On 1 March 2009 the New York Times ‘News of the Week in Review’ included a page of opinions from noted economists on the prospects for the economy, given the ongoing crisis and the various attempts – Troubled Assets Relief Program, bailouts, stimulus, budget plan – made so far to deal with it. Most more or less shared the forecast of Professor Nouriel Roubini of New York University, that the recession would not end until some time in 2011. The most optimistic (like Federal Reserve Bank chairman Ben Bernanke himself a few days earlier) thought that it would all be over in a year, while financier and author George Cooper saw a possible ‘two or more decades of readjustment’. Most were careful to hedge their bets by adding a proviso that a near-term recovery could be expected only if (to use Roubini’s phrasing) ‘appropriate policies’ were ‘put in place’. Not specifying what those policies were, of course, only strengthened the prediction safety factor. But then no one based his or her predictions on any serious analysis of the nature and causes of the crisis or the efficacy of the various remedies.1
In fact, it’s hard to imagine a more stunning demonstration of the theoretical bankruptcy of economics as a putative science than the ongoing discussion of the Great Recession. Just as no deeper explanation has been offered for 2007’s catastrophic events than that they were the fallout from a credit crisis caused by excessive debt peddled by and to financial institutions around the world, no cure has been proposed for what is commonly described as an illness gripping the economy other than the standard ‘Keynesian’ and ‘neoliberal’ remedies: the first calls for some combination, in different amounts, of the continued intravenous feeding of the financial system with government money, along with subsidization of selected industries, modest amounts of public works spending, extended unemployment benefits, increasing access to minimal health insurance and greater regulation of the banking industry to prevent a repeat performance. The second, as in the contribution to the Times symposium by William Poole of the ultra-conservative Cato Institute (and former St Louis Reserve Bank president) is simply to wait for ‘the self-correcting nature of markets’ to kick in. In fact, according to Poole, ‘Federal policy is damaging the economy’ since its stimulative effects will be ‘offset by anticipated higher taxes and the need to finance the deficit’, which will inhibit investment.
The dispute among pundits is matched by real-world conflicts among politicians, businessmen and economic officials over how to react to the ongoing weakness of the economy.2 While the United States undertook to spend 4.8 per cent of its expected GDP by 2010, and China planned a 6 per cent of GPD stimulus over the next two years – sums that a 2009 editorial in the Times, a far from extremist newspaper, pronounced ‘still too small’ – European governments did not come near to this level of spending. The struggles in spring 2010 over bailing out the collapsing Greek economy – necessary to safeguard other national bank and private holdings of Greek bonds, to attempt to block the spread of the Greek disaster to other, larger European economies and to preserve the euro as a continent-wide currency – provided a vivid illustration of the European hesitation over expansive government action. Even when European finance ministers were finally compelled to offer their weakest partners a rescue package of nearly $1 trillion, with backup from the IMF, ‘some bankers questioned whether [this] would be enough to calm the markets over the long term. One banker said that, with more European economies coping with rising deficits, raising, guaranteeing or backing such a large sum would not be an easy task.’ Said one expert, David Marsh, speaking of the richest European nation: ‘I don’t think that there is enough commitment or economic firepower in Germany to provide the massive loan guarantees to satisfy the markets.’3 The fund responsible for rescue itself, in fact, when invented was ‘more a theoretical construct’ than an actual programme: it institutionalized a commitment made to lend money in the future ‘if a large economy like Spain, which represents 12 percent of the output of the euro zone, asks for assistance’.4
