Not Time for Champagne Yet

By Jim Stanford

Financial headlines around the world herald the seemingly happy news that “recovery” is here. Global stock markets have surged 40 percent or more. Business confidence has shifted quickly from gloom to boom.

But hold on a moment. The world economy is still suffering through its worst downturn since the 1930s. World GDP is still declining, for the first time since the end of World War II. Unemployment rolls are still growing, not shrinking.

So why is the champagne being uncorked in financial centres around the world? More importantly, will the rest of us get to share in this good cheer, along with the bankers and brokers? Unfortunately, not likely. In reality, for working people, the effects of this crisis will linger for several years to come.

And that’s why governments, including Australia’s, need to stay on an active recession-fighting footing. Far from turning off the tap of job-supporting stimulus measures, governments’ efforts to spur real recovery (not just a financial bounce) need to be intensified in the tricky months ahead.

The financial party began back in March, when Citibank and other U.S. banks began reporting positive profits (largely thanks, of course, to $1 trillion in government handouts). After months of doom and gloom, the prospect of renewed financial profits set the markets on fire.

But before getting too carried away with this good mood, let’s remember there’s much more to economic recovery than profitable banks and roaring equity markets. True recovery requires getting people working again, producing actual goods and services. And on that score the world economy is still going backward, not rebounding.

Much confusion over the arrival of “recovery” arrived stems from the narrow terminology used by economists. For them, it’s not a recession unless real GDP (that is, the total value of economic output, adjusted for inflation) declines for at least two consecutive quarters. Then recovery simply constitutes the point when real GDP stops falling, and starts to grow again – no matter how fitfully.

So even if unemployment is growing and poverty is getting worse, the recession is “over” once real GDP is growing (as it is in Australia now). But this narrow terminology utterly misses the point. If people are losing their jobs and their homes, and living standards are falling not rising, then the economy is in trouble – regardless of whether GDP is rising or falling. Australia’s self-congratulation for narrowly avoiding “technical recession” this year is small comfort to the tens of thousands of Australians who continue to face tough times – tough times that are sure to last for some years to come.

It is typical for unemployment to continue to rise for months and even years after economists officially declare “recovery.” GDP growth must get up enough steam and generate enough jobs to offset lay-offs incurred during the downturn (let alone absorb new entrants to the labour force). So the unemployment rate will continue to rise right through 2010. Then, unfortunately, it will stay at very high levels for at least two or three years after that. That’s the human reality of the global financial crisis – in contrast to the all-to-easy rediscovery of irrational exuberance in the realm of high finance.

So don’t be fooled by the headlines celebrating imminent recovery. The brokers and speculators inhabit a hyperactive, surreal world. Only they could speak of “recovery,” when so much hardship and fear is plainly visible outside in the real world.

For most Australians, insecurity and austerity will prevail for years to come. And government must continue to actively address the social consequences of this crisis, without being sidetracked by reports of this so-called “recovery.” Stimulus will be required for some years to come. If anything, the existing recovery package should be expanded – to include active supports manufacturing and other productive sectors, funding for training programs (an alternative to continuing redundancies), and protection for workers’ accrued entitlements (like annual leave and sick leave) in order to underpin purchasing power despite rising unemployment.

Jim Stanford is economist with the Canadian Auto Workers, and author of Economics for Everyone (www.economicsforeveryone.com).

He is speaking in several Australian cities this month.

(see the earlier post immediately below for details)

Immanuel Wallerstein: Guest Post on World Economic Crisis

Commentary No. 251, Feb. 15, 2009
  
"The Politics of Economic Disaster"
   
Every day, I read another economist, journalist, or government official opining on how best to achieve economic recovery in this country or that. Needless to say, the remedies all contradict each other. But almost all of these pundits seem to me to live in fantasyland. They actually seem to believe their remedies will work in some relatively short period of time.
  
The fact is that the world is only at the beginning of a depression that will last for quite a while and will get far worse than it is now. The immediate issue for governments is not how to recover but how to survive the growing popular anger they are all, without exception, facing.
  
Let us start with the economic realities of the present. Just about everybody throughout the world - governments, enterprises, individuals - has been living above their income for the last 10-30 years, and doing it by borrowing. The world went giddy with inflated earnings and inflated consumption. Bubbles have to burst. This one has now burst (or actually several bubbles have burst). The impossibility of continuing on this path has sunk into consciousness, and suddenly everyone has gotten scared that they are running out of real money - governments, enterprises, individuals.
  
When that fear takes over, people stop spending, or lending. And when spending and lending declines significantly, enterprises stop producing or slow down. They may close down entirely, or at least fire workers. This is a vicious cycle, since closing down or firing workers leads to lower real demand and causes further reluctance to spend or to lend. It's called depression, and deflation.
  
