Roots of the Current Crisis: An Analysis by the Workers’ Party

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An analysis by the Research Section of the Workers’ Party

The global background

The current global crisis emerged from the workings of the capitalist class structure, initially in the USA and subsequently around the world.  Since the mid-1970s, workers’ average real wages in the USA stopped rising partly because the computerisation of production displaced workers and partly because of capitalists’ decision to increasingly move production to more profitable foreign locations. Because employers needed fewer workers in the USA, wages fell there for the first time in 150 years (1820-1970).

However, productivity kept rising, partly because of the computerisation of production processes and partly because workers were being pressurised to produce more.  Workers in the USA produced ever more for their employers to sell and yet their wages remained stagnant. The last 30 years realised capitalists’ wildest dreams- a new gilded age was upon them.  The surpluses extracted by capitalist employers rose.  Yet, stagnant wages and huge surpluses eventually plunged US capitalism into deep crisis. (Wolff)

Progression of real incomes (including capital gains) of the top percent and the lower 90% in United States 1950-2005 (1979=100)

Source : Estimates based on Emmanuel Saez et Thomas Piketty, “Income Inequality in the United States, 1913-2006″, Tables and figures updated to 2006, July 2008 : http://elsa.berkeley.edu/~saez/ From Houben

This contradiction between overproduction on the one hand and stagnating wages on the other is a core contradiction of the capitalist system and leads to its cyclical crises. The super rich can only buy so many yachts, Dubai island retreats and football teams. They tend to rely on working people to be the main consumers of goods in capitalist societies. But with workers being increasingly exploited and new technologies developing so that even more can be produced, capitalism produces more goods than workers can afford to consume.

The capitalist crisis appears in the form of overproduction, i.e. a … surplus of production or of the production capacities in use in relation to what can be sold. In this regard, it is different from pre-capitalist recessions which were mainly caused by phenomena which created underproduction. And overproduction in a world which underfeeds the majority of the population, which does not supply them with enough drinking water, shelter, clothes, etc., is simply shocking. (Houben)

The condition of the working class in the rich countries was also affected by the global growth in the number of people working under capitalist relations of exploitation. Beginning in the early ‘80s there  was an unprecedented rise in the number of people working in the global capitalist market. In this period the USSR and most of the other Socialist Bloc countries collapsed, and China and India were opened up to exploitation by imperialist transnational corporations.  The International Labour Organisation estimates that by 2000 the global capitalist labour force had more than doubled from 1.46 billion to 2.93 billion This growth has placed a downward pressure on workers’ wages in the rich countries, on their terms and conditions of work, and on their job security as has the growth in the  numbers of people unemployed around the world- a global reserve army, many millions of whom scratch a living in the huge slums that have grown up in the poor world in recent decades . The development of (relatively small) fabulously wealthy indigenous elites in these new markets has also created new markets for capitalist goods and services. (Goldstein)

So, who received all the surplus money gained from increasing exploitation of workers, new technology and the globalisation of production? Corporate boards of directors received most of those surpluses. A huge chunk went as payouts to top executives while another portion served as increased dividends to shareholders in corporations.  Other parts of this surplus bonanza financed the transfer of production abroad, increased the computerization of workplaces in order to reduce payrolls, and were paid out in lobbying for beneficial state actions such as reducing corporate taxes. (Wolff)

Corporations deposited mounting surpluses in banks, which in turn grew and invented new financial instruments to profit further from those surpluses. It was believed by some economists that the explosion of new financial instruments was an attempt by capitalists to offset the sluggish or stagnating rates of profit that had been in existence in the USA since the mid-1970s. These radical economists believe that in future capitalists will not be able to ensure sufficient profits in the real economy and as result we have entered a new period in which capitalists will increasingly pursue profits in the financial sector.  As a result, according to this perspective further financial crashes are almost inevitable under the present system, barring the development of epochal new technology – as powerful a lever of growth as the automobile was a hundred years ago.  (Despite the dot.com mania of the late ‘90s, the Internet has not proven to have anything near the same potential as an engine of economic growth as automobiles were when they first came off the production lines.) (Foster and Magdoff)

Other more sanguine thinkers, such as Gordon Brown, believed that the era of cyclical boom and bust was over and that we had arrived at a ‘New Economy’, something like the ideally balanced economy of neo-liberal myth. History – not yet over- has proved them wrong. In any case, financial capital – unmediated by the actual production of goods and services – has been increasingly important to the workings of the global economy since the mid 1970s.

In 1980, the value of financial instruments was estimated to be equivalent to the world Gross Domestic Product (GDP). In 1993, that value was twice as high. And, by the end of 2005, it was more than three times higher i.e. 316% of world GDP. Between 2000 and 2004, government and private debt securities accounted for over half of this increase. This shows the growing role of debt and leveraged buyouts as the motor of this process.

