“The way our economic and political systems work must change, or they will perish” (Martin Wolff, chief economics commentator of the Financial Times, 9/18/19).
Ten years after the Great Recession of 2008-9 which had catastrophic consequences for tens of millions, it is becoming increasingly evident that the world economy is entering another serious crisis.
The new head of the International Monetary Fund, Kristalina Georgieva, recently declared, “The global economy is now in a synchronized slowdown,” (Wall Street Journal, 10/8/19). The IMF and World Bank now estimate that 90% of the world economy is experiencing a slowdown compared to 75% experiencing accelerating growth just two years ago. This includes the massive Chinese economy whose rate of growth has slowed to the lowest level in 25 years and may well be significantly below the officially reported numbers. Germany, the key industrial power in Europe, is teetering on the edge of a recession. Some countries, like Argentina and Turkey, are facing an even sharper crisis. Global trade is expanding at its lowest rate since 2009.
The main trigger for this downturn is the trade war between the U.S. and China, which reflects a deeper conflict between rising Chinese capitalism and a weakened but still dominant U.S. imperialism. But trying to reduce this crisis to Trump’s imposition of tariffs would be false. There are deeper causes which flow from the increasingly parasitical character of capitalism in this period.
While the U.S. economy continues to grow, it is also slowing down. The latest reports indicate that manufacturing, agriculture and shipping, accounting for one-fifth of the U.S. economy, are already in recession (Paul Krugman, New York Times, 10/4/19). While consumer spending which accounts for two thirds of economic activity continues to grow, this will not continue if there are significant layoffs in manufacturing and other sectors directly affected by the trade war.
The Crisis Last Time
To understand the looming crisis it is worth reminding ourselves of how the Great Recession unfolded since it is a key part of the context of current developments.
The crisis last time actually began in 2007 with the increasing problems in the massive global derivatives market due to financial institutions loading up on repackaged “sub prime” loans in the housing sector. Once this “bubble” of drastically inflated assets imploded, other bubbles began bursting including overvalued stocks and shares and real estate as a whole.
A key moment was the collapse of the Lehman Brothers investment bank in September 2008 due to the amount of sub prime loan assets they were holding. This caused the titans of Wall Street to convene a meeting lasting late into the night as panic spread that the collapse of a bank of Lehman’s size could trigger a more general collapse in the banking sector. Their fear was absolutely warranted. The Bear Stearns investment bank had already collapsed. Lehman in turn was followed by AIG, the world’s largest insurance bank. In each case the question was posed: are the banks “too big to fail?” The American government, reflecting the interests of the capitalist class, chose to bail out Bear Stearns, AIG, and eventually the banking sector as a whole. The total cost of the bailout is a matter of dispute but, according to an article in Forbes in 2015, at that point $4.6 trillion had been paid out.
In one sense it’s true that bailing out the banks prevented a complete collapse, but it was done at the expense of working-class people who received no bailout as they lost their jobs and homes. In reality it was the bailout of a failed system.
According to the Bureau of Labor Statistics, 8.8 million people in the U.S. lost their jobs during the Great Recession. More than nine million families lost their homes due to foreclosure or short sale between 2006 and 2014 (Wall Street Journal, 4/20/15). The gamblers in the global casino whose activity led to the crisis were protected at every stage.
As the crisis spread internationally, the pattern was repeated. Serious measures were taken to stabilize the system but it was always working people who paid the price. The people of Spain, Ireland, and especially Greece were forced by the European Central Bank and International Monetary Fund to accept massive cuts (“austerity”) in social services in order to ensure the regular payment of their country’s debts to foreign banks. Vicious austerity was not just imposed in poorer countries like Greece but in Britain as well.
In the U.S., whole swathes of the country were left to rot as local industries collapsed. There were massive cuts to education and other social services. Even 10 years later, as the teachers revolt began, it was estimated that staffing levels in k-12 education were 400,000 below where they were in 2008 (The Nation, 4/23/18).
The Deeper Causes
The crisis of 2008-9 exposed the underlying realities of capitalism in this period. The neoliberal era, which began after the collapse of the post World War II expansion in the mid-‘70s, led to the attempt to restore profitability through an increasing role for financial capital (“financialization”); the massive expansion of credit; privatization of large sections of the public sector; and of course globalization. In total all these features reflected a ruling class unable to expand the forces of production or offer a better future, resorting to looting society, particularly by radically reducing the share of wealth going to working people, in order to restore profits, the lifeblood of their system.
