“Why have you raised the wages of your workers, Mr. Ford”?
“So that someone can buy my cars.”
Why is the crash and depression of 2008 shrouded in mystery? Why is it not possible to explain the crisis in simple terms that do not involve financial instruments which no one understands – not even their creators? Why have the pundits and economists resorted to little more than a primitive analogy to temperature, that is, the credit market has “frozen up.” Or a psychological one – that this is simply a crisis of confidence. The banks will not lend even though they are being provided heaps of cash by their government; but still there is no lending and no one can or will say why. Is there a real reason why credit is not available and why banks will not lend? Either no one knows, or the answer is unthinkable for the elite and unspeakable for the Commentariat.
There are major factors at work in the economy for decades, which are evident to even the most casual observer; and these, it would appear, are now coming home to roost. Since the 1970s the real wages of American workers have been falling – a decline now lasting over 30 years. Similarly, membership in unions has plummeted as the government has made it harder to organize and employers have become ever more adept at shutting unions out. At the same time, the Democratic Party supposedly the representative of the working class has sold out its base at every turn. Today the wealthiest 400 Americans sit atop a mountain of wealth equal to the wealth of the bottom half of the population, about 150 million Americans. And of course many jobs have been lost to overseas factories, many of them funded by American capital. All of this is a boon to those at the top. And all this means that the purchasing power of the average American has fallen.
At the same time, Americans have systematically been deprived of other means of making purchases. Defined benefit pension plans have all but disappeared, and there are calls for the remaining ones to be dismantled. Social security is not an adequate retirement program, leaving ever more people in poverty or close to it, or working until their dying day. And education is more and more beyond the reach of those who want to “purchase” it, a real mystery, since faculty salary and benefits are in sharp decline. (University CEO’s however are paid ever more handsomely.) Medicare, as a way for seniors to “purchase” health care, is still not comprehensive , and health insurance for all others is non-existent or prohibitively expensive ever less adequate even for those who have it. In previous downturns health care was “counter cyclical” but not this time according to The Wall Street Journal.
So what has been the solution to keep the economy going in this situation? The answer is easy – credit. Since the 1970’s the credit card has emerged as part of our life. Credit has been extended to anyone and everyone. And plastic credit has gradually become an ever more burdensome form of usury, with stinging and often disabling penalties, much to the delight of the creditors who simply find ways to extend more credit and extract more money. Credit has also been extended for mortgages which the creditors, banks and others, are only too happy to lend on the assumption, which no one dared question, that home prices always rise and the borrower can always be made to pay more. An army of real estate agents serves as enforcers for endless property inflation.
One other solution for the plight of the impoverished American is import of goods from overseas. But what can America provide in return? Nothing, is the answer for the long term. For the short term the answer is dollars which others have accepted despite their declining value and because at least fossil fuels can be purchased with them. But the dollar is ever less attractive for this reason. Similarly military Keynsianism has a limited ability to prime the pump in the long term since it is unproductive and there are limits to the ability of the US to force arms sales down the gullet of “allies.”
That such factors are operative is beyond dispute. But why has the crisis hit now? What is the straw that has broken the back of the economy? It would to the war on Iraq and the Muslim world, although it may be simply a coincidence that the economy has crashed as Iraq has burned. In a fairly short time the Iraq war has added another $3-5 trillion dollars of debt to the present and future balance sheets in the US, according to economists Joseph Stiglitz and Linda Bilmes. And with it has come the decline of the dollar, which Paul Craig Roberts has documented so convincingly on CounterPunch.
A simple comparison illustrates the truth of this analysis. Last week the Finance Minister of France was interviewed at length on CPB’s News Hour. She pointed out that France while not growing spectacularly is not in recession! Why? Good pensions, public sector health care insurance, public sector education and no crazy mortgage schemes. And in France a credit card is a rare thing – debit cards yes, credit cards, no. All these things are “counter-cyclical” as they say. Of course it remains to be seen whether France can escape the downward pull of the US economy.
What does recovery for the US economy entail? Certainly not giving more to the banks which have a disappearing class of worthwhile debtors and hence no one to lend to. But that is precisely the strategy which W. and Obama are pursuing. Such a strategy cannot possibly work because there are no credit worthy borrowers – and so far it has not. Quite simply the system has to reverse itself to save itself – and there is little sign of that. The idea that the rich should get poorer and vice versa has no precedent in this society. And Obama shows very little of such tendencies, and his advisers are dead set against it.
So here we are – with a capitalism that has been too successful at extracting wealth and no remedy in sight. Quite simply there are ever fewer people who can afford to buy Mr. Ford’s cars. This is simply a crisis of overproduction – not a new idea, of course, but one that seems to explain the present state of affairs very adequately. Could it be the end of the road for this system? Probably not, because it has still a role to play in the developing world. But it would seem that we are in for a lot of suffering, a lot of turmoil and considerable opening for some radical changes in our way of life – for better or worse.
JOHN WALSH is a professor at U Mass. He is not an a practitioner of the Dismal Science, and he frankly doubts that “economics” as taught in the universities now, as distinguished from political economy, is a valid discipline. He has some knowledge of the physicists and mathematicians who put together the Wall Street “instruments” that have triggered the present crisis. Many of these people knew that they were simply providing their bosses with simulations that proved what the bosses wanted proven. And many of these former academics openly referred to themselves as “whores.” It may be dangerous to let too many physicists go unemployed. He can be reached at firstname.lastname@example.org.