In 2004, daily trade of derivatives totaled 5.7 billion dollars and trade of currency 1.9 billion dollars. Together amounting to 7.6 billion dollars daily. That’s more than the value of annual exports.  (Cottenier and Houben)

In the USA, when the dot.com bubble burst in the late 90s the Fed under Alan Greenspan, fearing a recession,  reduced interest rates and ushered in the era of extremely easy business and household credit. The banks and financial institutions responded with a plethora of new financial instruments through which debt was bought and sold on the international financial markets.

New instruments included securities such as “collateralized debt obligations” (comprised of mortgage, credit card, corporate, and student-loan debt); “credit default swaps” (deals to insure such new securities); and other “derivatives” for trading the risks of fast multiplying new credit instruments among those with the surpluses to invest.  Because the new instruments operated completely outside existing regulations in a “shadow credit system” ever bigger risks were undertaken for ever bigger profits.  Specialized enterprises such as hedge funds arose to invest rising corporate surpluses and exploding executive incomes in the murky shadows of high finance.  Huge profits were made over the last 20 years, but the resulting capitalist exuberance once again overreached its limits. (Wolff)

With their wages stagnating, how were workers able to consume the things they produced?  In the USA and in other rich countries, such as Ireland, this was facilitated by an extraordinary rise in levels of household debt. Workers were suffering increased exploitation and stagnating wages and they offset this by taking out loans- credit card loans, student loans, second (and even third) mortgages. Instead of paying workers higher wages, capitalists arranged it so that workers got enough to live at the level they expected by taking out high interest loans. Annual savings made by all families in the USA fell from 8% of GDP in 1980 to 5% in 1990 and 1.5% in 2000. At the same time the debts of US families rose from about 50% of GDP in 1980 to 65% in 1990, 75% in 2000 and 100% in 2007. (Cottenier and Houben) Even the poorest and those with poor credit histories, who had previously been unable to avail of easy credit, were able to buy into the property market through sub-prime mortgages. It must have seemed like the perfect system for capitalists. Until it all began to unravel.

…defaults on credit card debt, auto loans, student loans, and mortgages took off in 2008.  The new kinds of securities based on workers’ debts began to lose value in the markets.  Banks, hedge funds, and others holding those securities faced mounting losses.  Corporations that insured those securities via credit default swaps, etc., could not pay when so many securities’ values collapsed.  Banks had used their depositors’ money and borrowed still more to buy such securities.  Banks’ losses prevented repaying those loans or guaranteeing their depositors’ money.  Financial markets froze as borrowers and lenders stopped trusting one another and drastically reduced transactions.  Bust followed bubble followed boom, once again. (Wolff)

Ireland’s Part

Ireland was a beneficiary of the rising surpluses being enjoyed by the US ruling class in the 1990s.  American firms invested more capital overseas in the 1990s- in excess of $750 billion- than in the previous four decades combined. Of this, roughly half went to Europe and after 1993 25% of all US investment in the EU went to Ireland (which has just 1% of the EU population). (O’Toole (a)) This represented the culmination of a decades-long process of opening up of the Irish state to foreign business. Ireland represented a good deal for American capital for a number of reasons. It had low corporate taxes, wage moderation expressed through a partnership process, active state involvement in attracting overseas jobs and was the recipient of EU structural funds which may have raised Ireland’s GNP by up to 4%. (O’Toole (a)) As it transpires, the Irish state was also willing to turn a blind eye to a whole range of financial misdeeds and crimes in pursuit of its share of the global pot, although Ireland was not alone in this. In the manufacturing sphere, US pharmaceutical and computer firms took advantage of Ireland’s low-tax regime. By 1999 half of all Irish manufacturing jobs in were in foreign-based companies compared to an EU average of 20% and by 2000, foreign investors spent the equivalent of $38,000 for every man, woman and child in Ireland. (O’Toole (b))

In keeping with the development of the globalised financial sector, Ireland was also a recipient of inward investment in this sphere.  Founded by Charles Haughey in 1987, the International Financial Services Centre (IFSC) came to play an increasingly important role in the Celtic Tiger economy.  In 2002 Ireland was the largest location for declared pre-tax profits for US firms and in 2005 the IFSC accounted for 75% of all foreign investment in Ireland. By 2008 the IFSC was dealing with €1 trillion per year.  At its height the IFSC had 25,000 employees and garnered €1.2 billion in taxes. In return for this boost to the Irish economy the Irish government ensured that regulators operated what the IDA called “a flexible and business focused tax and regulatory system”. (Quoted in O’Toole (b): 130) This allowed for the development of “apparently vast financial operations with huge paper assets but almost no substance.” (O’Toole (b):129) In 1998 the Irish government allowed the treasury arms of transnational corporations (TNCs) to set themselves up as banks and by 2007 400 of these banks were in existence, whose chief aim was to ensure that the parent TNC paid as little tax as possible. These banks were mostly front companies with few employees and engaged in no real banking activity. Ireland was a global centre of tax avoidance (legal) and evasion (illegal). The IDA itself boasted of Ireland having become the new Bermuda.