Finding the European hesitation over recession-fighting spending ‘especially puzzling’, Obama economic adviser Christina Romer asserted that the New Deal response to the depression of the 1930s had shown that ‘fiscal stimulus works’.5 If the lesson of history is this clear, the European response is indeed puzzling, as is the modest scale of the American stimulus, decried by forthright Keynesians like Paul Krugman. But, of course, history’s lessons are not univocal. One can, for instance, argue that history demonstrates the failure of the New Deal to end the Great Depression.6 It is true that by 1935 the panoply of measures set in motion by the Roosevelt administration – banking subsidies and regulation, industrial price controls, subsidization of agribusiness, unemployment and old-age insurance, federal make-work programmes and support for unionization – had helped arrest the downward trend that began in the late 1920s. Yet two years later, when the Roosevelt government cut spending sharply, investment and production fell again, unemployment increased (there were ten million unemployed by 1938) and at best stagnation seemed to be the order of the day. Only with the coming of the Second World War, and the dedication of resources to preparing for war, did ‘fiscal stimulus’ finally produce something like full employment, based not on the increased consumption that Keynes prescribed as the cure for depressions but on its restriction in favour of increased production of armaments.7 Mutatis mutandis, a similar story can be told of Hitler’s response to the depression: despite massive propaganda on the subject, make-work programmes and aid to agriculture actually accomplished little, and the true surge in economic activity, bringing full employment, came, as in the United States, with the preparation for and prosecution of the war.8
On the other hand, the limited success of the New Deal, like the later failure of the promised ‘end of the business cycle’ after the war, has been explained as a result of Roosevelt’s reluctance fully to fill the Keynesian prescription. The New Deal programme was, after all, limited by the Supreme Court’s finding the NRA national price-fixing system unconstitutional, as well as by business’s opposition to increasing taxes and budget deficits, along with Roosevelt’s own discomfort with the costs of state spending.9 Resistance to the stimulus idea, in fact, has as long a history as the idea itself. Roosevelt’s own Treasury Secretary, Henry Morganthau,
believed that the failure to achieve recovery was caused by the reluctance of business to invest, because it feared federal spending would lead to inflation and heavy taxation. Since the New Deal had failed to bring the country out of the depression, the administration, he argued, should balance the budget and give business a chance to see what it could do.10
The history of peace-time fiscal stimulus has from the beginning been one of reluctance on the part of political-economic decision-makers, whatever the enthusiasms of theorists. Today as earlier, the standard Keynesian position is that economic contraction calls for big-time stimulus spending, which can always be made up for by fiscal scrimping later. At the same time, as a commentator for the New York Times put it, ‘the idea that the world’s rich countries need to cut spending and raise taxes has a lot of truth to it’.11 Nothing could better convey the dilemma in which the managers of the capitalist economy were stuck than the joint statement issued after the conference of the G20 nations, the world’s richest, at the end of June 2010, which ‘acknowledged both sides of the debate’:
There is a risk that synchronous fiscal adjustment [i. e. austerity measures] across several major economies could adversely impact the economy . . . There is also a risk that the failure to implement consolidation [i. e. impose austerity] where necessary would undermine confidence and growth.12
In the immediate post-war years the Keynesian view, enormously strengthened in influence by America’s success in the war, predominated, largely because, in the words of an OECD study, ‘the expansion of the public sector took place within an unusually stable international economic environment and against a background of historically unprecedented rates of economic growth’.13 This changed in the mid-1970s, as the rapid expansion of state economic activity in response to the end of the Golden Age led to the emergence everywhere of budget deficits and the new phenomenon of stagflation, the disturbing combination of economic stagnation with inflation. Public spending, which neither produced anew the high growth rates of the Golden Age nor succeeded in ending poverty, was now held to have ‘detrimental effects on resource allocation, economic incentives, consumer choice, and individual freedom’14 – that is, on the supposed ability of markets to operate efficiently. More concretely, a period of reduced profitability required ‘economic adjustment and flexibility’15 – in other words, an ability to downgrade working conditions and wage levels. The 1980s saw attempts in most capitalist countries to ‘reform’ – that is, curtail – government spending, strikingly paralleled by moves towards the market in the ‘socialist’ world.
