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Can the Stimulus Package Revive the Economy? — Deep Crisis Facing U.S. Capitalism

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At present, Congress is debating different versions of Obama’s stimulus packages.
This article provides an in-depth review of the original stimulus package proposed by Obama in early January.

Dragged down by a massive overhang of debt, declining house prices and the collapse of the derivative market, the U.S. economy is mired in what will become the deepest crisis since the Great Depression.

The current recession began in December 2007. Already, it is the longest downturn since the 16-month recessions of 1981-82 and 1973-75. They are tied as the longest recessions since World War II.

This recession is caused by the destructive boom and bust cycle which is endemic to capitalism. However, this time it has been massively complicated by the collapse of two decades of unsustainable growth of credit. The speculative bubbles in real estate prices, the stock market, and the financial instruments called derivatives have now burst. U.S. society, and in particular U.S. workers, are being forced to pay for the crazy logic of the system.

Decline of U.S. capitalism

At the root of the crisis is the fact that big business sees no profitable outlet for investment in the U.S. This is due to the contradictions in the system. For example, GM spawned a financial wing for its operations, while it subcontracted out aspects of auto production. Many other examples can be found of the refusal of big business to invest in new productive machinery in the U.S. Yet, investment in new productive machinery is the only activity that can turn around the U.S. economy and create millions more living wage jobs.

The logic of capitalism, which led to the de-industrialization of Britain during the second half of the 19th century, has now undermined the industrial strength of U.S. capitalism. From being the absolute top-dog economy in 1950, the U.S. economy has been seriously weakened in the last 5 decades.

In 1965, manufacturing accounted for 53% of the economy. By 1988 this has fallen to 39%, and by 2004 it had sunk to 9%. The Economist (10/1/2005) stated: “For the first time since the industrial revolution, fewer than 10% of American workers are now employed in manufacturing.”

Jobs in manufacturing industry, the core center of living wage jobs since the successful industrial union struggles of the 1930s and 1940s, are becoming extinct as far as most workers are concerned. Consider these statistics: The average laid-off manufacturing worker was making $51,000 a year prior to layoff. Now in new industries the averages are: leisure/food service $16,000, health care $33,000 and construction $39,000 (Seattle Times).

The U.S. is becoming a low wage economy. Low wages only benefit the boss. Lower wages mean workers can buy less goods, which further depresses the economy. Low-wage jobs in the service sector of the economy have become the new reality for tens of millions of workers. 80% of the 134 million non-farm jobs are in the service sector.

A good example of this is the debate around the massive crisis that is shaking the auto industry. According to the AFL-CIO, between 3 and 5 million living wage jobs are at risk if the industry is allowed to collapse. Despite huge sales and profits in recent decades, the auto company owners failed to retool and modernize. Now the whole U.S. auto industry is on the rocks. Numerous working class communities are threatened with disaster.

In an astonishing display of double standards, there has been an unconditional bailout for banks, which has primarily benefited the rich investors. But any bailout of the auto industry, with millions of jobs at stake, is to be made conditional on givebacks by auto workers, whose sweat and blood built the industry in the first place.

The recent collapse in auto is staggering. In November, auto sales in the U.S. fell 35%. Sales dropped 31% at G.M., 32% Ford and 53% at Chrysler. In the last three years around 150,000 jobs have been lost at the big three. Hardest hit have been African American workers. In the last year 20,000 African American auto workers had lost their jobs.

Massive Loss of Jobs in 2008

The economy is shedding jobs at a massive rate. 1.5 million jobs were shed between October and December 2008. During that time economic output fell an estimated 6% compared to the previous year. 2.6 million jobs have been lost in the last year. This makes it the worst year of job losses since 1945. Nearly 800,000 manufacturing jobs were lost in 2008. 630,000 construction jobs disappeared as home-building slowed. The official unemployment rate rose to 7.2%, or 11.1 million workers.

