in politics and human affairs.

Marx did not have a problem in recognising the part played in economic events by mistaken ideas and stupid people. He cited the Bank Acts of 1844 and later which were based on an erroneous economic theory – the quantity theory of money – and a mistaken application of the theory to the constitution of the central bank. As a result of these factors, whenever a crisis broke out the Bank Acts had to be suspended. At first sight this seems to suggest that the root of the problem of the governance of the Bank of England was an inadequate understanding of political economy. This interpretation would be one of the purest subjective idealism. The problem of the malfunctioning Bank Acts in turn was really rooted in conflicts of interest between the policy-makers of the time.

Likewise we have been critical of the way the leading European Union decision-makers have responded to the Euro crisis that blew up in Greece and then in Ireland. We do not wish to give the impression that the situation was not resolved more decisively just because Merkel, Sarkozy and the others were a bit thick. The problem was that they were concerned above all with the national interests of Germany and France and not that of the EU as a whole. Capitalism is an anarchic system. Different capitalists have different interests from one another. That means that even the members of the ruling class may disagree with one another. So it is difficult, and may be impossible, for them to agree on a common policy.

Merkel may have seemed unwise when she has raised in public the question of Irish and Greek bondholders taking a ‘haircut’ (loss). Certainly the bond markets took fright as a result, and that made it much more difficult for the Eurozone leaders to implement the Irish and Greek ‘rescues’. But the question of default is a genuine dilemma for the Eurozone decision-makers. There is no one right course for capitalism to follow, and in any case the European powers may have conflicting interests on the question.

Merkel was reacting to a possible action in the German constitutional court and problems within her own struggling coalition. These parochial interests were more important to her than the future of the Euro, because they were about her survival as a political leader. That is typical. There were occasions in 2010 and 2011, and they may recur in the future, when the chaotic nature of the decision-making process in the Eurozone, could take the Euro to the brink of shipwreck.

The Euro is a unique institution. It is a currency without a country. A government, even under capitalism, has ways of influencing the level of economic activity within their economy and therefore of safeguarding its national currency.  As we’ve noted these economic levers are usually listed as fiscal and monetary policy. Fiscal policy within the EU is nationally determined. There is no common Eurozone wide or EU wide fiscal policy. Despite continual allegations of waste of EU funds, the Europe Union disposes of few resources and employs relatively few workers. At one time it had fewer employees than Kent County Council. It disburses considerable regional and agricultural subsidies to the member countries, but that is another matter.

When a government, like that of the USA, implements an expansionary fiscal policy by cutting taxes or spending more money, that may be expected to have an impact throughout the country. That cannot happen at present within the Eurozone. Instead of being able to pursue an active fiscal policy, Eurozone members are constrained in principle by rules on the maximum deficit and government debt they may run.

Not only that. The US has a common system of federal taxes and benefits. As a result if one state such as Michigan becomes economically depressed, the local citizens will automatically pay less tax and receive more benefits from the federal government. That will act as a bit of a cushion for the people of Michigan. These automatic stabilisers act to reduce economic volatility within the country. There is no such redistributive mechanism within the Eurozone. The message a country gets from its partners if in difficulties is, ‘you’re on your own.’

It should not be forgotten that the policy of European monetary union is driven by a hard neoliberal ideology. ‘Why should governments intervene to try to alleviate unemployment? Capitalism, left to itself, will generate the jobs. Even if it doesn’t, government intervention will only make the situation worse.’ That’s the sentiment at the top.

This nonsense is repeated in the arena of monetary policy. The European Central Bank does not have a growth target. Its sole brief is to keep inflation down. Presumably, so long as the money supply is stable, they think private capitalism will deliver optimal economic results.

The fact that the Euro has no real defences, or rather that these are being developed by the authorities on the hoof in the teeth of a crisis, makes the single currency very vulnerable. The idea of a European bond, with the whole weight of the Eurozone behind it, has been vetoed for the time being. On the other hand the ECB has been shamefacedly buying up sovereign debt in 2010 and 2011, as a clandestine way of propping up its weaker members from further attack.

Since the world economy is recovering, on the balance of probabilities the Euro should survive this crisis, though there is no doubt that some peripheral countries will remain in intensive care for some years to come. This is not a hard and fast prediction. Capitalism is an irrational system, as we have seen many times in the course of this book. Waves of speculation and what Keynes called “animal spirits” play their part and are quite capable of sweeping away the whole Euro project.

The authorities all over the world will have to take the situation seriously, as the collapse of the Euro would be a global calamity that could plunge the world economy into a double dip recession. Another serious world economic crisis in a few years ahead, which is quite possible, could sink the Euro altogether or severely reduce the area covered by the single currency.

The EU and Eurozone authorities ought to be able to manage an economic recovery in the Eurozone and European Union as a whole over the next few years, though there may well be stresses and strains. Greece, for instance, may have to be taken through an orderly default. This would involve recognition that the Greek economy could snap under the pressures imposed upon it. Default could also be the result of class struggle. The Greek working class is rightly furious at having to shoulder the burdens heaped upon them by the tax-dodging Greek ruling class. The problem involved in an orderly restructuring of Greek public debt is that this means that the French and German banks in particular will have to take a hit. The Euro presents a knotty problem that won’t go away soon.

  • The problems of the Eurozone      flow from its flawed design and architecture as well as the economic      crisis.
  • The Euro crisis remains the      most visible flashpoint for the world economy. This crisis is the one      thing that could even cause it to relapse from its present hesitant      recovery over the next couple of years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part 7: Economic perspectives

Over the course of the narrative we have identified two distinct periods since the Second World War. The first was the golden age of the post-War boom which came to an end with the recession of 1973-4. The second was the more difficult period thereafter, sometimes called the neoliberal era. That period came to an end in 2008 in the Great Recession, with wholesale state intervention in the economy aimed at saving capitalism. We are entering a new era. What will be its characteristic features? We seem to be entering a period of what may be permanent slower growth and higher unemployment – an age of austerity.

Chapter 7.1: What the crisis has cost so far and what it will cost in the end

Any assessment of what the crisis has cost us needs to end with the words ‘so far.’ If the ruling class get their way we could be paying for their crisis for years and years. Here are some findings.

