The Ghost of the Defunct Economist

Progressive, including myself, were generally enthusiastic about Barack Obama’s election as President. Even when negative about the track record of the Democratic Party in the past and while often disappointed with Obama’s specific policy proposals, we saw his election as a symbolic victory for opponents of racism and anticipated that a broader spectrum of ideas would enter into the policy dialogue after eight years of rigid rightwing ideology. Although I am a registered Green, I voted for Obama. This was partly because in discussions with the inner-city minority high school students, they could not understand why I would not vote for someone who in their eyes represented social justice and possibility for the future.

Meanwhile, events are moving quickly, especially in the economic sphere. President-elect Obama has already anointed the “same-old gang” financial capitalists to run the economy. They were chosen for their supposed smarts and experience, although they weren’t so smart when they got the global economy into this mess in the first place. Now that the election and the ensuing victory celebrations are over, it is time for “Obama progressives” to get down to some serious criticizing and make sure the new President and the public hear left wing voices.

As the current economic crisis unfolded last year, George Bush, John McCain, and Barack Obama all portrayed it as a combination of the failure of leadership and greedy, corrupt, businesses taking advantage of the system. They each believed better leadership and management would correct the situation and the invisible hand of minimally regulated capitalism would once again work. President Bush argued in a nationally televised address that reversing the downturn would only require a temporary regulatory incursion into what should remain unfettered free markets. The Democrats, who politically benefited from the collapse of financial markets in the 2008 election, saw the need for more long-term reform and argued that they were smarter and more pragmatic technocrats who were better equipped to address the problems. Once Obama was elected President the appointments to his economic team reflected his view that the solution lay in pragmatism and bipartisanship.

But what if the problems are deeper than they are being portrayed? What if rather than being the result of poor leadership and greed, they reflect a fundamental structural problem in the capitalist economic system on the magnitude of 1929? What if the solutions being debated such as bailouts for financial concerns and industrial giants, credit for consumers and small businesses, and insurance for small investors and homeowners, will at best postpone the fallout from the crisis? What if the problem is not that consumers are not buying at Wal-Mart, but Wal-Mart itself?

A photograph in The New York Times on November 20, 2008 (accompanying the article “Brave Faces, Hard Times”) gives a clue to the magnitude of the economic crisis facing the United States and the global economy. It showed the storage dock at Long Beach, California clogged with thousands of shipping containers filled with new automobiles and trucks. According to the article, “the inventory of unsold new vehicles accumulating at dealerships and on storage lots topped three million” in early November and thousands more cars and trucks were arriving each week. Carlos Ghosn, chief executive of Nissan and Renault, described October 2008 as “the worst month for U.S. auto sales in 25 years.” He noted that the economic decline was having a similar impact on car sales in Europe and Japan.

Worldwide car production set record levels in the 1990s with new factories going on line in Asia and even more expansion was planned in India, China, and Brazil. This was despite the fact that according to industry spokespeople, in 1997 the automobile industry had the capacity to produce 15 to 20 million additional vehicles, thirty percent more than it could sell. In the first decade of the new century, productive capacity probably outstripped demand, demand inflated by cheap credit at that, by as much as fifty percent. Detroit can try to produce more fuel-efficient cars and sell them for less, but the reality is that capacity so far outstrips demand that no one needs them.

The situation is worsened by long-term stagnation in the real wages (adjusted for inflation) of American workers. For a while, easy credit and the ability of people to borrow against rising home values, compensated for the failure of wages to keep up with prices.  However housing prices have plummeted and credit has dried up. Consumers just can’t buy what they bought before.

There are major economic parallels between the 1920s and today. The boom during the 1920s was marked by major over-capacity for industrial goods. Companies could not keep investing and expanding because there was no demand for all of their products. Part of this was residue from World War I when wartime production led to new factories and mines going on line. Steel and coal never recovered from post-war cut backs, although expansion in auto and electric and stock market speculation hide the growing wealth gap between the highest income groups and the working class and poor. This boom was fed and prolonged by artificial demand caused by speculation in the stock market that made it appear that prosperity would last forever, Much of this speculation was gambling (prices would never go down) using borrowed money without collateral. During the Great Depression regulations were put in place to block this type of economic speculation and you could no longer buy stocks on margin.

In the 1970s the U.S. suffered from double-digit inflation and unemployment, stagflation caused by Vietnam War era borrowing, the deindustrialization of the U.S. and the rise of other economic powers in Europe and Japan – everybody was buying Toyotas and Volkswagens. The Reagan administration got the U.S. out of the economic doldrums through tax cuts on the rich, sharply diminished regulation of business, and subsidies to industry through increased military spending. However, this placed the U.S. government into tremendous debt, allowed for corruption and the Savings and Loan scandal, and led to an increased wealth gap between the wealthy and the rest of society.

