The crisis: over or just beginning?
Feature by Joseph Choonara, May 2010
The post-election period will be dominated by the dire state of the British economy. While the political elite are desperate to make us pay for the crisis, they are also paralysed by the fear of a renewed recession precipitated by speculation against the pound. Joseph Choonara reports
The state of the economy will continue to mould British politics after the election. Economics will constrain the room for manoeuvre of the political elite, pressing them to drive through a series of attacks. It will also create the terrain on which workers will have to organise and resist. The prospects for the system are, then, of keen interest to those who wish to challenge it. After almost three years of chaos, what lies in store?
It is worth reminding ourselves of the enormity of the crisis that has unfolded around us. It is estimated that lost output, the goods and services that went unproduced during the crisis, amounts to $4 trillion - enough dollar bills to stretch to the sun and back twice over. That sum would also be sufficient to provide basic education, healthcare, sanitation and nutrition to all those on the planet currently denied them, and to do so for 30 years. According to Andrew Haldane, the Bank of England's director of financial stability (an oxymoron if ever there was one), the permanent long-term impact of the crisis could magnify these losses to anywhere from $60 trillion to $200 trillion.
One of the oldest and most powerful arguments for socialism is the gap between what the system ought to make possible, the capacity of collective human labour to enrich the lives of those who undertake it, and the miserable reality of what it actually delivers. And every sign is that the impact of the crisis, which has already mutilated nations, tortured millions with hunger and sparked both instability and resistance, will continue to be felt.
A new phase of the crisis
A year ago economists Barry Eichengreen and Kevin O'Rourke published research showing that the "Great Recession", as it has been dubbed, was closely tracking the trajectory of the Great Depression that began in 1929. But history seldom repeats itself. In a recent update to their original paper they show how the global economy has begun to diverge from the path of that earlier meltdown (see graph).
The action of states across the globe, which engineered a series of financial bailouts, stimulus packages and liquidity injections on a scale hitherto unseen, is largely responsible for preventing a 1930s-style slump. But this intervention has come at a great price. Socialising the risks associated with the crisis, at the very moment when tax revenues were spiralling down, has replaced the danger of a private-sector meltdown with that of entire nations becoming bankrupt.
Events in Greece this spring are the clearest example. After months of insisting that it would not bail out the heavily indebted Greek economy, the German government, along with the other eurozone countries and in partnership with the International Monetary Fund (IMF), agreed to do just that. The bailout comes with strings attached - Greek workers, a fifth of whom already live below the poverty line, will now face a structural adjustment programme as savage as that imposed on many Third World countries in the past. In return the IMF and eurozone government will guarantee that Greece can, in the short term, roll over its debt. Even this may well merely postpone the inevitable as markets continue to bet on an eventual default.
But even if Greece does avoid bankruptcy, this is not the end of the matter. Several financial columnists likened the bailout to that of Bear Stearns, which in spring 2008 became an early casualty of the crisis on Wall Street. Few people now remember Bear Stearns, but most do remember the next big Wall Street bank to collapse - Lehman Brothers - and the meltdown that followed. Speculators are already looking for the next domino set to topple after Greece. It might be one of the other weak eurozone countries, with Portugal tipped as the most likely, but it might well be Britain.
As the Guardian economics editor Larry Elliott writes, "Greece's...projected budget deficit in 2010 is lower than those for the US, Ireland and, of course, Britain. The UK is helped by the long maturity of its existing debt, which removes some of the short-term pressures on government bonds, and by its floating exchange rate, which allows the currency to take the strain during a financial crisis. On the other hand, there are plenty of off-balance-sheet liabilities, a record peacetime budget deficit, a dysfunctional financial system and a grotesquely unbalanced economy.
"The assumption is that the US is too big to fail because the dollar is the world's reserve currency... The assumption is that Japan is too big to fail because a debt-to-GDP ratio in excess of 200 percent can always be financed by high levels of domestic savings. The assumption is that Britain is too big to fail because, well, just because those sort of things don't happen here."
As Elliott points out, this is hardly reassuring.
The weak recovery
All this is happening despite the fact that the major economies are technically out of recession. The recovery can be characterised in three words: "weak", "fragile" and "uncertain". The recovery is weak because the crisis, in spite of its severity, has not resolved the underlying problems capitalism faces.
The conditions for the crisis were created by three decades of sustained low profitability. This argument, often made by Marxist commentators, occasionally finds an echo in the mainstream press. So a recent column in the Financial Times lamented the collapse of the "return on capital", roughly equivalent to what Karl Marx called the "rate of profit". It pointed out that after the Second World War this held up at about 15 percent in the US. By the 1980s it was 10 percent, and today it is just 5 percent. If these figures are to be trusted, the system has gone from a situation in which US firms could double the scale of their investment in just six years to one in which it would take two decades - hardly a great advert for the dynamism of global capitalism.
