Is the crisis over?

“Once a crisis is in full swing, then the argument starts about who is to blame for it. The businessmen blame the abrupt credit refusals by the banks, the speculative mania of the stockbrokers; the stockbrokers blame the industrialists; the industrialists blame the shortage of money, etc. And when business finally picks up again, then the stock exchange and the newspapers note the first signs of improvement with relief, until, at last, hope, peace, and security stop over for a short stay once more. Modern society notes the approach of crisis with horror; it bows its head trembling under the blows coming down as thick as hail; it waits for the end of the ordeal, then lifts its head once more—at first timidly and skeptically; only much later is society almost reassured again.”

These words could have been written yesterday, but are in fact the (slightly edited and paraphrased) words of Rosa Luxemburg, written a century ago, shortly after the crisis of 1907 (What Is Economics by Rosa Luxemburg. See ‘Is The Economic Crisis Over?’ at The question is, what stage are we at in the crisis that arrived 100 years later? Is society beginning to ‘lift its head once more’ and look toward a future of hope, peace and security? Or should we bow our heads and expect more blows?

Regular readers will have noticed that, in the pages of this journal, we are still talking about crisis as if we’re in the midst of one (and we will be discussing the issue again at our annual summer school in July). Followers of the official story might be confused by this. According to the mainstream account, the crisis, which began with a financial blow-up in America in 2007 and threatened a cataclysm as serious as the Great Depression of the 1930s, was over by the middle of 2010 thanks to the government policy of providing ‘stimulus’ (printed money). As if to consign the experience to the historical memory once and for all before moving on to business as usual, the crisis has even been given a name. It was the ‘Great Recession’. And now, it’s over.

The good news

But is it? The official story says yes. But then, the authors of that story, mainstream economists and representatives of the capitalist class, hardly ever expect crises and are shocked by them when they appear out of the blue. This is despite the fact that there have been major downturns in every decade since the 1820s, and regular financial panics since the 17th century. Given this failure to notice still less predict what is obvious to anyone with the briefest acquaintance with history, we can be forgiven for treating their pronouncements with extreme caution.

Still, the question is a tricky one. Commentators still can’t decide when the Great Depression of the 1930s ended, for example. Was the upturn of 1933 the conclusion of the crisis, and the recession in 1937-8 a separate event, as some argue? Or was the 1933-7 recovery merely an artifact of government spending (‘stimulus’), with the depression ending proper with the start of war production in 1939? Or should even the war production period be seen as a kind of government stimulus, with true, capitalist-based recovery delayed till 1946? To consider this problem is to see that, to some extent, history may be repeating itself.

At the present time, followers of the mainstream press will find confident pronouncements of recovery and positive (or, at least, not too badly negative) news from various economic indicators sitting side by side with accounts of deepening state debt crises, stockmarket slides, soaring inflation, falling wages and standards of living, and battles to impose austerity on the working class (including vast swathes of those who tend to think of themselves as ‘middle class’).

America, for example, the world’s biggest and most important economy, is officially out of recession. Yet manufacturing surveys show that global growth is stuttering and stagnating once again. US growth slowed to an annualised 1.8 percent in the first quarter of the year, down from 3.1 percent in the previous quarter. The housing market is already in ‘double dip’ territory, inflation is on the rise (it could already be as high as 7.4 percent, according to a new index from professors at the Massachusetts Institute of Technology) and wages remain stagnant – average hourly earnings of production and non-supervisory employees, who make up 80 percent of non-government workers, are lower than they were in the depths of the recession, adjusted for inflation, according to Robert Reich, a professor of public policy at the University of California at Berkeley ( Relative wages have, anyway, been stagnant or falling since the 1970s.

Initial confidence in the rising number of new jobs was squashed by the start of June when it was reported that the rise in the number of jobs was far lower than predicted: just 54,000 jobs were added to the total in May against an expected 165,000, according to the Financial Times, and the unemployment rate ticked up to 9.1 per cent. State debt continues to rise to historically unprecedented levels, which has prompted the credit-ratings agencies Standard & Poors and Moody’s to threaten to downgrade it. At the same time as we hear the crisis blamed on banks’ reluctance to loan businesses money, businesses themselves are hoarding cash – almost $1 trillion of it, according to a report in the Wall Street Journal published at the end of last year. This cash pile is the highest for half a century and “shows the deep caution many companies feel about investing in expansion while the economic recovery remains painfully slow and high unemployment and battered household finances continue to limit consumers’ ability to spend”.

The story is much the same around the world. Certain economies in Asia, particularly China, provide the most obvious apparent exceptions, but the health of these are still, for now at least, partly reliant on the health of the US and other Western economies. Commentators are currently watching China’s booming real-estate sector with particular concern – it is another debt-fuelled ‘success’ story, and a key driver of demand for commodities from other economies. But it is inevitably heading for a big crash, according to Nouriel Roubini, a bourgeois economics professor at New York University whose star rose when he correctly predicted the current crisis.   

