United States

Obama’s No Deal, New Deal

By Lynn Henderson

It’s often been observed that generals are notorious for their tendency to “fight the last war”—by using the strategies and tactics of the past in attempting to achieve victory in the present. The classic example is the French Maginot Line1 constructed in the aftermath of World War I, which proved to be a disastrous white elephant in World War II.

Today the U.S. economy is in the deepest economic crisis since the Great Depression and the U.S. crisis quickly dragged in its wake the entire global economy. The political-financial generals of today are desperately attempting to reverse this crisis by replicating the policies and strategies of the Roosevelt New Deal years during the 1930’s. First, save the principal financial institution of U.S. capitalism with a series of bailouts, and then, reverse the shrinking economy and stem soaring unemployment with a government stimulus plan. This policy is doomed to fail. Today the U.S. economy and the Obama administration stand in an entirely different place than the U.S. economy and the Roosevelt administration stood in the 1930’s.

Even in the 1930’s it wasn’t Roosevelt’s “New Deal” based on a government stimulus plan of social spending and infrastructure investment that got the U.S. out of the Great Depression. It was the truly massive government deficit spending for World War II in the late 1930’s and early 1940’s that ended the depression. Idle factories and shops were brought back into production, thousands of new plants were built and unemployment evaporated in response to the massive government war spending.

But the hundreds of billions in government bailouts and stimulus by the Bush and Obama administrations have had little effect in reversing the so-called “Great Recession.” This is particularly true in the key area of growing unemployment.

The official U.S. unemployment figure has now risen to more than ten percent. However the reality is much worse. This figure is a carefully crafted statistical fiction. There is an old saying, “figures don’t lie, but liars figure” and the official ten percent unemployment rate is a lie. If one just calculates those working part-time because their hours have been cut or they cannot find a full-time job, the underemployment rate is more than 17 percent. The average workweek has fallen to 33 hours, the lowest level since the government began tracking such data in 1964.

But the greatest distortion is that only those officially designated as “actively looking for work” are counted as unemployed. The longer people are out of work the larger grows the number of those who want work, need work and seek work but fall into the statistical black hole of the uncounted.

A statistic that is available and a little harder to fudge is the percent of the working-age population that is actually employed. Currently this rarely mentioned figure is 58.5 percent, its lowest level in more than sixty years.

While the Bush and Obama administrations have run huge deficit budgets driving an ever larger national debt, federal deficit spending today nowhere near approaches that of Roosevelt’s WWII/New Deal era. In 1943 at the height of Roosevelt’s spending, the federal budget deficit was 28.05 percent of the Gross Domestic Product. The 2009 budget deficit was 12.93 percent of the Gross Domestic Product, less than half of Roosevelt’s New Deal, wartime rate.

The liberal economic commentators say that’s the problem. The policies of New Deal “pump priming” are still valid. Obama is just not pursuing them aggressively enough and on a large enough scale. But this ignores the previous point—Obama and the U.S. economy stand at a completely different place than Roosevelt and the U.S. economy stood seventy years ago.

For starters, seventy years ago the United States was the largest creditor nation in the world. Today the United States is the largest debtor nation in the world. The Roosevelt deficit budgets and national debt reached unprecedented levels, which have never again been matched, but this debt was entirely held domestically. It was the American economy and U.S. citizens who bought the bonds that funded this unprecedented debt. They then had the wealth and wages to do so.

Today, who holds the U.S. Treasury bonds, the government I.O.U.s that fund the debt? Most U.S. treasuries have to be sold in the international market and are held by such countries as Japan, the Middle East oil nations and especially China. The United States has become utterly dependent on continued international purchases of these treasuries and the regular rollover of those already held. As the U.S. debt grows and the dollar becomes shakier, these nations become nervous and reluctant about continuing to fund the soaring U.S. debt. This can only end badly. No single country holding U.S. bonds is inclined to dump them abruptly; nobody including China aims to start a panic. But as the debt grows, the fear grows that one day a country may get spooked that another is about to dump its dollars—and that would trigger pre-emptive panic selling.

