January 2013 marks the beginning of the sixth year since the last crisis began in August 2007 and the fifth year since the crisis reached its climax with the panic on Wall Street in September 2008. Compared to the stormy events of those years, recent weeks have been relatively quiet.
The European debt crisis has at least momentarily eased with the decision of the European Central Bank to expand the euro-denominated monetary base—though much of the European economy remains in the grip of recession with unemployment still rising. In the U.S., the economy remains sluggish as the leaders of the ruling class seek ways to accelerate growth in order halt and reverse U.S. de-industrialization and prevent a serious social and political crisis.
This is therefore a good time to take a larger view of the current economic situation within the broader long-term evolution of the capitalist system. This month I will focus on the U.S. government deficits and the current austerity drive.
The U.S. federal government is now carrying a debt of over $16 trillion and is fast approaching the current legal maximum of $16.4 trillion. The financial situation of the federal government doesn’t affect only the United States but the entire world, since not only is the U.S. government the world’s biggest borrower, it is also the center of the entire world imperialist system.
Real versus manufactured crises
On New Year’s Day, just as I predicted last month, a last-minute agreement was reached between the Obama administration and the congressional Democrats and Republicans to avert mandatory tax hikes and spending cuts that would have withdrawn as much as $800 billion of purchasing power from the U.S. economy over the next year. If such a withdrawal of purchasing power had actually occurred, the U.S., and perhaps the world, economy would have been thrown into an artificial, government-induced recession that would have aborted the current global industrial cycle. Exactly because of this, there was virtually no chance this would actually happen. Far from seeking to induce a recession, the political leadership of the U.S. ruling class is attempting to accelerate the slow rate of growth of the U.S. economy.
What would a real crisis in U.S. federal government debt look like?
Back in August 2011, the Democrats and Republicans came to an agreement to cut the federal deficit by some $1.2 trillion over the following 10 years. However, with the U.S. government able to borrow at the lowest interest rates since the years immediately after the Great Depression and World War II, and the U.S. dollar for now at least holding its own against gold and other major currencies, there is no immediate real crisis of U.S. government finances despite the over $16 trillion federal debt.
A genuine financial crisis in the finances of the U.S. government would take the form of a plunging U.S. dollar against gold, and probably other currencies as well, that would bring into question the continued role of the U.S. dollar as the standard of price of globally traded commodities, and consequently as the almost universally accepted means of payment on the world market. This is the system that I call the “dollar standard.”
The U.S. government and the Federal Reserve System would then be unable to halt the dollar’s sharp decline without a sharp increase in the rate of interest on the money that the U.S. government has to borrow. Under these conditions, the only way out would be a combination of dramatic cuts in U.S. government spending, including military spending, or sharply higher taxes under pain of the collapse of the dollar-centered international monetary system.
What would a collapse of the dollar system mean?
A collapse of the dollar system would mean that the U.S. government would no longer be able to pay its debts in a medium—U.S. dollars—that it creates itself. Instead, it would have to pay its debts in some other medium, either a currency it does not issue or even gold itself—“the coin of last resort,” as Marx called it. Such a situation would signal the financial collapse of the U.S. world empire and with it the military and political collapse as well and the opening up of an entirely new period in world history.
The absence of a crisis such as the one I described above doesn’t mean that the U.S. government does not face long-term financial problems that if not addressed in good time will lead to a genuine U.S. government financial crisis. However, in order to make the kind of cuts that the U.S. rulers have decided will be necessary to avoid a future crisis of federal finances, a crisis atmosphere must be created. They fear with good reason that if they wait for a real crisis, it might be too late to save the U.S. world empire.
So in the absence of a real crisis, the Democrats and Republicans, with the Republican Party in the lead, decided to create a phony crisis. In 2011, the Republicans announced that they would refuse to grant a routine request from the Obama administration to raise the maximum level of the debt the federal government is legally allowed to carry unless there was a general agreement to reduce the deficit substantially over the next 10 years.
In theory, if the federal government “maxed-out,” it would be unable to borrow more money, not because capitalists would be unwilling to lend it more money but for purely legal reasons. Such a default really would undermine the credit of the U.S. federal government, since capitalist money lenders would be uncertain whether and when the principal and interest payments due on that debt would be repaid. Exactly because of this, there was never any real chance the U.S. government would default.
The solution to the fake crisis of August 2011 involved the Democrats and the Republicans setting a deadline of December 31, 2012, to agree to a series of tax increases and spending cuts to bring back under control the rate of growth of the federal debt. In addition to buying time to work out the details of the cuts—the devil is always in the details when it comes to unpopular measures—the December 31 deadline would be after the 2012 presidential and congressional elections. It would also be during the Christmas-New Year’s holidays when large demonstrations are unlikely, since even many left-wing political activists often spend the Christmas holidays with their families.
