When, in the last few weeks, insiders and economists like Jeffrey Sachs and David Stockman – not noted for their radical postures – decry the state of the economy and the direction of policies, all of us should take note.
Sachs, one of the fathers of neo-liberal “shock therapy,” recently cited decades-long stagnant wages and obscene levels of inequality: “We’ve reached the greatest income [and] wealth inequality in history… This is a new ‘Robber Baron’ era, of course.” He went on to say “…the people at the top buy the politicians… All of them – all parties. Everyone is in the hands of the super wealthy.” (Interviewed by Aaron Task, Tech Ticker, Yahoo! Finance).
In a similar vein, David Stockman, former director of the Office of Management and Budget under the Reagan Presidency, ripped the “crony capitalism” that has changed “capital markets into a rip-roaring casino that really is not productive for the real main street economy and is generating windfall gains for a very limited number of people to no good purpose…” He sees ordinary folks trying to save in this environment as “savaged” by Federal Reserve and government policies. (Interviewed by Peter Gorenstein, Daily Ticker, Yahoo! Finance).
These gloomy, critical views stand in stark contrast to the generally up-beat, optimistic reports and forecasts that usually flow from policy makers and dominate the media today. For the experts and pundits, the crisis has passed and we are on the way – though, they concede, tentatively – to recovery.
In truth, our modern-day Pollyannas mistake the first act for the entire play. While our economy may not be on the edge of a precipice, the problems that placed the world economy near collapse have only been displaced, pushed forward or swept aside. Even an arch advocate of capitalism such as Vincent Reinhard, senior fellow at the conservative American Enterprise Institute, understands this: “After a severe financial crisis, we [tend to] get a severe recession, slower recovery and subpar expansion… Denial is a standard feature of financial crises…" (Interviewed by Stacy Curtin, Daily Ticker, Yahoo! Finance).
A closer look at the economy – an up-to-date report card from a Marxist perspective – is surely in order.
Gross Domestic Product
The broadest conventional measure of national and international economic performance remains GDP growth. Laden with the assumptions fundamental to the continued functioning of the capitalist economic engine, it valorizes all that is considered important to the ownership class and its continued accumulation of capital. Conversely, if an enormous human asset, such as the addition of one year of life span, were added to every person in the US, that value would not show up in the annual GDP figures except insofar as it generated commercial economic activity. Yet, as biased as the GDP growth figures are, their trend does reflect something real – the prospect of capitalism’s sustainability.
The first quarter figures for 2011 show a tepid US annual GDP growth of 1.8% from January through March. Pundits posture this as an aberration, a momentary stumble; but the trend line from the last quarter of 2009 is decidedly downward, in step with the drying up of stimulus funds. Nonresidential fixed investment has followed the same downward trajectory since its highpoint in the second quarter of 2010, even with spending on equipment and software leaping 11.6% this past quarter.
Likewise, export growth rates – touted by the experts as a leading force of recovery -- show the same downward trend from the level reached in the last quarter of 2009. Despite the Federal Reserve’s shrinking-dollar policy to sustain the rate of export growth, it is now falling below earlier levels of growth. Given that refined oil-based products account for the second largest component of export value and that the dollar value of these exports is highly inflated by the rising cost of oil, export growth calculated in dollars is exaggerated in the official numbers.
Further suggestive of foul weather ahead, the February GDP report for Canada – the US’s leading export destination by far – demonstrated an actual decline of .2%. It is hard to imagine robust export growth ahead, with a stagnant Canadian economy.
The growth rate of government spending – the sole factor preventing the economy from falling over the cliff at the height of the crisis – is now in negative territory and falling rapidly. The debt hysteria gripping local, state and federal officials produced budget cuts that are only now beginning to affect the GDP and other key economic indicators. Their influence on key factors – employment, incomes, consumer spending, etc. – will be felt more dramatically and negatively in the months and years to come.
Consumer spending continues its modest growth from its decline in the depths of the crisis. Its sustainability is in question, however, given that wages failed to keep up with inflation in the first quarter of 2011. This suggests that consumer debt and shrinking savings will again be the source of consumption growth, a condition ominously reminiscent of the pre-crisis period.
Internationally, GDP growth shows the same downward trend in nearly all the developed capitalist world, particularly the European Union. For those countries that have surrendered their sovereignty to the International Monetary Fund and the European Union – Greece, Ireland, and Portugal – the decline is far more dramatic. In the case of Greece, compliance with the austerity hawks has been catastrophic, with four successive quarters of losses greater than an annualized rate of 5%. PRChina and many emerging markets, on the other hand, have sustained high growth rates for diverse reasons, ranging from rational planning to irrational investment bubbles.
