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The Crisis Enters Year Five

Wednesday, 25 May 2011 06:38 By Richard D Wolff, Richard D. Wolff's Blog | Op-Ed
The Crisis Enters Year Five

Tony Harrington waits in line to talk with potential employers at a job fair, which drew more than 250 people, in Bloomington, Minnesota, May 2, 2011. (Photo: Craig Lassig / The New York Times)

The current capitalist global crisis began with the severe contraction in the housing markets in mid-2007. Therefore welcome to Year Five.  This inventory of where things stand may begin with the good news: the major banks, the stock market, and corporate profits have largely or completely “recovered” from the lows they reached early in 2009. The US dollar has fallen sharply against many currencies of countries with which the US trades and that has enabled US exports to rebound from their crisis lows.

However, the bad news is what prevails notwithstanding the political and media hypes about “recovery.” The most widely cited unemployment rate remains at 9 % for workers without jobs but looking. If instead we use the more indicative U-6 unemployment statistic of the US Labor Department’s Bureau of Labor Statistics, then the rate is 15%.  The latter rate counts also those who want full-time but can only find part-time work and those who want work but have given up looking. One in six members of the US labor force brings home little or no money, burdening family and friends, using up savings, cutting back on spending, etc. At the same time, the housing market remains deeply depressed as 1.5 to 2 million home foreclosures are scheduled for 2011, separating more millions from their homes. After a short upturn, housing prices nationally have resumed their fall: one of those feared “double dips” downward is thus already under way in the economically vital housing market.

The combination of high unemployment and high home foreclosures assures a deeply depressed economy. The mass of US citizens cannot work more hours – the US already is number 1 in the world in the average number of hours of paid labor done per year per worker. The mass of US citizens cannot borrow much more because of debt levels already teetering on the edge of unsustainability for most consumers. Real wages are going nowhere because of high unemployment enabling employers everywhere to refuse significant wage increases. Job-related benefits (pensions, medical insurance, holidays, etc.) are being pared back. There is thus no discernible basis for a substantial recovery for the mass of Americans. The US economy, like so many others, is caught in a serious stagnation situation flowing partly from the economic crisis that began in 2007 and partly from the way in which most governments responded to that crisis.

Thus US businesses and investors increasingly look elsewhere to make money.
Rapidly rising consumption is not foreseeable in the US, but it is already happening where production is booming: China, India, Brazil, Russia, parts of Europe (especially Germany). Growth-oriented activity is leaving the US economy, where it used to be so concentrated. The US was already becoming less important as a production center as profit-driven major US corporations shifted manufacturing jobs to cheaper workers overseas, especially in China. In recent decades, those corporations’ export of jobs expanded to include more and more white-collar and skilled work outsourced to India and elsewhere. Now, US corporations are also spending their money on office, advertising, legal, lobbying, and other budgets increasingly where the expanding markets are and not inside the US.

Republicans are now celebrating “American exceptionalism,” the unique greatness of living conditions in the US. Yet again their politics stress vanishing social conditions whose disappearance frightens Americans who counted on them.  In reality, the US is fast becoming more and more like so many countries where a rich, cosmopolitan elite occupies major cities with a vast hinterland of people struggling to make ends meet. The vaunted US “middle class” - so celebrated after World War Two even as it slowly shrank - is now fast evaporating as the economic crisis and the government’s “austerity” response both favor the top 10 % of the population at the expense of everyone else.

The US budget for Fiscal Year 2011 is scheduled to spend $ 3.5 trillion while taking in $2.0 in taxes. It is borrowing the other $ 1.5 trillion – the deficit - and thereby adding to the US national Debt (already over $ 14 trillion, roughly the same as the annual output – GDP –of the US). Such massive borrowing is what got Greece, Portugal, Spain, Italy, and other countries into their current massive crises. The “great debate” between Republicans and Democrats over the first few months of 2011 haggled over $60 billion in cuts versus $30 billion with the final compromise of $38 billion.  That $ 38 billion cannot and will not make any significant difference to a 2011 deficit of $ 1,500 billion (the equivalent of $ 1.5trillion). Obviously both Republicans and Democrats are agreed to do nothing more that quibble over insignificant margins of so huge a deficit. Meanwhile they perform live political theater about their “deep concern about deficits and debts” for a bemused, bored, and ever-more alienated public.

Neither party can shake off its utter dependence now on corporate and rich citizens’ monies for all their financial sustenance. Therefore neither party imagines, let alone explores, alternatives to massive deficits and debts. After all, government deficits and debts mean (a) the government is not taxing corporations and the rich, and (b) the government is instead borrowing from them and paying them interest.  So the two parties quibble over how much to cut which government jobs and public services.