The Workers’ Party has previously outlined its view on how the Irish government conspired with big builders and the banks to squander the monies that came into the exchequer and developed the housing bubble with little or no thought as to the long-term consequences so that when the global collapse came, Ireland was in no position to deal with it. What follows is an attempt to outline where we are now and a brief outline of options open to the Left in Ireland at this time.

Ireland 2010

While the largely unregulated financial economy was booming, and US investment was creating industrial and financial jobs, not everybody in Ireland was living the dream. In fact, the gap between rich and poor widened to one of the worst in the world. “In the last three years of the boom (2004 to 2007) alone, the richest 400 people in Ireland added €41 billion to their combined personal wealth. Yet, somehow, Irish people went on believing that they lived in a relatively classless society.  (O’Toole (b): 76) The idea that ‘we’re all in this together’ remains powerful and is used by the government, by most commentators to construct a fictional divide between ‘vested interests’ and the rest of the country. In the current climate these ‘vested interests’ include public service workers, nasty bankers (Seanie Fitzpatrick, Richard Boucher, Michael Fingleton), dinosaur trade unions and their venal leaders. The underlying idea is that if we can disentangle the cronies from ‘crony capitalism’ and put ‘good’ bankers in place, all will be well again. It is an evident piece of fiction but as propaganda it may be working. For example, a recent Sunday Independent poll found that 55% of respondents would favour an all party government in the current economic climate. (25th April 2010).

The Workers’ Party does not believe that a unity government made up of two right-wing parties and a few others would be able to deal with economic woes to the benefit of the majority. We have no time for the bankers and their buddies in construction and in Fianna Fáil .We believe that a privileged ‘golden circle’ was partly responsible for the way things have panned out here. But we are aware that Ireland’s fate has been tied up with an increasingly globalised capitalism. We are equally aware that a squeaky-clean Fine Gael-led coalition government wouldn’t be of any help to the vast majority of the Irish people. A new direction will have to be coursed if we are to develop a society which looks after the interests of the majority.

Economic Crisis: a Deflationary Approach

Broadly speaking, within the capitalist system, there are two main approaches to dealing with large government deficits. One approach is to cut wages, and government spending and use the money saved to pay back the debt including interest. Cutting workers wages and entitlements is also supposed to make the economy more globally competitive.  There are problems with this approach. The first problem is that even fewer people will be able to afford goods and services at their current prices. Cuts will lead to higher unemployment and wage cuts put less money in workers’ pockets. People have less money to put into the economy. A lack of demand may in turn lead to a need on the part of sellers to lower prices and a general deflationary tendency in the economy.  There is also the risk that the people at the bottom end of the wealth pyramid might start taking to the streets, as they are currently doing in Greece.

The alternative approach involves the government spending money on social services (or anything – it could equally involve the government spending money on weapons and wars), which in turn will get more people working,  producing, spending and paying taxes, which in the longer run will help to clear the deficit.  As we might expect of a government which is hardly interested in the plight of that special ‘special interest’, the vast majority, the government has chosen a potentially deflationary and socially painful course of cuts, tax increases (aimed at the most vulnerable) and shut-downs.

According to the latest ESRI Quarterly Economic Commentary (Spring 2010), economic output has been flat between 2009 and 2010. They expect economic growth of 2.5% of GDP in 2011. As for the job forecast..

…we expect unemployment to fall between 2010 and 2011, averaging 13¾ per cent in 2010 and 13 per cent in 2011. This expected fall in the rate of unemployment is related to expected migratory outflows – 60,000 in the year ending April 2010 and 40,000 in the year ending April 2011. (p.1)

In the ESRI report there are clear signs that government policy is undermining demand in the economy.