As two enthusiasts of such reform are forced to acknowledge in their survey of the question, ‘relatively few countries have so far accompanied their antigovernment rhetoric with successful shifts in their policy regimes toward less state involvement and cuts in public expenditure’.16 This was in part because much of the post-1973 increase in public spending had come in the form of ‘entitlement’ programmes, like old-age pensions, unemployment insurance and disability payments, which were especially difficult to cut in a time of lower growth and increasing unemployment. Education and health spending also tended not just to resist shrinkage but to increase, along with costs of industrial regulation and environmental controls. A large and growing chunk of money was required for the rising interest costs produced by growing deficits (central government expenditure on interest for the world’s leading industrial nations grew from 1.4 per cent to 4.5 per cent of GDP between 1970 and 1995).17 In fact, as one author observes, ‘if debt repayment is taken together with interest payments . . . debt servicing is the largest individual item among the disproportionate increases in state expenditure in the industrial countries of the West’.18
In the United States, to take a spectacular example of the gap between rhetoric and reality, Ronald Reagan came to the presidency in 1980 as an animated symbol of the intention to end deficit spending and the associated inflation. Indeed, the Federal Reserve’s elevation of interest rates succeeded in cutting inflation, but at the cost of a deep recession, with 10.8 per cent unemployment by the end of 1982. By 1983 118 Savings and Loans banks – heavily invested in real-estate speculation – had failed; the next year saw the bankruptcy of the nation’s seventh largest bank, the Continental Illinois National Bank and Trust Company. Federal agencies bailed out the Continental Illinois to the tune of $4.5 billion, while the Savings and Loans absorbed more than $160 billion. Interest rates were lowered again, to counter the recession. And although some social spending was cut, defence expenditure soared; together with tax changes shifting the tax burden away from the richest 0.5 per cent towards middle-income earners, this resulted in an increase of the budget deficit from $80 billion (2.5 per cent of GDP) in 1981 to $200 billion (6 per cent of GDP) in 1983. By the time Reagan left office the national debt had tripled from $900 billion to $2.8 trillion.
Economic policy, in short, was not under ideological control. The other side of the same coin could be seen in the misadventures of François Mitterrand, who became the first Socialist president of post-war France in 1981. A sort of anti-Reagan, Mitterrand attempted to counter the recession that had spread worldwide from the United States by such demand-strengthening measures as ‘massive investment in public works and state enterprises’, along with nationalizations of private companies, a 10 per cent increase in the mini mum wage, a shortening of the working week to 39 hours, five weeks of yearly paid holiday and a ‘solidarity tax’ on wealth. ‘The result was negative. Financial markets were reluctant to help and French capital took flight abroad.’19 Unemployment continued to grow and the franc had to be devalued three times; by 1983 the government made a decisive move in the direction of neoliberalism and focused on fighting inflation.
For the industrialized countries taken as a whole, ranging between these two extremes of ideology in conflict with reality, the mixed economy was here to stay, but increasingly eluded stabilization. The European turn to neoliberalism,20 which led eventually to the Maastricht Treaty founding the single currency zone, had its American analogue in Bill Clinton’s moves to restore budget balance, deregulate banking and ‘end welfare as we know it’. But in fact it was only the government-engineered easing of credit in the US in the early 1990s that stimulated first the stock market and then the real-estate market to produce what Robert Brenner has aptly termed ‘asset price Keynesianism’. Seemingly, the Reagan years had opened onto a period in which state involvement in the economy could serve private enterprise rather than rival it: military spending subsidized corporate capital; the growing interest on state debt was paid to private banks while Treasury bills, presumably proof against default, strengthened portfolios; and the easy credit facilitated by Alan Greenspan’s Federal Reserve made possible a flourishing financial sector as well as the consumer spending that ultimately powered the whole world’s economy. But when the great mortgage bubble collapsed in 2007, national governments found themselves caught once again between the need to keep the system functioning by pouring money into financial firms ‘too big to fail’, supporting local governments and ‘stimulating’ the private economy; and the imperative to limit the growth of state debt before it reached the point of large-scale default.
