[Marxism] Facing the Economic Crisis

[Greg McDonald <sabocat59@xxxxxxx>]

Facing the Economic Crisis

By Prof. Stanley Aronowitz

Global Research, December 26, 2008
The Bullet

The main news these days is the global economic crisis, an event  
ascribed by economists and most pundits alike to a "financial"  
meltdown caused by the irresponsibility of mainly, but not  
exclusively, U.S. lending institutions and consumers in offering --  
and accepting -- "sub-prime" mortgages. The variable mortgages,  
initiated during the credit driven bubble of the 1990s, and welcomed  
by the Clinton administration but accelerated in the first six years  
of the new century, require home buyers to put no money down.  
Interest rates, which begin at 5%-9% are fated to rise within a few  
years, after which they could double, triple or more. In September  
2008 we began to hear of massive foreclosures in almost all sections  
of the country as the first round of ballooning rates took effect,  
and the projections for 2008 and 2009 were for 2 million homes, six  
percent of the U.S. total to go into serious default. New home  
construction came to a screeching halt and commercial building  
suffered only slightly less pain.

In a few weeks of October, bloated with bad loans they themselves had  
sold, several major banks had failed, prompting the Fed to inject  
billions of dollars ostensibly to save them from bankruptcy and  
liquidation; others, like Merrill Lynch merged with more stable  
partners. But the historic Lehman Brothers was fated to fail when the  
Treasury Secretary and the Fed chair refused to extend bailout funds.  
Of course, goliaths like Citibank, Bear Sterns, the insurance giant  
AIG and a few others were deemed by the Treasury Secretary, former  
Goldman Sachs executive, Hank Paulson "too big" to be allowed to go  
under. By the end of the month the banking system, which held  
trillions of dollars in "bad" paper -- unredeemable mortgage,  
business and credit card loans -- was teetering on disaster, and the  
crisis was widely described as a "financial meltdown." Almost all  
leading investment banks disappeared and those that remained were  
converting to traditional commercial banks.

By October, mobilized by Paulson and backed by the Fed chair, Ben  
Bernanke, Congress quickly passed a massive $700-billion bailout to  
financial institutions without scrutinizing the fine print. For  
different reasons, only a significant band of arch-GOP conservatives  
and a few liberal Democrats were prepared to let the system collapse  
in the hopes that either the market would self correct -- the  
Smithians -- or, in the case of the progressives, force an extensive  
re-regulation that had been rescinded by the Carter administration  
and a Democratic Congress in 1978 and followed rigorously by  
Democratic and Republican administrations alike. We don't like to  
recall bad memories, but it is useful to remember that the Clinton  
administration initiated a program of corporate "self-regulation"  
that further weakened the system and the Bush regulators simply went  
on a long vacation in every field, most dramatically its neglect of  
all manner of investment and commercial transactions that has led to  
the infamous Madoff scandal.

The purpose of the bailout legislation was to permit the government  
to purchase vast quantities of the bad securities at, or near,  
nominal value, in effect, a major infusion of cash into the banking/ 
insurance systems, without imposing stringent conditions on how they  
must spend the money. However, within weeks of President Bush's  
signing the bill into law, in the wake of the banks refusal to loosen  
consumer and business credit Paulson announced that this strategy was  
being replaced by a policy of purchasing bank shares, a direct  
infusion of cash in return for which the government would assume a  
measure of temporary partial ownership of banks that chose to apply  
for help, but would not, as the British government did, assume  
outright ownership and management of the system. Nor, as it turned  
out, did the Federal government closely supervise the use of the  
funds they had so generously given. Within weeks, complaints  
resounded throughout the economy that the banks were not loosening  
their lending policies but, instead, were holding the money close to  
their chests. Of course, business loans were tightened, but many  
would-be buyers of homes, cars and other durable goods, let alone  
borrowers of much needed cash to pay their bills were turned away on  
one pretext or another, most notably because their credit rating was  
not top of the line.

