What Is to Be Done?

(Part Four in a Series)

The March 1, 2009 edition of the New York Times “Week in Review” included a page of opinions from noted economists on the prospects for the economy, given the ongoing crisis and the various attempts—TARP, bailouts, stimulus, budget plan—made so far to deal with it. Most more or less shared the forecast of today’s official gloomster, Professor Nouriel Rubini of New York University, that the recession will not end until sometime in 2011. The most optimistic (like Fed chairman Ben Bernanke himself a few days earlier) thought that it would all be over in a year, while financier and author George Cooper saw a possible “two or more decades of readjustment.” Most were careful to hedge their bets by adding a proviso that a near-term recovery can be expected only if (to use Rubini’s phrasing) “appropriate policies” are “put in place.” Not specifying what those policies are, of course, only strengthened the prediction safety factor. Then again, no one based his or her predictions on any serious analysis of the nature and causes of the crisis or the efficacy of the various remedies.

Photos courtesy of Michael Short.

In fact, it’s hard to imagine a more stunning demonstration of the theoretical bankruptcy of economics as a putative science than the ongoing discussion of the current economic situation. No deeper explanation has been offered for the last year’s catastrophic events than that they are the fallout from a credit crisis caused by excessive, and excessively risky, debt peddled by, and to, financial institutions around the world. As a result, no cure has been proposed for what is commonly described as an illness gripping the economy other than the continued intravenous feeding of the financial system with government money, along with subsidization of the failing U.S. automobile industry, modest amounts of public works spending, extended unemployment benefits, and increasing access to minimal health insurance.

Despite collapsing economies in Europe, as well as the rest of the world, European governments are so far unwilling to add significant stimulus plans to those set in motion in the U.S. by the previous and current administrations. Finding this “especially puzzling,” a Times editorial cited Obama economic adviser Christina Romer’s assertion of an important lesson from the depression of the 1930s: “fiscal stimulus works.” If the lesson of history is this clear, the European response is indeed puzzling, as is the inadequate scale of the American stimulus according to the judgment of the same editorial, along with Professor Krugman and many others.

In fact, what history demonstrates, if anything, is the failure of the New Deal to end the Great Depression. It is true that by 1935 the panoply of measures set in motion by the Roosevelt administration—from banking subsidies and regulation to industrial price controls, subsidization of agribusiness, unemployment and old-age insurance, federal make-work programs, and support for unionization—had helped arrest the downward trend that began in the late 1920s. Yet two years later investment and production fell again, unemployment increased (there were ten million unemployed by 1938), and at best stagnation seemed to be the order of the day. Only with the coming of the Second World War, and the dedication of resources to preparing for war, did “fiscal stimulus” finally produce something like full employment, based not on increased consumption but on its restriction in favor of increased production of armaments. So, one may ask, what are the appropriate policies? What, exactly, is to be done?

In 1936 John Maynard Keynes published The General Theory of Employment, Interest, and Money, in which he observed that the insistence of orthodox economics on the self-regulated nature of the capitalist economy had failed to recognize that the system could regulate itself into a state of less than full employment. Sharing with orthodoxy the basic assumption that the point of the economy is the utilization of resources, natural and human, to produce goods for consumption, Keynes proposed that the state should intervene at such moments, borrowing money against future tax receipts to hire workers, thus increasing the number of consumers and so calling forth new investment to meet their needs. That is, he provided a theoretical rationale for the policies already implemented by Hitler, Roosevelt, and the leaders of other capitalist nations. The failure of the New Deal to end the depression—like the later failure of the promised “end of the business cycle” after the war—could now be explained by the failure to go far enough in applying the Keynesian prescription, as Roosevelt’s program was limited by the Supreme Court’s finding of the national price-fixing system unconstitutional as well as by business’s opposition to increasing taxes and budget deficits. Others, meanwhile, blamed government spending itself for continued stagnation: resistance to the stimulus idea, in fact, has as long a history as the idea itself.

While neither economists nor businessmen have an adequate theoretical understanding of capitalism, the latter at least have a practical sense of how it works. Economists, including Keynes, think of profit-making as a mechanism for getting people with money to invest in production, but businessmen know that profit itself, not consumption, is the goal of business activity. Goods that cannot be sold at a profit will not be produced, or may be destroyed if they have been produced, like the tons of food burned and buried during the Great Depression while millions went without sufficient nutrition.

