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Title: The Crisis of Capitalism Author: Eric Chester Date: 2013 Language: en Topics: crisis, capitalism, Anarcho-Syndicalist Review Source: Retrieved on 28th January 2021 from https://syndicalist.us/2013/03/12/the-crisis-of-capitalism/ Notes: From Anarcho-Syndicalist Review #59, Winter 2013
The global economy is mired in the worst crisis since the Great
Depression of the 1930s, and yet capitalism has always been
characterized by instability and insecurity. An economic system that
operates without an overall plan, and in which powerful economic forces
act on the basis of maximizing short-run profits, is a system that is
inherently unstable. Marx predicted a collapse of capitalism leading to
a revolutionary upsurge as early as the 1850s.[1] This would appear to
be a prediction that has been contradicted by the course of history, but
in fact the global economy has been plunged into one crisis after
another.
The unpleasant reality we confront today is that although capitalism is
constantly changing, the impact of these changes is, on balance,
overwhelmingly destructive. Indeed, as capitalism grows and expands, it
destroys everything in its path. As the system unravels, more and more
workers become permanently displaced from the workforce; income and
wealth differentials widen within the already industrialized societies,
as an increasing number of countries are added to the list of “failed”
nations; and ecological catastrophe threatens the continued existence of
the planet as we know it. We are at a crossroads. Either the working
class acts as a class and wrests power from the capitalist class, or the
system will disintegrate into a catastrophic freefall.
Capitalism has always been marked by short-run business cycles in which
times of prosperity are followed by harsh times. To some extent, these
short-run cycles are self-regulating. Unplanned growth leads to
overproduction in certain sectors and investors pull back. Bankruptcies
ripple through the economy, allowing venture capitalists to purchase
existing assets at bargain prices. Lower prices, and, more importantly,
even lower wages, create opportunities for new investment, and the cycle
begins again.
Capitalism has also experienced several severe downturns when its
continued existence was called into question. Frequently, an economic
boom is accompanied by a period of frenzied speculation. When the bubble
bursts and speculators go bankrupt, the crisis spreads rapidly through
the entire economy, with banks and financial institutions the hardest
hit. Investment banks play a vital role in directing investment into new
sectors, the dynamic growth sectors. Once confidence in the financial
sector has been lost investment spirals downward and the entire economic
system confronts a total collapse.
Although a decline in the price of capital goods might help to overcome
the down phase of the usual short-run business cycle, the opposite is
the case when bankruptcies occur as the result of a sustained and
precipitous slump, such as the current one. Firms coming out of
administration initiate massive layoffs as venture capitalists squeeze a
greatly reduced workforce in a desperate search for profits. In the end,
the spiral of bankruptcies that ensues in the course of an economic
crisis only reinforces the pervasive collapse in investor confidence,
thus making it even more difficult to spur the economy back into
sustained growth.
When the system reaches the point of catastrophic collapse at the onset
of a crisis of confidence, the most powerful capitalist interests
usually intervene, often in conjunction with the state, bailing out the
banks in order to avert a disastrous crash. This happened in the fall of
2008 and into the spring of 2009, with the support of both Presidents
Bush and Obama. Confronted with the imminent possibility of a
precipitous fall in output, and in stock market prices, the rich and
powerful abandoned their distaste for planning and government
intervention and agreed to a massive rescue of bankrupt financial
institutions, as well as the auto industry. The recent bailout is not
the only time that such a crisis intervention has occurred during a
financial panic.
An imminent economic collapse is not the only moment of crisis when the
government can rapidly assert a dominant role in the economy. The
planned mobilization of a nation’s resources when fighting a total war
is the other circumstance. During both world wars, the governments of
the combatant nations commanded vast resources, becoming the predominant
factor in the economy. In some cases, key industries were nationalized,
and the rudiments of a national economic plan were put into practice.
Segments of the Left, especially mainstream social democrats, viewed
these developments as significant steps toward a socialist economy. The
move toward a more planned economy was cited as a further proof that a
socialist transformation was inevitable. Furthermore, it was argued, the
inefficiencies of an unplanned economy were so glaring that even
segments of the capitalist class understood the need for a regulated
economy, with a substantial public sector that included key industries.