Marx placed just such a long-term decline in the rate of profit at the centre of his theory of crisis. He also argued that profitability could be restored by crisis itself, through what he called "the annihilation of a great part of the capital". During a recession some companies fail and are bought up by rivals, and others have to sell off parts of their business or dump their stock on the market to meet their obligations. Those companies that survive can take advantage of this, grabbing assets at a fraction of their real value and putting them to highly profitable use in the recovery that follows. Depressed wages and high unemployment also allow capitalists to squeeze more out of workers. A process of "creative destruction" may lead to a boom following a slump.
But this is not some automatic process that pushes the economy back towards some natural equilibrium. The post-war boom followed only after the prolonged horror of the 1930s slump and the destruction of the Second World War, which also forced states to intervene to reorganise whole national economies.
The current crisis has led to a surge in firms failing. In the US the asset value of publicly listed companies filing for bankruptcy in 2008 and 2009 was greater than the total for the preceding 28 years. However, so far the current crisis has not been long enough or deep enough to clear out the system and pave the way for a boom like that of the 1950s and 1960s. Some of the big multinationals have been able to survive by reducing their output for a time in an attempt to ride out the storm. And, more importantly, states have intervened to keep failing businesses afloat, for instance by rescuing car manufacturers Chrysler and General Motors along with large chunks of the banking system.
Eichengreen and O'Rourke contrast the length of the Great Recession with that of the Great Depression: "Global industrial production now shows clear signs of recovering. This is a sharp divergence from experience in the Great Depression, when the decline in industrial production continued fully for three years." Paradoxically, staving off a catastrophic slump may have simply guaranteed that problems linger on, ensuring that recovery remains weak.
The recovery is also uneven. Initial estimates suggested that British growth slowed to just 0.2 percent in the first quarter of 2010. The US is growing faster, and is also faring better than Germany and Japan, which are more export-oriented and have suffered more from the decline in world trade than from the initial financial meltdown. China was also hit by falling demand for its exports but has continued to boom due to a massive state-sponsored domestic investment programme. This has revived the fortunes of some of the developing economies that supply it with raw materials. But even in China there are fears that growth is unstable, with widespread concerns about an emerging property bubble, a glut of lending raising the prospect of colossal levels of bad debt, and the danger that too much is being produced for still-limited markets.
The weakness of the global recovery means that workers will continue to suffer. In some countries this takes the form of high unemployment and attacks on wages, as in the US, Spain and Ireland. In others, such as Germany and Japan, where unemployment has not risen as fast, companies have sought to hold on to workers but have cut pay rates, reduced hours or shifted workers onto part-time contracts. Britain lies somewhere between the two extremes. Wages have been held below the rate of inflation and unemployment has increased significantly. In April the jobless rate hit 8 percent, the highest it has been in 14 years. This figure excludes the growing number of people no longer looking for employment, which currently stands at over 21 percent of those of working age. In addition, the number of people working part-time because they cannot get full-time work is at its highest level since 1992.
Unemployment and underemployment will persist well into any recovery. A recent IMF report argues that employment falls further and takes longer to recover during recessions that have a significant financial component. The report indicates that it could take a year and a half from the end of the recession for any substantial improvement, assuming that the recovery continues.
Accompanying the weakness of the recovery is its fragility. This is a product of changes to capitalism that took place during the past few decades. Faced with continued low profitability, capitalists began to shift their investment towards the financial system, where they hoped to be able to grab short-term paper profits. This created a series of bubbles as asset prices boomed, from the dotcom bubble of the 1990s through to the subprime mortgage and commodities bubbles that had swollen to huge proportions when the crash came.
These bubbles flattered economies with the impression of dynamism and kept the system ploughing forwards. Underlying them was a "mega-bubble" of credit, fuelled by low interest rates and excess savings seeking a profitable outlet.
Martin Wolf of the Financial Times, one of the ruling class's most brutally honest spokespeople, argues, "Quite simply, the financial system has become bigger and riskier. The UK case is dramatic, with banking assets jumping from 50 percent of GDP to more than 550 percent over the past four decades... A large part of the financial system seems to be a machine to transfer income and wealth from outside to inside, while increasing the fragility of the economy as a whole." He concludes that the financial system produced "illusory gains on the way up and real pain on the way down".