For the moment, the United States government, which is still in a position to borrow money and print money, intends to throw some new money into circulation. This might work if the government threw an awful lot, and threw it wisely. But quite probably, it won't do it wisely. And quite probably throwing the amount that might work amounts to little more than creating another bubble. And the dollar might then really fall much faster than other currencies, pulling down the last important prop to the world-economy.
  
In the meantime, there is less and less money for daily consumption of all kinds for the bottom 90% of the world's population (and it's not so good for the top 10%). People are getting restless. Just in the last month, we have seen people in the streets protesting economic difficulties in a growing number of countries - Greece, Russia, Latvia, Great Britain, France, Iceland, China, South Korea, Guadeloupe, Reunion, Madagascar, Mexico - and probably a lot more that haven't been noticed by the world press. In fact, it's been relatively mild up to now, but the governments are all on edge.
  
What do governments do when their primary concern is dealing with internal unrest? They really have two choices - shoot the protestors, or appease them. Shooting works only up to a point. For one thing, the agents of force must themselves be well-enough paid to be willing to do it. And when there is a serious economic downturn, arranging this is not all that easy for the regimes.
  
So the regimes begin to appease their populations. How? First of all, by protectionism. Everyone has begun to complain about the protectionism of other countries. But the complainers are all practicing it themselves. And they will do a lot more of it. The free market economists all tell us that protectionism makes the overall economic situation still worse. That's probably true, but politically quite irrelevant, when there are people in the streets wanting jobs - now!
  
The second way governments appease when there is unrest is by social-democratic welfare measures. But to do that, governments need money. And governments get money from taxes. The free market economists all tell us that raising taxes (of any kind) during an economic downturn makes the overall economic situation still worse. That may be true, but in the short run that's also irrelevant. As it is, in a downturn, tax receipts fall. Governments can't keep up even with current expenditures, not to speak of paying for increased expenditures. So they will tax in one way or another. Or they will print money.
  
Finally, the third way they appease is by a healthy dose of populism. The real income gap between the top 1% and the bottom 20% both within countries and worldwide has grown enormously in the last thirty years. The gap will now be reduced to the more "normal" gap that existed in 1970, which is still very large, but somewhat less scandalously large. Hence, you have governments talking now of "income caps" for bankers, as in the United States and France. Or you can prosecute people for corruption, as in China.
  
It's a bit like being in the path of a tornado. The worst can come upon governments suddenly. When that happens, they have only minutes to take shelter in their cellars. The tornado then passes, and if one is still alive, one comes out to survey the damage. The damage will turn out to be very extensive. Yes, one can rebuild. But then the real argument begins - about how one rebuilds, and how fairly one shares the benefits of rebuilding.
  
How long will this gloomy picture prevail? No one knows or can be sure, but it will probably be a good number of years. In the meantime, governments will face elections, and voters will not be kind to the incumbents. Protectionism and social-democratic welfare serve governments the way the cellar does during a tornado. The quasi-nationalization of banks is another way of taking shelter in the cellars.
  
What we the people have to think about and prepare for is what we do when we emerge from the cellar, whenever that is. The fundamental question is how are we going to rebuild. That will be the real political battle. The landscape will be unfamiliar. And all our past rhetorics will be suspect. The key thing to realize is that rebuilding can take us into a far better world - but it can also take us into a far worse one. In either case, it will be a far different one.
  
by Immanuel Wallerstein
  
[Copyright by Immanuel Wallerstein, distributed by Agence Global. For rights and permissions, including translations and posting to non-commercial sites, and contact: rights@agenceglobal.com, 1.336.686.9002 or 1.336.286.6606. Permission is granted to download, forward electronically, or e-mail to others, provided the essay remains intact and the copyright note is displayed. To contact author, write: immanuel.wallerstein@yale.edu. These commentaries, published twice monthly, are intended to be reflections on the contemporary world scene, as seen from the perspective not of the immediate headlines but of the long term.]

World Financial Crisis - Where to from here?

Origins of the crisis

Now, as the world teeters on the brink of what might turn out to be the most profound economic crisis since the depression of 1929, a reappraisal is necessary in the face of neo-liberal shibboleths.

Around the world massive stimulatory packages and financial guarantees, even nationalisations, are in the process of implementation, to buoy consumer confidence and demand and also to encourage liquidity and fortify investor confidence.

Amongst Keynesians, and the Marxist and radical Left, there is an aura of vindication.

Most immediately, the crisis has been traced to the sub-prime mortgage debacle in the United States.

To summarise, overly-complex financial instruments were devised with the aim of minimising risk. According to John Bellamy Foster, writing for The Monthly Review, the idea was:

… that geographical and sector dispersion of the loan portfolio and the “slicing and dicing” of risk would convert all but the very lowest of the tranches of these investment vehicles into safe bets.