In December 2008, those working part-time jobs – because they couldn’t find full-time work, or their hours had been cut back due to the recession – jumped by 700,000 people to 8 million, the highest ever on records that date back to 1955. Taking into account also those who are too discourage to look for work, the real unemployment rate is now 13.5% (AFL-CIO.)

“This is unprecedented,” said Mark Zandi, chief economist of Moody’s “It’s coast to coast. It’s everywhere. There’s really no refuge in this job market. There’s no safe place.”

Almost every economic analysts predict that this recession will last at least through 2010. Some see it lasting longer. Nariman Behravesh, chief economist at IHS Global Insight, says: “It will get a lot worse before it gets better. We are in the midst of the worst recession in the postwar period, even factoring in a massive stimulus program.”

This means jobs losses will continue. Richard Yamarone, economist at Argus Research, says: “Many companies have a bare-bones mentality. With labor being their biggest expense, you will see them continue to drop the ax on jobs…There is absolutely no reason to believe the economy is going to be creating jobs any time soon. There are just no reasons for companies to flick on the hiring switch” (CBS/AP 1/7/2009).

The retail sector will be hit hard as consumers retrench and the post-Christmas reality sinks in for the over-extended retail sector. “A new report on retail sales said that 2008 had been the worst holiday shopping season in more than 30 years, raising the prospect that more stores will close or seek bankruptcy protection in 2009.” Most analysts expect New Year sales to be very bleak, “sending some of the well-known names of American retailing into bankruptcy” (New York Times, 1/9/2009).

Recession Deepening

Bernard Baumohl, chief global economist at the Economic Outlook Group states that the expectation of more job losses ahead “will only perpetuate the vicious downward cycle propelling the economy. As the number of people without jobs accelerates, so will the retrenchment in households’ spending. If consumers cut back more, business sales and earnings shrink further. The collapse in profit margins will force companies to carry out yet another round of layoffs, which only adds more momentum to the destructive cycle… Unfortunately, that’s the scenario we see ahead.”

The other main factor dragging down the economy is the housing market. It continues to fall precipitously. “The median sales price of an existing home plunged 13.2 percent in November to $181,300. That was the biggest year-over-year drop since 1968. The median, or midpoint, price for a new home sold in November also fell sharply, dropping 12.7 percent to $220,40” (Bloomberg, 1/7/09).

This means more delinquency on payments, more foreclosures, more mortgage defaults and more evictions. More workers will only be able to survive through credit, unable to afford the essentials of life.

In the next year one more shoe will drop. The financial crisis will spread into the consumer credit market. How many workers can afford to maintain payments on their credit cards? How many will make payments on their automobiles, when the other option is to go without food, or to miss a house payment? This could well create a new banking collapse as more bad debt floods the system.

With 67% of economic growth coming from consumer spending, the collapse of spending by working people, combined with the collapse in the value of their home, mean that working class people have less to spend. The deepening recession is worsening this.

With credit getting tighter, workers are boxed in. Their choices are limited. They will spend on what they need, and everything else will need to be dropped or avoided. This fall in spending will further exacerbate the recession. This will be further exacerbated by more lay-offs, and the fear that your number may be coming up next.

The consequence has been a massive fall in consumer spending, especially on big ticket items. This has had a huge effect on auto sales and the housing market. Falling income reduces sales, and falling sales lead to more lay-offs. This vicious spiral drags the economy into a deeper and deeper recession.

Economic Perspectives

So what are the perspectives for the economy? At present the economy is falling fast. Some analysts warn that economic activity could plunge as much as 6% (CBS 1/7/2009). This will most likely continue through 2009, and into 2010. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, explains why: “The sharp deterioration of banking and credit conditions, the deepening slump in consumer and business confidence and the ongoing housing correction must work its way through the economy.”

In other words the massive bubble created in the last 15 years must be sufficiently destroyed to create conditions where the economy can grow again. How this works its way out will determine the length and depth of this recession. There are a number of possible major shocks that could trigger an economic crash, or depression. For example, the collapse of major banks, a major economic collapse internationally, or a major run on the dollar. The depth of the crisis will depend on whether the Fed’s interventions can prevent an uncontrollable collapse.