And government-financed production does not produce profit. This is hard to grasp, not only because it violates a basic presupposition of the past seventy-five years of economic policy, but because a company that sells goods to the state, as when Boeing provides bombers for the Air Force, does receive a profit, and usually a good one, on its investment. But the money paid to Boeing represents a deduction from the profit produced by the economy as a whole. For the government has no money of its own; it pays with tax money or with borrowed funds that will eventually have to be repaid out of taxes.

Tax money appears to be paid by everyone. But despite the appearance that business is undertaxed, only business actually pays taxes. To understand this, think of the total income produced in a year as the money available for all social purposes. Some of this money must go to replace producers’ goods used up in the previous year; some must go as wages to buy consumer goods so that the labor force can reproduce itself; the rest appears as profit, interest, rent—and taxes. The money workers actually get is their “after tax” income; from this perspective, tax increases on employee income are just a way of lowering wages. The money deducted from paychecks, as well as from dividends, capital gains, and other forms of business income, could appear as business profits—which, let us remember, is basically the money generated by workers’ activity that they do not receive as wages—if it didn’t flow through paychecks (or other income) into government coffers. So when the government buys goods or services from a corporation (or simpler yet, hands agribusiness a subsidy or a bank a bailout) it is just giving a portion of its cut of profits back to business, collecting it from all and giving it to some. The money paid to Boeing has simply been redistributed by the state from other businesses to the aircraft producer.

This is why government spending cannot solve the problem of depression, though it can alleviate the suffering it causes, at least in the short run, by providing jobs or money to those out of work, or create infrastructure useful for future profitable production. The problem of depression—insufficient profits for business expansion—can only be solved by the depression itself (aided, perhaps, by a large-scale war), which increases profitability by lowering capital and labor costs, increasing productivity through technological advances, and concentrating capital ownership in larger, more efficient units (for a fuller explanation, see part three of this series in the February issue of the Rail).

Thus governments find themselves today between a rock and a hard place. The rock: a continuing descent into depression will bring enormous risks for social stability, as large numbers of people find that the existing social institutions are unable to take care of their most basic needs. Last winter’s riots in Greece have already demonstrated a high level of opposition to the political and economic status quo; France has already seen two nationwide demonstrations of nearly three million workers protesting job cuts and proposed changes in pension laws, and demanding government action. Popular protests drove the bankrupt Icelandic government from power, while angry workers have occupied closed factories in Ireland, Ukraine, and even the normally quiescent United States, where local organizations have also prevented housing foreclosures or occupied vacant buildings in a number of cities. True, the most publicized expression of popular anger so far has been that directed at financial executives rewarded with bonuses paid out of government funds issued to their near-bankrupt companies—anger rising from people earlier unfazed, so far as we know, by the astoundingly unequal distribution of income achieved by the wealthy, with government aid, over the last 25 years. But even this was enough to alarm a writer in the Times’ “Style” section on March 22, who found “something scary about all this rage” and suggested “finding constructive ways to channel the anger they’ve been feeling—outlets that quell the instinct to throw a rock through the window of somebody’s mansion.” If that anger gets channeled away from particular instances or individuals to a social system based on inequality and oppression, things could get quite constructive indeed. Hence the need to keep government funds flowing to prop up business institutions.

The hard place: the idea that companies like A.I.G., the Bank of America, or Citicorp are “too big to fail” amounts to a declaration of the failure of the market economy—that is, of capitalism in its classical, or ideal, form. Competition was supposed to eliminate the weak, leaving the most productive (of profits) to prosper, thereby optimizing social well-being. Blocking competition’s operation amounts to admitting the obsolescence of capitalism itself. Even more important, government action in the form of stimulus plans, bailouts, or nationalizations threatens the private enterprise system not only symbolically but practically, as money is taken from the circuits of the capitalist market and used by the state for objectives defined politically rather than by the criterion of profitability.

Furthermore, the situation today is rather different from that at the outset of the last depression. The United States had a government debt of $16 billion in 1930; today it is $11 trillion and climbing. In terms of percentage of GDP, the federal debt had already reached 37.9% by 1970; in 2004 it was 63.9%. The federal government is already responsible for about 35% of economic output (as measured by GDP, the value of all goods and services produced in a year). When this number hit 50% at the height of the Second World War, the growth of private capital came more or less to a halt. All of which is to say, the Keynesian means for depression-fighting have been largely used up, unless the state is to displace private enterprise completely to create a state-run economy like that of the old Soviet Union, a goal favored by no actual political force (despite Newsweek’s early February cover story declaring that “We Are All Socialists Now”). It’s only twenty years since Russia and its satellites embraced the free market, or at least some highly restricted version of it, but even those governments show no interest in returning to the centrally-planned system of yore. The Chinese state too has clearly thrown in its lot with the market, even while its economy is being dragged down by the global collapse. And even Sweden, long the Western standard-bearer for “socialism” in the eyes of American conservatives, is letting Saab go broke with the announcement from enterprise minister Maud Olofsson that “The Swedish state is not prepared to own car factories.”

