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As we go to press, Bush and Congress appear
headed toward agreement on a “stimulus package” of $146 billion centered
on tax cuts of a few hundred dollars per individual. This measly amount
is supposed to revive the economy and reassure the world’s stock
markets. All presidential candidates left standing have endorsed the
package.
Since the beginning of the year, the mortgage and credit crisis has
spread even further through the rest of the U.S. economy. January saw
the first absolute loss of jobs in over four years, with growing
numbers having exhausted their unemployment benefits. Homelessness is
growing even among former two-paycheck families, some of which now live
in shelters apart from each other and their children.
Oil prices continue their rise (yielding a record profit of $40 billion
in 2007 for Exxon), as do prices of food and other essentials. Despite fears
of inflation, the Federal Reserve slashed a key interest rate by
three-quarters of a point Jan. 22—the biggest cut in a quarter century—
and lowered it another half point a week later. Major U.S. stock
indices dropped about 10 percent in the first three weeks of the year.
U.S. banks have been forced to turn to overseas investors for infusions
of cash. Meanwhile, companies that insure the bonds dwindling in value
are themselves beginning to founder, further endangering the banks that
issued the bonds.
Soon after agreeing to the stimulus deal, Bush announced cuts of $105
billion to Medicare and Medicaid (while continuing to give billions in
Medicare money to for-profit insurance companies). Also dropped was aid
to state and local governments, which are cutting services and raising
taxes, each with a further depressing impact.
The New York Times columnist Paul Krugman called the bipartisan
agreement designed to deal with all this a “lemon.” He criticized
Democrats for giving in to Bush’s refusal to extend unemployment
insurance and increase food stamps, thus dropping aid to those who
would spend it quickest and with the most impact. Instead, much of the
tax rebates will be saved or used to pay off existing debt.
The liberal Economics Policy Institute pointed out that the $50 billion
the package gives to businesses would be used to pay off old debts or
repurchase stock rather than make new investments. EPI called for a
package twice as big, yet admitted even that would create jobs for
barely a quarter of the 7.6 million unemployed. They accurately point
out that government spending would have a bigger “multiplier effect”
than individual rebates.
But this Keynesian approach, like Washington’s stimulus package, is
still designed to “generate growth and jobs” by addressing the
“shortage of demand for goods and services.” It ignores the underlying
causes of the crisis (described below).
EPI points to the huge backlog of needed school and bridge repairs and
new construction projects. Times columnist Bob Herbert echoed this call
for infrastructure spending, citing collapsing bridges, exploding steam
pipes, schools with sewage backing up into classrooms, etc. Needless to
say, trillions more could be spent—and millions employed—rebuilding
post-Katrina Louisiana and Mississippi.
But such massive investments are not being considered, as neither
Democrats nor Republicans are willing to spend more than a tiny
fraction of the amount spent on
the global “war on terror.” Nor are the trillions homeowners are losing
in home values addressed by the package. Even liberals critical of the
stimulus package reassure business of their own good intentions.
Thus economist Robert Pollin, warning of “an investment strike by
business,” says “like it or not, we cannot ignore the reality that the
economy depends on businesses willing to spend money to hire workers
and expand operations.” But business, he says, will welcome the
stimulating effect of such parts of his program as home weatherization
and construction-related public investment.
The AFL-CIO echoed the liberals’ complaints. They called for “effective
regulation of housing and financial markets,” and demanded “reform of
the economic policies behind the coming recession that have created
wage stagnation and economic insecurity,”
policies “at the heart of today’s problems.” They called for a return
to “historically successful” fiscal, trade, and monetary policies “that
place a higher priority on full employment.”
Like the liberal writers, they confuse the succession of policies used
by capital to make workers pay for crisis, with the roots of such
crises. Nor can they fathom why their favorite party would rely for
advice on such Wall Street sharks (and former Clinton Treasury
Secretary) Robert Rubin.
The Washington Post quoted union officials upset that the party’s
stimulus package was shaped by “Wall Street Democrats” led by Rubin—the
man who engineered the very banking deregulation that allowed him to
craft mortgage-backed Ponzi schemes once he was back at Citigroup.
Robert Kuttner of the American Prospect, like the AFL-CIO, blames
specific policies of capital, saying the crisis “is the result of
right-wing ideology and the political power of Wall Street.” Kuttner
said the rate cut and stimulus package failed to recognize what was
supposedly unique about this recession: a collapse in credit markets
due to “deregulation gone nuts.”
But his parallels with the speculative mania of the 1920s ignore the
fundamental contradictions of the capitalist system, which were equally
at the bottom of that decade’s crisis.
The real roots of the crisis
Liberal economists and commentators see this crisis as stemming, on the
one hand, from too easy credit during the housing bubble, and on the
other, from too little credit now for both consumers and businesses
caught short by the liquidity crisis—i.e., neither have enough money to
keep spending in a way that would brake the recessionary spiral.
This apparent paradox does reflect the reality of a capitalist economy:
it oscillates wildly from too much to too little credit. Similarly, it
swings from too much production capacity to not enough; from too much
wages chasing too few goods to the reverse; and so on. The liberals, of
course, are unwilling not only to abandon such an illogically cyclical
system but even to speak honestly about its nature. Thus they focus on
such surface phenomenon as credit rather than the production process
underlying it.
In a nutshell, the process works like this: To survive, each capitalist
must seek ever more profit by investing in more, newer, and better
machines, and to keep pace with his competitors doing the same. These
investments can increase the productivity of the workers’ labor, and
even replace workers in the workplace, thus reducing the capitalists’
production costs for each unit.