In tune with government thinking the report notes that rising public debt and concerns about “medium-term fiscal sustainability in many advanced economies could potentially derail the recovery process by unsettling financial markets and increasing the cost of borrowing, thereby crowding out private consumption and investment” But it also notes that

… there remains a concern that the outstanding impairments in financial systems and in housing markets, together with rising unemployment levels, may impede the recovery in household spending to a greater extent than currently expected. In addition, much of the rebound in global economic activity has been driven by the extraordinary policy stimuli and there are still few indications that autonomous private demand is taking hold in the advanced economies. One of the key risks is that a premature termination of supportive policies may undermine the recovery. (p.6)

The Fianna Fáil /Green government is very much about “terminating supportive policies”. As implied in the quotation above, other governments have followed a different approach to that of the Fianna Fáil / Green coalition by putting extraordinary amounts of money into the economy in the hope of stimulating growth. Later, the ESRI Commentary notes that government figures show that “the volume of investment spending fell by 29.7 per cent in 2009. This figure was made up of a fall of 33.8 per cent in building and 15.7 per cent in machinery and equipment.” Figures for consumption also show a fall for the period.

The ESRI Commentary bases its budget forecast for 2011 on the pre-announced targets included in Budget 2010.

In the (2010)[Budget] document these include total cuts of €3 billion, with €2 billion targeted at the current side of the budget and a €1 billion reduction in capital expenditure. …we have assumed a freeze in welfare payments and public sector pay rates together with further reductions in the volume of public consumption which is forecast to fall by 2 per cent in 2011.

…we have implemented these measures to estimate the impact of the pre-announced budget plans on the public finances and the wider economy.

We estimate that such a budget package would reduce the General Government Deficit by between 1½ and 2 percentage points of GDP. The impact on the wider economy is to reduce the growth rate by approximately one percentage point. In addition, the level of employment is lower and emigration flows higher than in the absence of such a package. These are real costs attached to the programme of fiscal consolidation being pursued by the government. Despite these costs it is the view of this Commentary that such measures are necessary to ensure the medium-term sustainability of the public finances. Given the range of measures which have already been introduced, the 2011 budget is likely to involve some very difficult choices. While there are likely to be significant cost savings to be made in the capital programme which should mitigate the effects of the cuts on the levels of volume investment, it is nevertheless the case that by 2011 public investment levels in current prices will be one-third lower than in 2008. Implementing further cuts in current expenditure and increases in taxation will also be challenging…

The recently announced plans for providing support to the banking system involve very significant increases in the level of government involvement in the financial sector. It is very difficult to put exact figures on the level of government monies involved. However, a tentative estimate of the order of €73 billion, equivalent to 47 per cent of GDP in 2010, can provide a guideline. … Of course these are gross figures and much of this liability is matched by assets both within NAMA and in AIB and Bank of Ireland. Nevertheless, it is possible that the net cost to the taxpayer of this support to the banking system, based on the latest figures available, will be of the order of €25 billion or more. (p.23. Our emphasis)

The picture which emerges here is clear. On the one hand, the vast majority are expected to suffer a contraction in the economy, a growth in unemployment and emigration, in 2011 public investment will be a third lower than it was in 2008 and more cuts in taxation and government expenditure, although challenging, are expected. On the other hand, the government is going to give around €73 billion to the banks and might get €48 billion back meaning that generations of Irish people will end up paying for €25 billion or more that this government has given to the banks.

In the immediate term, the Workers’ party is in favour of government policies which will put money into workers’ pockets and which will ensure that social services are maintained at 2008 levels and even expanded.  We seek a coalition of all parties which are opposed to the deflationary anti-worker policies of Fianna Fáil  and its hangers on. We do not believe that a Fine Gael-led coalition, even with sincere social democrats in cabinet positions, will even begin to protect the living conditions and livelihoods of the majority of our people. We note that in his recent leader’s speech to the Labour Party conference Eamonn Gilmore’s big ideas on healthcare and a constitutional convention are already part of Fine Gael policy so that “… at the same time as he was challenging … Fine Gael’s bid to become the largest party in the state, Gilmore was setting out policy positions which would fit comfortably with [Enda] Kenny’s platform”. (‘Back Room’, Sunday Business Post, April 25th 2010) We hope that this does not mean that the Labour Party is planning to throw its lot in with Fine Gael after the next election. The Labour Party is – as usual- at a crossroads. This time it should turn to the Left, with the goal of finding allies and building lasting coalitions in that direction.

The Workers’ Party also notes with dismay the way in which most of the leaders of the Trade Unions have accepted a public sector agreement which offers Ireland’s 300,000 public sector workers very little. Indeed the little that it does offer in relation to voluntary redundancies and no further pay cuts is “subject to no currently unforeseen budgetary deterioration” and will almost certainly be taken away again. Jack O’Connor of SPITU has argued that “we are living in a ruined economy, and … any action we take will be depicted as an attack on the citizens of the country.” He seems to have bought into the arguments of those on the other side of the table. The Workers’ Party believes that it is incumbent on the Trade Union movement to show by word and deed that it represents the working class of Ireland in its broadest sense. The Trade Union movement needs to come out fighting against scare stories about ‘sectional interests’ and cushy public sector jobs instead of giving in to them.