Reinhart and Rogoff

In the book This Time is Different, Reinhart and Rogoff have made a quantitative analysis of hundreds of financial crises going back to the run on Florentine banks in 1340, and tried to factor in the effect of additional factors,. The authors are orthodox economists. They see financial crises (as they call them) as often caused by accidental factors rather than inevitable under capitalism. They chronicle the financial fluctuations and panics without perceiving them as just the form of appearance of a crisis of capitalism, as the Great Recession undoubtedly was and is.

 

They are emphatic that the costs of a banking crisis cannot be reduced to the direct costs of bailing out the banks (which are huge). In this they are right. They explain:

 

“This nearly universal focus on opaque calculations of bailout costs is both misguided and incomplete. It is misguided because there are no widely agreed-upon guidelines for calculating these estimates. It is incomplete because the fiscal consequences of banking crises reach far beyond the more immediate bailout costs. These consequences mainly result from the significant adverse impact that the crisis has on government revenues (in nearly all cases) and the fact that in some episodes the fiscal policy reaction to the crisis has also involved substantial fiscal stimulus packages.”  (p.164)

 

Despite these words of warning from serious number crunchers, we shall try to give a preliminary measure of what the crisis has cost us all, or at least drive home the seriousness of the situation facing working people everywhere in the future.

 

Reinhart and Rogoff differentiate between the general run of post-World War II crises, and what they call Great Depression crises, of particular severity, which are of course the nearest comparison with what we are grappling with today. They show that the big ones last an average of 4.1 years rather than 1.7 years. (p.234)

 

They also take up the fiscal legacy of crises, and work out the historical average real public debt in the three years following a banking crisis as 186.3% of what it was in the year of the crisis (an average 86%  increase). (p.232)

 

As regards crises involving sovereign default, debt restructuring and near default avoided by international bailout packages they see an average 15% decline in GDP from peak to trough, with the effects lasting for more than five years.

 

So this is a summary of their conclusions on the consequences of ‘Great Depression’ crises:

 

  • At least four years of austerity
  • Public debt almost doubling
  • A 15% fall in GDP over more than five years

 

This is what is in store for us based on past experience. This is the likely cost of the Great Recession, a classic crisis of capitalism.

 

Andrew Haldane

 

We are all appalled at the enormous amounts stumped up to save the banks from their own stupidity. But this is peanuts compared with the total costs we are likely to incur. Andrew Haldane has calculated that:

 

“World output is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms that translates into losses of $4 trillion” (for the world economy) “and £140 billion” (for Britain). These are losses for just one year!

 

“As” (evidence given in Haldane’s paper) “shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP.” If this is right the crisis has lost us between one and five year’s output for ever. Haldane goes on:

 

“Put in money terms, that is output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers ‘astronomical’ would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. ‘Economical’ might be a better description.”

He calls his paper The $100 billion question, and finds out the title he dreamed up is a gross underestimate. The cost of the crisis to Britain alone could eventually be as much as the fruits of the economic activities of more than 60 million people for five years.

Christopher Dow

Christopher Dow also demonstrates that losses to GDP in major recessions can be grievous and longstanding.  His book looks in detail at five major recessions in the UK over the last century. He shows in Major recessions that output fell by 10.6% in 1920-21, 12.6% in 1929-33, 8.1% in 1973-5, 10.6% in 1979 and 12.4% in 1989-93.

Moreover he emphasises it is unlikely that, in a major recession, after experiencing the shock the economy will just bounce back into action as if nothing had happened. This is called a V-shaped recession, and some optimists are hoping that is what we will experience in the near future. In fact it is already clear that the recession has done permanent damage to future growth prospects and that the economic outlook is far from sunny:

“The asymmetric shape of a major recession is held to result from two mechanisms. First it is easier to shatter confidence than to restore it…Second, a major recession of demand results in a downward displacement of the path of capacity growth.” (Major recessions, p.374)

In other words the economy will be permanently shunted on to a lower and slower flight path. Losses from the crisis will be correspondingly bigger. Dow divides the 1920-95 time frame of his book into three periods: the interwar period, the post-War boom and the time from 1973 to 1995. He shows the difference in growth patterns between the golden age and the other two periods is that during the post-War boom the country experienced no serious recessions. Such recessions in effect hole the economic ship below the water line and reduce growth prospects for a whole generation:

“The three major recessions since 1973, taken together, could well have reduced output to 25 per cent below what it would otherwise have been, and thus could have reduced government tax revenue in real terms, as compared with the previous trend, on at least this scale.” (ibid p.403)

These major recessions hit the government finances too (as Reinhart and Rogoff also noted). Government debt thus fell much slower after 1975, despite the bonanzas of North Sea oil and privatisation receipts: “The main reason” (why the debt ratio ceased to fall as rapidly) “was that, chiefly because of the big recessions, nominal debt now started to rise considerably more rapidly.” (ibid p.410)

The Reinharts

Carmen M. Reinhart and Vincent R. Reinhart summarise their conclusions in After the Fall, written in August 2010. This is all part of a body of work by the Reinharts and Kenneth Rogoff that attempts to analyse the present crisis in the light of the past. They draw similar conclusions to Dow from a wider international body of evidence. They compare the situation to that of the Great Depression.

 

“Our main results can be summarized as follows:

 

“Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. The median post-financial crisis GDP growth decline in advanced economies is about 1 percent…

 

“What singles out the Great Depression, however, is not a sustained slowdown in growth as much as a massive initial output decline. In about half of the advanced economies in our sample, the level of real GDP remained below the 1929 pre-crisis level from 1930 to 1939. During the first three years following the 2007 U.S. subprime crisis (2008-2010), median real per capita GDP income levels for all the advanced economies is about 2 percent lower than it was in 2007…” (It’s still lower in most countries after four years in 2011 – MB)

 

“In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher. In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009…

 

“The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.”

 

Lower growth for a decade; a collapse in output; unemployment significantly higher for ten years. We face a future of austerity as far ahead as the eye can see.

 

  • A comparison with the past, and an analysis of      present trends, show that we face a decade of austerity.