Yet the tax burdens of US corporations and the richest citizens (what they actually pay) are significantly lower than in most other advanced industrial economies. Indeed, they are far lower than they wereinside the US a few years ago. In the mid-1940s, the corporate income tax brought Washington 50% more than the individual income tax. Today, the corporate income tax brings the federal government 25% of what is taken from individuals. In the 1950s and 1960s, the top individual income tax rate in the United States (the rate paid by the richest citizens on all their income over about $100,000) was 91%. Today that rate is 35%, a staggering cut in the taxes on the richest Americans, far larger than the cuts in anyone else’s tax rates. Half or more of today’s federal deficits would be gone if we simply taxed the richest US citizens at the rates in effect in the 1050s and 1960s. If we also taxed corporations in relation to individuals as we did in the 1940s, the entire deficit would vanish.

In summary, shifting the burden of federal taxation from corporations to individuals and from the richest individuals to the rest of us contributed to massive deficits and debts. Instead of correcting and reversing that unjust shift, Republicans and Democrats plan instead to deal with deficits and debts by cutting Medicaid and Medicare and threatening Social Security.

A revealing historical incident can introduce our conclusion about the capitalist crisis as it enters Year Five. In May, 2011, as gasoline prices rose to between $4 and $5 per gallon, a US Senate Committee run by Democrats summoned the heads of major oil companies to testify. The senators asked why the federal government should continue to provide them with special tax loopholes and direct subsidies of $4 billion per year when their companies were earning record high profits. The Democrats had offered a meek plan to merely cut those loopholes and subsidies from $4 to $2 billion per year. After the hearings, the US Senate voted not to cut the loopholes and subsidies at al.

The largest corporations and richest citizens long ago learned that if you want to sustain an extremely unequal distribution of wealth and income, you need an equally unequal distribution of political power. Those corporations use their profits to pay huge salaries and bonuses to their executives, to pay big dividends to their major shareholders, and to “contribute” to politics. The corporations, their top executives, and the major shareholders whom they enrich all regularly finance the political campaigns and politicians who perform that sustaining function. An increasingly unequal capitalist economy pays for the increasingly undemocratic politics it needs.

Any serious effort to change the basic situation, functions and direction of government policy must change the answer our society now gives to this basic question: who gets and disposes of the profits of producing goods and services in the US economy? So long as the answer remains corporations’ boards of directors and major shareholders (the status quo), current trends will continue until bigger economic collapses bring the system to self-destruction.  Then we will have graduated from a crisis with banks “too big to fail” to a crisis that is itself “too big to overcome.”

A changed system – perhaps called “economic democracy” - in which the workers themselves collectively operate their enterprises would immediately redirect enterprise profits in different ways with very different social consequences. For example, according the Bureau of Labor Statistics, during 2010, the pay for average workers rose 2% while the pay for CEOs rose 23% (Time magazine, May 16, 2011). Workers who collectively directed their own enterprises would distribute pay increases very differently and far less unequally. Likewise, to take another example, self-directing workers would allocate their enterprises’ profits to the government (i.e. pay taxes) but demand in return the sorts of mass-focused social programs that the current CEOs and Boards of Directors want government to cut. Democratic enterprises would have to work out collaborations and agreements with democratically run residential units (cities, states, etc.) where their decisions impact one another.

This short article is hardly the place to work out the details of so changed an economic system. That is, after all, the task of democratic economic and political institutions to do together once the change has been discussed, adopted and set in motion.

Throughout the Cold War decades and even after the USSR dissolved in 1989, we remained, as a nation, afraid openly to discuss and debate a basic economic issue. Does our economic system, capitalism, serve our needs sufficiently; does it need basic changes; or might a change to another economic system be best? Instead of a debate over alternative answers to such questions, we permitted little beyond self-congratulatory cheerleading for capitalism. Seriously questioning capitalism (let alone challenging it) remained taboo, an activity to keep repressed. That repression encouraged an unquestioned and unchecked US capitalism to become ever more unequal, delivering more “bads” than “goods” to ever larger majorities of people. This unsustainable situation is being strained toward the breaking point by the crisis that now enters Year Five.

This originally appeared at Richard D. Wolff's personal blog.

Richard D Wolff

Richard D. Wolff is Professor of Economics Emeritus, University of Massachusetts, Amherst where he taught economics from 1973 to 2008. He is currently a Visiting Professor in the Graduate Program in International Affairs of the New School University, New York City. He also teaches classes regularly at the Brecht Forum in Manhattan. Earlier he taught economics at Yale University (1967-1969) and at the City College of the City University of New York (1969-1973). In 1994, he was a Visiting Professor of Economics at the University of Paris (France), I (Sorbonne). His work is available at rdwolff.com and at democracyatwork.info.


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The Crisis Enters Year Five

Wednesday, 25 May 2011 06:38 By Richard D Wolff, Richard D. Wolff's Blog | Op-Ed
The Crisis Enters Year Five

Tony Harrington waits in line to talk with potential employers at a job fair, which drew more than 250 people, in Bloomington, Minnesota, May 2, 2011. (Photo: Craig Lassig / The New York Times)

The current capitalist global crisis began with the severe contraction in the housing markets in mid-2007. Therefore welcome to Year Five.  This inventory of where things stand may begin with the good news: the major banks, the stock market, and corporate profits have largely or completely “recovered” from the lows they reached early in 2009. The US dollar has fallen sharply against many currencies of countries with which the US trades and that has enabled US exports to rebound from their crisis lows.

However, the bad news is what prevails notwithstanding the political and media hypes about “recovery.” The most widely cited unemployment rate remains at 9 % for workers without jobs but looking. If instead we use the more indicative U-6 unemployment statistic of the US Labor Department’s Bureau of Labor Statistics, then the rate is 15%.  The latter rate counts also those who want full-time but can only find part-time work and those who want work but have given up looking. One in six members of the US labor force brings home little or no money, burdening family and friends, using up savings, cutting back on spending, etc. At the same time, the housing market remains deeply depressed as 1.5 to 2 million home foreclosures are scheduled for 2011, separating more millions from their homes. After a short upturn, housing prices nationally have resumed their fall: one of those feared “double dips” downward is thus already under way in the economically vital housing market.

The combination of high unemployment and high home foreclosures assures a deeply depressed economy. The mass of US citizens cannot work more hours – the US already is number 1 in the world in the average number of hours of paid labor done per year per worker. The mass of US citizens cannot borrow much more because of debt levels already teetering on the edge of unsustainability for most consumers. Real wages are going nowhere because of high unemployment enabling employers everywhere to refuse significant wage increases. Job-related benefits (pensions, medical insurance, holidays, etc.) are being pared back. There is thus no discernible basis for a substantial recovery for the mass of Americans. The US economy, like so many others, is caught in a serious stagnation situation flowing partly from the economic crisis that began in 2007 and partly from the way in which most governments responded to that crisis.

Thus US businesses and investors increasingly look elsewhere to make money.
Rapidly rising consumption is not foreseeable in the US, but it is already happening where production is booming: China, India, Brazil, Russia, parts of Europe (especially Germany). Growth-oriented activity is leaving the US economy, where it used to be so concentrated. The US was already becoming less important as a production center as profit-driven major US corporations shifted manufacturing jobs to cheaper workers overseas, especially in China. In recent decades, those corporations’ export of jobs expanded to include more and more white-collar and skilled work outsourced to India and elsewhere. Now, US corporations are also spending their money on office, advertising, legal, lobbying, and other budgets increasingly where the expanding markets are and not inside the US.

Republicans are now celebrating “American exceptionalism,” the unique greatness of living conditions in the US. Yet again their politics stress vanishing social conditions whose disappearance frightens Americans who counted on them.  In reality, the US is fast becoming more and more like so many countries where a rich, cosmopolitan elite occupies major cities with a vast hinterland of people struggling to make ends meet. The vaunted US “middle class” - so celebrated after World War Two even as it slowly shrank - is now fast evaporating as the economic crisis and the government’s “austerity” response both favor the top 10 % of the population at the expense of everyone else.

The US budget for Fiscal Year 2011 is scheduled to spend $ 3.5 trillion while taking in $2.0 in taxes. It is borrowing the other $ 1.5 trillion – the deficit - and thereby adding to the US national Debt (already over $ 14 trillion, roughly the same as the annual output – GDP –of the US). Such massive borrowing is what got Greece, Portugal, Spain, Italy, and other countries into their current massive crises. The “great debate” between Republicans and Democrats over the first few months of 2011 haggled over $60 billion in cuts versus $30 billion with the final compromise of $38 billion.  That $ 38 billion cannot and will not make any significant difference to a 2011 deficit of $ 1,500 billion (the equivalent of $ 1.5trillion). Obviously both Republicans and Democrats are agreed to do nothing more that quibble over insignificant margins of so huge a deficit. Meanwhile they perform live political theater about their “deep concern about deficits and debts” for a bemused, bored, and ever-more alienated public.

Neither party can shake off its utter dependence now on corporate and rich citizens’ monies for all their financial sustenance. Therefore neither party imagines, let alone explores, alternatives to massive deficits and debts. After all, government deficits and debts mean (a) the government is not taxing corporations and the rich, and (b) the government is instead borrowing from them and paying them interest.  So the two parties quibble over how much to cut which government jobs and public services.