The dilemma faced by policy-makers today goes beyond the conflict between the apparent need for state support of the private economy and the quasi-instinctual revulsion at ‘big government’ felt by businessmen and their political representatives in the 1930s (and which can be traced back to the economic liberalism of the nineteenth century). While the need for state action in the face of the crisis that burst into the open in 2007 remains as great as in earlier moments of business collapse, today’s situation is rather different from that at the outset of the Great Depression.21 The United States had a government debt of $16 billion in 1930; today it is $12.5 trillion and climbing. In terms of percentage of GDP, the federal debt had already reached 37.9 per cent by 1970; in 2004 it was 63.9 per cent. In that year the IMF warned that the combination of the American budget deficit and its ballooning trade imbalance threatened ‘the financial stability of the global economy’; a team of Fund economists ‘sounded a loud alarm about the shaky fiscal foundations of the United States, questioning the wisdom of the Bush administration’s tax cuts and warning that large budget deficits pose[d] “significant risks” not just for the United States but for the rest of the world’.22 Five years later, with even relatively modest levels of stimulus spending,
Governments worldwide . . . are finding themselves in the same position as embattled consumers: paying higher interest rates on their rapidly expanding debt. [These rates] could translate into hundreds of billions of dollars more in government spending for countries like the United States and Germany . . . This could put unprecedented pressure on other government spending, including social programs and military spending, while also sapping economic growth by forcing up rates on debt held by companies, home owners, and consumers.23
And ‘even before the start of the crisis’, as a recent analysis emphasizes, ‘public finance in Europe was no longer sustainable, in the sense that budget balances did not improve significantly as the debt grew heavier’.24
The one-trillion-dollar budget passed by the Japanese parliament in March 2010, intended to stimulate an economy sunk in depression since the early 1990s, left Japan with a public debt twice the size of its GDP, the worst ratio among industrialized countries, and an interest bill amounting in 2008 to 20 per cent of the budget. A year earlier, Akito Fukunaga, a ‘fixed-income strategist’ for Credit Suisse, opined correctly that ‘Japan will keep on selling more bonds’ while worrying that ‘that won’t work in three to five years. If you ask me what Japan can resort to after that, my answer is “not very much.”’25 According to Moody’s Investors’ Service, the major bond rating agency, the United States and Britain, among other industrial nations, had by early 2010 moved ‘substantially closer’ to losing the AAA ratings that keeps money flowing into their government bond issues and yields low. That is, they are approaching the point at which the likelihood that they will be able to pay back loans will decline, forcing the interest rates they will have to pay to rise in response to the increased risk.
Those higher rates, in turn, add to the country’s overall debt burden and can force the government to reduce spending, increase taxes, or both. That difficulty has been well illustrated recently in Greece and Portugal, with strikes and protests as citizens march in the streets to oppose tough austerity measures that directly reduce entitlements and state benefits.26
It should be added that the sovereign debt problem can appear less severe than it really is in cases like that of the United States, in which much government debt, and the painful means for counteracting it, is borne by the states rather than directly by the federal government, or that of China, in which much of the national debt is carried by provincial treasuries.
This situation poses problems to which the advocates of massive Keynesian stimulus spending have no real answer, except to promise (like Paul Krugman) that the day of reckoning for government debt is really much farther off than it may appear. As Harold G. Moulton of the Brookings Institution pointed out long ago in a prescient critique of Keynes, the latter
did not face the long-run fiscal implications of the resort to government spending. Unlike many of his followers, he did not specifically contend that an ever-increasing public debt is of no consequence. This fundamental long-run issue was simply ignored.27
A good illustration of the pertinence of Moulton’s criticism is provided by Hyman P. Minsky, a Keynes follower of special interest at the present time for his insistence that the post-1960s economy was becoming increasingly vulnerable to financial crises. In his major work of 1986, Minsky blandly asserted that in 1975 the government deficit was ‘offset’ by a rise in personal savings and above all ‘by a rise in corporate cash flows. Business profits . . . were sustained and increased even as the country was in a severe recession.’28 This notion is based on the ‘fundamental principle in economics . . . that the sum of realized financial surpluses (+) and deficits (-) over all units must equal zero’.29 This principle seems to imply in this context, however, the illusory character of the income and profits on the credit side of the balance sheet, for they must eventually be taken to repay the amount on the governmental debit side. Of course, the unspoken assumption, for which no reasons were given, was that renewed growth would make it possible to combine this repayment with continued business expansion, thus keeping government debt ‘free of default risk’.30
It is the looming possibility of that risk, no matter how distant it remains at present, that keeps even those in favour of stimulus spending, like the current US and Japanese governments, modest in their Keynesian ambitions, simply hoping – bolstered by economists’ psychic predictions – that it will all be over in a year or two. In their hesitation between the rock of ongoing depression, with its dangers of social upheaval, and the hard place of stimulus spending, with its limited effectiveness and disastrously mounting deficits, governments seek a point of balance between their function of preserving ‘social cohesion’ and their fundamental orientation to the needs and wishes of business.