 

An age of austerity

 

In their book This Time is Different Carmen Reinhart and Kenneth Rogoff deal with the shape of the recovery. As they comment, “V-shaped recoveries in equity prices are far more common than V-shaped recoveries in real housing prices or employment” (p.239). This is unfortunate, since most of us are much more interested in our chances of a job and our living standards than the price of shares. We can rule out a V-shaped recovery as a serious prospect already from the slow pace of recovery. All the serious economists see doom and gloom ahead for years to come.

 

It seems the world economy will be faced with being knocked down onto a lower and slower flight path for the indefinite future on account of the crisis. This is quite apart from the crushing burden of state debt inflicted by the Great Recession. In The Age of Deleveraging, Gary Shilling notes that with deleveraging comes slow economic growth. He details nine reasons why real GDP will rise only about 2% annually in the years ahead  —  far below the 3.3% growth it takes just to keep the unemployment rate stable. Shilling had been notable in earlier years (for instance in Irrational Exuberance, 2000) in warning against the prevailing market euphoria. He has got it right in the past.

Shilling shows that the private sector is now definitely suffering a hangover on account of previously bingeing on credit. Saving will become the order of the day for households and firms. This is already happening. Meanwhile the banks are recapitalising. This amounts to unwinding all the excess leverage of the previous decade. Protectionism may grow under such gloomy conditions. Finally vicious cuts in government spending will further depress the outlook. His forecast is that the end of the spree will cut 1.5 percentage points off the 3.7% GDP growth rate of the relatively prosperous 1982–2000 years. He concludes, “These nine economic growth-slowing forces make 2.0% annual advances in real GDP in coming years reasonable, maybe even optimistic.”

Growth of 2% a year is not enough to restore full employment. In the summer of 2011 even that figure looks optimistic.

  • The world economy has been      permanently weakened. It will not just bounce back into full recovery.

What chance of a boom?

At the time of writing (the summer of 2011) the world economy has technically been in recovery for more than two years. For this reason the prospect of a double dip recession is receding. The obvious weak point that could challenge this prognosis is the fate of the Euro, discussed separately.

At the same time it must be recognised that the world economy, after a weak and lopsided boom, has suffered the most severe recession since the Second World War. It is severely weakened as a result. A recovery is under way, but there is no sign of a return to full employment. Where might a full recovery come from?

For most capitalist countries the condition of their economy is similar. This is the picture:

  • Consumption is reviving from the depths of 2008-9. Its      growth is severely constrained by the fact that households are      deleveraging, paying off debts rather than running up more credit. This      process of trying to getting back in the black is likely to continue for some      years Consumers have been burned by the speculative dance and then by the      recession.
  • Government spending cuts, which are likely to      maintain mass unemployment for years to come, will further hurt      consumption. As we pointed out earlier, consumption is the least volatile      element of national income. A real revival of consumption is likely to come      on the back of a boom elsewhere in the economy, probably in the investment      sector. But…
  • Investment is flat on its back and likely to remain so. Though      profits have revived, capacity utilisation in the USA is only running at      75%. Capital destruction has a way to go before a big investment boom will      start. British firms also have cash coming out of their ears that they      have no plans to invest.
  • Exports. ‘Export or die’ was the old motto. Countries      can export their way out of trouble. No doubt for some capitalist nations      exports will provide a fillip. But one country’s export is another’s      import. For the system as a whole exporting is a zero sum game.

The plans to cut public spending will further harm investment and consumption, since all the elements of national income are interdependent. Cuts will slow the recovery.  This is not the perspective for a healthy boom.

One common thread running throughout this work is that, though there have been common trends and laws of motion at work as long as the capitalist system has been in existence, history does not repeat itself exactly. With all the qualifications it might be worth looking at the 1973-4 crisis and its aftermath as a guide to perspectives for the future. There was never a complete recovery of economic health after 1974 and the recession was followed only five years later by another serious downturn. A similar pattern to the 1970s could well occur only a few years down the line once the economy has, it seems, successfully recovered. The twin crises of that period seriously brought the continued existence of capitalism into question.

Since the collapse of Stalinism after 1989 capitalism has seemed to the overwhelming majority of the population to be the only game in town. Whatever the political consequences of the Great Recession, and they have by no means been played out yet, the massive waste and injustice we have seen is bound to have produced a profound questioning of the system in the minds of millions of working people all over the world.

  • The economy is in slow      recovery. This is fragile.
  • Another recession soon would      have devastating consequences.

Growing out of debt?

It is argued that, when the economy gets going again, all the economic difficulties like government deficits will disappear. How do countries cut down the public debt? In theory they could just grow out of debt. If GDP grows and the debt remains the same size, then it gets progressively smaller as a proportion of GDP. It’s happened before.

In all the major capitalist countries the national debt sank quite dramatically after the Second World War because the economy grew. That is not the prospect that confronts the capitalist world now. We are confronted by years of austerity. It is quite possible that we will face another, even more serious, recession in a few years time. Full employment and the prosperity of yore seem to have gone for good. In a situation of slow and halting growth at best, the major capitalist countries will not be able to grow out of debt.

In any case the G20 meeting in June 2010 committed the governments involved to wage war on their national debt rather than concentrate on growing. The present round of global cuts, which is aimed at reducing the government deficit and debt, risks strangling the recovery by creating more redundancies and cutting living standards.

Take the case of Britain. Martin Wolf explains that the national debt to GDP ratio Britain confronts at present is by no means unprecedented. The average debt to GDP ratio has been 112% for the whole period from 1688 (when the debt was founded) to the present. (Financial Times 21.10.10) Yet the Tory dominated coalition is ringing the alarm bells as the ratio creeps up to 75% of national income. In fact the coalition’s austerity policies are likely to hamstring and constrain economic growth further, and slow the repayment of the debt as a result.

Every other capitalist government is trying to do the same, outdoing one another in their attempts to load austerity upon their citizens. For some capitalists, the public sector provides an important market. For the system as a whole, public expenditure makes capitalism more stable by providing a floor below which economic activity cannot plunge. It maintains a modest level of spending throughout the economy, pays wages and buys in services. Now the Tories in Britain and the rest of the G20 governments want to smash that floor.

But the fundamental problem for all the main capitalist countries is that capitalism continues to be in crisis. The recession is (technically) over. The crisis goes on. All the authoritative commentators we quoted in earlier in this Chapter see that problems stretch ahead for years to come. After the heart attack it has just suffered we cannot expect miracles of athleticism from the system in the future.

  • Capitalism grew out of its public debt burden in the      past. Slow growth in future means it won’t do so this time.

The BRICs

Commentators have noted that large parts of the world appear to have made a complete recovery from the great Recession. That is particularly the case for China which, after consciously adjusting policy to a sudden loss of export markets as a result of the recession, stormed ahead with growth rates of 8-10% p.a. as if nothing had happened. India, Brazil and other ‘emerging economies’ are also growing strongly. (The term is used for what were formerly called less developed countries.)

Our concern is principally with the heartlands of modern capitalism. These are still the metropolitan countries – the USA, European Union and Japan. Together these three are responsible for more than 60% of world of world output. Their fate is by and large the fate of world capitalism. The peripheral capitalist economies are mainly dependent upon them for markets and for growth prospects. By contrast China, by far the biggest, most important and most dynamic of the emerging economies is responsible for just 8% of global production.

To turn briefly to the case of China, there is a widespread misperception that the country is totally dependent on export earnings to explain its astonishing growth record. In effect China is seen as a vast sweat shop used by private capitalist firms from the advanced capitalist countries to export to the rest of the world. If this were the case then China would be completely dependent upon the performance of rest of the world economy and would grind to a halt in the case of economic crisis. This has not happened.

There are two things wrong with the conventional picture. First economic growth is powered by Chinese firms, mainly publicly owned. Secondly investment in China is the driving force of economic take-off, not exports to the rest of the world. Though China is integrated into the international division of labour, the Great Recession has shown that the country is pursuing its own trajectory, not helplessly dependent upon events in the advanced capitalist countries.

Jonathan Anderson (in Is China export-led?) estimates net exports as being responsible for about 9% of GDP. The Chinese authorities themselves announce that investment has made up about 40% of national income in recent years. The Chinese Xinhua News Agency announced recently that, “Investment accounted for 92.3 percent of China’s Gross Domestic Product (GDP) growth in 2009.” Anderson’s 2007 paper gave advance notice that China’s economic performance would not be totally dependent on that of the advanced capitalist countries.

The development of the so-called BRICs (Brazil, Russia, India and China) has been trumpeted as a phenomenon of great importance. But it deserves separate analysis. In passing it might be mentioned that we have sympathy with the view that the concept of the BRICs is a ‘broker’s fantasy’. Thank you, Alex Callinicos (Bonfire of illusions, p.116). Even if the BRICs are really a unified economic phenomenon, and their rise is preordained and irresistible, that would be a secular trend rather than a fundamental factor in the present cyclical crisis of capitalism, which is our principal object of study.

In fact Brazil and Russia are wholly dependent on commodity exports for their recent spurt of growth. China seems set to become the biggest exporter of manufactures in the world. India has a huge home market, but seems very dependent on the export of services to the advanced capitalist countries. To be sure, all these countries are growing quite fast by historic capitalist standards, but all for different reasons. Combined and uneven development is after all a basic feature of capitalist growth and development.

  • The BRICs are important in their own right, but      world economic development is still dominated by the imperialist      heartlands.

Chapter 7.2: Problems ahead

The destruction of capital

Marx was well aware that capitalism destroys capital continually and remorselessly as it accumulates. Never let it be said that capitalism uses resources efficiently. It advances by destroying the value of the means of production in its path.  This devaluation or moral depreciation of capital occurs because of the continuous rise in productivity spurred on by competition between capitalists. So machinery, and other fixed capital, has to be scrapped as it has become out of date long before it is worn out. If constant capital cannot allow the capitalist to compete with rivals who have retooled with the latest equipment, then it has to go

Marx quoted Babbage, a polymath who wrote extensively on the role and importance of machinery in the nineteenth century, with a startling example of this depreciation. “The improvements…which took place not long ago in frames for making patent-nets were so great, that a machine, in good repair, which had cost £1,200, sold a few years after for £60.” (Marx-Engels Collected Works Volume 33, p.350).

All this did not benefit the workforce one jot. Equipment had to be worked 24 hours a day by shifts of  workers to transfer all the value out of that expensive constant capital to the tulle (the final product)  before the machine became scrap metal. As Marx comments on this process:

“John Stuart Mill says in his Principles of Political Economy: ‘it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being.’ That is, however, by no means the aim of the application of machinery under capitalism…The machine is a means for producing surplus value.” (Capital Volume I, p.492)

Under capitalism innovation can often prove to be the ruin of the inventor:

“The far greater cost of operating an establishment based on a new invention as compared to later establishments arising from its very bones. This is so very true that the trail-blazers generally go bankrupt, and only those who later buy the buildings, machinery, etc., at a cheaper price, make money out of it. It is, therefore, generally the most worthless and miserable sort of money-capitalists who draw the greatest profit out of all new developments of the universal labour of the human spirit and their social application through combined labour.” (Capital Volume III p.199)

Here is a more recent example of the process that Marx called moral depreciation:

“From 1977 to 1984, venture capital firms invested almost $400 million in 43 different manufacturers of Winchester disk drives…including 21 startup or early stage investments….During the middle part of 1983, the capital markets assigned a value in excess of $5 billion to 12 publicly traded, venture capital based hard disk drive manufacturers…However by 1984 the value assigned to those same 12 manufacturers had declined..to only $1.4bn.”  (Sahlman and Stevenson Capital Market Myopia, cited in Railroading Economics by Michael Perelman, pp.54-5)

It seems that even this regular destruction of the productive forces is not enough in the event of a crisis. As the Communist Manifesto declares, in a slump:

“The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises.” (Communist Manifesto, p.8)

Take the case of the boom that crashed in 2001. Earlier we reported Robert Brenner’s account of the massive build up of overcapacity in the ICT sector:

“Between 1995 and 2000, industrial capacity in information technology quintupled, accounting by itself for roughly half of the quadrupling of the industrial capacity that took place in the manufacturing sector as a whole, which also smashed all records. As a consequence the gain in profitability deriving from the increased productivity growth was counterbalanced by the decline in profitability that resulted from growing over-supply” (What is Good for Goldman Sachs is Good for America, p.31)

What happened to all this surplus capital? It has disappeared as surely as if the earth had opened to swallow it up. The Financial Times reckoned after the debacle that only 1 or 2% of the fibre optic cable buried underground had ever been turned on (cited in Chris Harman – Zombie capitalism, p.286). The inflated share prices of new technology firms set up during the boom also went south. Their resources disappeared for a song in sales of bankrupt assets. Many of these firms had never paid a dividend and never would.