In relation to jobs, Fianna Fáil  has recently been coming out with what can only be termed well-spun guff about  post-recession Ireland becoming a ‘smart’, ‘green’ economy- what the newspapers have started calling ‘environomics’.  The economist Michael Hennigan at the finfacts website shows how unrealistic the aim of creating tens of thousands of Irish jobs in the green economy is. He notes(quoting Forfás) that between 1998-2008 fewer than 4,000  new jobs were added by Irish and foreign firms in tradeable goods and services while during the same period more than half a million new jobs were created in  construction, the public sector, retail and distribution. Moreover, research from the USA – a highly entrepreneurial culture – shows that only a small the number of business start-ups in tradeable goods and services last more than 10 years. Meanwhile, the government is talking about creating 80,000 sustainable jobs in the ‘new’ green economy. They are even talking about “a green IFSC” which could create 20,000 jobs over the next five to 10 years. According to Eamon Ryan, the Minister for Communications, Energy and Natural Resources, “It could specialise in clean energy project finance or carbon trading,” Ryan said. “It could also look at ethical fund management and administration. We would specialise in three or four key areas.” The reference to “ethical fund management” is particularly choice.

Even those who did well out of the Celtic Tiger have to accept that those days are over.  Speaking to business people in Dublin’s Mansion House, Craig Barrett former CEO at Intel, reminded his audience of the competitive pressures that faced them. He argued that with the collapse of the Soviet Union and the abandonment of socialist principles in nations like India, for example, an estimated 3 billion additional people entered the free world economic system.

“And guess what, they also want good jobs and have a rich educational heritage. You have 3 billion new customers, you also have 3 billion new competitors … The FDI [Foreign Direct Investment] era is over. Real economic investment will be indigenous and growth will come from investment in new ideas.”(‘The FDI era is over, says Craig Barrett’.  Businessandleadership.com)

No new green tiger is going to emerge when the CEOs are speaking in those terms.

The State as the Key Driver

For the Workers’ Party the state should be the key driver in job creation because we seek a society were goods will be produced according to the agreed needs of the people and not the dicatatorship of the market.  We note that during the final Tiger boom- between 2000 and 2008 – the net capital stock of the Irish state more than doubled from €222 billion to €477 billion. Of course, given the priorities of the government, €70 billion of this went into housing and €27.5 billion went into upgrading the roads -the latter an important, and arguably useful, investment. Road building accounted for almost 30% of the increase in ‘core’ productive capital stock (i.e. capital stock excluding dwellings, retail and transportation/storage). And most of the rest of the increase in Ireland’s ‘core’ productive capital stock was related to the state or semi-state sectors. It was not driven by private enterprise.

Of the €50bn rise in 2000-2008:

  • €14.5bn is manifested in roads;
  • €9bn went into schools, hospitals and buildings and equipment related to public administration;
  • €7bn was invested by the semi-state companies that dominate electricity and gas supply;
  • €3bn was pumped into water works, waste management and sewerage.

Private sector net investment in the capital stock – apart from retail, storage, transportation and housebuilding – was only €14.5bn in the eight years to 2008 (in constant 2007 prices). (finfacts team)

Even during the laissez-faire era of the Celtic Tiger at its height, the state was a crucial driver of core productive capital stock. This realisation must inform future policy.

A realistic radical approach to job creation has to put the basic needs of people first in terms of affordable housing, health, education and food and water provision. Radicals should ask why the government is not meeting basic needs in these areas and in the area of full employment. Will the government tax the wealthy and redistribute wealth to the benefit of the great majority? Will environmental concerns with the limits of our environmental systems and the necessity of sustainability assume more importance than the need to make a profit?  If the global economy grows at 3% per annum, within thirty years it will have doubled in size. Can the global environment realistically withstand such growth?  The profit system is unable to find solutions to these problems. Another world is necessary.

References

Jo Cottenier and Henri Houben ,‘System Crisis‘, International Communist Review , 2009

ESRI Quarterly Economic Commentary, Spring 2010

Finfacts Team “Davy says Ireland was never a wealthy country; High income in 2000-2008 largely wasted”,   finfacts.com, February 19th, 2010

John Bellamy Foster and Fred Magdoff, The Great Financial Crisis, Causes and Consequences, Monthly Review Press, 2009

Fred Goldstein Low-wage capitalism: colossus with feet of clay- what the new globalized, high-tech imperialism means for the class struggle in the U.S. World View Forum 2008

Henri Houben, Institute of Marxist Studies, Brussels
Contribution to the Fourth World Association for Political Economy (WAPE) Conference, ” Nation, State, and Democratic Governance of the Global Economy and Politics ” Paris, 28-29 May 2009

Fintan O’Toole (a) After the Ball, Tasc at New Island, 2003

Fintan O’Toole (b) Ship of Fools, Faber and Faber, 2009

Rick Wolff, ‘Capitalism’s Crisis through a Marxian Lens‘  MRZine.