The whole system probably would have collapsed by the early 1990s except for the computer driven boom. It is why Clinton appeared to be a successful manager, although he certainly was not responsible for the boom. Technology allowed capitalists and government to postpone the day of economic reckoning and paying the bills. When the bubble burst economic crisis was averted again through low mortgage rates and unregulated markets. This solved the problem of low consumer demand, but consumers were plunging into unsupportable debt. The sub-prime crisis might have been the pin that burst the balloon, but the balloon was going to burst sooner or later. The U.S. produces nothing and exports everything. Our major product, if it can be called a product, is debt. The Middle East, Europe, and China are our major creditors. They tolerate the U.S. debt because the dollar was the international currency of exchange and the U.S. seemed a safe investment, but not anymore. Now, if they refuse to keep feeding our debt and gambling habit, the entire system could collapse. Since this is a global economic crisis, the likelihood is that creditor nations will try to shore up their own economies.

The current economic crisis may well be worse than the crisis that produced the Great Depression of the 1930s for a number of reasons. First, it is an integrated global economy and it will be exceedingly difficult to coordinate what must be international solutions. There is tremendous economic inequality between the United States and Western Europe on one hand and the rest of the world. The advanced sector can hardly expect developing countries, primarily in Asia, where poverty is endemic, to accept cuts in their growing industrial base just when the tide seems to be turning in their favor.

Second are the problems of environmental degradation and potential disasters associated with global warming caused by industrial development. Unlike during earlier eras, the capitalist economic system can no longer count on new territory or untapped resources to exploit in order to stimulate and sustain economic recovery. The environmental costs will be too great.

Third, the population of the world has grown astronomically from about two billion in 1930 to almost 7 billion today. Capitalism counts on technological breakthroughs to spur development and continually bailout the system, but because of human population growth, there is a lot less room to expand. Technology has made much human labor superfluous. What will happen to all of these people?

Finally, the Great Depression of the 1930s did not end until wartime production knocked it out of its doldrums. Ultimately, World War II stimulated the U.S. economy while the newly produced weapons destroyed the productive capacity of America’s competitors. Fifty million people died during World War II, so a war of this magnitude is not an acceptable economic bailout plan.

Capitalist economies tend to follow a sine curve – cycles of up and down. When you postpone the downside of the curve, you increase the chance of an eventual longer and deeper decline. That is what I think is happening now. Capitalists and their governmental agents might be able to postpone the crisis longer with better management and more pragmatic decision-making, but the underlying economic problem will remain.

Eventually, the tendency of competitive capitalist economies to over-production and downward spirals must be resolved or the global economy will collapse into a prolonged depression.

In 1947, British economist John Maynard Keynes wrote, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” Ironically, the “defunct economist” that dominates contemporary economic thinking is Keynes, especially his 1923 rejoinder that “Long run is a misleading guide to current affairs. In the long run we are all dead.” We are now paying the price for short-term solutions that do not take into account long-term consequences.

Pressure from the left must be for both immediate solutions that protect working people (I don’t care if you euphemistically call them the middle class) and the poor around the world and for long-term global economic viability that enhances social justice. I think our demands and actions should include the following.

It is past time to get business out of politics. As long as they are able to buy politicians and elections, there will be no effective way to regulate their behavior. In the last election they gave vast sums of money to both parties in a blatant attempt to purchase influence. This should be seen as exactly what it is, bribery, and it should be against the law. Obama did the American people a disservice when he turned down public financing for his campaign and relied on corporate contributions.

It is also time to end the legal myth that corporations are somehow individuals entitled to constitutional protections and the same rights as people. Corporations are artificial organizations created by governments. They have no rights or privileges that are not granted them through the democratic process. If they are not socially responsible, their rights and privileges can be terminated. Any corporation that pollutes the environment, mistreat workers or communities, cheat consumers, or bribe politicians, should be disbanded.

Capitalist markets may be self-regulating, but it is time to accept that the self-regulating process is too costly, with too many economic lows and too much social dislocation, for a humane society. It is also clear that corporations can never effectively “regulate” themselves. They are too committed to short-term profitability by whatever means necessary. Only the public sector, meaning only government agencies, can effectively regulate corporations. This will protect workers, consumers, the society in general, pensioners, and stockholders. In return for this “service,” corporations should pay requisite high taxes.

Free, or unregulated trade, is devastating the natural environment as well as destroying the lives and cultures of people around the world and contributing to excessive over-production. It is destabilizing the economic system and the planet on which human survival depends. Free trade is never free, especially when it promotes pollution and environmental destruction. It is time to call it what it really is – foul trade – and to organize, collectively, and refuse to purchase foul trade goods. An international boycott on goods made in China, and Wal-Mart, its leading distributor in the United States, would be a good start. Hopefully, in a capitalist market place, our position as consumers will give us some leverage. At the same time, we should push for trade agreements that deny countries and companies access to American markets if they prevent workers from organizing independent unions and deny them living wages and safe working conditions.

ALAN SINGER teaches at Hofstra University. He can be reached at: