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Out of the Slump: The Only Road

by Brad Forrest Thursday, Aug. 09, 2012 at 12:10 PM

A real analysis of the United State’s economic history is rarely discussed by politicians or media alike, since the conclusions that would be inevitably drawn would be out of step with what politicians are currently advocating.

In fact, the current recession is only one more step — though a big one — along the same economic degeneration that has been underway since the end of the post war boom of 1945-1973. The Democrats and the Republicans cannot and will not be able to solve the problems of capitalism in the era of crisis that we’re stumbling through, a crisis that promises to evolve into Great Depression levels.

The post-World War II capitalist “golden age” came about from the destruction caused by the war. It was precisely this destruction that opened up big markets for reconstruction and expansion of markets for the United States. As some wag stated, “War is the health of the nation.” It was capital accumulation, mainly in the advanced capitalist countries, that provided the boom for western capitalism in an otherwise declining system.

America’s economy roughly doubled during the war, from a GNP of .6 billion in 1939 to 5 billion in 1944, which established its hegemonic position in the postwar system ( Now, capitalism, and capitalism alone, knows the peculiar problem of “overproduction” — too many goods produced without a market able to absorb them. The world capitalist class overcame this problem by engaging in what is now called “globalization”: Lowering tariff barriers, engaging in more world trade, increasing the world division of labor, etc., all this has allowed capitalism to overcome its problems for a period.

Keynes and the Illusion Avoiding Economic Slumps

Smashing down the barriers to trade allowed the world capitalist class to overcome their problems for a whole historical period. Trade growth ran about 8 percent per year on average ( This gave rise to the illusion that the stabilization methods worked out by John Maynard Keynes, a British economist, were responsible for the avoidance of slumps.

What did Keynes promote? He proposed that the state jump into the overproduction gap by providing the demand that the working class could not fulfill. The state was supposed to manipulate aggregate demand to smooth out the economic cycle. State spending, through accumulating deficits, would put money in the hands of consumers, who would then get the economy going again by spending.

The policy instruments that governments used to manipulate demand turned out the be the Federal Reserve raising or lowering interest rates, lower them to allow more borrowing, and using the printing press to increase the circulation of money. Money for state spending must come through taxes on the population, and taxes can either be gathered from the capitalist class, decreasing their profits, or the working class, cutting into their consumption, a situation that can only lead to stagnation of the economy.

This is why the Republicans are always grumbling about the evils of “big government.” They aren’t against government per se, just the part where wealth is redistributed to the workers. The size of the military suits them just fine. As instruments of big business they hate taxes on profits.

Milton Friedman and the Chicago School

Running the printing press to increase the money supply leads to inflation, and taxing the two main classes leads to stagnation. The late seventies saw the advent of stagflation, the worst of both worlds. The capitalist class had reached an impasse, and started looking for answers from an unlikely source. The capitalists hit on the antidote to the Keynesian mess from a particularly odious figure, an inveterate enemy of the working class, Milton Friedman.

Milton Friedman had been vegetating on the sidelines of the economic debate in a dung heap known as the Chicago School, and marginalized for many years by his adherence to what is called Monetarism. Monetarists simply believe that all problems can be solved by deregulation, privatization, and control of the money supply. With the theoretical impasse governments started giving Friedman a hearing.

Friedman got his chance on September 11, 1973, the day Augosto Pinochet came to power in Chile through a murderous and bloody coup against the democratically elected president, Salvador Allende. Looking around for an economic policy for his regime, Pinochet rounded up some Chilean students of Friedman who had studied at the University of Chicago. These students were known as the “Chicago Boys.”

Friedman was hailed by the world capitalist class as the apostle of economic “freedom.” The first test of his sort of “freedom” needed to be delivered to the population at the point of a gun — Chile’s military dictatorship — or it would never have been given the light of day. More Orwellian than Orwell, Friedman maintained that dictatorship was freedom. His policies were a disaster for the working population of Chile. Inequality and poverty shot way up. Dissidents were tortured and murdered. However this did not stop the world capitalist class from hailing him as a liberator from the failed Keynesian experiment. Henceforth, his policies would be the blueprint for new regimes all over the world. Privatization, deregulation, and cuts in social spending became the “consensus” for the International Monetary Fund (IMF) and World Bank.

Monetarism was a direct attack on the working class. Instead of inflation there would be a reserve army of labor due to rising unemployment that would serve to drive down wages for employed workers, since the threat of unemployment secured wage concessions from workers. Driving down wages leads to lower prices, and better competitiveness on world markets for the capitalists. This policy is known as deflation; low wages lead to low prices and increased sales. When one adds globalization into the equation, the lowering of tariffs and a race to the bottom on wages, it adds up to a ferocious hunt for markets by the capitalists of each nation who fight with each other on the world market and attempt to “export” unemployment. Trade is a zero sum game.

And yet free trade is the best that the workers can get in a capitalist economy! The union top officials in the U.S. as yet advocate protectionism, but this is ultimately to the benefit of the capitalists, however such a policy can serve to weld workers to their employer for a period. But protectionism leads to economic stagnation and high prices, since lower priced goods are kept outside the country through tariff walls.

Krugman: Old Bankrupt Policies

Neither Keynesianism (inflation) nor Monetarism (deflation) can lead to a better life for workers. It is time to strike out on a new road. Some people have a short memory, like The New York Times economics columnist Paul Krugman, who is currently dressing up some old bankrupt policies like Keynesianism with a new coat of varnish. Theory is the summing up of experience in order to learn from past mistakes, and shorten the path to a better future. Meanwhile the government is once again relying on the printing press, this time calling it “quantitative easing.”

Capitalism has no other way out for workers other than to lower wages to compete on the world market, and that is exactly what the Obama administration is doing. Obama could be creating a federal jobs program, but he prefers using unemployment to drive down wages, the old Monetarist cure. Staggering around from one “solution” to another “solution” like a gang of drunken sailors, the Republocrats don’t even know what the problem is, or even that the whole boat is going down.

The crisis of 2008-2012 means a ferocious attack on the living standard of workers. The banks made bad loans and got burned, then got bailed out with our tax money, and we got burned. Now there is “no money” for vital social services like Social Security or Medicare, education. The deficit, say the learned capitalist economists, is too big. The cuts must come at the expense of the workers. But how are we supposed to get out of the slump with spending cuts? The present period is characterized by a monstrous contradiction: to get out of the slump the government must cut taxes and increase spending, but to cut the deficit the state must increase taxes and cut spending. The position is absurd.

A Labor Party in the U.S.?

A labor party based on the unions is the principal instrument that workers need to prevent going down too. Without organization the working class is only raw material for exploitation. The unions mobilizing all working people and their allies to fight the cuts plus a labor party are needed to promote our class interests. The capitalists have their spokesmen, and we need ours. Since the mid 1990s labor productivity growth has been about 1 percent per year, meaning more wealth has been created to go around to everybody, but under the watch of both big business parties, and especially because of the fall of the Soviet Union,

most of the income has gone to the top 10%. In fact between 1979 and 2007 the richest 10% accounted for a full 91% of average income growth! (http://www.state/ Labor is getting the shaft, and that is one of the reasons for such a sluggish economy, since 1989 profits grew by about 160 percent while wages stagnated ( Labor is getting the shaft.

A labor party could institute a policy of progressive taxation, cut military expenditure to create jobs for all who want to work, and if need be, expropriate the commanding heights of the economy to serve the needs of working people. In order to acquire peace and plenty for all, the working class needs an organization capable of uniting its interests on the national level, and globally; under modern conditions this means that, like its European counterparts, the U.S. working class needs a political party of its own.

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