The classic statement of the need for more capital to be destroyed in a crisis in order for the recovery to come is from Andrew Mellon, US Treasury Secretary after the Wall Street crash; “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he ranted. “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, lead a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Joseph Schumpeter was another advocate of ‘creative destruction’  Business cycles, he declares, “Are not like tonsils, separate things that might be treated by themselves but are, like the beat of the heart, of the essence of the organism that displays them.” (Business Cycles, quoted in Perelman-Railroading economics, p.60) In other words, just put up with it.

The greatest and most wanton destruction of capital in human history took place as a result of the Second World War. The War was followed by an enormous secular boom, based precisely on this capital destruction.

Of course the political conditions for the survival of capitalism after 1945 had first to be established. “The political failure of the Stalinists and the social democrats, in Britain and Western Europe, created the political climate for a recovery of capitalism.” (Ted Grant – Will there be a slump?)

Grant goes on, “The effects of the war, in the destruction of consumer and capital goods, created a big market (war has effects similar to, but deeper than, a slump in the destruction of capital). These effects, according to United Nations’ statisticians, only disappeared in 1958.”

The War of course physically destroyed capital physically. A slump destroys the value of capital. In doing so, it should prepare the conditions for a new upturn.

Throughout the Great Depression productive forces, not to mention people’s livelihoods and lives, were recklessly squandered as part of this ‘healing’ process. But capitalism was not cured till the Second World War broke out. The 1930s saw capitalism in mortal danger. The ruling class felt thereafter that it could not stand idly by and wait for the interminable time it took for the system to heal itself through deflation. Since the Second World War the capitalist class has intervened actively in the economy to stop it hitting rock bottom.

They have done so for two reasons: politically it was too dangerous to leave things alone. The working class would draw the conclusion in increasing numbers that capitalism was a failed system. The other reason they have intervened is because there is no reason to believe capitalism need ever necessarily recover from a serious and prolonged bout of deflation.

  • Capitalism continuously devalues capital as it      accumulates.
  • Marx observes that this process cheapens the      elements of constant capital, and it is a factor offsetting the tendency      for the rate of profit to fall.
  • In a recession further capital destruction is needed      in order to prepare the conditions for a new boom.
  • The Second World War, by destroying capital on the      grand scale, prepared the conditions for the post-War boom.

Deflation

Deflation is what happens when the Mellons of the world allow the rest of world capitalism to go hang, by allowing capital destruction without limit. It does not offer a healing process. This was discovered by Irving Fisher during the 1930s. Fisher is famous principally for coming out with possibly the most ludicrous prediction in the entire canon of neoclassical economics, when he declared in 1929, “Stock prices have reached what looks like a permanently high plateau.”

Haunted by this comment thereafter, he developed the theory of debt-deflation in order to try to restore his credibility as an economist. In effect, he claimed, capitalism in crisis can go into a vicious circle of decline. As the economy slides down, incomes fall and wealth declines. But debts maintain their value. If prices are actually falling (as they were at about 10% a year in the worst years of the Great Depression) then debtors have to shell out more and more of their earnings to pay for the debts they built up in the good years. The debts become insupportable. They consume the debtors, who lose everything with no salvation in sight.

Deflation causes other distortions. If prices are falling, why keep your money in a bank? Savings will be worth more next year than this year even if you keep them in a sock. On the other hand interest rates demanded by the banks are high enough to discourage capitalists who want to borrow in order to invest. If nominal rates are just 1% and prices are falling by 10% annually, then the real rate of interest is about 11% a year.

That means the government cannot stimulate the economy by means of monetary policy. Small businesses and struggling farmers in particular crave lower interest rates as a lifeline. How can the government engineer negative nominal interest rates to keep real rates low when prices are falling?

Also people are more likely to hang on to their money as its purchasing power grows year by year rather than spending it, just when the economy could really do with a buying splurge to expand the market.

For all these reasons the economy will not reach a stable state where, in Mellon’s words, ‘all the rottenness has been purged out of the system’. Deflation will instead take the economy, “With hideous ruin and combustion, down / To bottomless perdition, there to dwell”, like Satan in Paradise Lost (Book I, lines 46-7).

If the capitalists have the tools to stop deflation happening, then they will intervene. The question is: can they? What effect will their policies have?

The Japanese deflation

Evidence of the effects of deflation, and of the ineffectiveness of government policy intended to prevent it, comes from Japan. In the 1950s and 1960s the Japanese economy achieved rates of growth higher than any capitalist economy had ever attained before. Competitors saw Japan as sweeping all before it on the world economy, conquering one export market after another.

In the 1980s it became clear that Japan was afflicted by a financial bubble. Its origins do not concern us here but it was associated, like the more recent bubble, with artificially low interest rates. Japanese banks had their arms twisted to lend more money. The loans were often secured by land as collateral. This was the prime cause of the land price bubble after 1985. More lending increased the demand for land, so its price went up. So people borrowed still more money to buy land, in order to borrow even more.

The bubble became particularly evident in property prices. The Nikkei share index was also in the stratosphere. Towards the end of the 1980s the total price of real property in Japan was reckoned to be worth more than the land in the whole of the rest of the world!

There had been a steady fall in the rate of profit even before the bubble burst. One reason for this was the enormous increase in costs caused by soaring rents and the rising price of land that had to be paid for by capitalists. In the end a rise in interest rates in late 1989 was enough to prick the bubble. Share prices collapsed. Land prices collapsed.

Huge debts, incurred during the bubble, remained unpaid and unpayable. The banks, massively overextended, began to deleverage, screwing the rest of the economy down as they went. The panic began on December 31st 1989. More than a decade of stagnation followed.

