What’s Behind the Economic Crisis?

by Andrew Pollack

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.