Thursday, October 6, 2011

"Neither caused by the government nor as curable by government spending"

United States entering a new recession?

On Sept. 30, the Economic Cycle Research Institute (ECRI) publicly stated that the United States economy was tipping into a new recession. This adds to the growing evidence of a serious slowdown in the U.S. economy, including the zero job growth and falling personal income in August as well as falling prices and sales of homes in August.

Republican presidential candidates have taken the free market view that the government is to blame for economic instability and have called for, for example, dismantling the Environmental Protection Agency (EPA) as a ‘job-killer.’ Unfortunately Democratic politicians from President Obama to California Governor Brown have also adopted this view of sacrificing the health and welfare of people in the interests of corporate profits.

These right-wing, free market views even go as far as trying to blame the boom and bust in housing prices on government-backed mortgage giants Fannie Mae and Freddie. In fact, the big boom in housing was driven by Wall Street and big banks that pushed risky and exotic mortgages from 2003 to 2007 while pushing Fannie and Freddie to the sidelines. The right wing also tries to put blame for the housing crisis on federal government efforts to increase homeownership among African Americans and other oppressed nationalities under the Democratic Clinton administration, when the big boom and bust came under Republican George Bush.

Backers of the free market view are calling for more austerity. Republican presidential candidates complain that the poor, working parents and seniors on Social Security often pay no income tax, while ignoring the payroll and sales taxes that lower income folks pay. Free marketers claim that extending unemployment insurance benefits causes unemployment by reducing people’s interest in finding a job, ignoring the fact that there are almost four people looking for a job for every job opening. They have also proposed at different times to do away with Social Security and Medicare and turning people’s retirement funds over to Wall Street and health care to private insurance companies.

Keynesian economists such as Nobel-prize winner Paul Krugman have argued that these policies of austerity are cruel and that the federal government should have spent even more, as the $800 billion economic stimulus under Obama barely offset the spending cuts and tax increases by state and local government, adding little stimulus to the economy. They correctly point out that the large U.S. government budget deficits have not increased interest rates, as the interest rate on long-term government bonds have dropped to the lowest levels in 70 years.

But the example of Japan shows that even massive government spending can fail to revive an economy. In the early 1990s the Japanese economy suffered a triple whammy of recession, a stock market crash and a bursting real estate bubble. The Japanese government borrowed and spent huge amounts, driving Japanese government debt from the lowest among the wealthier nations to the highest - it is now more than twice the size of the Japanese economy (in contrast, the U.S. government’s debt is still smaller than our economic production as measured by GDP). Nevertheless, the Japanese economy has remained in the doldrums, with only a strong export sector boosting the economy.

Marxist economics sees recession as neither caused by the government nor as curable by government spending. Rather, recessions are part and parcel of a capitalist economy where profit is the motive force. Businesses cut workers’ pay and benefits to increase their profits. But this limits their workers’ ability to buy back what they create. At the same time, these profits are reinvested in developing new technologies and expanding production. This clash - between limited ability to buy and growing ability to produce - leads to periodic crisis of overproduction, or what are called recessions.

Over the last 30 years a vast expansion of debt, especially credit cards and mortgages, has allowed workers to buy more and more despite having stagnant wages. At the same time it has been a profitable investment for capital that has had a hard time finding enough productive investments to turn a profit. But this pile of debt began to collapse with the financial crisis triggered by the collapse of the Wall Street investment bank three years ago.

Without more and more debt to stimulate the economy, it should be no surprise that the recovery from the last recession has been so weak. More than two years after the official end of the last recession, there are almost 7 million fewer jobs than before the recession started and many parts of the country are still mired in depression. More frequent recessions and quite likely worse ones are in the near future, as governments lose their will to bail out the economy and austerity measures cut spending.

The ultimate solution is that we need socialism, which includes an economy based on people’s needs, not profit. But in the meantime we also need to build a mass movement to defend the unions and social programs that have helped people raise their standard of living. Instead of cutting Medicare, we need a national health insurance program for all. Instead of cutting Social Security, we need to restore Social Security taxes on higher income individuals. Instead of closing schools and raising tuition at public colleges, the U.S. must get out of Iraq and Afghanistan.

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