Economic Recession and the Jobs Crisis

Meanwhile, jobless rates began their steep ascent. The November 2008  
figures showed that 513,000 jobs had been lost and applications for  
jobless benefits soared. In fact, for at least seven consecutive  
months the economy had shed jobs and the official unemployment rate  
crept up to more than 6.5% or 10 million. In reporting the  
spectacular job losses, even the New York Times ran a complimentary  
investigative story that argued the official figures were only a  
fraction of the extent of joblessness. According to the Times the  
number of discouraged job seekers who left the labour market,  
premature retirees who had no prospects but to accept inadequate  
pensions, and recent high school and college graduates who simply did  
not look for work, might swell the actual figure by four or five  
percent. At 11% actual unemployment, the number increases from 10 to  
about 13 million.

By early December, the National Bureau of Economic Research (NBER)  
reported that the economy had been in recession since December 2007,  
a year before they declared the recession "official." This  
revelation, which any sensible observer knew for at least a year,  
caused no leading politician or economist to ask why the information  
had taken so long to be determined and revealed. The conservative  
NBER explained that it often takes that long to check their  
calculations and come up with a definitive judgment. That they felt  
obliged to offer an explanation responded to the unspoken suspicion  
that the delay had something to do with the presidential election.  
Many believe that if the recession had been declared in the midst of  
an election season, Democratic Presidential candidate Barack Obama  
could have repaired to Hawaii for much more than a few days.

The NBER admission that the economy was in recession at least ten  
months before the financial meltdown, poked a huge hole in the  
initial view that excessive and wanton lending was at the core of the  
troubles and that the crisis was essentially financial in nature.  
Since 2002 the emerging recessionary signs were assiduously ignored  
by all virtually mainstream quarters. Fall 2006 witnessed the  
beginning of sagging economic growth, by the measure of aggregate  
Gross Domestic Product (GDP) which includes spurious categories  
within the service sector, falling housing prices that prompted a  
severe slowing of new housing starts and sales, and gradual increases  
in jobless applications.

Stagnation of manufacturing employment belied glowing reports of  
healthy increments in retail sales, on the premise that industrial  
production was no longer an important indicator of economic health.  
That throughout the first decade of the new century plants continued  
to close and reduce workforces, and not only in the Midwest but in  
the South as well, was not registered as signs of a slowdown in the  
midst of so-called "prosperity" were barely noticed in official  
circles. According to the conventional wisdom, the U.S. economy was  
"post-industrial" -- well on the way to realizing the prognostication  
that ours was a service economy, and it was better to let others like  
the Chinese and Koreans to produce material goods because industrial  
production caused pollution, and were inconsistent with our  
collective aspiration to become a nation of what Bill Clinton's Labor  
Secretary, Robert Reich had termed "symbolic analysts." If the U.S.  
remained a major producer of food, armaments (for national security  
reasons), aircraft, heavy machinery such as machine tools, trucks and  
specialty steels, these were necessary to maintain our trade  
balances, but were not otherwise fundamental for insuring economic  
health. Our future lay in specializing in various forms of  
"immaterial" production.

So, we could afford to lose the remnants of the once huge garment and  
textile production industries and, in the future, the U.S. might not  
be the center of basic steel and car production. That foreign auto  
companies were locating production facilities in the Southeastern and  
border states was a testament to the idea that union labour, not  
corporate malfeasance, had produced the steep decline in  
manufacturing. Software, research, and the growth of higher  
education, both as the center of innovation and, in terms of  
employment and capital formation, a major industry, pharmaceuticals  
and other activities linked to the health care industry, and  
entertainment would surely fill the gap left by the demise of the  
"rust belt," even if some regions of the South had suffered capital  
flight and become a major source of foreign investment, especially  
automobiles. And so what if the past thirty years were times of wage  
stagnation and decline, we had perfected a magnificent credit system  
(the main spur to consumption) that seemed to know no limits.

The bare truth is that what has been taken as economic expansion  
since the early 1970s was a symptom that the United States (and the  
UK and other European countries) have survived a genuine period of  
economic decline by means of a dramatic increase in the creation of  
huge amounts of fictitious capital. Fictitious capital is money that  
has no material basis, but is a speculation on future economic  
performance. Fictitious capital is an ordinary function of the credit  
system. Manufacturers borrow and lend money from each other and from  
banks to finance purchases of raw materials and labour on the promise  
of a near-term repayment when the value of their respective products  
were realized through sales, either within the production sector or  
through wholesale and retail purchases. But when these loans are  
exchanged by banks to businesses and non-commercial consumers on a  
long- term basis at exorbitant interest rates, and these loans become  
the basis of at least 2/3 of economic activity; when consumers or  
business owners, some of which are banks themselves, default on a  
large scale on payments, and the bubble bursts the whole system  
reverberates collapse.

