Whither global capitalism?

Mainstream economists and commentators, it seems, are worried that the global economy is going to come crashing down as a result of the COVID crisis. That’s why they’re willing now to consider the possibility that the current crisis is more than a normal recession, more serious even than the so-called Great Recession; in their view, it’s an economic depression.

That, at least, is the argument they present up front. But there’s something else going on, which haunts their analysis—that capitalism itself is now being called into question.

But before we get to that alarming specter, let’s take a look at the logic of their analysis about the current perils to the global economy—starting with the Washington Post columnist Robert J. Samuelson, who is basically taking his cues from a recent essay in Foreign Affairs by Carmen Reinhart and Vincent Reinhart.*

Their shared view is that the current slowdown is both more severe and more widespread than the crash of 2007-08, and the recovery will be much slower. Therefore, they argue, the COVID crisis represents the worst economic downturn since the Great Depression of the 1930s.

This is a big deal: mainstream economists and commentators are uneasy about invoking the term “economic depression.” They certainly resisted it for the crisis that occurred just over a decade ago, eventually devising a Goldilocks nomenclature, dubbing it the Great Recession (not as hot as the Great Depression but not as cold as a normal recession). As regular readers know, I had no compunction about calling it the Second Great Depression. And, according to their own logic, neither Samuelson nor the Reinharts should have either.

According to Barry Eichengreen and Kevin O’Rourke, the financial crisis and recession had led to as big a downward shock to global industrial production in 2008 as the 1929 financial crisis, and had pounded stock market values and world trade volumes harder in 2008-09 than in 1929-30. Thus, from the perspective of the magnitude of the initial shock, the global economy was in at least as dire shape after the crash of 2008 as it had been after the crash of 1929.

Moreover, the downturn that began in 2007-08 was “largely a banking crisis” (as the Reinharts put it) only if they ignore the grotesque levels of inequality that preceded the crash (based on stagnant wages and rising profits)—which in turn fueled the need for credit on the part of workers and the growth of the finance sector that both recycled corporate profits to workers in the form of loans and led to even higher profits, creating in the process a veritable house of cards. At some point, it would all come crashing down. And, eventually, it did.

In any case, Samuelson and the Reinharts are now willing to take the next step and use the dreaded d-word to characterize current events. Here’s how the Reinharts see things:

In its most recent analysis, the World Bank predicted that the global economy will shrink by 5.2 percent in 2020. The U.S. Bureau of Labor Statistics recently posted the worst monthly unemployment figures in the 72 years for which the agency has data on record. Most analyses project that the U.S. unemployment rate will remain near the double-digit mark through the middle of next year. And the Bank of England has warned that this year the United Kingdom will face its steepest decline in output since 1706. This situation is so dire that it deserves to be called a “depression”—a pandemic depression.

And Samuelson does them one better:

In one respect, the Reinharts have underestimated the parallels between the today’s depression and its 1930s predecessor. What was unnerving about the Great Depression is that its causes were not understood at the time. People feared what they could not explain. The consensus belief was that business downturns were self-correcting. Surplus inventories would be sold; inefficient firms would fail; wages would drop. The survivors of this brutal process would then be in a position to expand.

Something similar is occurring today.

Clearly, Samuelson and even more the Reinharts are worried that the global economy—their cherished vision of the free movement of capital (but not people) and expanding trade according to comparative advantage—is currently being imperiled and may not recover for years to come. The volume of world trade is down; the prices of many exports have fallen; corporate debt is climbing; and the reserve army of unemployed and underemployed workers is massive and still growing. The prospects for a return to business as usual are indeed remote.

That’s pretty straightforward stuff, and anyone who’s looking at the numbers can’t but agree. What we’re witnessing is in fact a Pandemic—or, in my view, a Third Great—Depression.