The New Year’s Day deal
However, the Obama administration and the Democrats and Republicans were not able to come to a “Grand Bargain” involving cuts to such highly popular “entitlement programs” as Social Security and Medicare. They therefore came to an agreement on a partial repeal of the Bush-era tax cuts while delaying an agreement on the “entitlement” cuts for several more months.
It was agreed to allow Bush’s income tax cuts on incomes over $400,000 per year to expire. This, however, leaves intact the overwhelming bulk of the series of regressive tax cuts that began with income tax cuts proposed by President Kennedy before his assassination and passed under Lyndon Johnson in 1964. The income tax increase on incomes above $400,000 was very slight, rising from 35 to 39.6 percent—and the wealthy have many ways to avoid even this modest rate.
To keep things in perspective, the new marginal tax rate on the highest incomes is a far cry from the 90 percent that prevailed under the Eisenhower administration in the 1950s. There was also a slight increase—from 15 to 20 percent—in the tax on those inheriting $5 million or more. In one concession to the working class, it was agreed to extend the eligibility for unemployment insurance to 2 million unemployed workers who would otherwise have faced the termination of their insurance payments.
The next scheduled artificial crisis
The U.S. federal government is expected to reach its current maximum debt limit of $16.4 trillion in February or March. Now the Republicans are saying they will agree to a three-month extension of the federal debt limit to give congressional Democrats time to agree to deep spending cuts—mainly no doubt in the so-called “entitlements” Social Security and Medicare—in return for Republicans agreeing to any subsequent increase in the debt limit. If members of the Senate, controlled by the Democrats, fail to agree on a budget that includes such cuts, the House, controlled by the Republicans, will cut off their pay, Speaker of the House John Boehner announced.
As for docking the Senate’s pay if it does not adopt the budget insisted on by the Republicans, Boehner said, “the principle is simple: No budget, no pay.”
In response, White House press secretary Jay Carney issued a statement saying that President Obama would welcome a “clean” short-term extension of the debt limit that did not include cuts.
As the federal government approaches the temporarily raised debt limit over the next several months, another artificial crisis atmosphere will be generated and warnings will abound about the imminent financial and economic collapse if an agreement is not reached to cut Social Security and Medicare. Once again the chances are virtually zero that the government will be allowed to default on that most holy of holies of the capitalist system—the debt and interest payments due on the national debt.
The real danger
The real danger is not a financial collapse caused by a failure of the Obama administration and the Democrats and Republicans in Congress to agree on how much to cut Social Security and Medicare. Instead, the danger is that in the name of staving off financial collapse the Obama administration and Democrats “will do the right thing for America” and agree to a compromise that will grant most if not all of the Republican demands.
If this happens, it will not only be a blow for the U.S. workers but for the workers of other capitalist countries as well. The capitalists of other countries will say that with the United States moving to dismantle social insurance—the social wage—the U.S. capitalists are going to become far more competitive. We have no choice, they will say, but to match U.S. cuts or face losing our market share to the U.S. capitalists.
Rise in the payroll tax
One tax increase that the Republicans agreed to that will affect almost the entire U.S. working population will be the rise in the payroll tax from 4.2 percent to its previous level of 6.2 percent. In the U.S., only a portion of the payroll taxes are used to finance the already highly inadequate Social Security pensions of retired workers.
The Social Security system by design runs a surplus—more is paid into the Social Security trust fund by those of working age than is paid out to retirees. The difference is handed over to the U.S. government via the purchase of special Treasury bonds—mostly to the Pentagon and the “intelligence community” to protect and extend the U.S. world empire. The Pentagon and “intelligence community” fear that as the baby boomers retire over the next several decades the Social Security surplus will shrink, depriving them of an important source of funds.
One way to deal with the “danger” of a shrinkage of the Social Security surplus would be to tax all the income of the rich, with the money going to the Social Security trust fund. Barring complete economic collapse, this would ensure the solvency of the Social Security trust fund indefinitely. The only problem is that it would involve increasing the taxes on the rich, something that the combined Democratic and Republican regime wants to avoid at all costs. The Obama administration and the Democrats and Republicans therefore dealt with the “problem”—for the Pentagon and “intelligence community”—in the most regressive way possible, by increasing taxes on hard-pressed workers.
Is the federal debt really a problem for the U.S. ruling class?
There is a school of thought based on Keynes that holds that the austerity drive now being carried out by virtually all capitalist governments to one degree or another is a huge mistake. The bourgeois and progressive opponents of austerity hold that in light of the huge number of unemployed workers and idle machines, the capitalist governments should be increasing not reducing their deficit spending. Only when “full employment” returns, or at least appears imminent, should capitalist governments begin to take measures to reduce their deficits, they say.
