The Economy

Anatomy of the Great Recession and the Class Struggle

By Nat Weinstein

Despite the many reports that joblessness continues to deepen, the Labor Department recently reported that the rate of unemployment, which had risen to ten percent in January, dropped by July 2010 to 9.5 percent. Rather than that being good news, as the Labor Department’s statisticians would have us think, it is anything but. It simply means that many long-term unemployed have stopped collecting their weekly unemployment insurance checks.

In fact, the mounting body of evidence strongly suggests that the Great Recession has all the earmarks of becoming ever deeper and far more destructive than the first great global crisis of overproduction, The Great Depression, had been.

Here’s what Richard Wolff, an economist who evidently believes (as increasing numbers of those old enough to have lived through the 1930s are beginning to think) that this crisis is at least as bad, if not worse than the one in the 1930s. Here’s a sample of what Wolff has to say about the matter:

“Clearly, the global capitalist crisis that started in 2007 will be neither short nor shallow. The government rescue of the U.S. financial industry pumped enough extra money into the economy and sufficiently reduced interest rates to give banks and the stock market the heavily hyped “recovery” that started March 2009 and is now over. What is worse, their recovery never reached much of the rest of the economy. Efforts to broaden the recovery or extend it beyond one limp year have failed. That failure cost Washington trillions in borrowed funds from lenders who now demand guarantees that those loans will be repaid to them with interest. Similar demands now confront many other governments who likewise borrowed heavily to cope with the crisis in their countries.

“The guarantee demanded by lenders is ‘austerity.’ Lenders want governments to raise taxes or cut government spending or both. Governments will then have more money available to pay interest on loans and to repay those loans. Governments that fail to impose austerity will face higher interest on new and renewed loans or will be denied loans, which would cripple those governments’ usual operations. Austerity is yet another extreme burden imposed on the global economy by the capitalist crisis (in addition to the millions suffering unemployment, reduced global trade, etc.).” (“Austerity: Why and for Whom?” by Richard Wolff, a professor of economics who teaches at the New School of Social Science, New York City, in a lecture printed on his website on July 4, 2010.)

All financial crises—big and small—are rooted deeply in the industrial infrastructure of the capitalist economic system. A financial crisis cannot cause a crisis of overproduction, which is what recessions and depressions are all about. But this particular financial disaster can and has deepened the current crisis of overproduction, which is rooted in the industrial infrastructure of the global capitalist economy.

Because the crisis in the financial superstructure of the economy is many times greater and deeper than any before in the history of capitalism, it’s highly unlikely that there will be a real recovery—that is, a new period of global economic expansion.

One of the many signs of things to come appeared recently in a report titled, “Wealthy Reduce Buying in a Blow to the Recovery” (New York Times, July 17, 2010). The article not only tells it like it is, it points to where the economy is going. (Its two sub-headings, “Confidence Is Ebbing” and “Stock Market’s Volatility and Global Instability Are Taking Toll,” capture the tone of the report.)

The author, Motoko Rich, further summarizes its tone and content.
He writes:

“The economic recovery has been helped in large part by the spending of the most affluent. Now, even the rich appear to be tightening their belts.

“Late last year, the highest-income households started spending more confidently, while other consumers held back. But their confidence has since ebbed, according to retail sales reports and some economic analysis.

“‘One of the reasons that the recovery has lost momentum is that high-end consumers have become more jittery and more cautious,’ said Mark Zandi, chief economist for Moody’s Analytics.”

“…Even Federal Reserve policy makers have acknowledged that the recovery is losing steam and suggested that should conditions worsen further, additional stimulus may be needed, according to minutes of their last meeting, released on Wednesday [July 14].”

Such reports have spurred a growing number of Wall Street’s professional optimists to search for a better way to lighten up the darkening economic reality by talking about what they call the “new normal.” That is, a prolonged period in which the average rate of unemployment hangs around nine or ten percent instead of the “old normal” of around five or six percent. But all other indications are that the rate of unemployment can only get worse for the foreseeable future.