But that’s when things start to get interesting. Because the Reinharts do understand (although I doubt Samuelson does, since he’s really only concerned about government deficits) that, when you resurrect the term depression and invoke the analogy of the 1930s, you also call forth widespread discontent, massive protest movements, and challenges to capitalism itself. Here’s how they see it:

The economic consequences are straightforward. As future income decreases, debt burdens become more onerous. The social consequences are harder to predict. A market economy involves a bargain among its citizens: resources will be put to their most efficient use to make the economic pie as large as possible and to increase the chance that it grows over time. When circumstances change as a result of technological advances or the opening of international trade routes, resources shift, creating winners and losers. As long as the pie is expanding rapidly, the losers can take comfort in the fact that the absolute size of their slice is still growing. For example, real GDP growth of four percent per year, the norm among advanced economies late last century, implies a doubling of output in 18 years. If growth is one percent, the level that prevailed in the shadow of the 2008–9 recession, the time it takes to double output stretches to 72 years. With the current costs evident and the benefits receding into a more distant horizon, people may begin to rethink the market bargain.

Now, it’s true, their stated fear is that “populist nationalism” will disrupt multilateralism, open economic borders, and the free flow of capital and goods and services across national boundaries. That’s as far as their stated thinking can go.

But the apparition that lurks in the background is that rethinking the “market bargain”—what elsewhere I have called the “pact with the devil,” that is, giving control of the surplus to the top 1 percent as long as they made decisions to create jobs, fund schools and healthcare, and be able to tackle problems like the novel coronavirus pandemic so that the majority of people could lead decent lives—will mean expanding criticisms of capitalism and the search for radical alternatives.

That’s the real specter that haunts the Pandemic Depression.

 

*Samuelson sees the wife-and-husband Reinharts as “heavy hitters” among economists:  “She is a Harvard professor, on leave and serving as the chief economist of the World Bank; he was a top official at the Federal Reserve and is now chief economist at BNY Mellon.”

Cartoon of the day

Special mention

Cartoon of the day

Special mention

Cartoon of the day

Special mention

 

Cartoon of the day

Special mention

Cartoon of the day

Special mention

Cartoon of the day

Special mention

  

Ten years after

Everyone, it seems, is writing their version of the lessons to be learned after the crash of 2008. And most of them are getting it wrong.

Here, for the record, are some of the lessons I’ve taken from the crash:

1. What has changed—and, equally significant, what hasn’t—during the past decade?
2. Mainstream economists got globalization wrong
3. The policy consensus on economics has not fundamentally changed
4. Mainstream economics has fallen in the eyes of the public—and for good reason
5. Little has changed in terms of the teaching of economics
6. Mainstream economists reject the new populism, which they helped to create
7. The normal workings of capitalism created, together and over time, the conditions for the most severe set of crises since the first Great Depression
8. Mainstream economists, for the most part, haven’t even attempted to make sense of the role inequality played in creating the Second Great Depression

Utopia and populism

Much has been made of the rise of populism in recent years and the threat it poses to liberal democracy.

My view is that liberal critics of populism, standing on their heads, get it wrong. If made to stand on their feet, they’d have to admit that populism actually represents the failure of liberal democracy.

Populism has experienced a resurgence of late—in Hungary, Britain, France, Turkey, the United States, and elsewhere—especially the form of populism variously characterized as right-wing, nationalist, or authoritarian. It has attracted increasing support and achieved notable political victories within the institutions and procedures of liberal democracy.

The problem is that liberal democracy has failed to confront, much less solve, the problems that have led to the rise of populism in the first place.

source*

Consider, for example, the history of populism in the United States. The three notable periods—in the late nineteenth century (with the rise of the People’s Party, which was also known as the Populist Party), the first Great Depression (around such figures as Father Charles Coughlin and Huey P. Long), and then during the second Great Depression (starting with the Tea Party and culminating in the election of Donald Trump)—all coincided with obscene levels of inequality and severe economic crises that decimated American workers and other classes (including farmers and small businesses) across the country.