Hence, in the US, the Treasury Department’s unwillingness to interfere seriously with bankers’ decision-making about the funds shovelled in their direction; hence the seeming schizophrenia of President Obama’s statement to reporters on 14 March 2009 that ‘we’ve got to see worldwide concerted action to make sure that the massive contraction in demand [in consumer spending] is dealt with’ while ‘signaling to Congress’, as he was reported doing a day later, that he ‘could support taxing some employee health benefits’, thus decreasing wages and contracting demand. And hence the unwillingness of European governments to follow the Americans very far down even this half-hearted road, leaving the stimulus exercise (with its hoped-for benefits to European exporters) to the United States while concentrating on limiting their budget deficits and tightening their citizens’ belts.
If simply allowing the economy to collapse into depression, as some ultra-conservative economists seemingly urge, is one unacceptable alternative, the other is to increase the economic activity of the state radically. But the American government (federal, state and local) is already responsible for about 35 per cent of GDP. When this number hit 50 per cent at the height of the Second World War, the growth of private capital came more or less to a halt. State sector growth today would mean a similar displacement of capitalist enterprise to create a state-run economy like that of the old Soviet Union, a goal favoured by no political force (despite Newsweek’s 7 February 2009 scare-mongering cover story, ‘We Are All Socialists Now’). It’s only twenty years since Russia and its satellites embraced the free market, or at least some highly restricted version of it, but those governments show no interest in returning to the centrally planned system of yore. The Chinese state too has thrown in its lot with the market, while Cuba, long the last holdout among the centrally planned economies, reacted to the economic downturn with plans ‘to lay off more than a half a million people from the public sector in the expectation that they will move into private business’.31 Even Sweden, long the Western standard-bearer for ‘socialism’ in the eyes of American conservatives, refused to take over Saab from General Motors with the announcement from enterprise minister Maud Olof s son that ‘The Swedish state is not prepared to own car factories.’32 Everywhere, most stimulus money is meant to be pumped into the private economy, as income transfers, tax cuts or government payments and subsidies to businesses.
From the viewpoint of economics – including most left-wing approaches – the point of an economy is the allocation of resources to meet consumption needs. The chief issue distinguishing conflicting viewpoints, then, is what sort of economy – what mix, for example, of market and state planning – does the best job of promoting the public welfare (the wealth of nations). This is why most economists, including Keynes, think of profit-making as a device for getting people with money to invest in the production that serves consumption. And this is what allows a contemporary Keynesian like Paul Krugman to ignore the imperative of profitability and insist, in making an argument for a massive stimulus program, that ‘under current conditions, a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle, and put both to work producing something useful’.33 But capitalism is a system not for providing ‘employment’ as an abstract goal but for employing people who produce profits; its goal is not the production of useful things but the increase of capital. (As noted above, it is an illusion embodied in the allied concepts of ‘national income’ and ‘growth’ that the health of capitalism consists in anything other than the growth of profits and so of capital investment itself.) Otherwise the fact that ‘the current expansionary fiscal policy has coincided with rising, and largely unfunded, age-related spending (pension and health-care costs)’34 would not be a problem requiring solution by such expedients as putting off retirement ages and, eventually, cutting benefits.
