Tuesday, October 4, 2011

Obama a Keynesian? Are they kidding?

Building an Economic Recovery After the End of History


Near the end of the last century the United States' became a nation of unparalleled military and economic power. With the fall of the Soviet Union and the rapid expansion of global trade some in the capitalist class even proclaimed that the West had entered "the end of history".

Political philosopher Francis Fukuyama made such a claim in his 1992 book The End of History and the Last Man. Fukuyama argued that liberal democracy, in part defined by a capitalist economy, complemented human nature and was to become the final social model for every society.

As the U.S. economy grew over the course of the decade, Fukuyama's proclamation seemed to become accepted wisdom among politicians and administrators who embraced neo-liberal trade policies and deregulation. The utopian hubris was such that it even disturbed economic libertarian Alan Greenspan who, as Federal Reserve Chairman, warned against "irrational exuberance and unduly escalating stock prices" in a 1996 speech to the American Enterprise Institute.

Most of the growth in this period was not due to production of with goods with actual use value as much as it relied on the growth of the financial sector. 

The financial sector surpassed manufacturing as the higher source of GDP in the same year Fukuyama introduced his theory. From 1990 to 2005, manufacturing's portion of GDP fell from 16.3 percent to 12 percent, a 26.4 percent drop from its original share, while finance grew from 18 percent to 20.4 percent, expanding 13.3 percent. In the same time period average wages remained stagnant, growing by only about 15 dollars a week, or 780 dollars a year.

As Professor David Harvey noted in his speech to the RSA, capitalism spent the nineties promoting the illusion of material growth through private debt. Effective demand for goods was created by the financial sector's finding new ways to lend money to people through credit and, especially, home mortgages. With unfounded optimism and a desire to maximize profits, financial institutions used the livelihoods of working people as bargaining chips to grow wealth in ways far removed from reality.

One way they did this was through expanding the use of derivatives, financial instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. A move was made to better regulate derivatives at meeting of the President's Working Group on Financial Markets in 1998, but this was prevented by Alan Greenspan and Robert Rubin, who was then acting as Treasuring Secretary after 26 years of work in the financial giant Goldman Sachs. When the Bush administration took over there was no longer any consideration of regulating these increasingly speculative practices. In fact, derivatives known as mortgage backed securities were deregulated in 2004 and the private mortgage industry was able to take on greater risk through distribution of bundled sub-prime mortgages.

It was the Bush administration's idealistic belief in the ability of markets to regulate themselves that led to the Great Recession that afflicts the U.S. economy now. When the housing market retracted in the final year of the Bush presidency the reduction of houses' value effected the mortgages financial institutions held and sent shockwaves throughout the economy. Finance was no longer supplying credit. The financial sector spent more than two decades making itself an increasingly essential economic fuel as wages stagnated and its collapse strangled the entire nation's economy.

Pinned by its own utopian capitalist ideology, but knowledgeable enough to know something had to be done, the Bush administration made a bold yet unimaginative push to restore the economy's basic functionality by bailing out the institutions that had led to the crisis. If limited by the laws of the capitalist system, the financial bailout package was absolutely necessary to prevent what would have led to a massive shortage of money in industry and households and to stymie a much greater economic collapse. 

When the Obama administration entered office it was prepared not to bring a socialist plan but to pursue a modest Keynesian approach with the intent to restore what had been before. The resulting debate over economic recovery has been framed by the same ideas that led to the economy's fall.  The Republican Party is proposing even less be done by elected officials to monitor the market, maintaining the status of the nation's wealthiest individuals and institutions, while proposing the market take over Social Security and that cuts be made to Medicare and other social programs. 

As politicians debated, CEO pay returned to its pre-recession levels in 2010 and the census recorded the largest income disparity in its history. At the same time, the financial industry has taken many working peoples homes and caused overall home equity to drop more than 35 percent. Unemployment doubled to over 9 percent. Underemployment went from 8.8 percent in 2007 to 17 percent in late 2010 as many people left full time jobs to work part time and, on average, the workers who became unemployed and then managed to find new full-time positions saw their pay drop.

The economic crisis will not be resolved using the same reasoning that started it.

Proponents of unrestrained capitalism, who favor the ideas of economists like Friedrich von Hayek, argue that society should let economic crisis occur without government interference. They believe that markets will naturally recover in the end. This would makes sense if capitalist societies were indeed at the end of history, with power relations frozen in place, but history has surprised before. Historically, entire empires, such as the Dutch or British, have collapsed as the result of economic crisis. Both declines began as the result of growing economic disparity, the simultaneous displacement of manufacturing by finance and their no longer possessing an unrivaled manufacturing sector. In the past, specifically in the crisis preceding both world wars, the U.S. recovered because of the relative strength of its manufacturing. With China recently surpassing our production and the other two factors met, the historically exceptional standard of living people in the U.S. have grown accustomed to could very well be in jeopardy.

