If there is anything that annoys me more than an ardent Republican it’s an ardent Democrat. Amid the release of the Job Reports this morning, I’ve already seen two articles saying that the loss of jobs is bad news for Obama and the democrats for the midterms. Indeed a high unemployment rate isn’t good for any sitting president. Obama has responded this morning that the government will give $2 billion in tax credits to create some 17,000 “green” jobs. All the while Glenn Beck, Sean Hannity, and other right wing noise artists are blasting the president for budget deficits and attempts at regulation, which according to them are debasing the recovery.
Anyone who subscribes to the noise artists’ point of view, whether its mouth pieces on the left or the right, is likely confused as all hell as to what effects and drives the economy. Unfortunately for partisan simpletons it isn’t the actions of congress or the president that can save or destroy the economy, although such actions certainly have an effect. The most ridiculous of the rabble rousing at this point must be that centered on regulation. Even the arch-conservative Richard Posner blamed a large part of the economic nose dive on the de-regulatory dogma of the nineties.
Even after the debacle in credit default swaps, the unregulated assets that bankrupted AIG, pro-market-or-die Republicans are still lambasting attempts at regulation as bad for business. Congress was repeatedly advised to regulate the assets, which basically uncollateralized insurance policies on mortgaged backed assets. That didn’t stop Congress from blasting Ed Liddy (the government appointed chairman of AIG) for letting AIG deal in CDO’s. This occurred when he handed out huge bonus to- according to him- retain the employees necessary to wind down the riskier business practices AIG had gotten itself into. Apparently Congress also forgot that Liddy was only appointed to head AIG after the risky business had already been undertaken. As congressman after congress man lined up to ask the same questions as the one before, I couldn’t help feeling depressed and anxious, amazed at how blithely stupid our politicians can be.
Unfortunately for them and us, the paying out of huge bonuses to top-level managers is consistent with a systemic and long-range analysis of the principles of economics. The underlying problem in our understanding of economics is due to widespread ignorance and politically motivated deception. All we ever learn about Adam Smith in high school is the theory of the invisible hand. We never hear that he supported government intervention in some areas of the economy, especially where it could reduce poverty. Also since the cold war Marx has been represented as communist theorist that only traitorous scoundrels would reference. In truth Marx’s theories of capitalism were very insightful while what he wrote about the Revolution was dead wrong. There was not a spontaneous workers Revolution in Russia or China. Dedicated strategists and politicians led both revolutions. Marx’s temporary dictatorship never dissolved into communism in any of the Red states. However, a Marxian approach to the counter cyclical path of economic growth sheds light on our own “Great Recession.”
In the past people traded goods for goods. Then we started using currencies and we traded currencies for goods. However, the advent of business enterprise changed all that. No longer were goods traded for currency in the hopes of obtaining more goods. The goal then is to get some goods, turn around and sell them, and end up with more money than originally had. Now goods were traded, not in the pursuit of other goods, but in the pursuit of money. Now get ready to strike a pose because were going to do a little modeling here.
Let’s suppose an economy where there is one good. It takes two things to make that one good, capital and labor. Now we will also assume the cost of capital either stays the same or rises because we also assume constantly increased competition in the market. The point of capitalism now is to always make a profit which can be represented with the equation, p-(C+L)=P where p is price, C is cost of capital, L is cost of labor, and P is profit.
Now because competition is always going up prices eventually must come down. As supply will eventually grow firms must compete by lowering the price. This puts downward pressure on profits. However, because competition is constantly increasing there is upward pressure on the cost of capital. This leads to more downward pressure on profits, the pursuit of which is the ultimate goal of capitalism. Because managers will all seek to protect their profits they must cut costs somewhere. So they cut the cost of labor to secure sizable profits. Assuming things continue on like this more supply problems are inevitable. Not only is there an abundance of supply, but also now there is less of a demand for it. As workers are paid less they can spend correspondingly less. So even as prices fall the money paid back to workers falls too. Eventually the system proves deficient. As profits shrink to zero so do the value of the firms. So value is lost. What is then necessary to solve the problem of over supply and too little demand is the destruction of productive capacity. This either can occur by literal destruction of capital or by simply devaluing capital. This analysis explains why these downturns are endemic to the system. Something no free-markets-or-die republicans will ever acknowledge.