As a result of this process, what Marxists refer to as “constant
capital” (i.e., the means of production—machines, tools, buildings,
etc.—as well as raw materials) generally grows more rapidly than
“variable capital” (the labor power of living workers). But since
profit is derived from variable capital alone, the average rate of
profit for the capitalists will tend to fall as the proportion of
variable capital decreases.
The decreased profit rate spreads as more capitalists are forced to buy
such machines to avoid being undersold. For a time they are not too
bothered, as the total amount of profit is still increasing. But soon
the still-declining rate of profit leads to a decrease in the total
amount of profit—at which point it doesn't pay for capitalists to
continue investing.
Exacerbating this problem is the fact that the new machines have thrown
more and more goods onto a market with limited ability to absorb them.
Before long, the capitalists not only cease new investment but begin closing
existing production facilities. Unemployment grows, decreasing workers'
ability to consume, leading to further production cutbacks, and on and
on.
Eventually, production is cut back so far that excess production
capacity has decreased, and the rate of profit restored, to a point
where the capitalists find it once again profitable to expand
production, both by purchase of additional existing models as well as
investing in yet another new generation of machines—which begins the
whole cycle all over again.
Of course, capitalists use many means to overcome the general tendency
of the profit rate to fall—and they are often successful in the short
term. These include cutting the workers’ wages and benefits, closing
plants and off-shoring their operations into poorer countries, the use
of immigrant labor at lower wages, getting the government to create tax
breaks for the rich, etc.
Furthermore, there are other factors involved in crises, such as the
disproportional growth, both in speed and size, among different sectors
of the economy, which we can't deal with here. And it must be
remembered that all the phenomena described rest on the central
contradiction of capitalism: the antagonism between socialized
production (i.e. goods made by large aggregates of people working
together) and the private appropriation of the surplus value so
produced.)
These business cycles occur roughly every seven to 10 years. But they
also occur within "long waves" of capitalist development of
25 or more years. These long waves are products of more fundamental
changes in the world capitalist economy: the expansion (or loss) of new
markets, wars, revolutions, and—most importantly—technological
revolutions such as the development of steam engines and
machine-manufactured machines in the 19th century, and the mass
assembly line, electronics, and automation in the 20th century.
These long waves are of two sorts: an upturn, during which
business-cycle expansions are longer and deeper and recessions are
shorter and shallower; and downturns, in which the reverse is true. The
last upturn long wave began in the 1940s and lasted until the end of
the 1960s. We have been stuck in a downturn long wave since then—one
whose effects have been mitigated by business and government's use of
credit, inflation, military spending, and other means to forestall a
complete crash.
But at some point those very measures will make the inevitable crash
even harsher, as they have not eliminated their underlying causes,
especially the falling rate of profit. Credit plays a dual role in
business cycles. On the one hand, it bridges the gap between
capitalists' need to expand during an upturn and their capital on hand.
On the other, in recessions it slows down cutbacks by businesses and
consumers.
In a downturn long wave, credit must play the latter role during
business cycles whose recessions are harsher and longer. What's more,
credit played a more crucial role in the last two long waves than in
all previous ones, whether upturn and downturn, precisely because the
20th century's technological revolution, along with such factors as
revolutions and the increased globalization of the system, so
drastically exacerbated all the contradictions of capitalism.
As early as 1979, Marxist economist Ernest Mandel could point out that
the postwar boom had rested on credit-fueled sales and investment
(especially in the auto and housing sectors), and thus on private debt
levels that swelled from 75 percent of national income in 1945 to 150
percent in 1970—before the long downturn had even begun.
But over time the system becomes less responsive to the credit-backed
stimuli of both government and private lenders, leading to stagflation
(combined recession and inflation). In any case, such measures are only
temporary substitutes for the normal system-cleansing methods used by
capital during a crisis: massive plant closures, astronomical
unemployment rates, absorbing competitors, etc.—measures whose
postponement also exacerbates the underlying contradictions.
Thus the supposed recoveries of the Clinton and Bush, Jr. years rested
on high-tech and housing bubbles, respectively, obscuring the long-term
decline of profitability. And of course, these recoveries were marked
by soaring stock prices (vastly inflated over the worth of their underlying
assets) and executive compensation for the rich, and shrinking
paychecks and disappearing jobs for workers.
Underlying all these phenomena were declines in profit rates, output,
investment, jobs and wages, which have characterized the entire period,
recovery or recession, since the early 1970s.
The consequences of neither the high-tech nor housing bubble—nor the
earlier S&L bubble—could be addressed by re-regulating the markets
or policies that allowed
them to happen. Nor could Federal Reserve interest-rate loosening, or
Keynesian
pump-priming—both intended to put more money in businesses' and
consumers' hands to increase spending and production—have much impact,
as neither address the reasons, outlined above, why business stops
investing in the first place.
It's not clear yet whether the crisis will go deep enough—nor whether
the ruling class is determined enough—to attempt the deep
system-cleansing measures used in the Great Depressions of the 1870s or
1930s. But certainly the flawed "solutions" of the liberals
will do nothing to mitigate the downturn, making increasingly likely a
more massive assault by the ruling class to save its system.
This makes it all the more important for workers in the United States
to respond in an organized, political way to specific attacks on their
living standards. This includes the need to protect those sectors of
the class who will bear the harshest attacks, such as immigrants and
workers of color. And through their organizing efforts, we can expect
that workers will begin to develop an understanding of the need to
replace the capitalist system as a whole with a new system run by and
for working people.
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