These arguments were advanced by some influential socialists in the
United States during World War I, only to quickly be proven totally
mistaken. Once the war ended, there was a concerted corporate onslaught
designed to ensure that the capitalist class regained its hegemonic
control of the economy. The entire network of railroads had been taken
over by the federal government during the war, but the railroads were
returned to their owners soon after the war came to an end. Public
sector spending was sharply curtailed, and any hint of government
planning was abandoned. After World War II, the anti-Communist hysteria
provided a convenient rationale for dismantling wartime planning, along
with the social reforms of the New Deal.
The dire threats arising from a total war provide a temporary crisis
situation in which the government displaces the capitalist class as the
prime factor in determining investment. In a very different context, a
pending economic collapse has the same effect. In both cases, the role
of the state as the determining factor in the economy has proven to be a
temporary phenomenon. As the crisis passes, the pendulum soon swings
back, and the government is forced to retreat.
The capitalist economy is not self-regulating. Furthermore, emergency
bailouts of bankrupt banks and corporations can prevent a rapid and
total collapse, but they don’t resolve the crisis, which continues as
economic stagnation threatens to deepen into a downward freefall.
Keynesian economists recognize this and argue for active government
intervention as an effective means of stabilizing the system. In
“normal” times, Keynesian economics can act to provide a certain
balance, smoothing out the cycle. Higher interest rates can check the
tendency to high inflation rates during the boom years. Deficit
financing can enable the government to stimulate output and employment
during the downturn. Only a few years ago, many mainstream economists
were convinced that counter-cyclical government intervention assured the
continued stability of the system. The current crisis has proven that
this forecast was nothing more than an ideological rationale for the
capitalist system.
In fact, once an immediate crisis situation has been passed, the
traditional resistance to government intervention, and, indeed, to any
kind of broader plan, reasserts itself. This resistance represents more
than an adherence to the ideology of “free markets.” Indeed, the
powerful corporate interests that backed the bailout did so in pragmatic
disregard for “free market” dogma. One of the essential mechanisms of
control held by the capitalist class is its ability to determine how
much of its savings it will invest, and in which industries it will
invest. To permit the government to become the primary channel for the
flow of investment funds is to strip capitalists of a key component of
the economic power they control as the ruling class.
It is easy for the wealthy to bring pressure on the government because a
rapidly growing debt will lead bondholders to become more fearful of a
default. With an increasing public debt to government budget ratio, or
public debt to output ratio, interest on the debt starts rising as a
proportion of total spending. This can not continue indefinitely since
some types of expenditures are viewed as critically important, and thus
are extremely difficult to cut. Thus, aside from upholding the interests
of the capitalists as the ruling class, bondholders have real concerns
that the state will default on interest payments as debt ratios
increase. Deficit financing by its nature can only act as a short-term
means of stimulating the economy.
These underlying factors produce the curious paradox that Keynesian
policies only work in “normal” times to smooth the short-run
fluctuations of the business cycle, and not in a time of crisis when the
system is threatened with collapse. Yet Keynes developed his General
Theory in the 1930s with the express purpose of countering the Great
Depression. He was convinced that his policies would enable the
industrialized countries to overcome the Great Depression, and to avoid
further slides into mass unemployment. Both predictions have proven to
be false. Once the “animal spirits”[2] of investors have totally soured,
as the wealthy few lose confidence in the growth potential of the
economy, deficit spending will not succeed in moving the economy back on
track.
The experience of the United States in the 1930s provides an interesting
case to examine. President Franklin Roosevelt was surrounded by advisers
who viewed themselves as social reformers, and who were open to
Keynesian economics. The federal government deliberately expanded its
expenditures on social services, through deficit financing, with the
explicit intention of stimulating economic growth and returning the
country to prosperity. These policies were followed from the time FDR
was inaugurated in March 1933 until June 1937.
