I. Inequality and Breakdown
In the spring of 2013 we are still living in an economic crisis of global proportions, marked by inequality and massive injuries of class. That the Dow-Jones index has broken through the 14,000 mark, or that a recovery of sorts has begun in the United States, does not alter the picture.
The distribution of wealth in the republic of Obama is at its most unequal since the Great Depression, with the top 1% of the population controlling 35.4% of the wealth, a much larger portion than that possessed by the bottom 90%, which was 23.3% of national wealth in 2010 (The Working State of America, Economic Policy Institute, Cornell University Press, 2012, Chapter 10). This pattern in the United States is part of “the steep and broadly recognized rise in income inequality since the late 1970s” (Working State, Chap. 2).
There is massive unemployment in Greece where a whole generation of young people has been condemned to bitter resignation. Much the same situation has occurred in Spain and Portugal. In Italy, a shocking proportion of older people cannot make ends meet; 4 out of 5 people in the Italian population fear losing their jobs and they are especially worried about their children.
In China, India, and elsewhere, glaring inequalities threaten the expanding production that is changing the landscape of Asia. Wealth abounds, while want cries out.
We are quite literally back in the situation of the late 1920s, but on a world scale. The neo-conservative movement of the last thirty years, marching under the economic banners of Milton Friedman and Friedrich Hayek, has brought the capitalist system to its point of greatest stress in nearly 100 years.
Little wonder then that many people look back to the concluding Chapter 24 in John Maynard Keynes’ 1936 work, The General Theory of Employment Interest and Money: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and income” (Keynes, Macmillan, 1967).
Of course the world as whole is much wealthier than when those words were written, and the participation rate – or number of adults working – is everywhere greater.
Nonetheless, the unequal distribution of wealth in the United States was the corrosive acid that produced both the economic breakdown of 2008 and its ongoing aftermath. Main Street Americans whose earnings had stagnated used credit to buy mortgages that were bundled together in derivative “products” concocted by the bloated financial sector.
Another economist of Keynes’ generation, the Polish emigré Michael Kalecki, explained in a pithy way why economic inequality can bring a complex, modern economy to its knees in this way: “Workers spend what they earn,” said Kalecki, “ and capitalists earn what workers spend.”
Unemployment and inequality of income gravely weaken workers earnings – the aggregate demand for the products and services that owners sell– and then productive capacity overshoots what regular people can buy. A crisis happens. Liquidity sits on the sidelines. Investment freezes. Stagnation sets in and the economy approaches collapse. That is what has happened at the beginning of the twenty-first century, initially in the United States, and now in Europe. The economic crisis is moving from place to place because the disequilibrium is of a worldwide nature.
This period that we see before us in the United States has been brewing since the late 1960s, but it became brutally evident on Monday Sept. 15, 2008, when the New York financial firm Lehman Brothers filed for bankruptcy with $600 billion dollars in liabilities, many of them highly-leveraged investments in the U.S. mortgage market. On Thursday Sept. 18, 2008, the Secretary of the Treasury and the head of the U.S. Federal Reserve spoke to the Congressional leaders. A member of the Congressional Financial Services committee, then Congressman Paul Kanjorski of Pennsylvania, later told C-Span in a famous interview: “On Thursday at about 11 o’clock in the morning the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to the tune of $550 billion dollars was being drawn out in a matter of an hour or two. The Treasury realized that they could not stem the tide. We were having an electronic run on the banks.” Kanjorksi added that the experts said that within hours the outflow would reach 5 ½ trillion dollars and break the financial system of the United States and the world. That did not happen. The money markets were frozen, new deposit insurance instituted, and then governments everywhere in the world attempted to provide liquidity to the global system.
Now, four and a half years later, after the enormous losses of certain banking, finance, and insurance companies have been “socialized,” austerity programs have been decreed in various jurisdictions to make the weakest members of the food chain pay for the gluttony at the top.
The Prime Minister of the United Kingdom, David Cameron, and his Chancellor of the Exchequer, George Osborne, are good examples of the damage governments are doing to their own people. Britain’s initial reaction to the crisis in 2008 was to vastly increase its deficit spending, as was required in order to avert collapse. Now the British government has begun a severe austerity program. Taxpayers have paid for the socialization of financial losses, and subsequently they are being squeezed to supposedly square the books.
The human cost among the most vulnerable is enormous. Interestingly, the pro-business London newspaper The Financial Times has been one of the media outlets with the best commentary on the economic crisis in the last two years. In the weekend edition on March 9-March 10 of 2013, columnist Gillian Tett – originally trained as an anthropologist – told about her visit to “a deprived area of Liverpool” where she helps a community centre. A local worker there told Tett about a child who had been chewing wall-paper at night: “He didn’t want to tell his mum because he knew she did not have the money for supper. We hear more and more stories like this.”