A few days later, another report appeared that also reveals more of
the truth. The reporter, Catherine Rampell, writes:

States are putting hundreds of thousands of people directly into jobs through programs reminiscent of the more ambitious work projects of the Great Depression.

“But the new efforts have a twist: While the wages are being paid by the government, most of the participants are working for private companies. (“Job Subsidies Providing Help to Private Side,” New York Times, July 29, 2010.)

The “twist” referred to above alludes to Roosevelt’s New Deal which had the virtue of using federal funds to put jobless workers back to work building roads, bridges, tunnels and dams designed to produce vast amounts of hydro-electric power and state-of-the-art power transmission systems to deliver electric power to rural America. Thus, liberal critics of the Bush and Obama bailouts of financial and industrial multinationals have argued that what Roosevelt did in the 1930s, Obama should be doing today.

But what these liberals have not bothered to mention is the big difference between Obama’s and Roosevelt’s America: The United States in the 1930s and ’40s, was the world’s richest and biggest creditor nation with virtually the entire world deeply indebted to the American empire, while today it is the world’s biggest debtor nation by far—owing far more than it can ever hope to pay back.

Therefore, when account is taken of both the public and private debt, of all nations together—with private debt many times the amount owed by governments—the extent of the U.S. and world financial crisis and its impact on the global crisis of overproduction becomes astronomical.

But it’s not as though Roosevelt was smarter or more “pro-worker” than his counterparts today. Obama is unable to do what the latter could do even if he and his bipartisan capitalist government wanted to. To do what Roosevelt’s America was able to do with cash on the barrelhead, to put a few million workers back to work, would cost trillions in today’s inflation-adjusted dollars, while in the 1930s it cost billions.

But there’s another important difference between America then and now that makes today’s ruling class even less able to pull itself up by its bootstraps. Roosevelt’s make-work projects, on one hand, improved the country’s industrial and economic infrastructure—its roads, its bridges, its dams. But Obama’s—the bailout of the rich and powerful—was pure waste, adding nothing whatever to the nation’s industrial and economic infrastructure.

On the other hand, Roosevelt’s make-work projects and the social benefits that came along with other labor-friendly measures like Social Security and unemployment insurance, gave Roosevelt and the Democratic Party something that Obama can never get anymore. It won Roosevelt and his party the support of millions of workers and earned him and his party the appellation, “friends of labor.” All of that has been lost forever for American capitalism of the 21st century!

China and its role in the global crisis

Other critics of Obama’s economic policies argue that China, like the U.S. in the 1930s, is also spending huge amounts of state funds on building roads, bridges, dams and other such improvements of its industrial infrastructure. This includes such things as the building of a state-of-the-art, super-fast electromagnetic railroad network and other advanced and more efficient systems, adding force to China’s industrial infrastructure and its productive forces.

However, what these liberal critics neither understand nor mention is the big differences between Obama’s and Roosevelt’s America, on the one hand, and China on the other. Neither do they make the connection between the phenomenal success of China’s hybrid economy, one-half privately owned and market-driven, and the other half state-owned, controlled and command-driven. This is something classic capitalist countries cannot do.

There are some very good reasons why the Chinese Communist Party’s bureaucratic dictatorship is able to do things that the most highly advanced capitalist democracies cannot do, even if some of them wanted to. What makes it possible has three sides:

• First, because China’s economic and industrial infrastructure is far less developed than are the major capitalist countries, China’s development of its infrastructure is not in any sense a make-work proposition, as were much of Roosevelt’s make-work projects, which provided wages to millions. China desperately needs further development of its economic and industrial infrastructure to keep up with its rapidly expanding economy. Thus, the jobs that result are almost entirely socially and economically necessary, not primarily a way to prime the pump of a stagnant economy such as the U.S. economy of the 1930s, which is called stimulating the economy today.

After all, America already has more railroads and other forms of transporting goods than it needs today because of the recession. And the U.S. Treasury today doesn’t have enough money to pay its every day expenses, or pay interest on the 13 trillion dollar public debt, much less spend billions on up-to-date electromagnetic high-speed railroads, which would make much of the existing rail and airline companies redundant. The latter, moreover, have already been consolidating into fewer but larger airline conglomerates in order to boost profits by having fewer workers do what many more of them did before.

• Second, China continues its more than 33 year-long period of uninterrupted economic expansion—averaging ten percent annually, which provides more than enough cash to finance the rapid expansion of its industrial infrastructure—while at the same time providing more jobs for its workers.

• Third, and most importantly, China’s hybrid economic system, partly market driven and partly state-owned and controlled—and not entirely profit-driven—helps explain why China has not yet, at least, been sucked into the global economic crisis. Thus, it continues to rake in a higher than average rate of profit, its economy grows stronger and more productive by the day and its phenomenal rate of economic expansion shows only the earliest signs of possibly coming to an end some time (perhaps, in the near future)—if the command-driven wing of the economy is unable to keep its whole economy booming.

On the other hand, because China is only partly profit-driven the higher rate of surplus value produced by its workforce also strengthens the Chinese state along with its bureaucratic apparatus and its new generation of capitalists—many of whom are the sons and daughters of the Stalinist bureaucratic dictatorship. And last but not least, China’s workers and working farmers are unfortunately among the last to benefit from China’s trickle-down hybrid economic system.

But the most reactionary consequence of China’s policy of “Socialism with capitalist characteristics,” was made possible in large part by first breaking up what the Chinese masses called their “Iron Rice Bowl”—that is, their cradle-to-grave social security system including jobs and/or income for those able and unable to work.

But workers in China like workers everywhere—American workers only temporarily excluded—have been organizing and fighting for better wages, hours and working conditions. And the future promises much more to come in China and everywhere else.

Meanwhile, Obama’s America cannot do what either Roosevelt’s America could do in the 1930s, and certainly not what China has been able do today.

And much as American imperialism fears the growing economic power of China, the latter’s economic successes also ameliorate somewhat the effect of the crisis on world imperialism. But that’s not likely to continue for much longer as the rest of the global economy sinks ever deeper into the Great Recession.

Investors begin taking
economic pessimists, seriously

For the last couple of months Wall Street’s economic pundits seem to be getting more pessimistic by the day—although the economic optimists still outnumber the latter by far. But most of the latter economists make their living as paid consultants of one kind or another, advising investors where and how heavily they should invest their capital. And more often than not, their recommendations are less than objectively determined.

The latest report, however, is anything but good news for investors and other capitalists large and small. On August 9 a front page report in the business section of the New York Times had this to say about the matter of optimism and pessimism regarding the future of the U.S. and world capitalist economy.

In a report by Landon Thomas Jr. titled “Economic Pessimists Gain Cachet,” he starts off with these words:

“The central question dividing economists these days is whether Western governments should spend more to ward off a potential second recession or retrench to hold down their ballooning debts to restore confidence among investors.

“But Albert Edwards, an investment strategist in London for the French bank Société Générale, considers the debate a waste of time. To be specific, he forecasts a “bloody, deep recession” that produces a stock market collapse of at least 60 percent, followed by years of inflation of 20 percent to 30 percent as the persistent printing of money by central banks desperate to improve the situation sends prices soaring.”

The rest of his report contributes little if any spin to make the bad news go down easier. The author argues that the U.S. economy not only faces a double-dip recession [when gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession] “it will be far worse than anything experienced in the lifetime of anyone younger than 70.”

That means that by 1940, barely a year after the beginning of WWII in Europe, most of the capitalist world had already begun producing weapons of mass destruction four years earlier starting in 1936. That was when Europe’s imperialist powers began preparing for a war they knew was on its way and could not be stopped. This would be war between those imperialist powers with most of the colonial world under their thumbs, against those with few or no colonies that provided them with ample supplies of cheap raw materials and markets for what otherwise would have been unsold goods.

Adding more force to imperialism’s drive toward war was the fact that rearmament and the rebuilding of Europe’s military forces on land and sea began easing the crisis of overproduction by putting millions of jobless workers back to work in war plants and as soldiers and sailors needed to fight what was slated to become WWII.

In other words, preparations for war, itself began to end the Great Depression even before the war began. That’s why nothing in the world could stop it once the preparation for war had begun in 1936.

And what happened in the past is more than likely to happen again.

In fact, the so-called “Cold War” had, in a sense, already begun, even before WWII had come to an end. That’s the meaning of the race between U.S.-led world imperialism on the western front, and the Soviet-led Eastern front of their war with German imperialism to take as much or all of Germany for itself.

We also know that after the Cold War came to an end the disintegration of the Soviet Union soon followed. But when capitalist war comes to an end, there is still no peace. No peace between working and capitalist classes; between the imperialists and their captive nations; and between factions of world imperialism divided against each other by competition, and by competition “by other means,” as Prussian General Karl von Clausevitz once put it so well.

In other words, we now have the War on Terrorism fought by the American superpower and its imperialist allies, and against the captive nations of the colonial and neocolonial nations of the world.

And then of course there’s also China and the complex relationship it has with U.S.-led world imperialism—the competition between the U.S. and China, which could take the form of a new “cold war.”

I am sure that even more convincing evidence will come to light before these words appear in print. In fact the day after the August 9 report titled “Economic Pessimists Gain Cachet,” the stock marked slipped down 265 points. And we can expect that more bad news will be forthcoming.

Making matters worse, the entire capitalist world is also heavily indebted—to each other. And sooner or later the biggest bubble in capitalist history, the fiat-money-based global monetary system will burst. Then, as dime novelists of my youth used to say, “all hell will break loose.”

In any event, we can be sure that whether or not another short-term extension of the jobless “recovery” materializes, it won’t last as long as the first one did.

Keynesian economics and the Great Recession

It is impossible to understand the workings of capitalist economy today without taking into account the radical changes in the character of the capitalist economic and monetary system known as Keynesian economics, and why these changes were set into motion at the end of WWII. In fact had there not been such a fundamental economic transformation at that time, there would, in all likelihood, have been a second Great Depression soon after the end of WWII.

To see why such an eventuality was next to inevitable, we must take a closer look at the organic connection between the Great Depression and the Second World War.

In the first place it must be said that the crisis of the 1930s never really ended. Unless one could say that a world war and the mass production of weapons of mass destruction was a solution to the suffering of literally billions of people resulting from the Great Depression. There can be little doubt, moreover, that at least the victors of that and other such wars certainly think so.

Moreover, if we follow the logic of wartime “prosperity” to its end, though millions of jobless workers were put back to work producing weapons of mass destruction, it was paid for with the lives of the 50 million killed, missing or crippled on both sides of WWII.

Moreover, when the war ended, and the armaments industry was sharply but not completely downsized, and soldiers became civilians again, had it not been for Keynes’s economic revolution, a second Great Depression would have been inevitable.

The essential feature of the Keynesian revolution is rooted in the exponential expansion of credit, without which the transition from wartime, to a peacetime economy, would not have been possible.

Moreover, modern war is no longer restricted to soldiers killing other soldiers. Modern war is total war, which includes bombing the military and civilian economic infrastructure of enemy territory to smithereens and the massive killing of civilians.

That also means that with the exception of the U.S. and Canada, all those on both sides of that bloody war had not only been bankrupted by the costs of total war, they were also deeply indebted to American bankers, as well as bankers everywhere. And if that wasn’t bad enough, every one of the war’s belligerents, the so-called “good guys” and “bad guys” on both sides, had come out of that war with a largely destroyed economic and industrial infrastructure. And most of them were worse than penniless, they were also debt-ridden. All, that is, except the U.S. and Canada.

The world’s capitalists, however, knew before the war was over what its outcome would look like. That’s why they came together in Bretton Woods, New Hampshire in 1944 to adopt what we now know as the Keynesian economic and monetary system, which made possible the massive expansion of credit, which was the only way the so-called Marshall plan could do the job it had to do if capitalism were to survive and grow again.