Such arguments are popular on the political left, among trade unionists, and within the left wing of the Democratic Party—and similar arguments are made in Europe on the left-wing of the political spectrum. However, these arguments enjoy little support in capitalist circles.
How serious is the problem of the federal debt? Are the progressives correct when they say that in light of continuing economic stagnation and the resulting unemployment crisis government deficits are not a problem but should actually be increased? What are the economic limits as opposed to the legal limits of the debt that the government that issues the global currency—that is, the U.S. government and its Federal Reserve System—can carry?
It is not the absolute size of the debt that matters, it is the relative size of the debt. For example, a $10,000 personal debt may represent a big problem for you. But for Bill Gates a $10,000 personal debt would be no problem at all.
One way to measure the U.S. federal debt is not in terms of U.S. dollars but rather the ratio between the debt and the GDP. Remember, the GDP supposedly measures the total value the country’s annual production. There are problems with the GDP, but for now let’s leave them aside, if only because the ratio of federal debt to GDP is calculated and widely reported. So as a first approximation, let’s look at the actual evolution of this ratio since the end of World War II. (1)
The highest this ratio ever reached in the entire history of the U.S. was at the end of the World War II when it reached 112 percent. As we know, this level of debt did not create a crisis. The ratio of federal debt to the GDP then declined, hitting a low point of around 25 percent at the beginning of the 1970s. This drop occurred despite the Cold War and the Korean and Vietnam hot wars. In this period, the federal debt was therefore not much of a problem despite claims of the right wing of U.S. bourgeois politics to the contrary.
The ratio of federal debt to GDP bottomed out during 1970s and began to rise during the Ronald Reagan administration, peaking out at just under 50 percent before it began to decline once again.
Why did this ratio, which had been falling before the 1970s economic crisis, and was more or less stable during that decade, start to rise so sharply under Ronald Reagan? The reason is the dramatic tax cuts for the rich carried out by Reagan combined with a huge increase in military spending designed to encourage the capitulationist trends in the Soviet Union represented by Mikhail Gorbachev.
Unfortunately, Reagan’s policy in this regard was successful (2), but the U.S. also paid a price in the form of a rise in the federal debt relative to GDP. Under Reagan, the marginal tax on the highest incomes fell to under 30 percent, a level unknown since the days of Calvin Coolidge and Herbert Hoover before the Great Depression. Back then, though the U.S. already had an empire, it was modest compared to the world empire of the post-1945 years. Overall, U.S. military spending was very low by post-1945 standards, and there was virtually no social spending at all.
Starting under Hoover (3) and then Roosevelt, the marginal tax rate on the highest incomes climbed to over 90 percent and continued at these rates right through the Republican Eisenhower administration. This doesn’t mean that the billionaires actually paid a 90 percent tax on their incomes. The U.S. tax code had, and has, many “loopholes,” and the rich hire armies of accountants and lawyers to take advantage of them. But overall, during the rise of the U.S. empire the U.S. ruling class was much more willing to tolerate a high rate of taxation on themselves than they are today.
Under Reagan’s two immediate successors, the Republican elder Bush and the Democrat Clinton, Reagan’s deficit-breeding polices were modified. First, thanks to the Soviet capitulation, the U.S. was able to reduce some expensive military programs without undermining its global empire, an empire that had been greatly strengthened by the Soviet surrender. In addition, the marginal tax rates on the highest incomes, though not restored to anything like the 90 percent level of the Eisenhower years, were raised from a Coolidge-like rate of under 30 percent to around 40 percent.
Many progressives foolishly looked forward to a “peace dividend” in the 1990s due to the end of the Cold War. Instead of a peace dividend, the Clinton administration cut social spending, “ending welfare as we know it“—more than Reagan had dared to do.
With the “danger of communism” lower than it had been for decades, the U.S. ruling class that Clinton represented saw far less need to make concessions to the workers. In addition, under Clinton the U.S. experienced a cyclical acceleration of economic growth—even though that growth was modest by historical standards—which increased federal revenues. As a result, the ratio of the federal debt to GDP began to shrink once again from just under 50 percent of the late Reagan years to just over 30 percent—well below the postwar highs and only modestly above the postwar lows of around 25 percent.
Indeed, the U.S. government was running an actual surplus by the later Clinton years. Many (bourgeois) economists predicted that the federal government would continue running surpluses for many years to come. The argument went that with the Internet revolution, economic growth would continue at least at the level of the late 1990s and would more likely accelerate. The result would be many years of federal government surpluses—tax receipts exceeding expenses—which would not only reduce the ratio of federal debt to GDP but would allow the debt to be gradually paid down altogether. (4)
Basing its policy on these rosy economic forecasts, the George W. Bush administration believed that it could make new tax cuts and launch a new series of costly wars without having to worry about the financial cost. After all, there was no need to actually retire the federal debt altogether was there? Indeed, the administration’s economists claimed that by cutting taxes on the capitalists, the capitalists would be so stimulated to invest that the federal government would be able to run surpluses despite or even because of the lower taxes. (5)
However, the combination of Bush’s new tax cuts for the rich, his invasions of Afghanistan and Iraq, and the general “war against terror”—a misnomer if there ever was one—together with the first drop in economic growth compared to the Clinton years, followed by the “Great Recession” and subsequent very slow growth, meant that the ratio of federal government debt to GDP has now reached 72.8 percent and continues to rise.