When Roosevelt became president in March 1933, the United States had
already experienced four years of economic collapse, during which
President Hoover had done virtually nothing to counter the crash.
Estimates of unemployment indicate that one out of four workers could
not find a job, and millions wandered the country looking to survive.[3]
This was a catastrophic disaster, one requiring drastic measures.
Roosevelt had no overriding strategy, but he was prepared to take
immediate action to counter the crisis. Legislation creating the
Civilian Conservation Corps was rapidly enacted by Congress, creating
jobs for hundreds of thousands to create nature trails and buildings in
national parks, as well as building and repairing basic infrastructure.
In 1935, the Works Progress Administration was launched, pump-priming
the economy on a large scale with a wide variety of projects that
employed a total of eight million workers over the eight years of its
existence.[4]
New Deal programs were funded through deficit financing. Historians have
estimated that the unemployment rate fell from 24% in 1933 to 14% in
1937. This was an improvement, but hardly an impressive one. The United
States was still bogged down in an economic depression, with millions of
workers confronting long periods of unemployment, with little hope for
the future.
In early 1937, President Roosevelt’s administration came under heavy
attack from corporate interests. The national debt had been rapidly
rising, and bondholders were becoming skittish. Furthermore, CIO unions
had organized militant strikes and occupations in the automobile
industry, as well as other key industries. A spike in unemployment might
dampen the militancy of an aroused rank and file.
Roosevelt had always viewed deficit financing as a temporary measure, a
brief exception to the norm of a balanced budget. In June 1937, he
proposed a drastic cut of three billion dollars in the funding of New
Deal programs, with the Works Progress Administration and the Civilian
Conservation Corps absorbing most of the cuts.[5]
The result was a profound shock to the system, with the downturn even
more precipitous than that of 1929, at the start of the Great
Depression. In the ten months following June 1937, total output fell by
12%, while industrial output dropped by one-third. Estimates of the
unemployment rate indicate a jump from 14% in 1937 to 19% in 1938, with
10.4 million workers out of work.[6]
Roosevelt’s advisors pleaded with him to restore the cuts, but he
refused until the spring of 1938, when funding was partially restored. A
further collapse was averted, but the economy continued to sputter until
the fall of 1939, when military production began to escalate as the
European countries prepared for World War II.[7]
Keynesian policies did not succeed in overcoming the economic crisis of
the 1930s, although the technical analysis underlining the policy
recommendations was shown to be true. Government spending when not
counterbalanced by taxes on the working class has a significant
multiplier effect on output, income and employment. Nevertheless, Keynes
did not take into account the overall context. First, unlike wartime,
countering an economic downturn does not provide the government, even a
very popular one such as that of FDR’s New Deal, with sufficient
momentum to engage in the level of deficit spending required to counter
the collapse in private investment. As a result, the economy remains
stuck in the doldrums, although no longer at the trough of the cycle.
Second, Keynes’s analysis views pump priming as a temporary fix. The
government gives the system a boost and then the economy returns to its
previous course. In fact, during a severe downturn investor confidence
does not respond to deficit financing. Once the government moves toward
a balanced budget, usually by reducing spending on social services,
output falls, moving back to the level where it was prior to the
government intervention. The underlying problem, the refusal by the
wealthy few to invest, has not been resolved.
The only way deficit financing could work in the midst of a severe
economic downturn is if it were to be made a permanent feature of the
economy, but this can never happen. Deficit financing can only be a
temporary measure because the state is taking over an essential task in
a capitalist economy, one reserved to the capitalist class. It follows
that the rich and powerful will use all of their power to ensure that
deficits are cut and they again become the driving force in the economy,
determining the flow and direction of investment.
The experience of the United States in the 1930s provides an
archetypical model. In spite of New Deal pump-priming, the Great
Depression only came to an end with the start of World War II. Such a
solution to the current economic crisis is no longer possible.
Capitalism is a dynamic system in which certain innovations are
fostered. The producers of armaments are always seeking deadlier weapons
that require fewer soldiers to deploy them. Thus, a future total war
would be over quickly and would leave the planet a radioactive
wasteland. Smaller, localized wars of occupation do not necessitate a
huge output of military weapons and do not involve enormous armies.
