Crisis of Neoliberalism

IN its country of origin, the federal government and the Federal Reserve bailed out the banks and passed a stimulus bill that stopped the initial freefall in the economy. Governments across Europe followed suit. However, precious little was done to solve the problems of the 99%: high unemployment, low wages, unredeemable debt, homelessness, and underwater mortgages. Today, corporations have plenty of funds but hesitate to invest because there is hardly any increase in demand from cash-strapped or unemployed consumers. The Federal Government is cutting expenditure under the 2011 “austerity deal” in the US House of Representatives, further dampening the markets. The housing sector is yet to recover from the body blow it suffered nearly five years ago.

In sum, three years after the recovery phase of the business cycle began, officially ending the Great Recession in the United States in June 2009, the US economy continues to stagnate – call it “Third Depression” after Paul Krugman or “The Long Slump”, as Robert E. Hall, the then president of the American Economic Association (AEA), said in an address to the AEA in January 2011. In his 2011 bestseller The Great Stagnation, Tyler Cowen showed that the U.S. economy has been characterized by “a multi-decade stagnation” that started well before the financial crisis hit the country. The defining characteristic of the present stagnation is limping, halting recovery punctured by relapses. This was what the US experienced in the 1930s and Britain did even earlier. Regarding the British experience, Engels wrote in the middle of the 19th century: “a chronic state of stagnation ... Neither will the full crash come; nor will the period of longed-for prosperity... A dull depression, a chronic glut of all markets for all trades, that is what we have been living in for nearly ten years.” (The Condition of the Working Class in England )

 

No better is the situation in Europe and Japan. In Japan growth slowed to 0.3% by the middle of this year. Surveys released on 1 August 2012 showed manufacturing activity in the 17-nation euro zone contracting for the eleventh straight month in July as a downturn that began in the periphery sank deeper roots into the core, not sparing star performer Germany or France, the region’s second biggest economy. (By the way, India’s industrial output shrank by 1.8 percent in June 2012). Across the Chanel, Britain’s PMI (purchasing managers’ index, computed on the basis of monthly statistical reports from private sector managers covering items like new orders, output, employment, suppliers’ delivery time and stocks of purchases) plummeted to a more than three-year low, shrinking at its fastest rate in more than three years. GDP growth in the 27 countries of the European Union (EU) has fallen from 2.4 per cent in the first quarter of 2011 to 0.8 per cent in the last quarter, according to the Organisation for Economic Co-operation and Development (OECD) Secretariat. The severity of the downturn can be gauged from employment figures too.

The Explosive Job Crisis

International Labour Organisation’s “World of Work Report 2011” dubbed chronic high unemployment “the Achilles heel of economic recovery in most developed countries” and added, “... there is a vicious cycle of a weaker economy affecting jobs and society, in turn depressing real investment and consumption, thus the economy and so on. This vicious circle can be broken by making markets work for jobs – not the other way around.” However, this is not being done. “Recent trends reflect the fact that not enough attention has been paid to jobs as a key driver of recovery. Countries have increasingly focused on appeasing financial markets.” (Emphasis ours)

Precisely because of this policy orientation, the job crisis is only worsening. According to the ILO report “EuroZone Job Crisis: Trends and Policy Responses” released in July 2012, total employment remains 3.5 million lower than before the crisis. “Most alarming, following a modest recovery in 2010 and 2011, employment has fallen since the start of 2012 in half of the Eurozone countries for which recent data are available.” The same trend is witnessed in most other countries, and for the same reason.

According to the World Development Report 2013 released by the World Bank in September 2012, at a time when the world is struggling to emerge from the global crisis, some 200 million people including 75 million under the age of 25 are unemployed. “The youth challenge alone is staggering,” World Development Report Director Martin Rama said, adding that “More than 620 million young people are neither working nor studying. Just to keep employment rates constant, the worldwide number of jobs will have to increase by around 600 million over a 15-year period.”

From people’s perspective the unemployment problem is one of the most painful manifestations of the systemic crisis and together with food crisis it presents a grave danger to the system itself. This is best appreciated by the World Economic Forum (see report on third cover) and no less concerned are other international authorities.

According to World Bank Chief Economist and Senior Vice President Kaushik Basu, “Jobs are the best insurance against poverty and vulnerability. Governments [he forgot to add: should but do not] play a vital enabling role by creating a business environment that enhances the demand for labour.” World Bank Group President Jim Yong Kim said, “We need to find the best ways to help small firms and farms grow. Jobs equal hope. Jobs equal peace. Jobs can make fragile countries become stable”. Such advice, of course, has absolutely no takers among policymakers hired by monopoly finance capital.

European Sovereign Debt Crisis

One of the novel features of the present round of economic turmoil is that some countries – such as Greece, Portugal – in the Euro area have sunk so deep in debt that they find it difficult or impossible to re-finance their government debt (i.e., pay interests and repay the principal) without the assistance of third parties like the IMF. This is known as the European sovereign debt crisis, which has called in question the very sustainability of the European monetary integration and the future of the euro. One wonders, how did things come to such a pass?