Here in Montreal we have just seen in early March 2013 a small but telling example of the same logic of making the poorest pay. The minority Parti Québécois government covertly cut welfare aid to the vulnerable – to those couples with pre-school children and to people 55-59 years old. The Minister in charge, Agnès Maltais, is the very same woman who supposedly is leading the charge against the Harper government cuts to unemployment insurance for seasonal workers. With one sweep of her pen she revealed the true colours of her government, and the move provoked outrage. Montreal’s Director of Public Health, Dr. Richard Massé, told the newspaper Le Devoir: “ I am really troubled because we are making these people more vulnerable. In Montreal that means several thousand people – 8,000 to 10,000 – who may find themselves in an uncertain, even precarious situation” (Le Devoir March 11, 2013).
At the heart of this global crisis is the issue of economic class. Those who own and control the means of production are in deep trouble because they have taken too much wealth to themselves and weakened wage-earners worldwide, bringing the global system close to breakdown. Just as Kalecki said, workers have to work and do so at a decent wage, or the whole system becomes unstable.
II. History—The Minsky Moment
The diagnosis of the current breakdown is clearly explained by a highly original American economist, Hyman Minsky, the author of Stabilizing An Unstable Economy (McGraw Hill 2008; first published Yale University Press, 1986). Minsky, who died in 1996, is little studied in university but read carefully by specialists in financial markets and is considered by many to have explained 2008 in full detail well before it actually happened.
Minsky was a radical, not a conservative Keynesian. His argument is that Roosevelt’s New Deal in its first seven years saved American capitalism from a total melt-down. In the post-war period, after 1945, the US economy was buttressed from inherent fluctuations by what Minsky called The Big Bank and Big Government.
Starting with the 1966 New York panic in the municipal bond market, however, the American economy entered cycles of repeated instability.
The very success of government intervention and lender-of-last-resort operations actually stoked further financial speculation, because increasing risk seemed to be “supported” and validated. Also important was the fact that many corporations began acting like banks, trading in all sorts of new forms of commercial liquidity beside US government bonds, and using debt – or leveraging – to do so. Repeatedly, investment went through a traceable cycle: from hedge investment in which present earnings cover costs, to speculation (earnings cover debt) , and then to Ponzi financing (increasing debt to pay debt). A crisis would happen, rescue would occur, and the cycle would begin again
From 1966 on, in 1970, 1974-75, 1982-1983, “The Big Bank” and “The Big Government” rescued the process at each turn of the wheel.
Much of this process was ideologically justified by a marriage of monetarists (following Friedman and Hayek) and conservative Keynesians – Ronald Reagan, for example, used “Military Keynesianism” (deficit financing of the military) to compete with the Soviet Union and get the US economy out of a dangerous recession in 1981.
Minsky is a very American figure. He said that he favoured “personal freedom and democratic rights,” but that the “safeguarding of so-called property rights…is not to my mind equal to the extension of individual liberty and the promotion of social justice.”
He was also an enemy of what the British economist Joan Robinson called “bastard Keynesianism.” Minsky thought that the supposed “debate” between monetarists and “Keynesians” in the 1970s, and after, was phoney because “Both monetarists and Keynesians are conservative in that they accept the validity and viability of capitalism…The view that the dynamics of capitalism lead to business cycles that may be thoroughly destructive is foreign to their economic theory.”
Hyman Minsky himself had an unusual program to fix the instability he described: an economy based on low investment and high consumption. He advocated the abolition of welfare and the corporate income tax, but high rates of progressive taxation for individuals earning large amounts. The government would create useful public sector jobs to achieve full employment and in the pursuit of equality it would regulate and intervene energetically to counter inherent financial volatility. Large-scale capital intensive production should be publicly controlled or owned.
Ironically, many people who believe deeply in “pure” capitalism, as Minsky did not, also think that he is right about this roller-coaster of repeating cycles that the world now seems to be on.
If Minsky is indeed correct, and Kalecki, whom Minsky followed intellectually, is right as well, then the “repair operation” now taking place in a number of countries will only lead to a much greater instability – unless the issue of economic class inequality is tackled head on by various leaders around the world. And if not, we are headed towards a massive “Minsky moment” that will further damage people in the most terrible ways.
III. West and East
At the time that this whole process was beginning – in the late 1960s and 1970s – I was working as a free-lance journalist. And while I am a rank amateur when it comes to the “dismal science, “ as a journalist I kept on being fascinated by the interaction between the economic and the political. In 1973, I went through the then Yugoslavia, Romania, Hungary and Poland – doing radio reports on the economies of the eastern bloc.