 

11 Responses

  1. JB

    July 12, 2010 11:32 am

    It amazes me how you can put so much effort into an article yet be so wrong on nearly every single point. Infact i can only pick one paragraph in your entire article which makes any sense, your reference to the federal reserve lowering interest rates following the dot com bubble bursting yet centrally planning interest rates is a socialist trait. does this mean that you agree that interest rates should be set by the market? your propaganda is very similar to that of the National Socialist German Workers Party in the 30′s but what disturbs me the most is the following line “The alternative approach involves the government spending money on social services (or anything – it could equally involve the government spending money on weapons and wars)”
    can you please explain to me how spending hardworking taxpayers money building bombs then blowing them up along with their targets and anybody nearby is good for an economy??? very george bushesk indeed… but the one question you’ve not addressed in your ‘alternative approach’ is, how are we gona to pay for it???
    regards

  2. krupskaya

    July 12, 2010 1:32 pm

    This is a sorry article, from beginning to end. I never kew the “Workers’ Party” was so pro-capitalist.

    To take only the opening premise,”Since the mid-1970s, workers’ average real wages in the USA stopped rising partly because the computerisation of production displaced workers and partly because of capitalists’ decision to increasingly move production to more profitable foreign locations. Because employers needed fewer workers in the USA, wages fell there for the first time in 150 years (1820-1970).”

    In 1975, US average hourly earnings were $8.48 and weekly earnings were $305.16. In real terms, ie adjusted for inflation, they ended 2009 at $8.60 and $284.91. So, real hourly pay has (marginally) risen but avge. hours worked has fallen from 39hrs a week to 33hrs.

    So the first assertion is ony partly true. But the second two are way off- that the fall in wages (should be weekly earnings)is because of (!) computerisation and job-shifting to Asia.

    Investment, such as computerisation, does not decrease total employment. In fact it raises the value-added per employee and should therefore raise total pay, other things being equal. To assert the opposite would imply the rapid increase in technological advance and its use has led to mass unemployment. The oppostite is the case, unemployment has fallen.

    Likewise it is widely assumed that the majority of jobs created in the poorer countries were initially at least low-skilled and low-wage. Therefore, for those in work in the rich countries, average pay should have risen (and fractionally did, on an hourly basis). There is no evidence at all that either computerisation or job-creation in the Third World, which the ‘Workers’ Party’ thinks is a negative, destroyed jobs inn the rich countries.

    It seems to have escaped the attention of the authors that, until the bubble burst, unemployment in the Western economies was falling rapidly, so it is completely untrue that they ‘needed fewer workers’.

    It is also the case that the Western economies still receive by far the lion’s share of foreign direct investment, negating any idea, seemingly shared by the Workers’ Party and Ross Perot that multinational investment in China, India, etc. sucks away Western workers’ jobs. In fact, as both economies move towards higher value-added production and increased domesic cosumption, that will create Western jobs. Someone needs to.

    The real picture is that there has been a chronic decline in both economic growth and corporate profitability that began in the early 1970s and which the capitalists have responded to with ever-lower rates of investment, plus attacks on the power and incomes of workers and the poor. The systematic breaking of union power in the US and elsewhere goes unremarked by the ‘Workers’ Party’.

    In the crisis this reducton of investment has become an outright investment strike, with the fall in gross fixed capital formation being responsible for 93% of the total declne in OECD GDP. Profits are rising once more, but the capitalists are hoarding the cash.

    The WP analysis does not identify the source of the crisis, and therefore the means to correct it; government-directed investment using the resources that the capitalists refuse to, ie their profits.

    Instead the Workers’ Party offers a long-winded combination of Luddism and Western chauvinism. I agree that another world is necessary, but this is economics from another planet.

    I trust no workers will be taken in by this nonsense

  3. Research Section

    July 14, 2010 3:13 pm

    In the course of two relatively brief comments on our document “the Roots of the Current Crisis” (henceforth ROC) we are described as being wrong on nearly every point, very similar to the Nazis, we are warmongers, we are pro-capitalist, we believe that job-creation in the Third World “is a negative”, we are anti-union, our analysis is “from another planet”, is “nonsense” and is a combination of “Luddism and Western chauvinism”.