Over the next few years asset prices fell in Japan as much as they had done worldwide in the Great Depression. House prices fell to a tenth of their top level. Commercial property was worth a hundredth of what it had been in the bubble. Over the decade the Nikkei lost three quarters of its ‘value.’ From a peak of 40,000 it was down to15,000 in 1992 and 12,000 by 2001.

The marvellous Japanese industrial machine continued to function, but the country never again achieved the growth rates of earlier decades, despite successive rounds of fiscal stimulus. The government spent 100 trillion yen in ten years. All this stimulus achieved was to ratchet up the national debt. The Japanese central bank also tried monetary policy. Interest rates stood at just 0.5% by 1995.

The whole debt-deflation mechanism described by Irving Fisher continued to grind away at the ‘Japanese economic miracle’. Investment was stagnant – no higher in 2002 than it had been in 1990.

So deflation can be a disaster. Once the process of deflation has begun, government policy can be ineffective to reverse it, as the Japanese experience shows. That is why governments intervene to try to prevent it starting.

  • The      Japanese experience shows that government policy can be completely      ineffective in the face of deflationary pressures.

The deflation/inflation dilemma

There is also a downside to the government intervening in order to offset the worst effects of the downturn and the danger of deflation, as they did at the end of 2008.

Quite simply capital is preserved, not destroyed. So capitalism is not healed, healthy and ready to gallop in the next steeplechase of boom and slump. The progress of recovery is slow. It continually demands stimuli such as injections of credit in order to get moving. Credit produces bubbles. This is one reason for the super-bubble in modern capitalism that Soros mentions. (Soros-The crash of 2008 and what it means)

In order to prevent the economy collapsing the government may intervene by allowing the pumping up of credit, for instance by cutting interest rates. As quickly as one bubble bursts, another is blown up. The bursting of the house price bubble after 2006 was inevitable. Yet, as soon as the banks got up off the floor, they have been pumping money on to the stock exchanges of the ‘emerging’ economies. Countries such as Brazil and India have been growing quite strongly as of the summer of 2011 and their stock markets bounced back. They have been aided by a flow of funds from the advanced capitalist countries where profitable investment opportunities are harder to find. Here are some warning signs from the Financial Times.

Bubble fears as emerging markets soar by Stefan Wagstyl and David Oakley (07.10.10): “Robert Zoellick, World Bank president, has talked of currency ‘tensions’ and ‘the risk of bubbles’. The IMF, in its global financial stability report, said: ‘The prospect of heavy capital inflows would be destabilising.’”

Emerging markets at risk from a gigantic bubble by Peter Tasker (18.10.10): “The degree of euphoria surrounding some emerging economies is already troubling. The Indian and Indonesian stock markets are trading at price earnings ratios of over 40 times, based on ten-year average earnings.” (That means it would take forty years to get your money back.)  “You would surely need a hundred years of fortitude to buy Mexico’s recently-issued 100-year bond at a yield of 5.6 per cent. Bubble and bust in China, on which the world is now so dependent for growth and optimism, would likely tank the commodities markets, set off a second round of deflation, and end the emerging markets boom in the most spectacular way possible.”

These people are incurable. Is it the case that ‘here we go again’?

  • The process of deflation associated with massive destruction of capital can become a vicious circle from which capitalism cannot escape.
  • If the      government intervenes to try to prevent deflation, they may prevent      adequate capital destruction that will eventually prepare the way for a full      recovery.
  • If capital      is not destroyed thoroughly a new speculative bubble can be blown and a      tendency to inflation created.

Regulating capitalism?

Joseph Stiglitz is one of the few economists who consistently predicted the crash. Stiglitz attributes the Great Recession to a combination of recklessness and a failure to regulate that recklessness (Freefall, Penguin 2010). Stiglitz has been right before and been ignored before. He is right this time and all the signs are that he will be ignored again.

The deregulatory drive attained an unstoppable momentum with the complete ideological victory of neoliberalism. Regulation was seen as cramping the style of capitalism red in tooth and claw.

After the Second World War global capital flows were carefully regulated in all the major capitalist countries. These regulations were progressively torn up as the post-War boom proceeded. The US Glass-Steagall Act that regulated the banks (passed as part of Roosevelt’s New Deal) was swept away in 1999 under Clinton’s Presidency. A wall of money and massive Congressional lobbying removed the last obstacle to unfettered freedom of finance. Arguably that paved the way for the present disaster.

Has capitalism got a death wish? Why not re-regulate when evidence of the damage caused by deregulation is all around? It needs repeating that the capitalist system is anarchic. The capitalist class does not work to a strategic plan. They respond to stimuli. Profit is their key stimulus. In an atmosphere of euphoria, all constraints are swept aside. As one broker explained, while the herd is making money you have to be part of that herd.  Because the capitalist class is the ruling class, they usually get what they want. When they wanted deregulation they got it, whether it was good for their system or not.

Regulation is only implemented when it doesn’t damage the essential interests of the financiers.  The handcuffs that Roosevelt apparently imposed on the US banks in 1933 in the form of the Glass-Steagall Act didn’t really hurt at all, for the simple reason that the banking system had already largely collapsed or was in a coma. By that time 9,000 banks had gone to the wall in the USA.

Roosevelt’s banking acts introduced a system of federal deposit insurance, a guarantee for depositors that their money would be safe. The acts separated high street banks, which were severely restricted in the risks they could take with depositors’ money, from investment banks, which remained uninsured and in principle would be allowed to go to the wall. The investments banks were by this time flat on their backs. Risk taking was the last thing on their minds in 1933. Survival was all-important. Roosevelt’s initiatives sound bold. Really he was bolting the stable door after the horse had bolted.

Only a year ago the bankers were hate figures, reviled by millions for ruining innocent people’s lives with their mad and incompetent gambling. Though not a complete picture of the nature of the present capitalist crisis, this was all substantially true so far as it went. It is incredible the extent to which the capitalist press and opinion formers have tried to use the fiscal crisis of the state – an inevitable phase in the capitalist crisis – to switch the blame away from the bankers and on to the public debt and the public sector. They have been partially successful in this, at least for a period of time. In a crisis consciousness can change rapidly, and it can and will turn around again just as quickly.