Indeed, the United States was fighting two localized wars in 2008 and
yet still experienced the worst economic downturn since the Great
Depression. In the current context, the military can not provide the
sustained demand needed to lift a country out of the mire of economic
stagnation.
In analyzing the failure of Keynesian economics to resolve the tendency
of the capitalist economy to veer into an economic collapse, the
emphasis has been on the underlying economics and class relations, and
not on ideological dogma. The current “common wisdom” of the Left
ascribes the defeat of Keynesian economics to the ascendancy of
neo-liberal ideologues. This is a highly dubious explanation.
There is nothing new about the theory that the capitalist system is
self-regulating, and that any government intervention can only make the
situation worse by upsetting the automatic correcting mechanisms built
into a market economy. Similar ideas were formulated by the Austrian
school of economists in the late nineteenth century in response to the
rise of a working class movement influenced by Marxism.
There is no doubt that this perspective has more traction now than even
a few decades ago, but this is hardly because of its cogency or
insights. The globalization of production has provided the objective
basis for the rise of neo-liberalism. Corporations have outsourced their
factories and mills to low-wage countries, thus destroying unions in the
private sector. Unions provided the essential base of support for social
democratic parties that legislated the welfare state in Western Europe,
and for the liberal wing of the Democratic Party as well.
As transnational corporations create a global workforce, corporate
bosses see no need to pay wages and benefits to workers in the
previously industrialized countries that are higher than those paid to
low-wage workers in Bangladesh, China or India. This drive to reduce
wages is not a matter of ideology, but rather the pragmatic imperative
of the bottom line. Globalization has substantially shifted the balance
of class forces. The rightward tilt in the ideological debate reflects a
more fundamental shift in the underlying balance of class forces.
This is not to deny that the rise of neo-liberal ideologues marks a
meaningful change in the political terrain. In particular, in the United
States, which has a long history of elections dominated by two corporate
parties controlled by opportunistic politicians whose political
perspective does not extend beyond a commitment to upholding the power
of the capitalist class. The Tea Party has a program and an ideology
that goes well beyond this, calling for the total dismantling of the
welfare state reforms instituted during the New Deal. Its rapid rise in
visibility has made a significant impact on the Republican Party, which
has begun to present a distinct alternative to the pragmatic centrism of
the Democrats.
As socialists, we can recognize that there are genuine differences
between the pragmatic Obama Democrats and the Tea Party neo-liberal
ideologues. Nevertheless, both approaches remain well within the
constraints of mainstream capitalist politics. When leftists target
neo-liberalism as the primary problem, they underscore their failure to
understand the essential dynamic of the current crisis in their desire
to exaggerate the differences between neo-liberals and their pragmatic
opponents. This position is often followed by a call for a coalition of
the broad Left against the rabid, dogmatic Right, as those on the Left
subordinate their radical politics to defeat the perceived threat of a
neo-liberal victory.
Global capitalism, not neo-liberalism, is the primary problem, and a
rapid transition to a socialist society provides the only possible
answer.
Capitalism has always had an inherent tendency to expand. Of course, the
drive to conquer others precedes the rise of the capitalist system, as
imperial rulers have always fought to expand their domain. In the past,
this would involve looting and pillaging. The empires that have arisen
in modern times have certainly looted and pillaged, but this has been a
secondary aspect of their rule.
Historically, a capitalist power has sought to create a distinctive link
between the imperial center and the subject countries on its periphery.
The British empire of the nineteenth century is the classic example.
Industrial production was concentrated in the center, England and
Scotland, while industry in the periphery was actively discouraged. The
headquarters and coordinating functions of the finance sector were also
centrally located in London. Conquered countries were limited to one
primary economic role, providing cheap raw materials for the industries
of the imperial power. This could entail the exploitation of scarce
natural resources, with no regard for the environment, or the extreme
exploitation of unskilled labor through the use of force.