So, to give credit where credit is due, Keynes’s economic and monetary revolution gave world capitalism more than 60 years of economic expansion and a kind of capitalist prosperity the world had never before seen; prosperity founded on seemingly unlimited amounts of credit that could, but need not, ever be paid back—unless of course, the debtors could not pay the interest on their debts.

However, the 60-years that followed couldn’t get around the boom-bust nature of the capitalist economy. There were around a dozen manageable recessions between the end of 1945 until December 2007 when the world’s worst crisis of overproduction struck America and most of the rest of the capitalist world.

Gold and faith-based or fiat money

The single most important innovation made by John Maynard Keynes was to take the global monetary system off the gold standard.

To be sure, replacing the then existing, gold-based capitalist monetary system with fiat-money, which is virtually worthless paper based purely on faith, is easier said than done. Ordinarily fiat money without proper preparation by world capitalism would have been treated just as counterfeit dollars are treated.

That’s why in order to make the Keynesian monetary and economic system work; the representatives of world capitalism present at Bretton Woods agreed to make the U.S. dollar the world’s reserve currency along with gold. That was something that could not have been done with any other currency or combination of currencies other than the dollar, because most of the world’s gold was stockpiled in vaults in Fort Knox, Kentucky. And all others had little gold, if any at all—and plenty of debts to boot.

As long as the U.S. had ample supplies of gold, any nation that demanded gold in exchange for dollars could get it. But because they were sure the gold was there for the taking, it was easier and cheaper to use dollars instead of gold to settle differences in the annual balance of trade between nations.

But as time went by and more and more of America’s trading partners found good reasons to exchange their dollars for gold, there came a time on August 15, 1971, when President Richard M. Nixon was forced to take the U.S. dollar off the gold standard simply because too little gold was left in Fort Knox’s vaults. And that was because the dollar had been slowly taking on the character of fiat money. And when most of the gold was gone, the dollar became unadulterated fiat money, based entirely on faith.

By that time, however, it wasn’t possible for world capitalism to do anything but keep using dollars as the international means of exchange because there were too many dollars stowed away in bank accounts and underneath mattresses around the world. Therefore, since there was nothing that could take the place of the dollar without upsetting the global capitalist applecart, they were forced to continue using the dollar as the international means of payment. Had they not, then the entire Keynesian monetary and economic house of cards, along with world trade and capitalism itself, would have come tumbling down!

And of course, by then, all capitalist economists worth their salt had come to realize that fiat money and the dollar had lives of their own, and the dollar would continue to serve as the international means of payment between trading nations—at least until now—but not likely for much longer.

Here’s where gold comes back into the Keynesian picture. Gold, despite the fact that it is no longer the international medium of exchange, nonetheless remains the most dependable measure of value and the most reliable medium of exchange. That explains why the dollar, which had been worth around $40.00 for an ounce of gold in 1970, is now fluctuating around $1200.00 an ounce—300 percent higher than it was back then. It continues to seesaw, higher and lower, but over the long run the worth of gold relative to the dollar and all other such pieces of paper rises ever higher.

In other words, from the time of ancient Greece, it has been widely believed that gold was money and money was gold! And when the time comes, as it must when faith in fiat money evaporates into thin air, gold will become money again. But rather than that being in any sense good news for the capitalists (think post-WWI Germany when deep recession and hyperinflation was the norm in the Weimar Republic ultimately adding as many as six or more zeroes to a one-mark note) think again, what that would mean on a global scale!

In conclusion

Assuming that the economic analysis outlined above is in the ballpark, it means that capitalist austerity for workers and all other sections of the exploited and oppressed is here to stay. That means that when the average rate of profit falls below the point where risk far outweighs gain and the bottom threatens to drop out from under the global economy, the only way out for the ruling class is to drive the wages and living standards of the masses of working people ever lower. And it stands to reason that sooner or later, workers will have little or nothing to lose but their chains.