At this point it’s hard to say how deep this crisis will be. What we can say is that it will be the deepest since the 1930s. But will it fall into a depression? There are no clear definitions of a “depression.” Webster’s dictionary defines it as: “A sustained economic recession in which a nation’s Gross National Product (GNP) is falling and marked by low production and sales and a high rate of business failures and unemployment.” YourDictionary defines it as: “A prolonged period of recession, or a significant and prolonged downturn in the economy. Characteristics of an economic depression include declining business activities, falling prices, rising unemployment, increasing inventories, public fear and panic.”

Based on the definition of a “depression” as a prolonged deep recession, yes, it is possible that the economy could fall into a depression. The second question is: Will it fall to the level of the Great Depression of the 1930? In the Great Depression unemployment reached 25% and production fell close to 50%. If the Fed had not responded so aggressively to prop up the finance system in the fall of 2008, then this would be a serious possibility. But because of its unprecedented intervention, the U.S. economy is not likely to see such a deep fall. However, if we see a major collapse of the banks or a major investor flight from the dollar, which cannot be ruled out, we could see a depression that starts to mirror certain aspects of the 1930s.

A better comparison is with Japan in the 1990s. Following the collapse of its massive property bubble of the 1980s, the 1990s was a decade of economic stagnation, with growth stuck at around 0%. This was despite a series of massive government spending packages. The U.S. economy could now face a period of a severe recession, or even a form of mild depression, followed by a period of stagnation with very low levels of growth, as it attempt to get from under the colossal mountain of bad debt. However, the social effects will be far more devastating in the U.S. than in Japan because of the extensive social programs that protected Japanese workers during their crisis of the 1990s.

Obama’s stimulus plan

A lot of hope is being created that Obama’s stimulus program can turn the economy around. Obama’s policies represent a turn to Keynesian policies. With the economy stuck in the water, credit markets seized up, and workers and businesses unable to increase spending, then there is a need for government to step in to provider some economic stimulus.

Robert Rubin, one of Obama’s main economic strategists, co-authored an article with Jared Bernstein, the head of the liberal Democrat (neo-Keynesian) Economic Policy Institute. Rejecting a false dichotomy between “fiscal rectitude versus stimulus and public investment,” they declared: “There’s a time to spend, a time to save; a time to build deficits up and a time to tear them down.” They continued: “With the current financial crisis, our joint view is that for the short term, our economy needs a large fiscal stimulus that generates substantial economic demand.” The U.S. economy requires “public investment in critical areas like education, health care, energy, worker training, and much else” (NY Times, 11/3/2008).

Obama and his economic advisors have announced a two-year $775 stimulus package to create or save up to 3 million new jobs. The intention is to give an immediate increase in spending to revive the economy.

Details are spelled out in the NY Times “It includes $300 billion in temporary tax cuts for individuals and businesses, in part to attract Republican support. It includes a big expansion of safety-net programs like unemployment insurance, which Democrats say makes both economic and social sense. It includes more money for highways, schools and other public infrastructure; more money for ‘green’ energy projects; and more money to help state governments pay for health care and education” (1/10/2009).

The inclusion of $300 billion in tax cuts means only about 60% of the Obama plan consists of public spending. This will weaken its overall effect. Mark M. Zandi, chief economist at Moody’s, explains that tax cuts provide the smallest amount of economic punch for your dollar. “Each dollar of additional money for food stamps yields $1.73 in additional economic activity, Mr. Zandi estimated, and each extra dollar in unemployment benefits yields about $1.63. By contrast, Mr. Zandi estimated, most tax cuts produce less than a dollar for each dollar of stimulus” (NY Times, 1/10/2009).