Profits, Productivity and Employment
Profit growth in the US – the fuel for a capitalist economy – has sprung back sharply from its nadir in the last quarter of 2008. Accelerating rapidly from that point, growth has stabilized over the last year at a rate commensurate with the pre-crisis period. Pundits hail the growth of profits in the manufacturing sector, a factor that has now reached about 90% of its pre-crisis level of production. But they fail to ask how profit growth can be so strong with less production and capacity utilization well below pre-crisis levels. The answer lies in a sharp increase in the rate of labor exploitation, expressed as intensified labor productivity. Labor productivity drove the explosion of profits after the 2008 collapse, settling at a level above historic averages. Put bluntly, the restoration of profitability came at the expense of an increasingly sweated, shrunken workforce.
Two factors opened the door to profit restoration: a weak, class-collaborationist labor movement, unwilling to confront capital, and the high rate of unemployment sowing fear throughout the workforce – what Marx called “the reserve army of labor.” With little organized fight for a larger share of the surplus and generalized fear of job loss among the working class, intensified exploitation was readily available to the capitalist class.
Nonetheless, the trend in labor productivity, like the trend in profitability, is downward, suggesting strongly that the crisis has failed to wring from the economy the long-term tendency for the rate of profit to decline–the theoretical basis for the Marxist theory of crisis.
With private sector labor productivity losing momentum, capital has turned to the service sector, primarily public goods and services, as a target for countering slowing profitability and surplus accumulation. The current attack on public employees’ rights, wages, salaries and benefits marks this tactical shift. With weak unions, disunity and nearly non-existent class consciousness, the private labor market is virtually elastic – capitalism can dictate the terms and conditions of labor. State-monopoly capital cannot tolerate a relatively inelastic public sector labor market with high union density, firm contracts and stable standards of living alongside a nearly enslaved private sector. Hence, it has launched an all-out assault on public sector workers, organized by capital’s minions in both political parties. While they cannot outsource police, firemen, and other face-to-face employees, they can break their unions. Of course, this initiative is done under the transparent ruse of debt reduction.
Another alarming sign emerging from the profit picture is the return of financials as the leading force in US profit growth. While non-financial profits lost steam at the end of 2010, profits from the financial sector jumped dramatically. By the end of 2010, financial profits achieved the same percentage of total domestic profits as they did in 2005. Clearly, speculation and financial maneuvers have ominously returned to the main stage in the US economy. For example, hedge funds have been increasing their CDS bets against Japanese debt, doubling the notional value of swaps made over the last year. Millions were made with the recent natural disaster and nuclear crisis. Debt speculation is an active agent in amplifying the volatility of European debt.
While supporters and critics of Administration policies wring their hands over the persistently high rate of unemployment, massive layoffs -- reducing the labor force dramatically faster than economic activity – was the key factor in restoring profitability and increasing asset value as expressed by equity markets. It would be naïve not to see unemployment as a capitalist tool of capitalist recovery, a tool that the ownership class is reluctant to surrender.
Much has been made of recent drops in the official monthly unemployment rates. Critics are quick to correctly note that these declines also reflect people who have left the workforce, people who are “discouraged” and statistically disappeared.
Perhaps a more realistic measure of the employment consequences of the crisis comes from examining the employment-to-population ratios and the labor participation rates compiled by the Bureau of Labor Statistics. The ratio of US employed to the total population has lost 4.5 points from its pre-crisis peak – a workforce loss of 13 to 14 million workers. When we add back those displaced but receiving unemployment compensation, we find a loss of 1.9 points in the labor participation rate, revealing 5 to 6 million workers officially disappeared – left without jobs or unemployment benefits. For these casualties of the crisis, savings, family support, food banks, social security, meager government aid, or the street are their only means of support. Unlike the politically biased official unemployment rates that obscure as much as they reveal, these grim BLS calculations offer little to celebrate.
Nor does the future of US employment appear bright. Over the last decade, US based multi-national corporations have added over two million jobs overseas while eliminating nearly 3 million here, a trend that will likely continue.
Running on Empty
Since the depths of the crisis over two and a half years ago, US policy makers have sought to stabilize and revive the critically wounded capitalist system. First, they offered a transfusion to the financial sector by injecting trillions of publicly obligated dollars into its lifeless body. Secondly, federal authorities cut away the gangrenous tissue infected by financial speculation – over a trillion dollars’ worth of fetid securities -- and placed it in the vaults of the Federal Reserve and Treasury, where it rests to this day. Thirdly, lawmakers agreed to an $800 billion stimulus package meant to restart the economy’s feeble heartbeat. After all these treatments, the economy remains in critical condition.