The result was a staggering increase in inequality, with three men now owning as much wealth as the bottom 50% of the American population. While Amazon’s Jeff Bezos and his family have amassed $160 billion, hundreds of thousands of Americans are homeless and millions more are one lost paycheck away from disaster. The United Nations’ Special Rapporteur on poverty last year stated that 18.5 million live in “extreme poverty” in the U.S. But even many “middle class” people are in an increasingly precarious position. An estimated 40% of the population would find it difficult to afford a $400 emergency.
For years we have been told that a “recovery” is underway. The U.S. has had the longest continuous economic expansion on record, now standing at 124 months. But the reality is that the benefits of this expansion have gone overwhelmingly to the capitalist elite. The vast sums of money pumped into the banks by the bailout or Trump’s tax cut for the wealthy have overwhelmingly gone back into the casino rather than into productive investment. The infamous global derivatives market today has a nominal value of $1.2 quadrillion ($1,200,000,000,000,000)! Meanwhile real wages have barely grown.
The inability of capitalism to show a way towards a better life for the mass of people – in fact the reverse – is exacerbated by the increasingly dire threat of climate catastrophe. Large areas of the planet could in the coming decades become uninhabitable. A recent United Nations report warned that “A half-billion people already live in places turning into desert, and soil is being lost between 10 and 100 times faster than it is forming…A particular danger is that food shortages could develop on several continents at once,” (New York Times, 8/8/19). This will also contribute to desperate mass migrations. Drought caused by climate change, which has devastated agriculture in Honduras and Guatemala, has been a direct contributor to the mass migration of people from Central America to the U.S. border this year.
This all points to economic slumps becoming deeper and recoveries ever more shallow as the very basis of the world economy is undermined.
The Crisis This Time
It is not yet clear whether the new phase of economic and social crisis will be on the same scale as that of 2008-9. As we go to press it appears that the U.S. and China have negotiated a pause in the trade conflict but it is very hard to see an overall resolution any time soon. And there are other triggers which could worsen the crisis, including if Britain crashes out of the EU without a deal (“No Deal Brexit,” see article on p. 22) or if a war begins in the Middle East leading to a sharp rise in the price of oil.
There are several factors that point to this crisis being even more difficult to address if it worsens. First of all, compared to 2008-9, the ability of central banks to respond effectively has been severely undermined. Ten years ago, interest rates could be cut to encourage businesses to spend. Indeed they were cut in many countries until they were effectively negative interest rates, meaning businesses were being paid to take money. On top of that, Quantitative Easing (QE) policies in Europe and the U.S. meant that central banks effectively printed vast amounts of money.
While the monetary “economic toolbox” has been severely depleted, there is a bigger problem. In the wake of 2008, the capitalists relied on the BRIC countries (Brazil, Russia, India, and China), whose economies were relatively dynamic, to pull the world economy out of the ditch. China, in particular, invested in massive infrastructure projects and imported vast amounts of raw materials. Today, facing its own debt crisis, China is not able to play this role. Its “Belt and Road” program of infrastructure investments abroad have also created crises for countries now having to repay the Chinese loans that financed the projects. In fact, all the BRIC countries are facing slowdown (China and India) or are in danger of going into recession in the coming year (Russia and Brazil). Brazil has barely emerged from the most brutal recession in its history and 13 million are still unemployed with millions more underemployed.
Ten years ago, there was a coordinated international response led by Obama. This is almost inconceivable today with Trump at the helm. U.S. tariffs on imports are now at a higher level than at any point since the 1930s and could eclipse the 1930s (Barrons, 5/10/19). However, Trump also came to power after a decade in which protectionist measures were increasing internationally. In reality we are experiencing the partial unwinding of globalization. There are limits to this given the complexity of international production chains, but it is remarkable that we are already seeing the beginnings of a partial “decoupling” of the U.S. and Chinese economies. And while globalization and its neoliberal trade deals were done at the expense of workers and the environment, a resurgence of economic nationalism and protectionism is also very dangerous, pointing toward increasing international tension and conflict between capitalist states.