In this context, the working class of the imperial power had a vested
interest in maintaining the empire. Indeed, a century ago the more
far-sighted strategists of the British Empire understood the utility of
ensuring the loyalty of the British working class by providing limited
social benefits and establishing a minimum wage. In the past, there had
been a unique and defined set of economic relationships between the
imperial power and its dependent colonies.
The outsourcing of industry and mining to the developing countries has
devastated the traditional working class in the developed capitalist
countries. Unions in the private sector have been virtually wiped out,
and public sector unions have come under intensive attack. As a result,
inequalities in income and wealth have significantly widened, thereby
increasing the volatility of the system as well as its tendency to
become mired in prolonged slumps. Globalization also increases the
volatility of the system because it greatly restricts the ability of
governments to regulate the economy, and to redistribute income through
taxes. The interconnectedness of the global economy also increases the
likelihood that a crisis triggered in one country will spread quickly
throughout the globe.
Globalization makes the system more volatile, but it only accentuates
the fundamental underlying problems. Indeed, the Great Depression of the
1930s occurred decades before corporations began shifting industrial
production overseas. Still, globalization adds to the instability of the
system, while making it more difficult to pull the economy out of a
prolonged downturn.
The Keynesian policy of deficit financing as a method of stimulating the
economy constitutes one of an array of government programs designed to
stabilize the system. Many on the Left are convinced that the
deregulation of markets, as driven by the neo-liberals, provides the
primary reason for the current global downturn. In their view, future
disasters can only be avoided by strict regulation of the economy,
especially the financial sector.
At the turn of the twentieth century, progressives pushed for government
action to break up the trusts. They called for anti-trust legislation,
hoping that the market economy would return to a mythical golden age
when small firms, acting independently of each other, operated within
competitive markets. This project proved to be a total failure, as large
corporations discovered ingenious ways to evade anti-trust legislation
in order to create ever more gigantic entities, and to act in collusion
with other powerful firms in their market. Capitalist economies have
always been dominated by a few large corporations that manipulate prices
and outputs so as to maximize profits. These days, corporations span the
globe, crossing national borders with ease.
During the New Deal, the focus of reform shifted from anti-trust
legislation to the financial sector. The current crisis has led
progressives, once again, to argue that strict regulation of the
financial sector will be a critical element in a program that will allow
the economy to overcome the current slump and prevent another one from
occurring. In fact, such a policy is bound to fail.
To start with, a speculative frenzy only occurs when investors are
confident of the future and are willing to take risks. The current
situation is characterized by investor pessimism, and a reluctance to
undertake risky projects. Indeed, investor confidence appears to be
heading downward, with no imminent sign of any upswing. The current
problem confronting capitalism is not how to curb an unbridled
speculative frenzy. Quite the contrary, investors are following an
extremely cautious path.
Even if the current crisis were to be overcome, it will be very
difficult for any government to enforce strict regulations on the
financial sector that inhibit speculative investments. The only time the
economy can prosper is when investors are prepared to undertake
investments in new sectors where, by definition, the future is unclear
and the risks are high. Obviously, there are no gains to society from
the kind of scam investments that brought the housing market to a
standstill. Still, it is difficult to discern in the midst of a boom
what are risky but still potentially worthwhile investments and what are
elaborate frauds.
Furthermore, even the most skillful regulation does not touch the
underlying problem. Capitalism generates more savings than can be
matched by profitable investments. Globalization has further exacerbated
this underlying problem by widening the gap between rich and poor.
Regulating the financial sector will not add to effective demand, and,
indeed, may well reduce it by dampening investment.
There is also little reason to believe that regulation of the financial
sector will prove to be effective. Globalization has integrated the
world’s financial markets, making it easy to shift funds from country to
country. Financial institutions need no longer remain in New York or
London, but rather can be relocated to any place that is connected to
the internet. Restrictive legislation in the United States and Britain
will just speed the rate at which financial institutions move offshore.