Which is exactly what happened in Fall 2008. Small producers,  
retailers and building contractors routinely borrowed money from  
banks or other lending institutions with which to purchase raw  
materials, rent stores or industrial facilities and hire labour on  
the premise that consumers who purchased their goods, and not only  
homes would, in turn, receive loans from lending institutions and  
have income sufficient to pay their credit debt on time. For nearly  
two decades real estate boomed, prices of all commodities -- food,  
clothing, homes and other durables -- climbed. The accumulation of  
debt, which underlay the fictitious accumulation of capital on a wide  
scale, finally collapsed like a house of cards. As Rick Wolff has  
argued the discrepancy between high levels of labour productivity --  
abetted not only by falling wages but also by labour-saving  
technological changes -- has led to over accumulation. We have  
entered what Marx has termed a "realization" crisis -- commodities  
cannot be sold at profit rates that are sufficient to stimulate  
further investment in plant, equipment, construction and the labour  
that underlies them and other affected industries. In order to  
alleviate their inventory glut business up and down the line is  
obliged to reduce prices, but this tactic may take years before  
capital investment on a grand scale resumes. But as long as deflation  
lingers new investment is bound to remain tepid. Then comes the  
period of layoffs, falling prices, to the point where in many cases  
the value of the mortgage loan, for instance, exceeds the exchange  
value of the home. Wallowing deep underwater this leads to  
foreclosures and a precipitous decline of housing starts and sales of  
used homes.

Another hidden fact: for thirty five years, the private sector has  
not produced a net increase in jobs. The growth of jobs in computer- 
mediated services and software production was counterbalanced by  
losses in manufacturing; mergers and acquisitions in the retail  
industry were barely matched by growth in fast food employment. In  
the past decade as the private sector failed to create new jobs but  
relied increasingly on contingent and temporary labour to meet their  
short-term labour requirements, the public sector -- especially  
education and health care -- became the main source of new, decent  
paying jobs. And as the Federal government abdicated responsibility  
for a variety of services, state and local bureaucracies added jobs.

Of course, besotted by the conventional neoliberal ideology that only  
the private sector is a job creator, economists and politicians  
conveniently ignored this fact and continued to insist that whatever  
the service, the private sector can do it better, and more  
efficiently. What net increases in private sector employment occurred  
were largely, if not exclusively, the result of contracts awarded by  
federal, state and local governments who adopted both the mantra and  
practice of privatizing public goods. Although industrial production  
held steady, factory jobs stagnated during the boom because computer- 
mediated production began to dominate key industries and, contrary to  
the hype that computer-based manufacturing creates more jobs than it  
destroys, the reverse is actually the case. And, eventually the  
technology sector, of which the bubble in software and communications  
(dot.com) companies were the leading edge, burst. As early as 2000,  
this sector began to experience mass layoffs, the effects of which  
were notices for about fifteen nano-seconds but quickly relegated to  
the back burner.

The Obama Administration and the Employment Challenge

Fast forward to U.S. President-elect Barack Obama's post-election  
series of declarations about the crisis: where five prior  
administrations beginning with Carter relied on monetary policy to  
address economic problems(reduction of interest rates were their  
major tool) had strenuously avoided using the tool of fiscal stimulus  
to address economic grief. Repeating his campaign promise, the  
President-Elect said his administration would create (or save) 2.5  
million jobs in his first term. Immediately, he pledged to find huge  
funds, presumably by issuing tens of billions in treasury bills  
(previously known as deficit financing) that the Chinese and some  
American investors would buy, to address the serious deterioration of  
America's infrastructure -- roads, bridges, urban streets, schools,  
public facilities, and the like. In a flash, state after state  
reported they had billions of dollars worth of projects "ready to  
go." Given the depth of the crisis, we can expect an Obama  
administration to inject more substantial funds that the tiny $25- 
billion it originally pledged. Some jobs will be created, to be sure,  
but we should not expect miracles.