    In this response we only intend to deal with the substantive points made in the comments, such as they are. Insults and invective are not worthy of anyone’s time.

    The criticisms relate to the opening section of ROC, which does not claim to be anything other than an overview of the economic situation in the USA from a working class perspective. For example, we did not mention the decline of Unions and probably should have. Likewise, we failed to mention the increasing feminisation of the global workforce and probably should have.

    The main outlines of the approach taken in the early sections of the document will be familiar to anyone who has read the analyses emerging from the pages of Monthly Review magazine, or that of David Harvey in his recent book, The Enigma of Capital. We do not claim to be saying anything new here. The major point is that as the rate of profit has declined in the United States in the past thirty years, capitalists have increasingly invested in the financial economy. At the same time stagnating wages have pushed workers towards supplementing their income with credit. Meanwhile, large sections of the global economy were opening up to capitalist exploitation. All of these factors lie behind the recent financial crash.

    The first point to be made is that our analysis is an attempt to outline major trends in the real world. When we say that a government stimulus to the economy can take the form of military spending (“Military Keynesianism” ), we don’t mean to endorse this activity. In fact, we are completely opposed to the military-industrial complex but recognise that it is possible for a government to stimulate the economy by military spending. According to John Bellamy Foster:

    Aside from finance, the main stimulus to the economy, in recent years, has been military spending. As empire critic Chalmers Johnson noted in the February 2008 Le Monde Diplomatique:

    The Department of Defense’s planned expenditures for the fiscal year 2008 are larger than all other nations’ military budgets combined. The supplementary budget to pay for the current wars in Iraq and Afghanistan, not part of the official defense budget, is itself larger than the combined military budgets of Russia and China. Defense-related spending for fiscal 2008 will exceed $1 trillion for the first time in history….Leaving out President Bush’s two on-going wars, defense spending has doubled since the mid-1990s. The defense budget for fiscal 2008 is the largest since the second world war.27

    But, even the stimulus offered by such gargantuan military spending is not enough today to lift U.S. capitalism out of stagnation

    And Wikipedia provides an outline:

    Keynesian economists point to the large deficits during WWII as being the cause of the US recovery from the Great Depression, and that prior fiscal stimulus had been insufficient due to opposition to large deficits. That is, military mobilization provided the popular political support for Keynesian stimulus.

    In today’s discourse, the term is “Military Keynesianism” is most frequently discussed in relation to the United States, particularly the administration of President Ronald Reagan in the 1980s. Reagan’s administration pushed for significant tax cuts, while increasing military spending to confront the Soviet Union in the Cold War. This was in practice a policy suggestive of military Keynesianism, although Reagan defended it, arguing that military spending was necessary to combat Communism by outspending the Soviet Union. It also coincided with the early 1980s recession, with some arguing that the resulting stimulus helped end the recession.

    In relation to the current crisis, as is made clear in ROC, we hope that a stimulus to the economy can be affected through social welfare spending and infrastructure development NOT through building bombs and growing the military. For capitalists destruction can be good for the economy as long as it turns a profit. As socialists, we look beyond the profit motive.

    Similarly, to say that outsourcing by multinationals to the third world has happened, that does not mean that we either endorse such outsourcing or that we think that job creation in the third world is a negative phenomenon. Indeed, although we don’t go into it in ROC, we hope that eventually a critical mass of workers in the advanced economies will come to the realisation that power lies through making alliances with workers around the world and not with their local ruling elites. Is this another example of our “Western chauvinism”? To say that capitalists have used high technology to further tilt the balance of power away from the working class does not mean that we are against high technology. This makes no sense and we fail to understand how anyone could think we have said this from even a cursory reading of ROC.

    At the risk of being called a capitalist, here’s how Ben Bernanke described the modern world system in 2006:

    [P]roduction processes are becoming geographically fragmented to an unprecedented degree. Rather than producing goods in a single process in a single location, firms are increasingly breaking the production process into discrete steps and performing each step in whatever location allows them to minimize costs. For example, the U.S. chip producer AMD locates most of its research and development in California; produces in Texas, Germany, and Japan; does final processing and testing in Thailand, Singapore, Malaysia, and China; and then sells in markets around the globe.

    Ben S. Bernanke, “Global Economic Integration: What’s New and What’s Not?” Remarks at the Federal Reserve Bank of Kansas City’s Thirtieth Annual Economic Symposium, Jackson Hole, WY, Aug. 25, 2006.