The upshot is that governments will continue to be largely paralyzed, just hoping—bolstered by economists’ psychic predictions—that it will all be over in a year or two. Hence, in the U.S., the unwillingness of the Congress, so far, to allocate more than a fraction of the estimated $2 trillion in troubled assets held by American banks; hence the immediate opposition of Democratic as well as Republican politicians to the proposal of the Obama government to limit tax deductions for the wealthiest 1.2% of taxpayers, limit climate-changing gas emissions, or cut subsidies to agribusiness; hence the Treasury Department’s unwillingness to interfere seriously with bankers’ decision-making about the funds shoveled in their direction; hence the seeming schizophrenia of Obama’s statement to reporters on March 14 that “we’ve got to see worldwide concerted action to make sure that the massive contraction in demand [in consumer spending] is dealt with” while “signaling to Congress,” as he was reported doing a day later, that he “could support taxing some employee health benefits,” thus decreasing wages and contracting demand. And hence the unwillingness of European governments even to follow the Americans very far down their half-hearted road, leaving the stimulus exercise (with its hoped-for benefits to European exporters) to the United States while concentrating on limiting their budget deficits and tightening their citizens’ belts.

But if, as I have been arguing, we are now in the opening stages of a Greater Depression, it’s hard to expect anything but worsening economic conditions for decades to come, requiring increased assaults on the earnings and working conditions of those who are still lucky enough to be wage earners around the world, waves of bankruptcies and business consolidations throughout the economy, and increasingly serious conflicts over just who is going to pay for all this. Which automobile companies, in which countries, will survive, while others take over their assets and markets? Which financial institutions will be crushed by uncollectible debts, and which will survive to take over larger chunks of the world market for money? What struggles will develop for control of raw materials, such as oil or water for irrigation and drinking, or agricultural land? All governments attack protectionism today (or at least they did yesterday) and call for mutual support and free trade, but in practice even a relatively integrated economic union like Europe is breaking down under the strain of divergent interests, while yesteryear’s global cheerleaders today solemnly intone the need to Buy American.

The biggest unknown, however, is the tolerance that the world’s population will show for the havoc that resolving capitalism’s difficulties will inflict on their lives. Whatever mix of stimulus and respect for market freedom governments decide upon, the working-class majority will pay for it, with greater unemployment or lower wages and benefits—in fact, as we can already see, it will be with both. Will people be willing to march off to war again, as in the last great crises, to secure better terms for national businesses? Europeans, whatever their governments may be planning, show every sign of having finally learned their lesson in this regard, while the American popular acquiescence in war seems to have been weakened by the series of defeats and stalemates suffered in Korea, Vietnam, and Iraq, and soon in Afghanistan.

Will people instead turn their attention to bettering their own conditions of life in the concrete, immediate ways an unraveling economy will require? Will newly homeless millions look at newly foreclosed, empty houses, unsaleable consumer goods, and stockpiled government foodstuffs and see a way to sustain life? No doubt, as in the past, Americans will demand that industry or government provide them with jobs, but as such demands come up against economic limits, perhaps it will also occur to people that the factories, offices, farms, and other workplaces will still exist, even if they cannot be run profitably, and can be set into motion to produce goods that people need. Even if there are not enough jobs—paid employment, working for business or the state—there is work aplenty to be done if people organize production and distribution for themselves, outside the constraints of the business economy.

When the financial shit hit the fan last fall, everyone with access to the media, from the President to left-wing commentators like Doug Henwood of the Left Business Observer, agreed that it was necessary to save the banks with infusions of government cash lest the whole economy collapse. But, aside from the fact that the economy is collapsing anyway, the opposite is closer to the truth: if the whole financial system fell away, and money ceased to be the power source turning the wheels of production, the whole productive apparatus of society—machines, raw materials, and above all working people—would still be there, along with the human needs it can be made to serve. The fewer years of suffering and confusion it takes for people to figure this out, the better.

End of series.

Part 1
Part 2
Part 3

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Paul Mattick

PAUL MATTICK'S book, Business as Usual: The Economic Crisis and the Failure of Capitalism (Reaktion, 2011) is based on articles written for the Rail.