Yet the tax burdens of US corporations and the richest citizens (what they actually pay) are significantly lower than in most other advanced industrial economies. Indeed, they are far lower than they wereinside the US a few years ago. In the mid-1940s, the corporate income tax brought Washington 50% more than the individual income tax. Today, the corporate income tax brings the federal government 25% of what is taken from individuals. In the 1950s and 1960s, the top individual income tax rate in the United States (the rate paid by the richest citizens on all their income over about $100,000) was 91%. Today that rate is 35%, a staggering cut in the taxes on the richest Americans, far larger than the cuts in anyone else’s tax rates. Half or more of today’s federal deficits would be gone if we simply taxed the richest US citizens at the rates in effect in the 1050s and 1960s. If we also taxed corporations in relation to individuals as we did in the 1940s, the entire deficit would vanish.

In summary, shifting the burden of federal taxation from corporations to individuals and from the richest individuals to the rest of us contributed to massive deficits and debts. Instead of correcting and reversing that unjust shift, Republicans and Democrats plan instead to deal with deficits and debts by cutting Medicaid and Medicare and threatening Social Security.

A revealing historical incident can introduce our conclusion about the capitalist crisis as it enters Year Five. In May, 2011, as gasoline prices rose to between $4 and $5 per gallon, a US Senate Committee run by Democrats summoned the heads of major oil companies to testify. The senators asked why the federal government should continue to provide them with special tax loopholes and direct subsidies of $4 billion per year when their companies were earning record high profits. The Democrats had offered a meek plan to merely cut those loopholes and subsidies from $4 to $2 billion per year. After the hearings, the US Senate voted not to cut the loopholes and subsidies at al.

The largest corporations and richest citizens long ago learned that if you want to sustain an extremely unequal distribution of wealth and income, you need an equally unequal distribution of political power. Those corporations use their profits to pay huge salaries and bonuses to their executives, to pay big dividends to their major shareholders, and to “contribute” to politics. The corporations, their top executives, and the major shareholders whom they enrich all regularly finance the political campaigns and politicians who perform that sustaining function. An increasingly unequal capitalist economy pays for the increasingly undemocratic politics it needs.

Any serious effort to change the basic situation, functions and direction of government policy must change the answer our society now gives to this basic question: who gets and disposes of the profits of producing goods and services in the US economy? So long as the answer remains corporations’ boards of directors and major shareholders (the status quo), current trends will continue until bigger economic collapses bring the system to self-destruction.  Then we will have graduated from a crisis with banks “too big to fail” to a crisis that is itself “too big to overcome.”

A changed system – perhaps called “economic democracy” - in which the workers themselves collectively operate their enterprises would immediately redirect enterprise profits in different ways with very different social consequences. For example, according the Bureau of Labor Statistics, during 2010, the pay for average workers rose 2% while the pay for CEOs rose 23% (Time magazine, May 16, 2011). Workers who collectively directed their own enterprises would distribute pay increases very differently and far less unequally. Likewise, to take another example, self-directing workers would allocate their enterprises’ profits to the government (i.e. pay taxes) but demand in return the sorts of mass-focused social programs that the current CEOs and Boards of Directors want government to cut. Democratic enterprises would have to work out collaborations and agreements with democratically run residential units (cities, states, etc.) where their decisions impact one another.

This short article is hardly the place to work out the details of so changed an economic system. That is, after all, the task of democratic economic and political institutions to do together once the change has been discussed, adopted and set in motion.

Throughout the Cold War decades and even after the USSR dissolved in 1989, we remained, as a nation, afraid openly to discuss and debate a basic economic issue. Does our economic system, capitalism, serve our needs sufficiently; does it need basic changes; or might a change to another economic system be best? Instead of a debate over alternative answers to such questions, we permitted little beyond self-congratulatory cheerleading for capitalism. Seriously questioning capitalism (let alone challenging it) remained taboo, an activity to keep repressed. That repression encouraged an unquestioned and unchecked US capitalism to become ever more unequal, delivering more “bads” than “goods” to ever larger majorities of people. This unsustainable situation is being strained toward the breaking point by the crisis that now enters Year Five.

This originally appeared at Richard D. Wolff's personal blog.

Richard D Wolff

Richard D. Wolff is Professor of Economics Emeritus, University of Massachusetts, Amherst where he taught economics from 1973 to 2008. He is currently a Visiting Professor in the Graduate Program in International Affairs of the New School University, New York City. He also teaches classes regularly at the Brecht Forum in Manhattan. Earlier he taught economics at Yale University (1967-1969) and at the City College of the City University of New York (1969-1973). In 1994, he was a Visiting Professor of Economics at the University of Paris (France), I (Sorbonne). His work is available at rdwolff.com and at democracyatwork.info.


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