Finally, the impetus to enforce strict regulation dissipates as the
crisis that spurred these actions fades in memory. As time goes on,
enforcement becomes increasingly lax and banks, and financial
institutions become more adept in evading the rules. Corporations use
their enormous power to press the case for regulatory “reform,”
insisting on the need for freeing financial institutions from
“unnecessary” restrictive red tape.
This trajectory can be traced in the United States from the 1930s to the
recent debacle. During the first days of the New Deal, the
Glass-Steagall Banking Bill was passed with the goal of stabilizing the
financial sector, in part by making it harder for banks to invest in
high-risk loans. One aspect of this was the creation of a tight barrier
between retail banks, those taking deposits from individuals and small
businesses, and investment banks, which funnel large sums to fund
mergers and new technologies, but also underwrite risky investment
vehicles. Over the years, the tight separation of the two types of
financial institutions was eroded, until legislation passed in 1999,
during the Clinton Administration, junked the entire policy, permitting
retail banks to merge with investment banks. The funneling of funds from
retail banks to the high-risk investments of credit default swaps and
real estate investment trusts was one factor facilitating the
speculative frenzy in the housing market, which, when it collapsed,
triggered the current crisis. It should be noted that this piece of
deregulation was not formulated by neo-liberal ideologues, but rather by
the pragmatic advisors of Bill Clinton who were enamored with the rapid
spread of a global financial sector.
Capitalism is inherently unstable, and subject to extended periods of
mass unemployment, bankruptcies and crisis. Government regulation will
not prevent economic instability. Efforts to regulate the financial
sector in order to prevent destructive speculative booms are bound to
fail. These efforts represent yet another case of reformers fruitlessly
trying to fix a system through piecemeal changes. Capitalism can not be
reformed. It must be fundamentally transformed through a revolutionary
process.
Emergency bailouts of banks and bankrupt corporations can forestall a
total collapse, but the economy remains mired in stagnation. The recent
course of events in the United States is indicative of the depth of the
problems confronting a capitalist system in decline.
President Barack Obama is, above all, a pragmatist. He has no
ideological reluctance to using the state to intervene in the economy,
and yet he also has no intention of confronting the capitalist class.
Very much the corporate centrist, Obama’s economic policy has been
marked by cautious timidity. A total collapse has been forestalled, but
output remains stalled, and unemployment remains at high levels. The
official unemployment rate fell from 10.0% in 2008 to 8.4% in 2011.
These figures limit the count of the unemployed to those who are
currently out of work, but who are actively seeking employment. A
broader figure adds to the number of unemployed those who have become
discouraged, as well as those “marginally” tied to the workforce,
including older workers who reluctantly retired after finding that work
was no longer available. Using this more accurate indicator, the
unemployment rate fell from 15.2% in 2008 to 13.5% in 2011.
These statistics demonstrate that the United States remains stalled in
the worst economic crisis since the 1930s, and the Administration has
done little to overcome it. Obama’s approach to overcoming the crisis
has been far more cautious than Roosevelt’s New Deal, as limited as that
was. This reflects several factors. First, the bailout of 2008 was
enormously expensive, adding significantly to the total debt, and thus
making it more difficult to undertake deficit financing to spark a
revival. Furthermore, globalization has led to the U.S. debt being held
by wealthy individuals and financial institutions from around the world.
It is all too easy for those currently holding U.S. bonds to sell them
should they become concerned with the federal government’s increasing
debt. Such a dumping would significantly increase the interest rate
accruing to U.S. bonds, making it more expensive to borrow.
These factors are relevant, but secondary to the significant shifts in
the objective situation since the 1930s. Globalization has undermined
the strength of the working class in the previously industrialized
countries. (In the United States, only 7% of those working in the
private sector are union members.) With the working class in retreat,
Obama has only agreed to implement a fiscal policy of economic
stagnation. This is in contrast with the first years of the New Deal,
when Roosevelt authorized deficit financing on a scale that led to lower
unemployment rates, although unemployment still remained at depression
levels. Globalization makes capitalism even more susceptible to severe
economic downturns, while at the same time making it more difficult to
recover.