At the end of WWII an expanding and dominant U.S. economy was able to pay down this huge federal debt relatively quickly despite its unprecedented size. Today the American middleclass/working class rightly suspects that they will be burdened for generations to come with paying off a debt that was primarily incurred to bail out predatory financial institutions. What has changed?

The United States won WWII. It won WWII big. It won WWII not just against the Axis powers but against its allies as well. The entire capitalist world came out of WWII in a shambles. Its industrial plants were destroyed or in decay, its working classes was reduced, dispersed, and demoralized, its political structures in turmoil and its national economies for the most part flat broke.

But the United States came out of WWII immeasurably stronger in every way than when it entered the war. Its industrial capacity had dramatically expanded, incorporating all the new technologies in electronics, chemicals etc. developed during the war. Its working class was intact with better skills and education than prior to the war. It was politically, militarily and financially the dominant capitalist economy in the world.

The war ushered in what U.S. capitalism triumphantly called “The American Century.” The usual laws of capitalist international competition were uniquely and temporarily in suspension. The dollar was enthroned as the reserve currency for the entire capitalist world replacing gold and the British pound. This gave the dollar and U.S. capitalism a uniquely advantageous position—the exorbitant privilege of paying its foreign bills in its own currency, which it could just print. This status lasted for decades. But not for a hundred years.

With the reemergence of intense international competition the “American Century” came to an end. How has U.S. capitalism responded to this new global reality? For one, in response to growing global competition in manufacturing, it shifted its profit making focus. It concluded that the quickest, largest, and easiest profits were now to be made not in the making and selling of products, but in the so-called financial sector. Between 1973 and 1985, the U.S. financial sector accounted for about 16 percent of domestic corporate profits. In the 1990s, it ranged from 21 percent to 30 percent. In this last decade, it soared to 41 percent of all U.S. domestic corporate profits.

Banking, real estate, mega insurance companies, and stock markets speculation replaced industry and manufacturing at the center of the U.S. economy. Many economists began to refer to this as “casino capitalism.” Like a gambling casino, most of this financial activity generated no new wealth or real investment, but merely shifted existing wealth out of the hands of many into the hands of a few. At least casinos provide free drinks and entertainment.

One concrete effect of “casino capitalism” and its lack of real investment and production are reflected in the Bureau of Labor Statistics annual growth of business output per labor hour—labor productivity. From 1948 to 1973 this averaged a healthy 3.2 percent, from 1973 to 2008 only 1.9 percent.

Another effect of course has been the dramatic and growing concentration of wealth and income into the hands of an ever-smaller group at the very top of American society.

In response to the reemergence of global competition U.S. capitalism also attempted to maintain profits by aggressively driving wages down. For at least 40 years now the American working class, or the media’s preferred euphemism, the American middle class, has been the target of an intense one-sided class war in which real wages and income have been relentlessly reduced. According to the most recent U.S. Bureau of Labor Statistics, real wages adjusted for inflation from 1970 to the present have fallen more than 12 percent.

While driving down wages can certainly boost profits in the short run it introduced another problem. Economists calculate that approximately 70 percent of the U.S. economy is driven by consumer spending. If real wages have been falling over the last 40 years, how has the economy, at least until recently, continued to expand and profits continue to grow?

This was accomplished by a number of strategies designed to offset the effect of falling real wages on consumer spending. The first of these was the simple expedient of drastically increasing the total number of hours worked. Overtime was increased, leisure time was decreased. The single wage earner family was largely eliminated. No longer did one partner work while the other, usually the female, took on the demanding job of running the home and caring for the children.

More family members were put to work, working longer hours at more full and part time jobs. However the number of extra hours an individual can work is limited, as is the number of additional family members that can be put to work. New additional steps had to be taken to offset the negative effect falling wages continued to have on consumer spending and the economy.