Of more immediate concern the eurozone – most particularly Greece, Portugal, Spain and Italy – also remains in deep trouble. For now, all eyes are on Greece. Despite already having agreed a €10bn bail-out package last year, it is now obvious that that was not enough, and the EU, European Central Bank and IMF are having to bail out the bail-out, as The Economist put it. By 2012, Greece was supposed to be well on the road to recovery, but in reality, as austerity reforms stalled and the economy shrank (by 4 percent last year), state debt continued to soar. It’s now near 160 percent of GDP. The consequences of default are currently deemed too dangerous, so other options are being considered, such as lending Greece yet more money, and extending the repayment dates on the debt. But some commentators, including Lex in the Financial Times, think that default is, sooner or later, ‘inevitable’. The European debt crisis, says economics analysts Capital Economics, “may be entering a new and more dangerous phase”. Meanwhile, as in the US, the biggest companies in Europe, not including the major banks, are sitting on £445bn in cash, according to a Bloomberg report at the end of last year.

Dealing with the economic downturn in Greece

Britain has been spared some of the worst of the troubles afflicting Europe because it is still in control of its own currency and can therefore engineer some fiscal wriggle-room with low interest rates and money-printing and so on. It has also recently elected a government committed to radical reforms that will impoverish sections of the working class but also, capitalists are hoping, reduce the deficit and restore profitability. But the picture is far from rosy for the capitalists. The British economy grew by only 0.5 percent in the first quarter of this year following a contraction of the same amount in the last quarter of 2010. Household disposable incomes are predicted to fall by 2 percent in real terms this year, and the TUC trade union body has warned that wages – already stagnant over the past 30 years while the economy doubled in size – are likely to trail behind inflation for years to come, putting low and middle-income earners into a “livelihood crisis”. Growth has fallen off in the services sector, house prices continue to slide, retail sales are down, and the Bank of England has been forced to cut its growth forecasts and up its inflation outlook. And with interest rate rises mooted and surely inevitable sooner or later, things can only get worse in the near term. At the same time, as in Europe and America, British companies sit on vast cash hoards as the prospects of profitable investment remain small and risky.

The bad news

There are really two questions here. The first is, is the crisis over in the narrow, technical sense, i.e, is the economy officially out of recession according to conventional definitions and measures? Here the answer is yes, though the shakiness of the recovery is signalled even in the mainstream press by the constant reference to the fear of a ‘double dip’, the return of recession, especially if or when stimulus measures end and austerity measures kick in (dampening effective demand), or both. Luxemburg’s ‘first signs of improvement’ are certainly there, but it’s still way too early to say that society is ‘reassured again’.

The second is whether the crisis is over in a broader sense, and here the answer is, almost certainly not. Take a historical and Marxist view, and it seems clear that we are merely at the start of a major global restructuring.

Apart from a socialist transformation of society, the only solution to the problems of a depression is the depression itself. If capitalism is to return to profitability, unprofitable concerns must be closed, workers laid off, wages suppressed, and capital devalued. This restores profitability and lays the basis for a new round of capitalist prosperity. The trouble is, despite a number of serious recessions and wobbles, capitalism has not had a proper and necessary clearing of the decks since the 1930s.

As the Marxist economist Paul Mattick points out, that depression, and the war that followed it, laid the basis for the ‘Golden Age’ of 1950 to 1973, an ‘economic miracle’ built on the destruction of the war and the corpses of 50 to 60 million people. This period of capitalist prosperity ran into serious trouble in the 1970s, and the result was the stagnation and inflation (‘stagflation’) of that period, a reliance on unprecedented levels of state involvement in the economy, an excess of printed money and soaring debt. The idea was that this debt would be paid back in the good times as depression was averted and capitalist prosperity returned. The reality was that the debt and spending had to continue to rise to subsidise capitalist industry and buy social peace.

Despite the rhetoric and ideological determination, and some major attacks on working class living standards through the 1980s, it has proved impossible to roll back the state and cut spending and debt while keeping capitalism buoyant. The working class seemed to be boosted for a while with the credit card explosion and rising house prices. That prosperity, too, was obviously unsustainable for capitalism, and it ended in 2007.

But could the full force of a depression be delayed with a combination of yet more debt and spending? Governments around the world are betting that it can. But they are also hedging their bets by preparing and implementing austerity measures as it must be obvious, even to them, that the historically unprecedented expansion of state spending and debt cannot go on for ever if capitalism is to survive. Keynes himself famously ignored this problem. “In the long run, we’re all dead,” he said. Over the next decade, we’ll discover what happens in the ‘long run’.

The probability is that previously taken-for-granted entitlements (to education, jobs, retirement, health care, an income during periods of illness, joblessness or disability, and so on) and standards of living will end. There will be continuing struggles both within the capitalist class and between the capitalist and working classes over who is to bear the brunt of the losses. The hegemony of the United States may be challenged in the not too distant future, with potentially catastrophic consequences: bear in mind that it took a world war to completely end the last truly major depression. And the depression, if not rescued by a major war, could be deeply exacerbated by the falling off of cheap and easy oil and energy supplies and the possibility of ecological catastrophe.

Yes, in the long run we’re all dead. But in the short run things are not looking too great either. At an underlying level, this economic crisis is not over. And neither is the increasingly desperate urgency and need for the socialist alternative.


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