Deficits, Debts, and Deepening Crisis

Standard and Poor downgrades US debt, stock markets gyrate around the world, Sarkozy and Merkel do yet another pointless summit, the Chinese and Japanese economies look worrisome. Serious commentators worry about global recession, Eurozone dissolution, and austerity programs that only make matters worse. Nouriel Roubini, famed Professor of Economics at NYU’s Stern School of Business writes an article in August, 2011, entitled “Is Capitalism Doomed?” His answer: maybe.

The crisis of capitalism that erupted in mid-2007 now enters its fifth year. It grew out of excessive debts of US households and enterprises (especially financial enterprises) that their underlying incomes and wealth could not sustain. The most basic contributor to crisis was real wage stagnation since the mid-1970s. As the cost of realizing the American Dream kept rising while real wages did not, the solution was household borrowing. Eventually families built up debt levels (mortgages, credit cards, student loans, car loans and so on) whose interest costs could not be met on the basis of stagnant real wages. The overloaded system blew in 2007. Nothing since has significantly relieved or alleviated that basic contradiction of stagnant real wages and rising household debts. The crisis deepens as this fundamental contradiction remains unresolved.

Likewise since the 1970s, banks, insurance companies, and hedge funds invented new speculations on the debts of
US households (asset-backed securities, credit default swaps, etc.). The financial speculations were even more profitable than the soaring profits of non-financial corporations, who kept their workers’ wages flat (stagnant) even
as rising productivity delivered ever more product per worker to those corporations. Their huge profits prompted financiers to borrow in a self-reinforcing spiral ever further removed from the household debts on which
it was based. When the base collapsed as millions of US workers could no longer sustain their debts, so too did the financial speculations built upon it.

The wealth and power accumulated by the financial industry since the 1970s secured massive government-funded bailouts after the crisis hit. Recoveries were underway for banks, insurance companies and larger bankrupt corporations by mid-2009. But no recoveries were provided for real wages, declining benefit packages, and unsustainable household
debts. Nor were recoveries secured for the unemployed or those facing foreclosures.

By bailing out their private financial industries, the US and other governments took over (nationalized) the private sector’s bad debts at the cost of adding massively to their national debts. This “recovery” for the financiers and the stock markets that they dominate bypassed the mass of economically distressed people. At the same time, the
governments that funded those extremely uneven and unfair recoveries accumulated heavy debts and liabilities. Economically depressed working classes and increasingly indebted states now combine to undo even the limited recovery of the financiers who engineered the crisis.

The crisis since 2007 collapsed aggregate demand for goods and services. Unsustainable household debt had combined
with stagnant wages to collapse the US housing market, raise unemployment, freeze credit, cripple state and local finances, and so on. Businesses and the rich stopped investing in production of goods and services as demand shrank
fast. Their investible funds were idled, and that only aggravated the crisis. The self-regulating, efficient capitalist market system proved to be the myth its critics had mocked. That market spread the US crisis quickly to Europe and beyond, replicating many of the same baleful conditions.

As the crisis flared in 2008, governments moved to unfreeze credit markets by pouring capital into tottering banks and insurance companies. Governments printed and created new money to pay for part of these policies; to pay for the other part governments borrowed. The governments’ creditors included the banks and insurance companies they had bailed out. Governments also borrowed from the companies and rich individuals who had withheld investing in the production of goods and services, had thereby worsened the crisis, and then enjoyed lending their uninvested funds to governments.

The absurdities of such “economic policies” (not to speak of their gross injustice) invite grim laughter if only to keep from crying.

But wait, the costly absurdities thicken. The recently bailed-out banks and other financial companies that had become creditors of the governments got worried about those governments’ fast-rising debt levels. This was particularly poignant in the US, whose government enjoyed fiscal surpluses as recently as the 1990s. The new millennium ushered in massive tax cuts for corporations and the rich coupled with a global “war on terror” that cost trillions more poured into Afghanistan, Iraq, Pakistan and now Libya. Utterly predictable federal budget deficits immediately replaced the surpluses. When additional trillions were spent by Washington to “cope with” the 2007 crisis, it further exploded government deficits.

Creditors know from history that governments invite political trouble with such fast-rising debt levels. After all, the interest costs of rising government debts risk diverting tax revenues to pay interest to creditors rather than to provide public services to tax payers.

Already suffering four years of economic crisis, populations may not accept reduced government services while more of their taxes flow in interest payments to the banks, insurance companies and other financial enterprises they blame for the crisis. They may revolt when told by leaders of any party that their pensions and national health insurance
must be reduced because “our nation must reduce its budget deficits and debt.”

Those risks are why Standard and Poor, Moody’s and Fitch have been downgrading the debts of more and more “advanced industrial countries.” Those downgrades acknowledge in their oblique way the historic dangers of this global capitalist crisis. They also indirectly recognize the absurdities and contradictions of the ineffective, trickle-down
policies pursued by governments since 2007.

Across Europe and the US, all sorts of campaigns seek to prevent or deflect awareness of all this as a systemic crisis of capitalism (when its politics and economics undermine rather than reinforce one another). Some of these efforts aim at redefining the crisis in nationalist terms. Thus, for example, the German working class is prompted
to blame its economic difficulties and/or its government’s austerity policies on the Greek and Portuguese working classes and/or their governments’ profligacies. Other diversionary efforts discover scapegoats in one portion of
the capitalist employers: thus, it is “the financial industry” for some, more narrowly “the bankers” for others, and still more narrowly, the “central bank.” In the US, Texas Governor Perry, now running for President, narrowed matters
further down to one man, the current Federal Reserve Chairman.

Another diversion from seeing the crisis as one afflicting capitalism as a system takes the form of asserting that the largest “emerging” economies – especially China, India, Brazil, and so on – can escape or even reverse the global capitalist crisis. However, the basic dependence of those emerging economies on trade and capital flows with the US and Europe should dispel fantasies of their independent development or super-fantasies that those economies’ development will revive the US and Europe. This crisis is forcing ever more of its victims to recognize
the historical roots and contradictions deepening it against even the coordinated efforts of the strongest capitalisms.

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.

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