The next move was a massive expansion of consumer debt. The credit card industry was born. New federal legislation repealed all state usury laws and the nation was flooded with credit cards carrying 20 percent plus interest rates, a return previously only available to Mafia loan operations. The average American family now holds seven of these cards. The banks issuing these cards made record profits and consumer debt soared to record levels. But it did mask the effects of falling real wages and produced a significant if temporary boost in consumer spending.

Paralleling the encouragement of ever more consumer debt was another risky policy, the massive and continuous expansion of government debt. This deficit spending of necessity fueled inflation and one way these inflationary pressures expressed themselves was an artificial rise in the dollar value of houses.

As credit cards maxed out and the size of consumer credit card debt became unsupportable, a final and particularly dangerous financial gimmick was floated. Consumers were encouraged, and driven by necessity, to take cash equity out of their inflated house value. Second mortgages, third mortgages, adjustable rate mortgages, home equity loans, became the last desperate hope for keeping their heads above water—for meeting expenses and paying down credit card debt that was killing them with 20 percent plus interest rates.

When the housing bubble burst, it triggered not just a crisis in the mortgage market but the collapse of a financial house of cards that had been building for decades. A house of cards built on the idea that you could on one hand increase profits by relentlessly driving wages down and on the other hand maintain consumer spending by driving people into ever-deeper debt. There is a term for this kind of operation—“Ponzi” scheme.

Lately we’ve heard much about “Ponzi” schemes—Bernie Madoff, Robert Allen Stanford and many others, and no doubt more to come. But people like Bernie Madoff even with his 50 billion dollar “Ponzi” scheme are small potatoes compared to what has been going on in the broader economy. In reality the entire U.S. economy over the last 40 years has operated as little more than a gigantic “Ponzi” scheme. Like all “Ponzi” schemes it was destined to eventually collapse.

The economic and political defenders of present day U.S. capitalism, both conservative and liberal, have a different explanation. Political and policy errors were made. The deregulation movement was taken to excess. The lack of government regulation and oversight led to the proliferation of new risky, exotic financial instruments—hedge funds, derivative securities, credit default swaps, securitized and bundled mortgages, etc.

These new instruments lacked “transparency” we are told, and were too complicated for the market to accurately evaluate. The usually efficient invisible hand of the free market was unable to perform its normal functions. Financial “bubbles” emerged which then burst creating the crisis.

Also, American consumerism got out of hand. Americans were living beyond their means: not saving enough and running up too much debt.

However, the roots of this crisis are not correctable “political and policy” errors, but much more fundamental forces. An aging U.S. capitalist economy was inexorably and unavoidably forced to shift from industrial capitalism to finance capitalism to maintain its viability. Financial deregulation and the freedom to create new “exotic” financial instruments was not an error but an absolute necessity if falling industrial profits were to be replaced and offset by rising financial sector profits. And the speculative “bubbles” while risky, were not an accident but a necessary and inevitable component of this.

What about the claim that the crisis was a function of the American middleclass/working class living beyond their means—living too “high on the hog”? The reality? Over recent decade’s living standards for most Americans have fallen significantly, to the point where today one in eight Americans and one in four children, are on food stamps.

But in terms of the requirements of U.S. capitalism, there is no other choice. The costs of shifting U.S. capitalism from an industrial model to a financial model and maintaining profits in the new global reality can only be met by further significantly reducing living standards.

U.S. capitalism will use the present crisis itself to dramatically intensify the class war against America’s middleclass/working class. Use it to “reform” what they now label “entitlements.” Cut Social Security, Medicare, Medicaid and other hard won social gains. Use the crisis to drive real wages even lower.

This is what the present move to “reform” healthcare is really about. We are constantly told that present healthcare spending is “unsustainable” for the U.S. economy. The main aim of Obama’s healthcare reform is to significantly reduce the total amount of money now devoted to healthcare in this country.