The efficacy of such instruments, however, proved to be illusory.

Those most vulnerable - including millions of working class Americans - were encouraged into the market through a variety of mechanisms regardless of their credit history, income or wealth. Such “mechanisms” included low interest rates as well as “teaser” rates which were only temporary. Other devices included low reserve requirements.

This sector of the mortgage market became known as the “sub-prime”.

In a scenario which should be familiar to Australians, these circumstances led to an extraordinary “housing bubble”: a process which has been referred to as “speculative mania” and “hyper-speculation”.

According to Australian blogger, Sean Carmody, between 2004 and 2006 more than 20 per cent of new US mortgages were taken out by “sub-prime” borrowers. Enormous amounts of money were diverted into the housing sector, in wave after wave, under the assumption that asset appreciation would somehow continue forever.

In Australia, a housing bubble had the effect of enriching existing home owners on paper, while making home ownership impossible for many younger investors. Efforts to help first-home-buyers in Australia were simply exploited and fed into the vicious logic of the property bubble. The appreciative effect was particularly great under Australia’s specific circumstances of undersupply. Regardless of low interest rates, the Australian housing bubble ensured that “over the past 10 years” houses became “nearly twice as expensive relative to income”.

Correction in the housing market especially has become necessary but such is the nature of the system that it will inevitably be painful.

In the US, the property bubble was burst with an increase in interest rates, and as upward speculation in the market was reaching its limits.

In the aftermath, Glenn Dyer, writing for Crikey supposes that foreclosures will surpass 2 million by the end of the year 2008: hundreds of thousands driven from their homes with nowhere to turn. And the flow-on effect of defaults on credit has led to despair and uncertainty.

The natural consequence of these events, then, was a crisis of consumer and investor confidence. Following a surge in bad debts, the gears of liquidity for the world financial system threatened seizure. This in turn is leading to global recession. World finance centres were exposed in their relations with US finance; and looming recession in the US has spread worldwide.

Neither Australia, nor Europe nor China are immune. Such are integrated markets in the age of “globalisation”.

Other symptoms of the crisis

Many economic commentators believe that current economic circumstances are symptomatic of a deeper crisis in the broader capitalist world economic system. For others it is merely capitalism’s “neo-liberal variant”.

Most immediately, the initial reaction to the crisis for some is to return to Keynes. In reality, both the Marxist and Keynesian traditions have much to say on the current crisis: and there is no need to pursue one line of criticism to the exclusion of the other. Keynesian policies of demand management and counter-cyclical expenditure have now found their way back into the economic policies of governments all over the world.

Thirty years of crude Thatcherite neo-liberal ideology have been “put on hold” in an astounding display of practical thinking. Counter-cyclical expenditure and socialisation of failing financial interests deemed “too important to fail” seem to be the best world governments have at their disposal to limit the decline in investor and consumer confidence.

And without public intervention in the broader credit system: the alternative is collapse.

In Australia particularly, there is a clear need to invest in education and training and in infrastructure which will overcome “capacity constraints”. Rudd Labor is intent on stimulating the Australian economy even, in the process, bringing the Budget into deficit.

The recessionary spiral must be cut short - lest it know no end.

But not all aspects of the Keynesian compromise would sit well with today’s dominant economic elite.

To begin with, the legacy of the Keynesian “golden age” is associated with a period characterised by a rising wage share of the economy for labour, full employment and an expansion of the social wage. Powerful elements of the economic elite, however, could be accused of preferring the disciplinary effects of a maintaining a “reserve army of labour”. And among this elite, there are those who view the social wage as “crowding out” private sector investment.

Indeed, the Keynesian project may well have found its “historical moment” has come once again. But a full and sustainable return to an effective social democratic settlement will require ongoing mobilisation by the forces of social reform.

Rarely is any significant progressive social reform gained without demand “from below”.

Briefly: growth of the finance sector - decoupled from “the real economy”

Financial markets need to be restructured to relate to the real economy, and provide for real human need.

Ramas Vasudevan notes in Dollars and Sense that “The profits of the financial sector” (in the US) grew from “14 per cent of total corporate profits in 1981” to “nearly 50 per cent” in 2001-02.

The finance sector, here, is increasingly decoupled from the “real economy”. Investment decisions, many leading to job losses, are made to maximise share value: not in pursuit of human need. Instead “players” in the finance markets pursue short term return, often through speculation.

And importantly, because of the dominance of financial markets, “renters” - as Vasudevan refers to them - have become the dominant socio-economic force.

The massive relocation of power, here, provides the economic elite with the leverage they need to apply constant pressure to reforge policy in its favour.

In Australia we need only look at the preference for Public Private Partnerships: dubious finance methods that channel money from the public purse to the socio-economic elite.