While this is still below the ratio of 112 percent that prevailed immediately after World War II, if the current trend continues it will rise above 112 percent, which would be an all-time high. It seems that it will be only a matter of time before the U.S. government faces a real financial crisis, or so the supporters of “austerity” argue.
What is the limit of the debt?
The mathematical maximum for the total debt—federal, state and local as well as corporate and consumer debt—is the level at which the entire national income—total profits plus wages before taxes—would have to be used to pay the interest on the debt. Of course, this can never happen. If it did, the workers would have to spend their entire after-tax income servicing their debts. They would have nothing left over for food or other commodities and would starve to death. Therefore, long before this mathematical limit is reached, something would have to give.
The mathematical limit for federal debt alone would be a situation where all wages would have to taxed at a 100 percent rate and used to pay the interest on the debt. This would assume that there are no other debts, either local or state government debts, corporate or consumer debts. Again this is a situation that is clearly impossible, since it would mean among other things the extinction of all members of the working class through starvation.
So much for the mathematical limits, what are the practical economic limits?
Whether a given ratio of federal debt represents a crisis or not depends on many things. Not least of these is the weight or extent of non-federal debt. The greater non-federal debt, all other things remaining equal, the less debt the federal government can carry. Non-federal debt consists of the debts of state and local governments plus corporate debt and consumer debt.
Private debt has grown much faster than federal debt
In fact if we look at the post-World War II era as a whole, we see that it is private debt not federal debt—and central government debt of other capitalist countries—that has been the real engine of debt. This is something almost completely ignored by right-wing economists and the Wall Street supporters of austerity.
“Between the first quarter of 2004 and the first quarter of 2009,” the September 19, 2012, online edition of the London Economist reported, “private-sector non-financial debt rose by an average of 43% of GDP in the Western countries shown (excluding Germany).” Therefore, it was an explosion of private debt—not government debt—that preceded the Great Recession.
And indeed, since World War II, even at today’s 72.8 percent level, the U.S. federal debt overall has been declining while private debt—corporate and consumer debt—has risen tremendously relative to the U.S. GDP and the GDPs of other big capitalist countries. And this brings us to the nub of the problem.
The world’s industrial capitalists would not have been able to sell at profitable prices the tremendous quantity of commodities they have produced without an ultimately unsustainable inflation of credit. Behind the problem of growing debt, including the rise of the debt of the U.S. government—which has made only a relatively] modest contribution to growth of overall debt—is the problem of the general overproduction of commodities.
It is certainly possible to imagine a situation—and it has occurred in the past—where the growth of the debt of the central government eventually leads to a devastating financial crisis. Not all financial—and monetary—crises, as Marx explained, represent crises of overproduction. Financial and monetary crises can occur for many reasons other than a general overproduction of commodities. For example, such crises have occurred in the past because the government’s demand for resources overwhelms the productive capacity of society. These types of crises tend to occur during periods of full-scale war economy. But this is not the situation we have today.
It is the overproduction of commodities that lies behind today’s debt problems and not the excessive claims of the government against the total global product. Capitalist society, looked at globally, indeed has a growing debt problem not because it has produced too little but because it has—relative to the purely capitalist limits on production—produced too much!
This doesn’t mean that growth of the debt of the U.S. federal government—and other capitalist governments—is no problem at all simply because it has taken place in the context of a much faster growth in private debt. During a crisis of overproduction, a growing government debt tends to undermine the ability of the government to play the “countercyclical” role that “stabilization policies” assign it. The possibility of a disastrous interaction between rising private debt and government debt is indeed a real danger that confronts the capitalist class in the years ahead.
Therefore, one factor that determines the upper limit on how much debt the U.S. federal government can carry without destabilizing the capitalist system is the level of corporate and consumer debt. The other factor is the rate of interest the U.S. government—and other capitalist governments—have to pay on borrowed money. After all, military and “intelligence” expenditures—excluding the self-financing Social Security system—have caused interest payments the government has to pay on the debt to be the the second biggest item in the U.S. federal budget.
If the federal government can borrow at a low rate of interest, and if state and local and, far more importantly, private debt levels are low, the federal government can carry a much higher debt than it can when interest rates are high and/or when the debt levels of state and local governments, corporations and individuals are high.