Only a year ago the cry went up, ‘never again!’ Never again would the banks hold the rest of us to ransom. They should not be allowed to be ‘too big to fail.’ As we have pointed out the problem was that the banks were really too interconnected to fail and too important to capitalism to fail. There was the rub. The banks could blackmail the rest of the capitalist class with all too plausible stories of complete economic meltdown

The call for re-regulation of the footloose and fancy free financial institutions that were the trigger for the crisis faces stiff resistance from vested interests. Reinhart and Rogoff actually attribute the frequency and seriousness of financial crises to financial liberalisation. “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously, as they did in the 1990s, but historically.” (This Time is Different p.155)

In the USA the biggest slap on the wrists to a bank has been applied to Goldman Sachs. The bank admitted to misleading customers on the quality of mortgage backed securities. They have been fined $550m. This is the loss of just two weeks’ profits. (Dominic Rushe-Resurgent Wall Street winning lobby battle, Guardian 27.06.11) It doesn’t hurt at all.

All over the world the bankers have evaded regulation and have been restored to their privileged position. The City of London has grown too big and parts of it are ‘socially useless’, commented Adair Turner, Chair of the Financial Services Authority, in exasperation. Right first time, Lord Turner. Still they got their way. Froud, Moran, Nilsson and Williams describe in detail (Opportunity lost, in Socialist Register 2011, pp.98-119) how the financiers ran rings round the New Labour ministers. While critical of the Macmillan Committee of 1931, the Radcliffe Committee of 1959 and the Wilson Committee of 1980 (all on finance) the authors observe how, in the Wigley (2008) and Bischoff (2009) Reports:

“Non-City groups were not included or consulted in the information gathering, problem-defining phase or subsequently in the drafting of the two reports about the benefits of finance.” (p.109)

In effect the City investigated itself, with not even a token trade unionist on the Committees.  Not surprisingly, it gave itself a clean bill of health. Bischoff decided that finance represented value for money. How?

“Bischoff added up taxes paid and collected by finance without considering the costs of bailing out the financial system.” (ibid p.210) This is the sort of dodgy accounting that brought the banks, and the rest of the economy, to the brink of ruin in the first place!  After this sleight of hand, no wonder the report concluded, “Financial services are critical to the UK’s future.”

The banks continue to be effectively unregulated. Though the article is fascinating as a description of how the British establishment works, the complete success of finance capital in shredding any proposed regulatory restrictions is mainly on account of  the spinelessness of Gordon Brown and Alistair Darling as representatives of New Labour. They were all hapless creatures of the establishment who could not conceive of an alternative to the rule of finance capital. In this respect they behaved like establishment politicians all over the world, as servants to the big banks and to capitalism.

So the banks got away scot free. This is true of the upper management, those who were solely responsible for the catastrophic decisions that led to the credit crunch. But there have been mass redundancies among ordinary bank workers in the UK and elsewhere over the past year. Those who have lost their jobs are the ordinary working class finance workers who had no part in the crazy revels of the speculative boom. They are the ones to pay the price.

The Tory-led government has continued the traditions of New Labour in grovelling to finance capital. They have effectively ditched the Walker Review on pay and bonuses in the banking sector. Their proposal for a bankers’ levy has been trimmed back and is likely to garner just 0.1% of bank profits.

It seems that capitalism as a whole could benefit from curbing the ‘animal spirits’ of the financial entrepreneurs. All the major capitalist powers swore in 2008 not to let the guilty bankers off the hook. It has become quite clear by 2011 that the financial interests have been able to fend off these pressures to behave themselves and face regulatory restrictions down.

Here’s how. In the USA lobbying has been intense. Gillian Tett quotes Larry Summers, Obama’s chief economic adviser, as estimating that, “The financial sector is currently funding an average of four lobbyists, to the tune of $1m or so, for every member of the House (including those who have nothing to do with finance)” (Financial Times 29.10.10). If this is not outright corruption, then it comes close. This is how political decision-making is arrived at in a capitalist democracy.

Bank profits are back. Bonuses are back. The rest of us look to years of austerity in the future, but the banks have been saved. Governments lumbered the people with huge public debts, largely to bail out the banks and because of the disastrous effects the banks’ conduct has had on the rest of the economy. All over the world they have now foresworn intervening in the financial arena and are letting the banks carry on exactly as they did before.

  • Regulating the banks has been abandoned. They are      back in the driving seat.

Protectionism?

We know that the Great Depression was made worse by the tendencies to protectionism that became manifest as the economic crash proceeded. The protectionist legislation, such as the Smoot-Hawley Act raising tariffs on imports which was passed in the USA in 1930, was not the cause of the Great Depression. It came too late for that. But protectionism did make the crisis worse.

If capitalism grows and world trade grows, then a rising tide raises all boats. But in a crisis the national ruling class does not only turn on ‘its own’ working class. It also tries to foist the burden onto other countries. And that makes it worse for everyone.

“As long as everything goes well competition acts…as a practical freemasonry of the capitalist class, so that they all share in the common booty …But as soon as it is no longer a question of division of profit, but rather of loss, each seeks as far as he can to restrict his own share of this loss and pass it on to someone else.” (Capital Volume III, p.361)

So far we have not seen an equally serious protectionist trend as happened in the 1930s. Indeed we have heard loud declarations as to the virtues of free trade and the need for all capitalist nations to work together and co-operate. Beware! This might be taken as a warning signal. We always hear these exhortations from the great and the good, specially on the eve of a trade war.

The form that the tendency to protectionism may take is currency manipulation rather than tariff barriers, as happened in the 1930s. The financial press has been running headlines about ‘currency wars’ all through the past year. Arguments, spats and sabre-rattling between the trading nations will continue. We have also seen attempts to manipulate currencies between the USA and China, while the US Congress has approved measures that may be regarded as covert protectionism.

In late 2010 the US Fed decided to launch a second round of quantitative easing (printing money). They injected a further $600bn into the economy, even though they didn’t know whether the first stimulus had ‘worked’. Trade rivals believe that pumping out dollars will depreciate the US currency, make US goods cheaper and their own products dearer on world markets and thus provide the USA with an unfair trade advantage. They are not happy.