To begin with, Obama has warned that the 2.5 million job figure is a  
long term projection. How much money would it take to create 1  
million jobs, about 7% of current unemployment? This is a tricky  
calculation. Would the program(s) be contracted out to private  
employers or would the government be the direct employer? If  
contracts are let at 30% gross profits, fewer jobs would be created.  
And what average wage would be offered? Would the government insist  
on "prevailing wages" as in the current construction industry? If the  
new jobs paid 50% above the poverty level, for example, they would  
match the current national average of about $15 an hour. The sum  
required to create a million jobs at prevailing wages, would range  
from $50 to $75-billion depending on whether the Obama administration  
replicated the New Deal practice of government as direct employer or  
continued the extant policy of privatization.

We have seen almost no discussion of the real problem of job  
composition, particularly the relation of skilled to unskilled labour  
in the stimulus package, issues of training and education and the  
role of unions in these programs. And, of course official policy  
remains tied to the illusion that technology is a net job creator.  
For example, lost in the rush to stimulate the economy by  
infrastructure development is a little known fact: unlike the Great  
Depression era when the federal government undertook road building as  
a major employment program on the basis largely, of manual labour,  
today's road construction industry is highly mechanized. The main  
"forces" of construction are earth-moving machines, machine spreaders  
to lay down asphalt and concrete (which are produced, automatically,  
on trucks). Manual labour is still employed, but not nearly to the  
extent as the older production regime.

On the other hand, school, hospital, recreation facilities and other  
public buildings employ a variety of mostly craft labour:  
electricians, plumbers, carpenters, among other crafts and a fairly  
substantial corps of labourers to haul materials and perform  
finishing work. Facilities construction would do more for alleviating  
unemployment for the skilled, less for the semi- and unskilled. Then  
there is the question of costs: capital intensive activities are  
expensive, but not nearly as costly as human labour. So, unless the  
administration intends to build facilities as well as improve roads  
and such infrastructure as water treatment and waste disposal plants,  
the job payoff might not be as substantial as Obama believes.

Then there is the problem of contracting out these activities. During  
the Depression, the Works Projects Administration, a government  
agency, was the direct employer; today, in the era of privatization  
federal and state governments often contract to private companies to  
perform these tasks. This means that profits must be factored into  
all expenditures; like the privatized U.S. health care system, it is  
more expensive than socialized production and the job payoff is less.  
Moreover, under this contracting regime there are fewer controls over  
hiring practices; people of color tend to be shortchanged. In which  
case, the level of oversight would need to be much more stringent  
than any administration has been willing to implement. What is the  
warrant for believing that Clinton era appointees will be willing to  
reverse past practices, especially if the Obama administration wishes  
to reassure the private sector?

Obama promises to create millions of "green" jobs. Some of these  
might be included in infrastructure plans, if windmills, geothermal,  
solar and other alternative forms of energy are substituted for  
existing power stations that run on oil and coal. Capital could be  
raised to build or reconvert metalworking factories to produce these  
products; water treatment and waste disposal plants might be  
constructed and put on line to fulfill the "green" objective. But  
there will be the problem of the administration's apparent fondness  
for nuclear energy as a "clean" source or its flirtation with  
chimerical "clean" coal projects. In our haste to applaud an apparent  
jobs program, we need to examine what kind and how many jobs green  
and infrastructural activities will produce.

The most promising sources for job creation on a large scale are in  
services, environmental maintenance, and the arts. One of the least  
understood aspects of the 1930s New Deal's WPA (Works Progress  
Administration) was its many cultural, service and clean-up  
activities, all of which were labour-intensive. Youth were sent into  
the forests and fields to clean them up; rivers and streams were  
cleaned by manual labour. The federal government created a system of  
national parks and allocated funds for cities and towns to build  
playgrounds, swimming pools and sponsored a program of public housing  
construction. Artists, writers, theatre people, social service  
workers, health care workers and many other groups were put to work  
in local communities, some directly employed by the Feds and some  
employed by local governments and non-profit organizations using  
federal funds. Writers, musicians and artists were sent into schools  
to teach and to paint murals. There has been little or no discussion  
of this aspect of job-creation in recent times, although the Johnson  
and Nixon administrations did create and finance "public service"  
programs, some of which had training and education aspects.

A Left Challenge to the Obama Administration?