The last time we saw wide support for the use of Keynesian policies in the U.S. was in the 1950s and 1960s. They were used to extend the post-World War II upswing. However, this was during a period of economic boom. Capitalists saw a period of world growth, and were spending money to build new factories, etc. which soaked up much of the government’s spending on social programs and the Vietnam War. Now, with capitalism in crisis, Keynesianism is being used as a short-term measure to kick start to the economy. As previously explained, any extensive use of Keynesian spending will create a new spiral of inflation.

To date the Federal Reserve has injected trillions of dollars to keep the economy afloat. Much of this had been borrowed. Some was funded by printing dollars. The budget deficit for this year is already expected to grow to $1.2 trillion, and this before Obama’s stimulus package is factored in.

This massive spending can only be paid for by increasing the national debt or printing more dollars. This will pile up more contradictions for the system. Dialectically, these measures will then become integrated into the economy, becoming a further drag on the system in the next period.

A NY Times editorial (12/22/2008) spells this out well:

“Economic history – of the Great Depression of the 1930s and Japan’s lost decade of the 1990s – suggests that the Fed is doing the right thing. Confronted then, as now, with the twin scourges of deepening recession and incipient deflation, governments did more damage with too little intervention than they would have done with too much.

“But that doesn’t make such interventions ‘good.’ It’s a big and unfortunate risk.

“Flooding the economy with freshly printed money may prevent a self-reinforcing downward spiral. But it may cause trouble long after the present danger has passed. One reason is that it could cause inflation later. In the worst-case scenario, inflation, or fear of inflation, could dissuade foreign investors, who finance the United States’ debt, from buying and holding dollars. That, in turn, could provoke a disorderly decline in the currency, sending prices and interest rates sharply higher.”

This accurate description doesn’t even deal with the ballooning budget deficit. Once they feel they have stabilized the system, politicians will use the massive budget deficits as a reason to make the working class and poor pay for this deficit, by pushing through deep cuts in social programs, Social Security and Medicare, etc.

In case anyone thought that Obama would protect these essential programs, that provide Americans over 65 with health care and retirement benefits, on January 8, the NY Times reported: “President-elect Barack Obama said Wednesday that overhauling Social Security and Medicare would be ‘a central part’ of his administration’s efforts to contain federal spending” (1/8/2009).

This can only mean one thing: cuts. With Republicans chomping at the bit to slash these programs, it appears that mass movements will be needed to prevent this from happening. In a telling comment, Obama said to Republicans: “I’m not out to increase the size of the government long-term. My preference would be that the private sector was doing this all on their own” (New York Times, 1/9/2009).

Will Obama’s policies work?

The question we need to ask is: will Obama’s policies succeed? On this we need to take a short-term view, and then a medium and long-term view.

In the short term, Obama’s policies will not prevent the development of a deep recession, the most serious since the 1930s. He cannot prevent the business cycle of capitalism. He cannot remove the mountains of bad debt that clog the arteries of capitalism. In the short term he can try to head off anger at the rich and big business and the outbreak of struggles. Or, as the NY Times stated in a recent editorial: “making the burdens yet to come more bearable.”

Paul Krugman has been a firm proponent of Keynesian measures. Yet he feels that Obama’s stimulus package is not big or effective enough to measure up to the dangers that loom. He quotes the Congressional Budget Office as saying that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production.

Krugman says: “To close a gap of more than $2 trillion – possibly a lot more, if the budget office projections turn out to be too optimistic – Mr. Obama offers a $775 billion plan. And that’s not enough.”

Krugman then looks to see what effect Obama’s stimulus package would have, taking into account that $300 billion is in tax cuts. He says: “The Congressional Budget Office’s most recent analysis of the budget and economic outlook stated that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come” (NY Times, 1/8/2009).

“Since GDP is roughly $15 trillion – you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point. Suppose that we’re looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years; this plan would cut that to 7.3 percent” (NY Times, 1/6/2009).

Krugman concludes: “The Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan” (NY Times, 1/8/2009).

Others agree. “Even with a big government stimulus, economists still believe the unemployment rate will keep climbing, hitting 8 or 10 percent by the end of this year” (CBS/AP 1/7/09).