In mid-2010, the Federal Reserve recognized that these efforts to resuscitate a sickly economy were failing. Despite offering financial institutions and corporations virtually cost-free loans, the economy continued to respond sluggishly. The authorities acknowledged that the huge accumulated federal debt would eventually require higher interest rates to entice purchases of treasury securities to offset that debt. They understood that higher interest rates to secure the purchase of government debt would rebound through our financial institutions, driving all interest rates up and slowing borrowing. With lending drying up, they anticipated that the economy would slow down.
Thus, they sought to backstop this potential setback to recovery by embarking on a massive purchase of US treasury securities to maintain extremely low interest rates and ease any barriers to borrowers – essentially a rear-guard action dubbed Quantitative Easing II. As with the gangrenous financial securities, they purchased nearly $600 billion in government debt and locked it in the Federal Reserve vault, where it joins the garbage accumulated in the speculative frenzy that gave birth to the crisis. They hope to determine what they will do with it and the other “assets” at a later date.
Like most of the moves that flow from economic theories corrupted by wishful thinking and iron-clad confidence in capitalism, the Federal Reserve strategy produced consequences undesired. The huge infusion of dollars to purchase treasury securities cheapened the value of the dollar against other currencies. Imports, which outstrip the value of our exports to other countries, grew more costly to the US consumer; and inflation raised its ugly head, chewing away the living standards of working people. Further, many commodities, like oil, are traded internationally in dollars. With the value of dollars declining, pressure drove suppliers to raise prices to offset the falling buying power of the dollar, creating more inflationary pressure internationally. Moreover, rising interest rates in several countries inflated their currencies against the dollar as well, further affecting the costs of imported goods. These inflationary forces amplify the costs of other products, feeding an inflationary spiral. Despite unfounded optimism purveyed by the authorities and the media, inflation poses a serious threat to the economy and, especially, working class living standards. Those elements of the Consumer Price Index most relevant to working and poor people – fuel, health care, food, childcare, school fees, rent, etc – are those showing the most dramatic increase.
In addition, Federal Reserve policies failed in their mission. Though the cost of funding the US government debt is relatively stable, the cost of borrowing in the consumer arena continues to grow. Interest rates on mortgages, student loans, auto loans, etc. are on the rise. Again, QE II offered little relief to working people.
Rather than a recovery, we are in Act II of a severe crisis of capitalism. It is not merely a financial crisis, a severe business-cycle trough or a radical imbalance, but a profound crisis of the capitalist system. Yes, there are imbalances, especially in the global economy. However, they are the effects and not the causes of this deep crisis. The advanced economies are scrambling to find solutions – individually – to the intractable problems of stagnation or decline, inflation, debt, intensified competition and failing economic institutions. These problems have fostered equally intractable political crises. Economic blocs, like the European Union, are under great stress from the diverse interests of the member states.
The emerging economies, on the other hand, are super-heated and threatened by the influx of speculative capital boiling over into severe eruptions of inflation and over-production.
As I argued some years ago, early in the crisis, the ephemeral era of capitalist cooperation – once called “globalization” – is over. Nation-states are going it alone, trying to find solutions to their immediate life-and-death issues, often at the expense of their global “partners.” Where they do find areas of limited cooperation, for example, in the aggression against Libya, their differences surface as well.
Years from now, when sober heads look back on the global crisis, they will recognize that the stability of PRChina, with its publicly owned banks and rational planning, did more to save the global economy from the brink than all of the bankrupt policy antics of the major capitalist powers. But there are more acts to come before the global capitalist economy finds firm ground.
What is missing from the maelstrom is for the working classes of all nations to move to center stage and demand solutions benefiting the vast majority. The Economist magazine, the voice of free markets since Marx’s time, reports that confidence in free markets has sunk by 21 percentage points internationally since 2002. Similarly, the Gallop Poll shows the confidence in banks and Congress is now at an all time low in the US. Only 23% of respondents have “a great deal of” or “a lot of” confidence in banks. The Congress scores even lower: a meager 11% share “a great deal of” or “a lot of” confidence in the US legislative branch. The crisis opens great opportunity to shape the world in a new direction, a direction that would not merely tame capitalism, but remove its destructive forces forever.