While these developments cannot simply be “undone”, development of public pension funds or “Meidner style” wage earner funds could provide a strong measure of democratic input. Providing a new national public bank; fully regulated and providing financial services to vulnerable Australians “at or below cost”, could also aid in warding away collusion and instability over the long term.

The aim must be to democratise the sector; minimise risk exposure for the economically vulnerable; set higher prudential standards in the loan market; harness capital for human need; and make it socially accountable.

Is Marxism relevant?

Even assuming a renaissance in Keynesian ideas, most associate Marxism with an unbearable connotation of oppression. It is an unfair assumption, though, which ignores the instance of Marxists, and those who draw eclectically from Marx, who also wed their analysis with ideas of the liberal and democratic Left.

Today we need discussion of radical ideas more than ever. The Keynesian golden age might never have happened without the radical culture of working class “demand from below” emerging after World War II. Furthermore, the Marxist tradition, and other related traditions of critical theory, still have much to offer, even if in opposition to their historic Stalinist variants.

The time is ripe for a pluralist “reinvention” of the socialist and social-democratic movements. Criticising the dynamics of 19th Century capitalism, Marx identified several tendencies which remain today. We will consider two:

The rate of profit

A most important tendency of capitalism is that of the rate of profit to fall. As technology improves the productivity of labour, the “constant” component of capital rises in relation to its “variable” component.

Put otherwise, there is a rising “organic composition” of capital, comprising “the value of the materials and fixed costs”. 

This stands in contrast to the “variable” component, comprising of wage labour. Because any expropriated surplus comes from the exploitation of labour, the relative decrease of capital’s “variable” component causes the rate of profit fall. This dynamic is overcome by increasing the rate of exploitation- either directly or indirectly.

Wages can be cut as a proportion of GDP (Gross Domestic Product); or workers can provide for corporate welfare - taking collectively upon themselves the costs of education and infrastructure.

Similarly, social programs and welfare can be cut to provide scope for further corporate subsidy.

Overproduction

Another tendency noted by Marx is that of systemic overproduction: supply beyond demand. Here, the capitalist system is seen to be constantly expanding the boundaries of its markets: to maximise the realisation of surplus value.

Production is for profit: it is distributed in keeping with market dynamics - not directly in response to human need. But this process inevitably involves waste.

Despite production beyond the scope of realised market relations, the poor and needy go without - even while in relative terms there is “plenty”.

For a renewed social democracy

There are many lessons, here, for social democracy.

Importantly, falling wage share - in response to the “falling rate of profit” -contributes to lower consumer confidence, and a contraction of local markets.

As we have seen, many in advanced capitalist economies have responded to this crisis with a turn to credit. Credit can expand a market beyond its usual confines. And debt finance can be well justified when leading to increased production over the long term, and the sustainable provision for human need. But beyond sustainable means, reliance on debt cannot be depended upon forever. Indeed, it can provide a “financial prison” for the needy: a vicious cycle of indebtedness.

Welfare and social programs, including public housing, education and health, and also progressive taxation and labour market regulation must free people from the desperate circumstances that lead to the unsustainable, downward spiral of credit-dependence.

And over the long term, through democratic and industrial struggle, citizens and workers must achieve a much more even spread of wealth and economic power. Lifting incomes and living standards at the lower end of the spectrum, here, can assist the broader economy: boosting consumer confidence while providing social justice at the same time.

Within the confines of capitalism, though, the falling rate of profit continues to erode the wage share of the economy, and also the social wage: as hyper-exploitation is entrenched. Even as real wages fall in relative terms, though, improved productivity can lower the cost of consumables; while new technology can greatly improve the quality of human life.

And in cases of overproduction, surely it is not impossible for government to intervene to redistribute goods not traded through “the market”.

Take, for instance, the provision of free information technology goods from the developed to the under-developed world. Or consider the free provision of pharmaceutical technology to under-developed countries.

Further, unoccupied housing could be nationalised to provide for the poor and homeless. As Ken Davidson writes: “about 11 to 12 million houses throughout the US are empty and about 20 per cent of people live in streets where houses are simply boarded up.”

Even in a social democratic society there must be a role for innovative and responsive markets that can provide qualitative improvements in material living standards. Any alternative economic model must be both mixed and democratic.

But in response to hyper-exploitation it is also reasonable for workers to fight for “a greater share” of the economic pie. Even while maintaining profitability, this could be achieved through subsidy and support of co-operatives, and winning of collective capital share through pension funds, wage-earner funds, or other such vehicles.

And until workers and citizens are so organised as to make a greater process of redistribution viable, then wealthier workers ought stand in solidarity with the most poor and vulnerable. (Again - through the tax transfer system, and social wage.)

In the wake of the current disaster, we are not “locked into” the neo-liberal model ever more. Assuming civic mobilisation, and the alignment of organised labour with social movements - including environmental movements - we have the potential to win real change.