In his announcement of appointees to cabinet and key administrative  
posts dealing with the economy and with business regulation Obama  
revealed that, contrary to his campaign mantra of "change," nearly  
all of these crucial appointees were recruited from the alumni of the  
Clinton administration. From National Economic Council chair,  
Lawrence Summers to his appointee to chair the Securities and  
Exchange Commission, Mary Shapiro, Obama has signaled to the  
financial sector that, despite brave talk about rigorous business  
regulation, they have little to worry about. None of his key  
appointees has a reputation that might inspire fear among those who  
have benefited from the long wave of business deregulation and  
bailout that began in 1976.

In mid-December, after a virtual unconditional giveaway to banks and  
insurance companies of $350-billion by the Bush administration, half  
of the $700-billion bail-out package remained to be disbursed. On  
December 19, President Bush announced a $17-billion bridge loan to  
the major auto corporations. The remaining $333-billion could be  
spent on assisting homeowners suffering foreclosure or its imminent  
threat and putting a substantial down payment on the job creation  
part of the stimulus program. But there is little hope that this  
scenario will come about unless organized labour and social movements  
insist on such emphasis. For this to happen, some of Obama's most  
fervent supporters on the Left would have to cut the assumed six  
months honeymoon short. They would be required to actively intervene  
on a number of fronts:

1. a set of proposals for a labour-intensive jobs program to  
accompany infrastructure development; 2. demand the governments be  
the direct employer, and only absolutely necessary private contracts  
be let for specialized services; 3. demand that the new jobs pay a  
living wage at least equal to the national average; 4. demand  
creation of labour-intensive jobs in public services and the arts; 5.  
demand enactment of the Conyers Bill HR 676 providing medicare for  
all. Universalizing health care would create hundreds of thousands of  
new jobs; 6. implement the Green Jobs program by re-opening and  
retooling abandoned auto and parts plants as well as building new  
plants to produce solar panels, windmills, geo-thermal machinery,  
water treatment technology and waste disposal products. These should  
be owned and operated by workers' cooperatives as well as letting  
contracts to existing manufacturers of these goods; and 7. demand  
rigorous oversight of employment programs to insure employment  
opportunities for blacks, Latinos women and the disabled.

Progressives have advanced hope that Obama will usher in a 'new' New  
Deal. But the New Deal of yesteryear was never intended to pull the  
United States out of the depression. While it did employ more than a  
million workers in government projects, even considering that these  
might have produced three times or 3 million jobs, as late as 1940,  
unemployment hovered at about 20% of the labour force. What the New  
Deal accomplished went well beyond its relatively modest economic  
impact; more important was its ideological and political force.

In contrast to Herbert Hoover and the first New Deal's focus on  
stimulating economic activity by pouring capital into business  
corporations, controlling prices and wages in order to foster profits  
and limiting its direct aid to the unemployed to feeding the hungry,  
the so-called "second" New Deal put money in the pockets of the  
jobless through public works and service programs, promised to save  
small farms from foreclosure through government purchases of crops  
and paying farmers to retire part of their growing capacity in a land  
bank. But it was the farmers themselves who, through direct action  
and mass organizing, sometimes prevented evictions, created  
cooperative enterprises to oppose the big processing corporations  
and, even before the depression became official, created their own  
political vehicles.

And, after the mass industrial strikes of 1933 and 1934 conducted  
without a legal framework for union recognition, in 1935 the National  
Labor Relations Act guaranteed workers the right to organize unions  
of their own choosing, established a procedure for official union  
recognition and collective bargaining, and outlawed company unions  
and competitive unionism within the same bargaining unit. In short,  
the second New Deal was a consequence of a popular upsurge, not only  
the brainchild of FDR and his advisors. It remains an open question  
as to whether the organizations at the base of the Obama  
administration will match, let alone exceed, the achievements of the  
New Deal. There is little or no prospect that, within the current  
framework of neoliberal, market capitalism, the deepening economic  
crisis can be significantly reversed. Will the Left urge direct  
action to address the crisis, open a dialogue about its capitalist  
roots and propose possible radical solutions? •

Stanley Aronowitz teaches at the City University of New York and is  
the author of Left Turn Forging a New Political Future (2006). A  
slightly different version will appear in the forthcoming issue of  
Situations (#5).


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