One of the the great paradoxes of capitalist production is the fact that the federal government—and other central capitalist governments—can run much higher deficits and safely carry a much higher debt relative to the GDP when the economy is in a cyclical depression and the GDP has shrunk than it can during periods of cyclical prosperity when the GDP is rising. Indeed, Keynesian economics largely bases itself on this paradox, and it plays a role in ruling-class decisions to launch wars.
As I explained last month, the U.S. ruling class is counting on a significant acceleration of economic growth in the years to come in order to halt and at least partially reverse de-industrialization under pain of losing its worldwide empire.
At the same time, the political leaders of the U.S. capitalists want to see a resurgence in the private ownership of homes, which since New Deal days has played an important role in maintaining political stability in the U.S. As a general rule, workers who are homeowners are politically much more conservative—since they have something to lose—than workers who are renters. (For more on the question of home ownership, see this post.)
This is why the media is so excited about the renewed rise in home prices—though from depressed levels—that occurred in 2012 and are desperately hoping that this rise will continue in effect forever. At the same time, the leadership of the U.S. ruling class is counting on a major rise in corporate investment in order to achieve the hoped for re-industrialization.
If one or more of these things are not achieved—a new prolonged rise in home prices and ownership and/or a major rise in private corporate investment to accelerate economic growth and realize at least some re-industrialization—the hopes of the American capitalist class for a second “American century” will be put in grave peril.
If these aims are to be achieved, there will have to be sooner or later a major rise in private demand for credit—now sharply curtailed in the aftermath of the Great Recession—on the part of both corporations and individuals. Where is the loan money to come from to finance all this?
In part at least, the U.S. ruling class is agreed that it must come from a halt to a continuing rise of the borrowing by the federal government that has characterized the whole period since the Great Recession. To the extent that the federal government can reduce its borrowing, funds will be released for other purposes such as financing a continued recovery in home prices and eventually a new expansion of homeownership, as well as the hoped-for re-industrialization.
The most logical way to deal with the long-term debt problem would be to raise the rate of taxation on those most able to pay, the wealthy, reversing the trend—with some ups an downs—of regressive tax cuts that began with the Kennedy/Johnson (6) tax cut of 1964 and reached its climax with the Reagan tax cuts of the 1980s.
But throughout history, the ruling classes of reigning empires have resisted paying taxes. Beginning with the Hoover tax increases of 1931 and continuing through the Roosevelt years—both the later Depression and the World War II years—the U.S. ruling class tolerated a considerable rise in taxes. Then it wasn’t a question of maintaining a huge world empire but establishing it. From the viewpoint of the U.S. ruling class, the relatively high rate of taxation of those years could be looked upon as a kind of investment.
In order to establish the kind of worldwide empire in which all the other imperialist powers—Germany, Britain, France, Italy, Japan and so on—would be reduced to mere satellites of the U.S.—and their colonies and semi-colonies opened up for exploitation by the U.S. capitalists without restrictions—a world war would have to be fought and won. World wars cost money as well as human lives.
Once the world was totally subordinated to U.S. imperialism, the empire builders figured tribute in one form or another would be extracted from the conquered nations and the taxes would be reduced. This willingness to tolerate a relatively high rate of taxation on the wealthy continued beyond the Roosevelt years to the Eisenhower years due to the “threat of communism”—that is, of world socialist revolution. Within this framework, the U.S. ruling class realized that in order to consolidate the U.S. empire it would be necessary to undermine and eventually overthrow the Soviet Union. This too cost money.
But in the longer run, the whole point of empire is to extract the loot and not to pay for the costs of empire. The burden of the costs of empire has to be transferred to the victims of the empire. Therefore, beginning with the Democratic Kennedy-Johnson administration of the 1960s, the U.S. government began to slash taxes on the wealthy, who benefit most from empire. The downward trend of federal taxation, especially on the rich, has continued with some fluctuations.
For example, after the initial tax cuts of the Kennedy-Johnson years, in 1968 the Johnson administration was obliged to request a temporary income tax surcharge of 5 percent as part of a move to balance the federal budget. With the the U.S. economy booming and the quantity of loan capital coming under pressure, the policy makers of the Johnson administration felt obliged to free up loan capital by halting federal borrowing in order to support continued corporate and consumer borrowing. This episode is a good example of how the ability of the central government of a capitalist country to borrow falls during a cyclical economic boom. I will examine this entire phenomena much more closely next month.
As has been the case in various forms throughout history, the rise and growth of empires has meant the decay of the productive forces of the ruling nations relative to other nations. This is why no empire lasts forever. In the early days of the U.S. world empire—Roosevelt through Eisenhower—U.S. industry dominated the world market. This enabled the U.S. to develop the overwhelming military power to make the global empire possible in the first place. Today, however, U.S. industry faces fierce competition from Europe, Japan and, more recently, the rising Asian countries, most importantly but not only China.