The first thing the Obama administration did in its healthcare initiative was meet and strike a deal with the drug corporations, insurance industry, and medical establishment. They were assured that their monopolistic control and profits would not be challenged. In return they agreed not to use their financial clout to run the kind of “Harry and Louise” ad campaigns that helped kill the earlier “reform” attempt in the Clinton administration. If total healthcare spending is to be reduced, and the monopolistic control and profits of the healthcare industry are to be protected, there is only one place those “savings” can come from—from the health and wealth of the general population.

The “fig leaf” Obama has used to sell his plan to a skeptical populous is the claim that this reform would extend health insurance to the vast and growing number of uninsured. How does Obama’s plan intend to do this? The legislation would make it illegal for individuals not to have health insurance. Not illegal for employers not to provide coverage for their employees, but illegal for individuals not to have coverage. This coverage would have to be purchased from the existing private health insurance industry, and individuals would be subject to fines if they did not have coverage.

While they’re at it why not solve the unemployment problem by adopting the same formula. Make it illegal not to have a job and after a specific length of time fine anyone not in compliance.

Putting this healthcare “reform” into effect is not proving to be easy. It is not because there is disagreement between the Democratic and Republican parties as to the fundamental goal. The politicians of both these parties agree that healthcare spending has to be drastically cut. Furthermore, there is agreement that all so-called “entitlements” including social security will also have to be slashed in the name of U.S. corporate profitability.

They know that when the effects of this healthcare “reform” begin to be felt it will generate a Tsunami wave of anger in the American people. The current heated rhetoric and political maneuvering between Democratic and Republican politicians reflect their desperate attempts to achieve the goal without having their specific fingerprints too directly on the results. These two capitalist parties are nervously searching for some smoke screening devise—bipartisan commissions, independent commissions or even better, some method of implementing “entitlement reforms” without a direct congressional vote.

They already have some experience in these methods. The United States now routinely goes to war without Congress ever fulfilling its constitutional requirement to vote to declare war. After Congress passed the original 700 billion TARP bank bailout, there was an explosion of anger throughout the country. Congress stopped voting for bank bailouts. But new bank bailouts didn’t stop. With Congress functioning as co-conspirator they continue with doubtful legality, through the FDIC and the Federal Reserve without any congressional votes.

Today there is a complete absence of any viable, radical political left in the United States. Today the organized labor movement has degenerated into a docile appendage of the Democratic Party, completely incapable of defending its own members let alone rallying opposition to the intensifying one-sided class war against the entire American middleclass/working class. These are by far the two most decisive and sweeping differences between where Obama and the U.S. stand today and Roosevelt and the U.S. economy stood seventy years ago. Roosevelt throughout his administrations was faced with a significant radical left and an aggressive, fighting American labor movement.

One of the most shameful rewriting of history ever to occur is the characterization of Roosevelt and the Democratic Party as a “friend of labor.” This myth continues to this day, promoted by liberal historians and the present trade union bureaucracy.

When F.D.R. took office in 1933 he was faced with the largest strike wave since the 1920’s. Many of these strikes were initially defeated, with the aid of the Roosevelt administration. Then in 1934 three strikes occurred, all led by radical socialists, which galvanized and transformed the American labor movement—the Toledo Auto-Lite strike; the Minneapolis Teamsters strike; and the San Francisco Longshoremen general strike.

The Roosevelt administration and its allies did everything they could to defeat these three strikes including scabs, court injunctions, police violence and troops. Faced with the success of these strikes and a revitalized trade union movement Roosevelt was forced into a tactical retreat.

But with the declaration of World War II, Roosevelt went back on the offensive. Using his new War Labor Board, Roosevelt imposed a wage freeze backed up by a no strike pledge on the entire U.S. labor movement.

In 1943 faced with falling real wages and sharply deteriorating safety conditions in the mines, the nation’s coal miners led by C.I.O. founder John L. Lewis went on strike to break the war time wage freeze and the no strike pledge.