Obama has also been eager to limit the scope of counter-cyclical
spending to capital projects that can be viewed as emergency measures,
while avoiding projects that widen the scope of projects undertaken by
the public sector. New Deal plans to counter mass unemployment were
quite different. The Civilian Conservation Corps constructed roads and
buildings in wilderness areas that made natural parks more accessible
and desirable, and thus stimulated the demand for increased funding for
the park system that lasted well beyond the 1930s. The Works Progress
Administration was given a broad mandate that led to a variety of
projects such as the Federal Theater Project and the Federal Art
Project[8] that could only inspire working people to demand that the
federal government do more than fund a vast military apparatus. The
Obama administration has studiously avoided any creativity in
envisioning pump-priming projects.
This difference in approach reflects the underlying shift in the balance
of class forces. Roosevelt was worried that the working class in the
United States might be attracted by Soviet Russia or Nazi Germany. He
therefore sought to present a positive alternative, a welfare state
which remained a capitalist market economy.
The change in approach to deficit financing also reflects the very
different global context in which the United States finds itself. In the
1930s, most Americans believed that the Great Depression was merely a
temporary downturn that would be followed by further periods of
prosperity. Eighty years later, globalization has led to
deindustrialization.
For three decades prior to the economic crisis of 2008, the working
class has suffered through declining real wages and a deterioration in
essential social services. Although Obama has pursued a fiscal policy of
modest economic stimulus that has forestalled a total collapse, state
and local governments have not been provided with funds from the federal
treasury needed to counteract the precipitous drop in tax revenues at
every level of government. As a result, there have been drastic cutbacks
in education, health care and mass transit, compounding those that were
already in place before the current crisis. Workers are constantly told
that austerity is inevitable, and that they will have to live on less,
not just now but in the future.
The sharp downturn in the global economy has led to a rapid increase in
the debt owed by governments in most of the developed capitalist
countries. Banks have been bailed out by governments anxious to avoid a
collapse of the financial sector. Tax revenues have substantially
declined, as output and incomes spiral downward. At the same time, some
countries have pursued Keynesian pump-priming policies by increasing
expenditures on infrastructure projects, such as roads, railroads, even
prestige projects such as venues for the Olympics.
In several countries within the Eurozone, the rise in the national debt
has led to a catastrophic collapse in the economy. Generally, these
countries are among those with the weakest economies, having the lowest
per capita incomes within Western Europe. Still, the crisis is deepening
and spreading. Even France and Holland are threatened by the debt
crisis, and the possibility that the European Union may disintegrate is
very real.
Although several countries are approaching the economic abyss, their
paths to this critical point have been strikingly different. Spain had a
small debt to output ratio prior to 2008. The Spanish housing market
boomed, but once the slump began, mortgages could not be repaid and the
banks collapsed. In Greece, the debt to output ratio was high before
2008. The Greek government hoped that the richer EU countries,
particularly Germany, would continue to funnel aid its way, permitting
the Greeks to construct a network of social services that approached
that of the wealthier countries of Western Europe. Once the global
crisis hit, the shaky foundation of this fleeting prosperity was
exposed, and the economy collapsed.
In both Spain and Greece, official unemployment rates stand at 25%, and
interest rates on government bonds have risen to levels that cannot be
sustained. Although the specific road to the debt crisis has varied, the
results have been very similar. The economic crisis has led to a sharp
fall in output and, as a result, tax revenues have fallen as well. As
deficits increase, the countries are pressured into sharp cuts in social
services, which produce even further cuts in output, and the downward
spiral continues as the system spins out of control.
Bondholders observe debt to output ratios rapidly increasing in the
weaker Eurozone countries, and they respond by shifting out of the bonds
of those countries and into safe havens, such as U.S. government bonds.
The increase in those wanting to sell leads to a fall in the price of
the bonds of the beleaguered countries, and thus an increase in interest
rates. Higher interest rates add to government expenditures, thus
creating even larger government deficits, and a further twist in the
downward spiral.