If the world economy continues to recover, then the protectionist voices will become less strident for the time being. National antagonisms, which occur because of the combined and uneven development of world capitalism, will be a continued source of friction. In particular the global imbalance between China and the USA will remain a secular feature of the world economy and a permanent source of conflict. But the decisive difference with the 1930s is that world trade has now turned up and therefore a full-scale trade war is unlikely this time around.

  • Protectionist voices will fade if and when the      recovery develops, but, like the recovery, that process will be slow.

The fate of the Euro

The fate of the Euro remains insecure. Economic trends are not inexorable forces. They can be interfered with and reversed by human action, in particular by government, which is an important economic player in the twenty-first century. Here we discuss the role of ‘mistake’ and apparently accidental factors in politics and human affairs.

Marx did not have a problem in recognising the part played in economic events by mistaken ideas and stupid people. He cited the Bank Acts of 1844 and later which were based on an erroneous economic theory – the quantity theory of money – and a mistaken application of the theory to the constitution of the central bank. As a result of these factors, whenever a crisis broke out the Bank Acts had to be suspended. At first sight this seems to suggest that the root of the problem of the governance of the Bank of England was an inadequate understanding of political economy. This interpretation would be one of the purest subjective idealism. The problem of the malfunctioning Bank Acts in turn was really rooted in conflicts of interest between the policy-makers of the time.

Likewise we have been critical of the way the leading European Union decision-makers have responded to the Euro crisis that blew up in Greece and then in Ireland. We do not wish to give the impression that the situation was not resolved more decisively just because Merkel, Sarkozy and the others were a bit thick. The problem was that they were concerned above all with the national interests of Germany and France and not that of the EU as a whole. Capitalism is an anarchic system. Different capitalists have different interests from one another. That means that even the members of the ruling class may disagree with one another. So it is difficult, and may be impossible, for them to agree on a common policy.

Merkel may have seemed unwise when she has raised in public the question of Irish and Greek bondholders taking a ‘haircut’ (loss). Certainly the bond markets took fright as a result, and that made it much more difficult for the Eurozone leaders to implement the Irish and Greek ‘rescues’. But the question of default is a genuine dilemma for the Eurozone decision-makers. There is no one right course for capitalism to follow, and in any case the European powers may have conflicting interests on the question.

Merkel was reacting to a possible action in the German constitutional court and problems within her own struggling coalition. These parochial interests were more important to her than the future of the Euro, because they were about her survival as a political leader. That is typical. There were occasions in 2010 and 2011, and they may recur in the future, when the chaotic nature of the decision-making process in the Eurozone, could take the Euro to the brink of shipwreck.

The Euro is a unique institution. It is a currency without a country. A government, even under capitalism, has ways of influencing the level of economic activity within their economy and therefore of safeguarding its national currency.  As we’ve noted these economic levers are usually listed as fiscal and monetary policy. Fiscal policy within the EU is nationally determined. There is no common Eurozone wide or EU wide fiscal policy. Despite continual allegations of waste of EU funds, the Europe Union disposes of few resources and employs relatively few workers. At one time it had fewer employees than Kent County Council. It disburses considerable regional and agricultural subsidies to the member countries, but that is another matter.

When a government, like that of the USA, implements an expansionary fiscal policy by cutting taxes or spending more money, that may be expected to have an impact throughout the country. That cannot happen at present within the Eurozone. Instead of being able to pursue an active fiscal policy, Eurozone members are constrained in principle by rules on the maximum deficit and government debt they may run.

Not only that. The US has a common system of federal taxes and benefits. As a result if one state such as Michigan becomes economically depressed, the local citizens will automatically pay less tax and receive more benefits from the federal government. That will act as a bit of a cushion for the people of Michigan. These automatic stabilisers act to reduce economic volatility within the country. There is no such redistributive mechanism within the Eurozone. The message a country gets from its partners if in difficulties is, ‘you’re on your own.’

It should not be forgotten that the policy of European monetary union is driven by a hard neoliberal ideology. ‘Why should governments intervene to try to alleviate unemployment? Capitalism, left to itself, will generate the jobs. Even if it doesn’t, government intervention will only make the situation worse.’ That’s the sentiment at the top.

This nonsense is repeated in the arena of monetary policy. The European Central Bank does not have a growth target. Its sole brief is to keep inflation down. Presumably, so long as the money supply is stable, they think private capitalism will deliver optimal economic results.

The fact that the Euro has no real defences, or rather that these are being developed by the authorities on the hoof in the teeth of a crisis, makes the single currency very vulnerable. The idea of a European bond, with the whole weight of the Eurozone behind it, has been vetoed for the time being. On the other hand the ECB has been shamefacedly buying up sovereign debt in 2010 and 2011, as a clandestine way of propping up its weaker members from further attack.

Since the world economy is recovering, on the balance of probabilities the Euro should survive this crisis, though there is no doubt that some peripheral countries will remain in intensive care for some years to come. This is not a hard and fast prediction. Capitalism is an irrational system, as we have seen many times in the course of this book. Waves of speculation and what Keynes called “animal spirits” play their part and are quite capable of sweeping away the whole Euro project.

The authorities all over the world will have to take the situation seriously, as the collapse of the Euro would be a global calamity that could plunge the world economy into a double dip recession. Another serious world economic crisis in a few years ahead, which is quite possible, could sink the Euro altogether or severely reduce the area covered by the single currency.

The EU and Eurozone authorities ought to be able to manage an economic recovery in the Eurozone and European Union as a whole over the next few years, though there may well be stresses and strains. Greece, for instance, may have to be taken through an orderly default. This would involve recognition that the Greek economy could snap under the pressures imposed upon it. Default could also be the result of class struggle. The Greek working class is rightly furious at having to shoulder the burdens heaped upon them by the tax-dodging Greek ruling class. The problem involved in an orderly restructuring of Greek public debt is that this means that the French and German banks in particular will have to take a hit. The Euro presents a knotty problem that won’t go away soon.

  • The problems of the Eurozone      flow from its flawed design and architecture as well as the economic      crisis.
  • The Euro crisis remains the      most visible flashpoint for the world economy. This crisis is the one      thing that could even cause it to relapse from its present hesitant      recovery over the next couple of years.

 

 

 

 

 

 

 

 

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