To be brief, when the common currency (Euro) was created, banks utilised the opportunity and the euphoria to lend freely to Spain, Greece and other financially weak nations. This flood of easy credit fuelled huge housing bubbles, enormous profits for lenders and real estate dealers, as well as mountains of debt. Then, with the financial crisis of 2008, the flood dried up, causing severe slumps in the very nations that had boomed before.

Late last year, the European Central Bank (ECB) lent some 489 billion Euros to European Banks at the extremely generous rate of just 1% over 3 years. The latter are relending from this fund to these governments at 10% or more. Why doesn’t the ECB lend directly to the governments? Because an article in the treaty governing ECB forbids it to do that. Actually the purpose of this particular article was to ensure that the ECB is not pressured by governments to print money and make loans and this is understandable. But there should be some flexibility for serious contingencies like the present one, which is missing.

This rigid rule helps big banks make easy money by borrowing cheap and lending at high interest. The banks can take the risks because they know they will be bailed out if their loans go bad. This is one of many instances showing how vested financial interests formulate selfish policies that hamper recovery and make life even more miserable for ordinary people.

Grand Feast for Cannibals

The crisis is no doubt global, but the fundamental law of uneven development of capitalism remains in operation. Thus on an international scale you cannot equate the performance or position of Germany, US and China for example with Spain, Greece or even France, not to speak of poorer nations.

Nor can we overlook the enormous disparities in performance within the euro zone. While Southern Europe is caught in deep, long depression, German exports in 2011 set a record of a trillion Euros with its trade surplus reaching 158 billion Euros, that too after a 155 billion surplus in 2010. (BBC News, 8 February, 2012). Of course, this is not to ignore recent data on the inevitable German slowdown.

Again, differences in youth unemployment (among jobseekers between 16 and 25 years) figures are quite pronounced: Spain 48.7%, Greece 47.2%, Italy 31%, and Portugal 30.8% as against Germany 7.8%, Austria 8.2% and Netherlands 8.6%. The concentration of high youth unemployment in Southern Europe explains why mass street protests are centred there. On the other side of the same coin is the fact that the great mass of unemployed youth provides a handy tool for employers to threaten and replace older permanent workers drawing relatively higher wages.

We should also be careful enough to note that while the working people and the capitalist system as such are suffering badly, the top 1 % have sufficient clout and power of manipulation to continue to amass enormous fortunes. Thus in the US, “the profit margins of the S&P 500 (top 500 companies identified by the American rating agency Standard and Poor’s) leapt from 6% to 9% of the GDP in the past three years, a share last achieved three generations ago.” (Financial Times, 13 February, 2012). Another study reports, “US corporate profits are higher as a share of gross domestic product than at any time since 1950” (FT, 30 January, 2012).

In The Crisis, A View from Occupied America, an essay based on his opening plenary presentation at the 2012 Left Forum in New York City, William K. Tabb pointed out: “Between 2009 and 2011, 88 percent of national income growth went to corporate profits, while just 1 percent went to wages. In terms of personal income, in 2010 (the last year for which we have data) 93 percent of all income gains went to the top 1 percent of Americans. An early 2012 story in the Wall Street Journal said ‘U.S. companies are booking higher profits than ever. But ‘Corporate tax receipts as a share of profits are at their lowest level in at least 40 years.’”

The crux of the matter is that a mortal crisis did strike the capitalist class – Wall Street bankers in the first place – but the neoliberal state’s unprecedented massive transfer of wealth from the public treasury to the corporate sector quickly restored profits for the latter and furthered the centralisation of capital. Big financial corporations took bailouts and used them to engage in unscrupulous activities and become even bigger than before 2007.

Recently, debt defaults on the part of South European nations have resulted in substantial losses for banks in France, Germany and England and they are preparing for further ‘haircuts’. But while ordinary share-holders suffer, the corporate honchos know how to fast recover their losses, if any, and resume the personal accumulation spree.

The Elusive Search for a Solution

Right since 2007, governments have taken series of measures to tide over the crisis. Among recent ones, mention must be made of new financial regulations aimed at reducing global risks, such as the internationally agreed framework known as Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act of the United States. The Financial Stability Oversight Council (FSOC) established under the Dodd-Frank Act is mandated to identify and monitor excessive risks to the U.S. financial Protests Against Austerity Measures in Greece system arising, for example, from distress or failure of large banks or financial companies. The European Stability Mechanism (ESM) is another international organisation in formative stage which, if and when it becomes operational, will provide financial assistance to members of the Euro-zone in financial difficulty. Critics have noted that the ESM provides excessive powers and immunity to the board of ESM Governors and severely curtails the economic sovereignty of its member states.