Populism has been one of the principal responses to the complex and shifting layers of discontent and resentment that the ideas and policies of the leading political parties, economic elites, and mainstream intellectuals within American democracy first created and then failed to respond to. As I explained last November,

The paradox of the 2016 presidential race is that both major party candidates claim (or at least are identified by those in the media with) support of portions of the U.S. working-class and yet neither campaign offers anything in the way of concrete policies or strategies that actually respond to the real issues and problems faced by the members of the working-class. . .

It’s no wonder, then, that over the course of the past year and a half American workers have rejected establishment politics—as offered by both Democrats and Republicans—and voted in large numbers for Bernie Sanders and Donald Trump. They’re simply fed up with an economic system that has been rigged to benefit only a small group at the top and frustrated by a set of political candidates (not to mention economists and economic pundits) who pronounce fundamental change to be undesirable and unrealistic. Better to stay the course, so the elites preach, and eventually trickledown economics will work.

A different response was, of course, possible in all three circumstances. Instead of populism, marginalized classes in the United States might have been persuaded by and coalesced into a movement with utopian impulses—an association, organization, or political party that combines a critique of the existing order, including the elites that defend it, with an agenda that seeks to radically transform economic and social institutions in a progressive direction.**

As I see it, both right-wing populism and left-wing utopian movements see the existing system as “rigged” against the vast majority of people and level an indictment against “elites” that both benefit from and defend the existing system. Both responses therefore represent a failure of liberal democracy.

But the two reactions are not at all similar, even when both attempt to represent the grievances of workers and other classes that have been left behind.

There are, it seems to me, two key differences between right-wing populist and left-wing utopian movements. First, they approach the matter of alliance and opposition quite differently. Utopian movements identify a basic conflict between the people and an elite or establishment, and then challenge the claims to universality of those on top in order to form a different universality, a set of changes that will create a new humanity and realm of freedom for everyone, including the existing elites. As John Judis explains, right-wing populists exhibit a radically different approach. They

champion the people against an elite that they accuse of favouring a third group, which can consist, for instance, of immigrants, Islamists, or African American militants. Rightwing populism is triadic: it looks upward, but also down upon an out group.

The second major difference is that right-wing populists look backward, conjuring up and then offering a return to a time that is conceived to be better. For Trump, that time is the 1950s, when a much larger share of workers was employed in manufacturing, American industry successfully competed against businesses in other countries, and Wall Street played a much smaller role in the U.S. economy.***

That time was, of course, exceptional—in terms of both U.S. and world history. And it’s a vision that conveniently forgets about many other aspects of that lost time, such as worker exploitation, Jim Crow racism, and widespread patriarchy inside and outside households.

Instead of looking backward, left-wing utopian movements look forward—criticizing the existing order but also understanding that it creates some of the economic and social conditions for a better, more just society.

Liberal critics of populism understand neither their own role in producing the circumstances within which populism emerged nor the senses of injustice—especially class injustice—that fuel populism’s gathering strength.

The Left should be able to do better, both in analyzing the rise of populism as a failure of liberal democracy and in offering a utopian alternative to the status quo. But for that, it will have to look beyond the idea that populism alone represents a threat to liberal democracy.

If liberal democracy is under threat it is because of its own failures.

 

*The chart illustrating the wealth shares of the top ten percent and top one percent is from Richard Sutch, “The One Percent across Two Centuries: A Replication of Thomas Piketty’s Data on the Concentration of Wealth in the United States,” Social Science History 41 (Winter 2017): 587-613.

**Such a movement did in fact gather strength during the first Great Depression, the Thunder from the Left, which is precisely what led to the second New Deal in 1935 (after the 1934 midterm elections and before Franklin Delano Roosevelt’s 1936 reelection campaign).

***Joshua Zeitz argues that the Populists of the late nineteenth century also looked backward and that the parallels between then and now are striking:

Ordinary citizens chafed at growing economic inequality and identified powerful interests—railroads, banks, financial speculators—that seemed to control the levers of power. Many came to believe that the two major political parties, despite certain differences, were fundamentally in the pockets of the same interests and equally unresponsive to popular concerns.

Cartoon of the day

Special mention