The U.S. ruling class feels that it cannot afford to return to the levels of taxes on itself that it tolerated when U.S. industry ruled the markets of the world. They have therefore, just like the ruling classes of all the declining empires before them, been fiercely resisting any rise in their tax “burden” since the days of Kennedy and Johnson. Since the ruling class is unwilling to tolerate a level of taxation on itself that would actually solve the deficit problem, that leaves cuts in federal spending.
Where to cut the budget
The huge war machine necessary to maintain the empire, designed not only to keep the workers and peasants of the world down but also prevent any challenge from rival imperialist powers or new rising industrial nation, is extremely expensive. However, since there is general agreement among the Democrats and Republicans that the war machine is necessary for the empire, there is great resistance to cutting war spending. And since Clinton, welfare spending has been cut to the bone, so that leaves Social Security and Medicare.
Therefore, there is a general agreement among Republicans and Democrats alike to cut the so-called entitlement programs of Social Security and Medicare. These programs are extremely popular, and the “opinion makers” of the capitalist class have had great problems whipping up sentiment against them—though they have tried. The government would face the possibility of real resistance if it attempts to cut too openly. As a result, the Democrats and Republicans are having great trouble coming up with the details of exactly how and by how much—and how rapidly—to make these cuts.
The Democrats with an eye on their base of trade unionists, virtually all people of color, and political progressives will push for more limited cuts. Then as the artificial crisis over the raising of the federal debt limits reaches its climax in the next several months, with a federal default only “days if not hours away,” an agreement will be made for “the good of America” that will accept many though not all Republican demands.
The exact details, as always, will depend on the balance of forces. But unless there is an unexpected surge of mass struggle—mass demonstrations, political strikes and the like—the results will not be good for the working class in particular and for working people including farmers and small business people in general.
Will the current U.S. and global economic stagnation continue?
As we have seen, the current low rate of economic growth has paradoxically made it easier for the U.S. government to run up huge debts and pay a very low rate of interest on this borrowed money. This raises an interesting question: Will the current U.S. and global economic stagnation continue with the low demand for credit from corporations and consumers? As we know, the recent rate of economic growth has been extremely slow, particularly for a post-crisis period.
Many on the left have drawn the conclusion that the extremely low rates of economic growth and the resulting sharp drop in the demand for credit, aside from governments, are permanent and that no significant acceleration of economic growth—capitalist expanded reproduction—can be expected in the years ahead.
This assumes that the industrial cycle is largely defunct. In the place of the capitalist boom/bust cycle has come permanent depression/stagnation that will continue until the working class finally overthrows capitalism—an outcome that will be greatly accelerated by the indefinite continuation of depression/stagnation.
If this indeed turns out be true, we would have a major mutation in the very nature of capitalism on our hands, something that would actually be hard to explain within the framework of Marx’s economic theory. In that case, we might have to subject Marx’s theory to a process of critical revision.
We should keep in mind, though, that however long the economic stagnation seems—especially to the unemployed—it is still a very brief period in the history of capitalism. By proclaiming the current economic stagnation permanent, we are running the risk of succumbing to mere impressionism, much like the bourgeois economists who always predict never-ending prosperity during economic booms and never foresee the coming crisis.
Forces tending toward a cyclical acceleration of the rate of economic growth
One factor that will likely lead to a cyclical acceleration of economic growth over the next few years is the need to replace durable commodities that are wearing out. Many of the optimistic forecasts being made by bourgeois economists about rising auto sales, for example, are based on the increasing average age of automobiles currently on the road.
It indeed appears that the need to replace the aging auto fleet is playing an important role in the current upward movement of auto sales—though, to keep things in perspective, they are still well below the best levels that prevailed just before the crisis broke out in 2007-08.
Another example is the aging of the U.S. airline fleet—now according to Bloomberg News one of the world’s oldest and least fuel-efficient with an average age of 14.8 years.
The media also points to the need of businesses as well as consumers to replace aging computers. With the current generation of desktop computers no longer much improved in the sense of raising the productivity of office workers—despite Moore’s Law (7)—as was the case in the early days of desktop computers, the fact remains that computers over five years of age or so are increasingly likely to fail and will need to be replaced.
Much more importantly, since the crisis and the economic stagnation that it has bred began, the replacement and expansion of factory machines around the world have been curtailed. At a certain point aging factory machines will need replacement, and when that happens, there will have to be a new surge of investment. Remember, Marx explained the 10-year duration of the industrial cycle by the need to replace large numbers of factory machines after about 10 years of use.
Another factor working for a period of accelerated growth at some point is the current rise in gold production as the profitability of producing gold both relatively and absolutely has increased since 2008.