It’s clear to see that this has been happening. Since the de-industrialization of the seventies high paying jobs have become fewer and farther between. The growth of the Service sector meanwhile has left us with plenty of jobs for the most passionate of dog groomers, burger flippers, and wait staff. The overall reduction in the pay of individuals is also apparent by our un-indexed minimum wage. Which overtime has become worth less and less. Now in the midst of the recession workers, including my father, have been forced to either take pay cuts or lay offs and the American worker ends up with an even smaller piece of the pie. This is only half the story of the collapse and why blaming either party is an exercise in futility.
The second half of the story has to do with a systemic analysis. Systemic analysis contests that it’s impossible to understand one economy with out understanding the role it plays in the world economy. The basic premise of the systemic perspective is that a global hegemonic (dominant) power is necessary to provide security to those who wish to engage in trade. Since that dominant power provides the security it also makes the rules. The hegemony of “the center,” in the dialect of world-system analysis, becomes dominant by being stronger militarily. This is achieved by being more efficient at production, because the better your killing technology the better you are at killing. Eventually technology spreads and “the periphery,” the other countries, catch up to the dominant country. Then the economic advantage that ensured the security of the system is undermined. In this second stage of the cycle profits from production of real goods are effectively quashed to zero as a system of perfect competition ensues. Since real production is no longer a viable source of income, profit seekers resort to financial speculation to make money.
We can see this today in our own economy. GMAC the financial division in GM was, before the crash, the only profitable wing of GM. Now it just petitioned for more bail out bucks. Similarly GE makes very little profit by selling a dishwasher. It makes up for that by financing the purchase of the dishwasher. See the U.S. after WWII was the hegemonic power. With all the industries of Western Europe and Japan bombed to high hell, the U.S. had the clear economic advantage. Not only that but high wages paid during the war years created a savings glut as no consumer goods were available. In the post war years consumer demand at an all time high as factories switched from making hand grenades to hair dryers. The U.S. was also the only developed nation left not blown to bits. Around 1968 the rest of the world caught up in terms of productive capacity. Now the big three couldn’t compete with each other with features alone, because Honda was competing with them in terms of price. The effects on our economy when the down turn kicked in was deindustrialization and increased financialization of our economy. No longer would goods be produced in the U.S. and then sold over seas. Now U.S. companies would buy parts from abroad at as low a price as possible and act as only organizers of the product chain. Meanwhile reduced wages at home diminish demand for goods here. Despite what the right wing noise machine may have you believe, demand is the driving force behind the economy, not the degree of regulation placed on companies. What has occurred to buoy demand is a glut of debt and money creation. However increased liquidity only goes so far, especially once people have already taken on huge swaths of debt to finance consumerist lifestyles.
You might be reading at home thinking, but wait during the nineties we had a huge boom. Realize though over-valued tech stocks drove that boom. These tech stocks were over valued because of the increase in institutional investors like insurance companies, financial wings of corporations, and expanded commercial banking investment. The increase in risky investments by commercial banks was due to the repeal of the Glass-Steagal Act. The law divided commercial banking and investment banking activities. The repeal of which also gave rise to the “too big to fail” megaliths like Citi Group and Bank of America.
In my opinion the reason why the economy is in the shitter is for all the aforementioned reasons. There is a deficiency in demand. Americans don’t want a new car every year. We’re sick of running up our credit cards to buy shit we don’t need. Shit that will probably break due to some planned malfeasance. Perhaps if we were paid more we would run out and buy the newest plasti-form junk-o-matic. But then the managers wouldn’t make enough money. As the process of managing a successful business becomes harder because of the downward pressure on profits endemic to the system, firms are forced to pay out the huge bonuses like those paid out at AIG last spring. Otherwise the top-level managers capable of turning a profit will go somewhere else.
So the next time you curse Obama for attempting to get some regulation in the dangerously deregulated financial sector, shut up. Democrat’s regulation of the economy isn’t what is causing this downturn. If you’re tempted to go the other direction, please shut up! Obama’s green jobs plan isn’t going to save the economy. Even with the most generous of multiplier effects the 17,000 green jobs his plan is supposedly about to create aren’t going to fix an economy of 304 million people. Understand that the economy isn’t going to respond to even the most vigorous sloganeering. As long as the underlying production of goods isn’t met with sufficient demand the economy is going to suck. No amount of money creation by the FED will fix that. Neither will all the hope in the world. So please stop looking for simple solutions, because there aren’t any. It’s time to start asking serious questions about the future of capitalism. Different approaches to ensure steady growth and a more equitable dispersion of the spoils of growth without encroaching upon our individual liberties are out there. We just haven’t thought of them yet.