An Untenable Situation
Recessions are normal under capitalism, but the situation we find ourselves in is not the boom and bust cycle of a forward-moving system but rather the increasing paroxysms of a system in decline. In the ten years since 2008 none of the underlying issues that caused the biggest economic crisis since the Great Depression of the 1930s were resolved. One of the expressions of this is the massive overproduction and overcapacity in the global economy as working people, whose share of the wealth has shrunk, are unable to buy the products they make. Another is the massive levels of state indebtedness which some pro-capitalist commentators are falsely trying to convince themselves is not a problem.
But the biggest danger facing the ruling class is that they enter this crisis with a staggering loss of legitimacy. This is rooted in the savage attacks on working people and the staggering corruption of a political system awash in corporate money. A turning point in the U.S. was the Occupy Wall Street movement in 2011 which popularized the idea of “the 99% versus the 1%.” Occupy occurred at the same time as popular uprisings against corrupt regimes in the Middle East and North Africa and the beginning of massive struggles against endless austerity in Southern Europe. The weakness of the left and lack of leadership from the unions or left parties meant these struggles largely failed but they left a lasting imprint on mass consciousness.
Now young people in this country favor socialism over capitalism when asked by pollsters. There is massive support for Medicare for All and a Green New Deal and taxing the rich to pay for it. Some are beginning to realize that what is needed is to bring key economic sectors into public ownership. Working people – beginning with teachers in 2018 but since joined by hotel workers, grocery workers and now auto workers – are showing their willingness to fight back and use their collective power as workers.
A number of more far-sighted supporters of capitalism recognize that sticking with neoliberal policies is unsustainable. In the piece by Martin Wolff of the Financial Times, quoted at the start of this article, he also says:
“We need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits. What we increasingly seem to have instead is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy.”
Wolff is right that the political and economic system is seen as rigged and corrupt (because it is) and also to point to the role of monopolization, including in the financial sector, as creating further problems for capitalism’s credibility.
He points positively to the recent declaration by the Business Roundtable, made up of key U.S. CEOs, that corporations “share a fundamental commitment to all their stakeholders” including communities where they operate and employees as opposed to their previous line that “corporations exist principally to serve their shareholders,” i.e. maximize profits at all costs.
Of course the leopard won’t really change its spots, but this is recognition from the highest level that the system needs a makeover. Elizabeth Warren, whose key theme as a presidential candidate is “accountable capitalism,” takes this a step further, saying that American companies should be forced to apply for charters that would oblige them to – in the words of the Economist – “look after stakeholders especially local ones. Those who let the side down would have their charters revoked.” The issue is not whether this is likely to become reality or whether it would really change things, but rather that a candidate who may wind up being backed by the Democratic political establishment to block Bernie Sanders is saying this. The contrast between Warren’s rhetoric and that of the unapologetic neoliberal Hillary Clinton in 2016 is stark.
In the next period, due to mass pressure, but also due to the climate crisis and growing inter-imperialist competition, we could see a move toward more state intervention, even an element of Chinese-type industrial policy or “state capitalism.” Capitalism has gone through different eras or “regimes” with different balances of class forces and policies. Neoliberalism has survived past its sell-by date in large part because of the general weakness of working-class organizations since the collapse of Stalinism, but particularly since the crisis of ‘08, despite the willingness of working people and young people to fight.
The Effects of the Coming Crisis
But that may be beginning to change. Even before the full crisis breaks out there has been an astonishing development of struggle by working people and youth internationally including the Yellow Vests movement in France; the revolutionary struggles in Algeria and the Sudan; and new movements against corrupt regimes in Haiti, Egypt, Iraq and Indonesia. In Ecuador, the president fled the capital after mass protests against cuts ordered by the IMF as part of a bailout plan. This is not to mention the movements of women in country after country, as well as the global days of protest by millions of young people demanding action on climate change.
Working people will not be as shocked by the next crisis. While a serious slump can have a “stunning effect” especially as people cope with mass unemployment and evictions, this phase will be of far shorter duration than after 2008. When struggle resumes, it will very quickly be on a wider scale, more determined, and with more far-reaching demands. What is clearly needed in the U.S. is the rebuilding of a fighting labor movement and a new political party based on the interests of working people and the poor. Bernie Sanders’ campaign for president, while trapped inside the corporate Democratic Party, points in this direction. Building the foundations for this new party out of his campaign is the key step we can take to prepare for the onslaught of the next phase of capitalist crisis.