The capitalists have gotten the message delivered to them by relative and absolute fluctuations in profit rates that in the years leading up to the Great Recession they were producing too many commodities and not enough new money material. Since 2008, commodity production has been stagnant while the production of money material has been increasing. I will take a closer look at this next month.
All this indicates that the industrial cycle remains very much alive.
Importance of changes in the phase of the industrial cycle
Far from denying the likelihood of an upward movement in the industrial cycle, we must keep such a prospect in mind. At some point, the demand for the commodity labor power will inevitably increase. Almost certainly, this rise in demand for labor power will not be nearly enough to absorb the huge mass of those currently unemployed, but a certain portion of them all the same will indeed find jobs and gain the possibility of fighting against the bosses.
Already we see, unlike the crisis proper in 2007-2009 when employment was actually falling rapidly, since the crisis phase of the current industrial cycle gave way to the depression/stagnation phase around July 2009, that total employment has begun to rise, though much too slowly to absorb the tremendous reserve army of the unemployed—hence the continuing unemployment crisis. The rate of growth in employment will likely increase further as the industrial cycle emerges from the current stagnation phase and enters the phase of average prosperity and then boom.
Far from this being a bad thing, an increased demand for labor power will offer the possibility of rebuilding the trade unions and other workers’ organizations, including the political organizations.
There are, however, factors that are tending to lengthen the current phase of stagnation. One is the extraordinarily high level of private debt. As people use their incomes to pay off debts, they have far less ability to purchase commodities, keeping the demand for commodities low. In addition, as far as the U.S. is concerned, the rise in the payroll tax will tend to dampen consumer demand. Any “austerity measures” that Obama and the Democrats and Republicans agree to will work in the same direction, as will the austerity measures adopted in other countries.
So it is quite possible the current economic stagnation will continue for a while longer. But sooner or later, there will be a quickening of economic growth that will inevitably lead to a new crisis.
The great paradox of government finance and the industrial cycle
And this brings us back to the great paradox of government finance. It is far easier in a developed capitalist economy for the central government to run deficits during periods of cyclical economic depression and stagnation then when the economy is booming. I haven’t had the space to explain in detail why this is the case in this post. This will be central question that I will examine next month. As we will see, the paradox of the declining ability of the central government to borrow during an economic upswing lies at the heart of crisis theory.
Posted January 20, 2013
1 A favorite trick of right-wing economists and “opinion makers” is to chart the absolute rate of growth of the federal debt in terms of U.S. dollars. The numbers are astronomical and you wonder why the U.S. federal government didn’t go bankrupt decades ago.
Left out of these arguments is, first, the fact that a U.S. dollar that represented 1/35th of a troy ounce of gold after World War II represented a lot more real money than a dollar that represents around 1/1600th of a troy ounce of gold—real money—today. Also left out is the size of the national income—measured in terms of these radically depreciated dollars—allocated to servicing the federal debt. If the national income—total wages and profits—were the same as in 1945 and the U.S. dollar still represented 1/35th of a troy ounce of gold, with a $16 trillion debt the U.S. government would indeed have long since gone bankrupt.
2 The question of what caused the counterrevolution in the Soviet Union and the role Reagan’s policy played in it is of great interest to all Marxists but lies well outside the subject matter of this blog, which centers on the question of capitalist crises. However, I will note here that the capitalist propaganda machine worked overtime to encourage the so-called “pro-Western”—really pro-capitalist”—tendencies in Soviet politics that opposed the sacrifices needed to construct socialism in a hostile capitalist environment. In order to do this, they used both the carrot and the stick.
The carrot was the promise that the the population of the Soviet Union would enjoy a much higher living standard if only the Soviet Union stopped challenging Western imperialism and supporting national liberation movements. The stick was that if the Soviet Union did not capitulate to imperialist demands, the Soviet people would be obliged to spend an ever greater amount of their national income on defense, reducing the amount that could be spent on the production of consumer goods.
The idea was to make the pro-socialist forces within Soviet society appear to be the ones responsible for the relatively low living standards and continued hardships of the Soviet people while allowing the pro-capitalist reactionaries—and their stooges within as well outside of the ruling Communist Party—appear to be the champions of the interests of the working class.
Gorbachev and the pro-capitalist forces behind him justified their policies of capitulation to Reagan’s demands—which they called the “new thinking” and the policy of putting “universal human values” over the class interests of the workers—by claiming that their policies would mean a radical reduction in military spending that would in turn make possible a sharp rise in the living standards of the Soviet people.
As it turned out, the destruction of the Soviet planned economy that began in earnest under Gorbachev and was completed under Yeltsin meant a radical reduction of the standard of living of the Soviet people—though it radically increased the living standards of a small minority who became far richer than the most privileged bureaucrats of Soviet times.
3 The rise in the marginal tax rate began under the extremely conservative U.S. President Herbert Hoover in response to the banking crisis of 1931. This tax increase has been sharply criticized by economists, especially Keynesian economists, over the years and blamed by them for greatly worsening the Depression.
4 The claim that the technological revolution in communications assured years of accelerated rates of economic growth is a good example of the failure of bourgeois economists to understand that the real cause of capitalist economic crises and the more or less protracted periods of economic stagnation they breed is not the insufficient growth of the forces of production but rather the opposite—the growth of the productive forces beyond the capitalist-determined limits of production—which expresses itself as a general overproduction of commodities.
An amusing side of this unfounded optimism of the bourgeois economists was the concern expressed by some of them regarding how the U.S. Federal Reserve System would manage the growth in the “money supply” once the U.S. government no longer needed to borrow money. In the past, the U.S. money supply expanded and contracted in response to the ebb and flow of gold. Over time, the money supply grew as the global gold hoard grew in response to the mining and refining of gold.
But under the system of “fiat money” where the quantity of gold is not supposed to play any role in determining the quantity of money, that quantity is instead supposed to be regulated by the “monetary authority,” which does this by buying government securities when it wants to expand the quantity of money and selling government securities when it desires to reduce the rate of growth of the money supply. But how exactly would the Federal Reserve do this if the government didn’t have to borrow money and there were no federal securities for the Federal Reserve to buy and sell. Well, this is one problem they did not have to worry about after all.
5 Reagan and Bush were surrounded by so-called “supply-side” economists. The supply-side economists are extreme right-wing economists who quite explicitly base themselves on Say’s Law, which as regular readers of this blog know denies that a general overproduction of commodities is possible [see link to posts and replies on this].
The arguments of the supply-siders translated into Marxist terms would go like this: The capitalists can sell all the commodities they can produce, since just as Say explained, “supply creates its own demand.” However, governments greatly reduce the rate of economic growth by taxing away the capitalists’ surplus value—profits—and spending it unproductively (not to produce surplus value). Recessions, they claim, are caused by the government taxing away the surplus value and consuming it unproductively and not by overproduction as Marx and Keynes held.
Therefore, if taxes on the capitalists are radically reduced, the rate of growth—capitalist expanded reproduction—will radically increase, causing government revenues to rise rather than fall. And so the way to balance the federal budget is to reduce taxes—especially on the rich, the capitalists.
6 Between 1957 and 1961, the U.S. experienced a double-dip recession, the biggest economic setback the U.S. economy had experienced after World War II up to that time. Somewhat like today, the U.S. ruling class was concerned to increase the rate of economic growth, though the problems of unemployment and economic stagnation were mild by today’s standards. In the 1960 election—held during the second recessionary dip—Senator John F. Kennedy campaigned on the slogan of “getting American moving again” and was eager to find ways to accelerate U.S. economic growth.
His Keynesian advisors advocated a highly regressive income tax reduction. Their arguments were different than the “supply-side” economists that surrounded Reagan and Bush. Unlike the supply siders, Kennedy’s advisors did not deny the possibility of inadequate demand—overproduction. They claimed, however, that the deep tax cut for the rich, along with increased military spending in order to “meet the Soviet challenge” and then fight the war against Vietnam among other things, would increase monetarily effective demand and thus end the economic stagnation of the early 1960s.
While their economic arguments were different, their policy recommendation was remarkably similar—a highly regressive tax cut in favor of the rich.
The tax cut proposed by President Kennedy was not passed before his assassination on November 22, 1963. However, President Lyndon Johnson and Congress passed a tax cut along the lines that had been championed by Kennedy and his advisors that cut the marginal tax rates from about 90 percent to 70 percent. Because the tax cut was proposed by President Kennedy but only passed under President Johnson, it is sometimes called the Kennedy-Johnson tax cut. Since then, while there have been some tax increases, the tax increases have been far less than the cuts.
7 A major problem facing the computer industry is that you don’t need the latest and fastest Intel CPU to run the word processing and spreadsheet programs used by office workers. Nor have changes in computer user interfaces since the Windows graphical user interface was perfected around 1995 done much to improve the productivity of office workers—enable a given amount of office work to be done in less time, making it possible to reduce the number of office workers. Indeed, many writers that follow the computer industry are complaining that Microsoft’s latest Windows 8 interface, though it works well on smart phones and tablets, may actually reduce the productivity of office workers rather than increase it.
Therefore, unlike earlier years—especially the period of transition from the hard-to-use MS-DOS text-based interface of the 1980s to the more user-friendly graphical user interface introduced by Microsoft in 1995—corporations are increasingly tending to hold on to their office computers until they begin to fail rather than replace them when they become “obsolete.” This has greatly slowed down the sales of desktop computers and helps explain the stagnation in the desktop computer market. Eventually, however, even in the absence of meaningful improvements in desktop computers, older office computers will fail and have to be replaced, generating a new wave of computer sales.