Central Banks in the US (the Federal Reserve), the UK (the Bank of England) and the Eurozone (European Central Bank) have taken recourse to quantitative easingQuantitative easing (QE) means a central bank buying financial assets from commercial banks and other private institutions in order to inject a pre-determined quantity of money into the economy. It increases the excess reserves of the banks, and raises the prices of the financial assets bought, which lowers their yield as percentage of the amount invested. When short-term interest rates are at or close to zero, the conventional policy of buying up government bonds can no longer lower interest rates. QE may then be used by the monetary authorities to further stimulate the economy by purchasing assets of longer maturity than short-term government bonds, and thereby further lowering longer-term interest rates. But there remains the risk that the policy may prove more effective than intended in acting against deflation – leading to higher inflation, or may not yield the desired result if banks do not find proper opportunities to lend out the additional reserves. In the specific case of QE 3 in the US, the primary aim seems to be buying up toxic mortgage-backed securities (MBS) as yet another step in the never-ending backdoor bailout of Wall Street banks and big investors. with doubtful effectiveness. In the US, QE3 (“3” refers to the third time such measure was taken after the crisis) announced in September 2012 has become a bone of contention between Republicans and Democrats. While the latter expect it to stimulate the economy and create jobs, the former opine that it will only create another asset bubble and harm the long term interests of the economy.

But all these measures, even bourgeois experts agree, do not adequately address risks in the international financial system and that the world economy is heading toward a steeper decline than what was experienced in 2008-09. The previous economic engines of global expansion have exhausted their potentialities. Manufacturing in the world’s biggest economy grew at its slowest pace in nearly three years last July, and the inevitable correction of the enormous US fiscal deficit (less spending and more taxes) will worsen the situation from 2013. As for the second largest economy in the world, Chinese factory output grew at its slowest rate in eight months. Overall, the BRIC countries, which provided a new impetus for growth during the first decade of this century, are de-accelerating more or less rapidly. With fewer resources, greater debt and increasing popular resistance to shouldering the burden of saving the capitalist system, nation states and international organs of finance capital are at a loss what to do.

Indeed, policy makers are running out of options. Monetary policy tools – such as reduction in interest rates and printing paper money or electronically generating virtual money – have also become ineffective through overuse. In 2008-09 and thereafter, recourse was taken to astronomical amounts of fiscal stimulus (mostly for bailing out banks and then even countries like Iceland and Greece) but that, on top of previously accumulated debts, resulted in unsustainable budget deficits and public debts in most advanced economies. So much so, that “austerity” – the opposite of fiscal stimulus – became the new mantra.

The Austerity Onslaught

But austerity, i.e., the savage spending cuts in an attempt to reassure bond markets, have led to growing political instability particularly in Europe, with the masses hitting the streets and toppling governments. And why not? The ruling bourgeoisie shamelessly call upon the working people to suffer the agony of austerity, but it is their policies that are solely responsible for the mountains of debt burden on individuals and nations. In the US for example, simultaneously with personal and household debt, national debt also skyrocketed and is projected to hit 75 percent of the national income in 2012 compared to the post-World War II low of 26 percent when Ronald Reagan took office, and 40 percent in 2008.

Behind this rise lie three major policy thrusts of the successive governments: the superpower syndrome that waste enormous resources on military expenditure; huge tax cuts for corporations and the rich, which reduce revenues drastically; and the costly bailouts of greedy banks. The responsibility thus rests squarely with the government(s).Why then should the public be asked to bear the burden of so-called austerity now?

Moreover, spending cuts are being imposed at a time when precisely the opposite policies are needed: a sharp increase in productive government investment and spending on crucial social programs to stimulate growth and employment. As the 2011 ILO Report observed, “efforts to reduce public debt and deficits have disproportionately and counter-productively focused on labour market and social programmes. ... For instance, cutting income support programmes may in the short-run lead to cost savings, but this can also lead to poverty and lower consumption with long-lasting effects on growth potential and individual well-being. Increasing active labour market spending by only half a per cent of GDP would increase employment by between 0.2 per cent and 1.2 per cent in the medium-term, depending on the country. Moreover, pro-employment programmes are not expensive to the public purse. ... there is scope for broadening tax bases, notably on property and certain financial transactions. Such measures would enhance economic efficiency and help share the burden of adjustment more equitably, thereby also contributing to appease social tensions.”

However, this is not acceptable to the lords of finance. Their opposition to a financial transaction tax is understandable, but that is not all. When state funds are routed through private financial institutions, they can use it for high-risk, high return investments like lending to Greece and Spain as well as stock and currency market operations. Direct state expenditure can contribute towards mitigating stagnation but do not offer this special privilege to high finance; rather it adds to the worry about unmanageable sovereign debt. Hence the opposition of governments dominated by bankers to such rational policies, reflecting a deep mismatch between the sectarian interests of the finance oligarchy and overall long-term interests of the capitalist system as a whole.

It is such conflicts of interests between hegemonic monopoly finance capital and the rest of capitalist society – popularly perceived in the US as a tussle between Wall Street and Main Street – that find expression in the endless policy debates among economists and policymakers. While some advocate relatively progressive or regulatory reforms, others push for pseudo-changes that will safeguard the interests of the financial sector. Of course, academic debates and rational arguments do not decide policy orientation. Intra-class (between different sections of the bourgeoisie) and inter-class struggles do, with a given national-international political milieu – precisely the balance(s) of class forces in particular countries and on the global scale – also exerting a major influence. Such is the evidence of history, to which we now turn.