Roosevelt, his allies, the entire U.S. press, and even the Stalinized Communist Party launched a vicious attack on the coal miners and Lewis. They were accused of “stabbing the American troops in the back” of being “agents of Hitler and the Japanese Mikado.” When the miners refused to cave in Roosevelt “nationalized” the mines, put them under the direction of an army general, and ordered the miners to return to work. Lewis and the miners refused, responding with the now famous phrase: “You can’t dig coal with bayonets.”

The miners’ victory smashed Roosevelt’s wage freeze and opened a whole new wave of labor struggle, mounting steadily through 1943, 1944 and 1945, reaching a titanic climax in the winter of 1945-46. The postwar plan to turn the returning war veterans against the workers and smash the unions failed. Instead Americans saw in the following decade a significant increase in wages, higher living standards and the creation of what we now call America’s middleclass.

Nothing is more revealing than the contrast between the fighting union movement of this period, which in the middle of a major war stood up against the Democratic Party and its popular president, and the present status of today’s labor movement.

In the long run Roosevelt and his successors succeeded in suppressing the left and house breaking the union movement. Beginning with the historic bargain struck by Roosevelt with organized labor by which union bureaucrats got automatic deduction of members’ dues for their treasuries, in return for witch-hunting the Trotskyist and later Communist left out of the labor movement. In the cold war years of the fifties this policy was reinforced and extended by the Taft-Hartley Act, the loyalty oath, and the Smith Act.

What does the present crisis of U.S. financial capitalism mean for the American middleclass/working class? None other than billionaire Warren Buffet (The Oracle of Wichita) assures us that all economic crises eventually come to an end. That may be true, but under what conditions—under what new division of economic and political power? The present day leaders of American capitalism and their dual political parties intend to achieve a new stability based on a dramatically lower standard of living for the middleclass/working class.

There will be resistance to this. It will not remain a one-sided class war. Americans will not docilely accept U.S. capitalism’s plan for them. But resistance does not necessarily guarantee success. The trade union movement will be of little help, as it is presently constituted. Unlike most of the major industrial nations America, has no socialist or labor party which in the heat of battle could be transformed into a fighting political instrument.

Deep illusions about the progressive nature of the Democratic Party and its imaginary liberal left-wing continue unabated. Liberals and liberalism have never been an independent force in American society, especially when there was no radical organized left and militant trade union movement, which they could piggyback off of.

We already see building anger and frustration, and its expression in developments like the so-called “Tea Party” movement. We also see how easily, without a radical, socialist left with a class struggle program, this anger can be co-opted and diverted into useless and even reactionary channels. The level of confusion and deception is demonstrated in their bizarre slogan that Obama, who has presided over the largest transfer of wealth in history directly into the hands of the banks, is a communist and Bolshevik.

The fact that the “American Century” is over for U.S. capitalism does not mean than America’s middleclass/working class is automatically doomed to a falling standard of living. That question will be determined in the struggles of the now emerging, two-sided class war. It will be determined by the ability of the American middleclass/working class to successfully reorient itself politically, and mobilize to fight this capitalist ruling elite and their horrendous solution, to their crisis.

Until there is a rebirth of class struggle consciousness, conditions are destined to get worse, much worse, for the American middleclass/working class.

—February 2010

1 Maginot Line - 1929-1940 - World War II

Maginot LineSummary: The Maginot Line was erected by the French along their Eastern--and most vulnerable--frontier, with the intent of protecting France from invasion by Hitler’s Germany. …Unfortunately, the Line was not complete: two major holes existed, the first along the Belgian border extending to the English Channel, and the second across the wide swath of forested land, the Ardennes, considered too thick for forces to pass through. At the start of World War II, anticipating an affront from the Germans, the French banked on Hitler’s army attacking from the north, through the unprotected Belgian border. The majority of French forces were stationed in and around Belgium, with a paltry few stationed at the seemingly invulnerable Ardennes. Hitler split his army into two parts, sending some troops to Belgium, but the majority to the Ardennes. German forces broke through weak French defensives at Ardennes, and in a matter of days cut across France to trap the rest of the French troops near Belgium. The supposedly impenetrable Maginot Line had failed, and France fell to the Germans.