As interest rates on government bonds approach 7% per year, bondholders
begin to panic, and bankruptcy looms. Interest rates for both Greece and
Spain have begun to approach this critical point. To avoid a crisis, the
European Union, that is primarily the German government, provides
emergency funds to buy the bonds of the targeted country, demanding
stringent repayment plans and further cutbacks. The emergency infusion
of funds stabilizes the bond market for awhile, until the spiral begins
again and the abyss approaches again.
In this situation, austerity measures are self-defeating. Cutting
government spending only exacerbates the underlying problem. Still,
stimulating the economy through deficit financing will not work either,
given the readiness of bondholders to flee from the risk of default.
Furthermore, the draconian cuts required to service the emergency loans
virtually propel the working class into action, and the militancy of the
popular resistance deters the government from fully implementing the
austerity program demanded by the European Union and the International
Monetary Fund.
There would appear to be only one way out of this impasse within the
constraints of a capitalist market economy. The wealthy few must be
heavily taxed, and the revenues thus generated used to fund vital social
services. This would require a significant shift in the balance of class
forces toward the working class. The recent decades have been
characterized by the exactly contrary trend, as the gap between the rich
and the poor widens even further.
Globalization not only undercuts the power of the working class in the
previously industrialized societies, but it also makes it easier for the
affluent to hide their incomes in the many tax havens that have sprung
up around the world. The ability of nation states to effectively tax
wealthy individuals or large corporations has been significantly
undermined by globalization. Incomes and corporate profits would have to
be taxed at the source, and this would require full and open
transparency by corporations to become meaningful. A true accounting
would necessitate a direct confrontation with international capital,
triggering massive capital flight.
Immediately, the Eurozone countries confronting economic collapse can
gain a breathing space by leaving the European Union and defaulting on
sovereign debt. By being integrated into a currency zone dominated by
Germany, less technologically advanced countries such as Spain and
Greece have been saddled with overpriced exports. This has exacerbated
the impact of the global downturn, and has been one factor contributing
to the economic crisis in these countries. Nevertheless, leaving the
Eurozone will not resolve the underlying problems. Investor confidence
has been decimated, and a brief upsurge in exports is not likely to
remedy the problem.
The choice is stark. Either countries such as Greece and Spain move
rapidly to overthrow capitalism, and to establish a new society, or
economic stability will be restored by quashing the working class,
dismantling social services and slashing wages. This is a choice that
can not be confined to one country. The revolutionary option will only
succeed if it rapidly spreads. The current crisis can not be transcended
through half-measures and limited reforms. We need to think in bold
terms, to view our commitment to building a new society as an immediate
strategic priority, not as a goal for some vaguely defined future.
[1] In a letter to Engels written on September 25, 1856, Marx suggested
that the crisis had “assumed European dimensions such as have never been
seen before.” The two revolutionaries would not “be able to spend much
longer here merely as spectators.” Karl Marx and Frederick Engels,
Collected Works (London: Lawrence and Wishart, 1983), 40:72.
[2] John Maynard Keynes, The General Theory of Employment, Interest and
Money (London: Macmillan, 1936), p. 161.
[3] The federal government did not collect statistics on unemployment
during the 1930s, so economic historians have calculated rough estimates
based on the available statistics concerning output and income. In 1940,
the current system was initiated, based on monthly surveys of the labor
force. The estimates of unemployment rates from the 1930s, therefore,
are not comparable to the current statistics.
[4] Frank Knight, “The Economic Principles of the New Deal,” in Morton
J. Frisch and Martin Diamond, The Thirties: Reconsideration in the Light
of the American Political Tradition (De Kalb: Northern Illinois
University Press, 1968), p. 92.
[5] William Leuchtenberg, Franklin D. Roosevelt and the New Deal,
1932–40 (New York: Harper and Row, 1963), p. 244.
[6] Richard Polenberg, “The Decline of the New Deal, 1937–1940,” in John
Braeman, Robert H. Bremner and David Brody, eds., The New Deal: The
National Level (Columbus: Ohio State University Press, p. 255.
[7] Knight, “Economic Principles,” p. 94.
[8] Leuchtenberg, Roosevelt and the New Deal, pp. 125–8.