The excesses of the bubble era now emerging are astonishing. April saw the beginning of a series of litigations against those who created the arcane financial instruments traded in the run-up to the crash. Goldman Sachs stands accused of repackaging loans, including what it knew to be toxic debts, in an asset it created for the Paulson hedge fund. Paulson could then bet on its failure, while unsuspecting buyers lost out. So too did companies who insured the investment, including RBS and AIG, in which the British and US governments respectively are now the majority shareholders. Goldman Sachs denies the allegations, but whatever the outcome of the case it sheds light on the increasingly bizarre and bloated world of finance.
There is little evidence that the crash has "tamed" finance, as some left-leaning economists had hoped. Indeed, all the features of the bubble era are returning. Financial profits are growing far faster than profits in the wider economy; the housing market, which tumbled with the recession, is shooting back up, as are oil prices; speculation on exchange rates continues; banking bonuses are back. The super-rich are also returning to the conspicuous consumption to which they are accustomed, as evidenced by the 33 percent growth in sales of Dom Pérignon and similar high-end champagnes in the first three months of 2010.
Financialisation means each new problem that emerges is amplified as panic spreads rapidly through the system. This is what happened just before Christmas with the Dubai property crash and then in spring with events in Greece. All of this lends an additional fragility to the already weak recovery.
An uncertain future
Finally, any recovery is and will remain uncertain. State interventions replaced private borrowing and investment with mountains of public debt, and falling tax revenues made it difficult to recover the money spent. Now governments everywhere face a dilemma. Do they cut back to pay off their debts, risking a "double-dip recession" as the stimulus is withdrawn? Or do they continue spending and risk a run on their currencies, as the eurozone experienced amid fears of a Greek default?
Chris Giles writes in the Financial Times, "Never has a UK government borrowed more in peacetime than Labour did last year, when it was in the red to the tune of 11.8 percent of national income. Never has a government had to obtain £1 for every four it spends from investors rather than tax payers. And never has a government borrowed £6,000 annually, as in 2010-11, on behalf of every household, with a further £25,000 expected over the course of the coming parliament."
Even if Britain avoids a complete loss of faith on the part of its financiers, the political elite is committed to an assault on the public sector the likes of which we have never seen. The general election result was unknown as Socialist Review went to press but the consensus between the parties in the run-up to polling day was greater than the differences. As Giles argues, "In terms of defined spending cuts, each [party] has outlined less than £10 billion worth - far less than the minimum £40 billion needed in the first three years." In order to appease the City of London real government spending will have to be slashed by about one fifth, he concludes.
Similarly, the Chartered Institute of Personnel and Development, a body representing human resources professionals, predicted "a 10 percent reduction in the 5.8 million core public sector workforce...the likelihood of 500,000 jobs being shed in the next five years dwarfing the figures the parties have been prepared to acknowledge".
Challenges for the left
The scale of the challenge facing the left can seem paralysing. But it is important to remember that crisis also weakens and divides our rulers.
Capitalism has been discredited in the eyes of many who live under it as once solid certainties have melted into air. The crisis has sharpened the divisions within the ruling class, setting its representatives against each other as they each seek to find ways to preserve their profits at the expense of their rivals. Different groups of capitalists are coming into conflict on a global and national level, further fracturing the ideological consensuses of our age and creating cracks that the left can exploit by putting forward its own arguments.
The political elite who claim to preside over the system have suffered blow after blow to their legitimacy. Any incoming government will be a weak one, lacking real hegemony over those it seeks to rule. But it will be under pressure from the wider ruling class to drive through attacks on an unprecedented scale, whether it does so enthusiastically or reluctantly. This is an explosive combination, and in this context there will be further struggles, both local eruptions and national disputes.
Politics will be crucial to these battles. For instance, in order to break out of the commonsense view that some part of the public sector has to be slashed, it will be necessary to argue that there are other ways of raising the money - through cutting the budget for the Trident nuclear programme, for example, or closing tax loopholes exploited by the rich, or by increasing the top rate of income tax. That means challenging the agenda of the mainstream political parties. Politics can also bridge the gap between local campaigns to defend public services and struggles by groups of workers in these services who also wish to defend their wages and their jobs.
The Right to Work initiative, set to hold an emergency conference on 22 May, can begin to draw together a network of solidarity and resistance, strengthening each of the different battles and maintaining a permanent relationship between all those who want to fight back.
At the heart of the resistance, we also need a growing core of revolutionaries committed to a socialist alternative to capitalism and capable of arguing for a way forward for the working class movement as a whole. The situation in the coming months can change very rapidly indeed. To rise to the challenge, the left must be able to match the pace of events.
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