While neither economists nor businessmen have an adequate theoretical understanding of capitalism, the latter at least have a practical sense of how it works. Businessmen, however much they may claim that their activities ultimately are for the general good, know that profit itself, not consumption, is the goal of business. They can see that government-provided payments for old-age pensions, healthcare and unemployment relief represent increases in workers’ incomes, not business’s, and that the growing government debt will at some point have to be repaid, while in the mean time absorbing money that might have gone into business investment (whether or not in fact businesses are eager to use it in this way). They feel, without fully comprehending, the fundamental conflict between the private-enterprise economy and the government spending on which it has come to rely.35 Broadus Mitchell’s remarks about the opposition in the United States to the accumulating public debt fuelling the New Deal apply equally to the ‘deficit hawks’ of today, when anxiety is no more warranted by the immediate threat of fiscal insolvency than it was in the 1930s:
There is every reason to believe that the real protest was not fiscal, but broadly economic and political in character . . . The true fear was that government, intervening in the crisis, would weaken the claims of the system of private enterprise. What began as succor to private business threatened to supplant it.36
The underlying problem is that government-financed production does not produce profit. This is hard to grasp, not only because it contradicts a basic presupposition of the past 75 years of economic policy – that government spending can function as an equivalent of private capitalist investment – but because a company that sells goods to the state, as when Boeing provides bombers for the Air Force, does receive a profit, and usually a good one, on its investment. But the money paid to Boeing represents a deduction from the profit produced by the economy as a whole. For the government has no money of its own; it pays with tax money or with borrowed funds that will eventually have to be repaid out of taxes.37
Tax money appears to be paid by everyone. But despite the appearance that business is undertaxed, only business actually pays taxes. To understand this, remember that the total income produced in a year is the money available for all purposes. Some of this money must go to replace producers’ goods used up in the previous year; some must go in the form of wages to buy consumer goods so that the labour force can reproduce itself; the rest appears as profit, interest, rent – and taxes. The money workers actually get is their ‘after tax’ income; from this perspective, tax increases on employee income are just a way of lowering wages. The money deducted from paycheques, as well as from dividends, capital gains and other forms of business income, could appear as business profits – which, let us remember, is basically the money generated by workers’ activity that they do not receive as wages – if it didn’t flow through paycheques (or other income) into government coffers. So when the government buys goods or services from a corporation (or simpler yet, hands agribusiness a subsidy or a bank a bailout) it is just giving a portion of its cut of profits back to business, collecting it from all and giving it to some. The money paid to Boeing has simply been redistributed by the state from other businesses to the aircraft producer.
Government spending therefore cannot solve the problem of depression, because the problem is not insufficient consumer demand but insufficient profits for business expansion (which in turn determines the extent of consumer demand). It can put off the issue by supplying financial and other businesses with the money they need to continue operations. It can also alleviate the suffering it causes, at least in the short run, by providing jobs or money to those out of work, or create infrastructure useful for future profitable production. Beyond that, the main service rendered to the industrial capitalist system by the state, as Martin Jänicke ironically insists, is to serve as a scapegoat: while ‘it is the entrepreneurs and managers who make the decisions . . . the state is blamed for failures in the economy, from inflation to unemployment, and the parties involved in the game of “changing of the guards” play it in all seriousness’.38 The underlying problem in a period of depression can be solved only by the depression itself (perhaps aided, as on the last important occasion, by a large-scale war – a real role for the state), which (as explained in chapter Three) can raise profitability by lowering capital and labour costs, increasing productivity through technological advances and concentrating capital ownership in larger, more efficient units.
This is why the recurrent application of stimulus since the Second World War could provide an (ever weakening) simulacrum of prosperity only at the cost of a rising accumulation of debt. It is also why debt cannot expand indefinitely, without either undermining the very ability of governments to function (via the growing domination of budgets by interest charges) or diminishing the already insufficient profit ability of private enterprise. It is why politicians were already turning, by mid-2010, from moderate stimulus policies to austerity, cutting government employment, unemployment relief, healthcare, pensions and everything else within reach.