The economic theory of Karl Marx applies best to the situation the U.S. currently finds itself in. Marx observed in Capital that capitalism has internal contradictions that eventually cause it to self-destruct. These contradictions lead to economic crisis where economic disparity, rooted in the shrinking purchasing power of workers and the accumulation of wealth in capital, eliminates the demand for goods that capital requires for profit. A paradoxical cycle results where businesses either eliminate workers or reduce wages in an attempt to again profit and subsequently cause the lack of demand for their own goods to worsen. A few contemporary economists, including Nouriel Roubini, famed for predicting the current economic crisis, have recently stated that Marx's analysis of this problem is correct. In a recent interview in the Wall Street Journal, Roubini aptly observed that the current crisis can even be considered the second leg of the Great Depression, and had been put off by the growth of finance. Despite their finding certain powerful truths in Marxist economics, Roubini and his colleagues go on to introduce ideas that would provide temporary fixes to the system but which shrink from addressing the fundamental contradictions they themselves highlighted. It is up to a much braver group of people to to take action.

The current political situation encourages uniting behind President Obama's American Jobs Act. The jobs act proposes $35 billion be spent to prevent layoffs of up to 280,000 teachers, while supporting the hiring of tens of thousands more and keeping cops and firefighters on the job. It also emphasizes the creation of employment in the modernization of 35,000 public schools with an investment of $25 billion. A further $65 billion is dedicated to the rebuilding of highways, transit, rail and aviation, and the creation of construction jobs those projects require. Some of the financing of this plan is offset by taxe restructuring and some by a reduction of spending elsewhere.

It is no secret that the American Job Act's offsetting costs with spending reductions is a political strategy to garner conservative support. Regardless, it remains vehemently opposed by the capitalist class and those who support them, requiring a substantial movement made up of labor unions and social activist allies to rally behind it. As its passage would fail to create the jobs necessary to return employment to the levels it was before the Great Recession, any movement focused on the goal of seeing it implemented could, and should, continue to push for a more ambitious plan immediately afterward.

If it can be built in an effort to pass the American Jobs Act, a people's movement which seeks to resolve the U.S. capitalist crisis must further address growing income disparity and unemployment.

Considering total income accrued by the wealthiest 10 percent of households jumped from 34.6 percent in 1980 to 48.2 percent in 2008, and that the wealthiest 1 percent's share in the same time period rose from 10.0 percent to 21.0 percent, it would not be a radical idea to levee an increased tax on the rich as part of such a plan. These income groups paid taxes at 70 percent in 1980, but now pay half that at 35 percent. It is estimated that for every 1 percent taxes is raised on only the wealthiest 1 percent of households that 150 billion dollars of annual revenue would be generated. 

The revenue generated by a progressive tax focused on curbing income disparity makes possible the goal of full employment. An ambitious economic recovery plan titled A Permanent Jobs Program for the U.S.: Economic Restructuring to Meet Human Needs, put forth by the Chicago Political Economy Group (CPEG) in 2009, details how this could be done. In it, the CPEG emphasized the creation of primarily public sector jobs, proposing that 3.5 million new jobs be created each year for five years in public infrastructure, current social services institutions, and industries of the future like new energy. Workers being given the median wage of 18 dollars per hour, 5 percent added for administrative costs and 30 percent for administration, the total annual cost for such a program would be 877.5 billion dollars.

It should be noted that Marx also observed that a lack of demand for goods does not demonstrate a lack of need. A great many people are unable to afford goods, especially when economic disparity is high. Using the housing market as an example, there were about 700 thousand homeless people in 2009 despite there being over 14.5 million unoccupied houses. An economic plan like the one proposed by CPEG, which aims for full employment, would resolve this issue. This resolution is not without its own problems, however.

Capitalism's need for profits pushes it to raise prices to market equilibrium where it may be more profitable to actually have a portion of the population not be able to afford goods if the return from making others pay higher prices is greater than the return from producing commodities affordable for everyone. Further, Marx noted that capitalist's require the unemployed, which he called the "reserve army of labor" in order to make sure they can dictate wages rather than have the worker, who is no longer threatened with unemployment, pressure them for higher wages. If price controls are set to make sure goods are affordable and full employment is realized businesses would eventually fail to profit.

Socialism must be seriously considered as an economic model for the U.S. if it is to recover from the Great Recession and it must be committed to if Americans wish to maintain their standard of living.

In the greater push for jobs and economic recovery the foundations for socialism must be built. Union membership should be included in economic plans which push for full employment and the frame which explains union membership as "building democracy in the workplace" actually realized in practice. As prices rise due to wage increases subsidies or price controls could be put in place. If price controls or wage increases are too much for corporations to withstand and/or they seek to move overseas, democratically structured nationalization should seriously be considered. Instead of bailing out the financial institutions and auto giants that were in free-fall in 2008 this is what really ought to have been done. It is not to late to fight for such solutions now.

The capitalist class, Republican Party, and their allies are directing us to join them in looking at stars as they march us over the edge of a cliff. They present us with a utopian vision of capitalism, proposing we wait out the Great Recession while they design plans that would have us competing for jobs in a global economy which pays its workers wages far lower than what we earn now. They would have us believe there is no alternative to this vision, that we have entered the end of history and that the U.S. will be an exception among nations which have collapsed as a result of similar circumstances.

Let them march on alone. Let them have their end of history. We'll take the future.

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