So, overall, Obama’s policies will be able to provide some economic stimulus which could prevent unemployment rising as high as it might, and could put a bottom under the recession, preventing it from falling into a depression. It can also have a certain effect in shortening the length of the recession. However, other events, like new bank collapses, etc., will also affect this, and could trigger an even deeper slump or depression.

The Structural Crisis of U.S. Capitalism

The more important question is whether these policies can overcome the overall structural crisis of U.S. capitalism. On this we can clearly and definitively say “No.” Obama’s stimulus plan reveals a strong emphasis on public works to rebuild the infrastructure. Yes, rebuilding the infrastructure is important. But doing that alone will not improve the long-term profitability of U.S. industry. It won’t retool and revitalize the fundamentals of the economy so capitalism can compete in the world again.

To revitalize the economy means the government laying down policies that force the CEOs of key industries to massively invest in plant and new technology. Capitalists will only act based on their interests. With glutted markets and easier profits to be made elsewhere they will refuse to massively invest in new plant and equipment. The present talk of modernizing industries, and loans to these industries will not fundamentally change the policies of the corporate CEOs, who will make some minor changes, and then continue to milk niche markets and retool overseas.

There is already a discussion comparing Obama’s policies to the New Deal policies of Roosevelt. People are arguing that Roosevelt’s New Deal policies ended the depression. It’s important that we look at Roosevelt’s policies in the 1930s policies carefully.

The Myths of the New Deal

Like the conservative wing of the Republican Party today, in the 1930s, the ruling class, with Republican president Hoover in the White House, believed that the blind forces of the market place would revive the economy. As a result, after the stock market crash in October 1929, the economy fell for three straight years! Industrial production fell almost 50% and unemployment reached up to 17 million in U.S. in 1933.

In November 1932, with his vague promise of a “New Deal” Roosevelt was elected. In many ways his promise of a “New Deal” is similar to Obama’s calls for “Hope and Change.” The “New Deal” was a phrase, not a thought-out policy.

One immediate difference is that Roosevelt was elected after the economy had been in recession for three years. Three years of depression had destroyed much of the bubble that had been created during the “roaring ’20s.” Conditions were present for some kind of economic growth.

Today, Obama will be taking office near the beginning of a recession. Few analysts expect any kind of growth until 2010 or later. Also, as, we have said, the Federal Reserve is actively pumping money into the economy to prevent a depression. While we can expect a deep recession, it is probably unlikely the economy to fall into a deep depression similar to the 1930s.

On coming into office, Roosevelt was faced with a collapse of the economy and a developing collapse of the financial system. The New Deal was intended to get the economy moving again. With capitalism on the ropes, he put a moratorium on withdrawals from banks, consolidated the big banks and let the small ones collapse. Millions of workers and small farmers across the country suffered.

In an effort to revive industry and create conditions for a growth of capitalism he injected money into the economy, and created a certain level of government/industry coordination for each industry. The New Deal set prices and wages in a number of key industries, creating more stable economic conditions for growth.

At the beginning of 1933, the depression began to bottom out and the economy started a period of slowly increasing growth. However, the New Deal didn’t end the depression. The economy fell into a new deep recession in mid-1936.

At its height, the NRA never provided jobs for more than 25% of jobless. The average annual expenditure for the unemployed was $1-1 ½ billion. This compares with war spending which was $79 billion in 1953. Only $500 million was granted to states to continue starvation payments given to some of the unemployed (Art Preis, Labor’s Giant Step, p11). After an initial period of shock, waves of struggles erupted as workers fought for relief and then moved to build militant unions.

Ferdinand Lundberg in his book America’s 60 Families wrote: The New Deal was neither “revolutionary nor radical.” “Its mild tentative reformist coloration” was a “concession in the face of widespread unrest.” The Unemployed League described it as: “Not enough to live on and just too much to die on.”