What struck me was not differences, but the similarities between western capitalist countries and regimes in the East. In both forms of industrial society, there was a deep alienation of people from the decisions that affected their lives. In the East, a nomenklatura of a petty-bourgeois type controlled the means of production and through political monopoly of power excluded the demos, so much so that a simmering resentment and rage lay below the surface. Economic disequilibria of all sorts took place – over-investment, shortages, waiting lines instead of inflation, poor wages.
After my travel across Eastern Europe, I ran across a left-wing economic atlas published in the U.K. and was intrigued because the editors had attempted to calculate the “rate of exploitation” of all the countries in the world, both capitalist and “socialist.” This rate of exploitation is a fundamental idea in Marx, and is a ratio between the wealth that a worker produces and the proportion returned to her or him in the form of a salary. This figure is difficult to measure, but that small atlas revealed a comparison that I believe to be true. The “rate of exploitation” in the U.S.S.R. was much, much greater than in a high-wage, capitalist country such as Australia. The producers in Eastern Europe were not only alienated from production processes, such as investment decisions, they were also systematically deprived as a social class.
In a recent edition of The Handbook of Economic Sociology, two left theorists, Lawrence P. King and Ivan Szelenyi, contribute a chapter called “Post-Communist Economic Systens,” and they describe the contrast between capitalism and the old Eastern Europe prior to 1989 in these terms: “ The ‘historic mission’ of capitalism was to separate the producers from production. [The weaver ceases to make cloth at home and becomes a worker in a textile factory.] Since actually existing socialism was implemented only in countries that did not complete capitalist development, socialism performed the same historic function.”
“Socialism” in Eastern Europe did indeed “separate the producers from production.” The workers often – though not always – became like drones with their work directed by technocrats. Szelenyi and others have described the managers of the U.S.S.R. and their allies as the “rational redistributors” of the system, ruling from above in the name of the working-class. Little wonder then that when 1989 came, this same group of superior bureaucrats quickly acquired and stripped state assets in a whole series of countries, co-operating, of course, with foreign and domestic investors.
Meanwhile in China in 1978, Deng Xiaoping and others launched the massive reform in which the Communist Party essentially adopted a capitalist path of development for China. This long-term transformation is of crucial significance for the crisis we are in, since the Minskian instability now involves three major poles of activity: The United States, Europe, and China.
IV. Without More Equality – A Long Crisis
At this point, class inequality has become an issue everywhere. One can truly say, without fear of exaggeration, that if the rate of exploitation becomes too severe, the world system we now know will collapse.
In early 2013, two highly experienced economists – Peter Temin (Professor Emeritus, MIT) and David Vines (Oxford) – produced a book directly addressing this question of systemic breakdown: The Leaderless Economy: Why The World Economic System Fell Apart And How To Fix It (Princeton University Press).
Temin and Vines say that we are now living through what they call an “end of regime crisis” that bears a marked resemblance to the world situation in the 1920s after World War I. Then Britain could no longer play the role of the “hegemon” in the global economic system. Now the United States, which replaced Britain in the leadership role in 1945, finds itself in that same situation, so once again the world economy is “leaderless” without an effective economic centre.
The result today is that certain countries, as in the 1920s, have accumulated debt, unemployment problems, and trade imbalances with other countries. Within Europe, a Germany in surplus exports to its fellow members in the European Monetary Union, but its partners cannot find a way to escape deficits of both trade and finance. The United States owes about $16 trillion, roughly the same as that of all Europe, while China runs a trade surplus and holds more than $3 trillion dollars of U.S. debt.
In the twenties and thirties of the last century, countries failed to co-operate. They applied rigidly restrictive policies in an attempt to stick to an outmoded gold standard, and brought chaos upon themselves. Near the end of their book, Tiemen and Vines comment: “After the experience of the industrial world with the gold standard after the First World War, it seems incredible that leaders do not recall the economic history of the interwar years and have produced the same straitjacket that makes the world economy so vulnerable. The current support for austerity policies follows exactly the same path of the gold standard in the early 1930s.”
Among the elites of Asia, Europe, and North America, perhaps the Chinese best understand the general dilemma, because they know they must strengthen their domestic market and move away from export-led development. But, even if it were desirable, they are not able at this time to supply “hegemonic leadership” of the type described by Temin and Vines, nor is the Chinese leadership ready for a real empowerment of its own workers.
For its part, the United States needs to completely reverse the policies of the last 30 years through a redistribution of wealth downwards. Europe requires a robust, fair federalism in which Germany, in particular, sees that it cannot pursue a mercantilist policy that oppresses its own partners in a currency union.
And everywhere the Common Woman and the Common Man need to regain the powers of production as their own.
Such an eventuality is unlikely because it entails an increase, not a diminishment, of economic equality. In the absence of such change, the crisis we are in will be long and difficult.