Roosevelt’s New Deal policies did not end the depression. Unemployment according to the Congress of Industrialization (CIO) was 10 million in 1935; 8.75 million in 1936, 8 million in 1937, and 11 million in 1938. It was only the massive military build-up in preparation for U.S. entry into WWII that ended the depression.

Obama’s policies in the recession

Obama will not be able to prevent the deepest recession since the 1930s. Despite his stimulus package creating new jobs, a larger number of workers will be losing their jobs. Overall, living standards will fall.

Individual capitalists will respond in the only way they can, to restore profitability through layoffs of workers, and squeezing wages and benefits. This will exacerbate the recession, and will fuel class anger and struggle.

State Budget Deficits: 50 Hoovers

Even while Obama promotes a $775 stimulus plan, the states are following monetarist policies of slashing spending to overcome their deficits.

At least 44 states face, or are facing, shortfalls in their budgets for this and/or next year. The Center on Budget and Policy Priorities predicts the combined shortfall for all 50 states could total upwards of $350 billion for the remainder of this fiscal year and 2010/2011.

Trapped by a declining economy and balanced-budget rules, state governments are increasing the recessionary pressure exactly as Obama is attempting to pull the stick the opposite way. Considering that Obama is planning to spend around $800 billion over two years, and $300 billion is for tax cuts, that leaves only $500 billion for all his other programs. Clearly this amount will not be able to compensate for the cutbacks that will come at a state level.

Paul Krugman explains: “But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers – state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation’s economic future.” He concludes: “The priority right now is to fight off the attack of the 50 Herbert Hoovers, and make sure that the fiscal problems of the states don’t make the economic crisis even worse” (NY Times, 12/29/2008).

In some states the crisis is staggering. In California the deficit is 35% of operating budget, New York 11%, Massachusetts 11.5% (The Center on Budget and Policy Priorities, In California, with the deficit expected to reach $41.6 billion by the middle of next year, the crisis has left the state with little more than a month’s worth of cash in the treasury.

Many essential programs for workers, unemployment benefits, Medicaid, etc are administered at a state level. “The combination of rising unemployment, declining consumer spending, declining asset values, and foreclosures has led to declining state revenues. And the number of people in poverty is growing, adding costs to state budgets for programs such as Medicaid and social services” (Center on Budget and Policy Priorities, 12/23, 2008). In an ominous sign electronic unemployment filing systems have crashed in at least three states in the few weeks (CBS/AP 1/7/2009).

Accounting for 46% of all state spending, education will be hit hard. “At least 24 states have implemented cuts to public colleges and universities and/or are implementing large increases in college tuition to make up for insufficient state funding” (Center on Budget and Policy Priorities, 12/23/2008).

The warped logic of capitalism

Enormous pain will come to the working class as result of this crisis. Unfortunately, its concerns are not even registered on the radar screens of corporate politicians and their corporate advisors. Restoring profitability for big business is what matters. To do that they are desperately trying to find a policy that can overcome the contradictions of the system.

The only reason they are increasing unemployment benefits and providing a jobs program is to jump start their system. As soon as that is done they will whisk it away. No one is talking about how all the money poured into the financial system would be far better spent on providing universal health care, and the construction of millions of affordable homes. No one talks about the need to bring down unemployment to 0%, and ensure that everyone has a living wage job – the basic necessity of a decent life in capitalism. Yet, this is the most practical and effective way to solve the crisis.

In order to stop capitalism falling into the abyss a huge stimulus package is being put together. But the corporate bailout and the stimulus package will need to be paid for. This will explode the federal debt and the federal budget deficit

As soon as it looks like the economy is pulling out of the recession, we can expect to see Obama increasingly talk about the need to shrink the deficit and the debt. To do that they will take aim not at the massive debt payment to rich investors, or the bloated military budget. No, they will take aim at the two most important programs that provide some security and relief for workers in their later years – Social Security and Medicare.

We need to reject this whole logic. Capitalism doesn’t benefit the working class. The working class didn’t create this crisis. They should not be made to pay for “saving” it.

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