    Thomas Palley, assistant director of public policy at the AFL-CIO trade union agrees:

    Manufacturing has already been placed in competition across countries, with dire consequences for manufacturing workers. The internet promises to do the same for previously un-tradable services, and higher paid knowledge workers will start feeling similar effects. Not since the industrial revolution has there been a transformation of this magnitude, and that revolution took one hundred and fifty years to complete. By comparison the new revolution is only twenty-five years old. These developments have a significance that goes far beyond the currency manipulation and WTO rules violations…. There is no reason to think that the end is in sight, and American workers can look forward to the international economy exerting downward pressure on wages and work conditions for the next several decades.

    Thomas Palley, “Super-sized: What happens when two billion workers join the global labor market?“, posted Sept. 29, 2005.

    Krupskaya’s first substantial point is that real wages have risen marginally but hours worked have fallen. S/he doesn’t indicate where the figures quoted are from but other figures indicate that overall the trend between 1973 and 2004 has been downward:

    REAL WAGES

    1964-2004

    Average Weekly Earnings (in 1982 constant dollars)

    For all private nonfarm workers

    Year

    Real $

    Change

    1964

    302.52

    1965

    310.46

    2.62%

    1966

    312.83

    0.76%

    1967

    311.30

    -0.49%

    1968

    315.37

    1.31%

    1969

    316.93

    0.49%

    1970

    312.94

    -1.26%

    1971

    318.05

    1.63%

    1972

    331.59

    4.26%

    1973

    331.39

    -0.06%

    1974

    314.94

    -4.96%

    1975

    305.16

    -3.11%

    1976

    309.61

    1.46%

    1977

    310.99

    0.45%

    1978

    310.41

    -0.19%

    1979

    298.87

    -3.72%

    1980

    281.27

    -5.89%

    1981

    277.35

    -1.39%

    1982

    272.74

    -1.66%

    1983

    277.50

    1.75%

    1984

    279.22

    0.62%

    1985

    276.23

    -1.07%

    1986

    276.11

    -0.04%

    1987

    272.88

    -1.17%

    1988

    270.32

    -0.94%

    1989

    267.27

    -1.13%

    1990

    262.43

    -1.81%

    1991

    258.34

    -1.56%

    1992

    257.95

    -0.15%

    1993

    258.12

    0.07%

    1994

    259.97

    0.72%

    1995

    258.43

    -0.59%

    1996

    259.58

    0.44%

    1997

    265.22

    2.17%

    1998

    271.87

    2.51%

    1999

    274.64

    1.02%

    2000

    275.62

    0.36%

    2001

    275.38

    -0.09%

    2002

    278.91

    1.28%

    2003

    279.94

    0.37%

    2004

    277.57

    -0.84%

    http://www.workinglife.org/wiki/Wages+and+Benefits:+Real+Wages+(1964-2004)

    Michael Mandel has broken down this decline in wages into employment groups between 20003-2008

    Change in real wages

    2003III-2008III

    All civilian workers -2.4%

    management, business, and financial -3.5%

    professional and related -0.7%

    sales -4.6%

    office and administrative support -2.1%

    construction, extraction, farming -0.9%

    installation, maintenance, repair -3.1%

    production -4.2%

    transportation -4.1%

    service occupations -2.4%

    Further, research by Ian Dew-Becker and Robert Gordon shows that what wage increases there were have been enjoyed by those at the top of the wealth pyramid:

    We show that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth. Growth in median real wage and salary income barely grew at all while average wage and salary income kept pace with productivity growth, because half of the income gains went to the top 10 percent of the income distribution, leaving little left over for the bottom 90 percent. Half of this inequality effect is attributable to gains of the 90th percentile over the 10th percentile; the other half is due to increased skewness within the top 10 percent

    Ian Dew-Becker and Robert Gordon, “Where Did the Productivity Growth Go?” National Bureau of Economic Research, Working Paper 11842, December 2005.

    Wage and salary disbursements as a percent-age of GDP

    Sources: Economic Report of the President, 2008, Table B-1 (GDP), Table B-29-Sources of personal income, 1959-2007.

    According to Fred Magdoff and John Bellamy Foster the decline in wages is “part of a massive redistribution of income and wealth to the top”:

    Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. In contrast, from 1990 to 2002, for each added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (today around 14,000 households) made an additional $18,000. In the United States the top 1 percent of wealth holders in 2001 together owned more than twice as much as the bottom 80 percent of the population. If this were measured simply in terms of financial wealth, i.e., excluding equity in owner-occupied housing, the top 1 percent owned more than four times the bottom 80 percent. Between 1983 and 2001, the top 1 percent grabbed 28 percent of the rise in national income, 33 percent of the total gain in net worth, and 52 percent of the overall growth in financial worth. http://www.monthlyreview.org/081201foster-magdoff.php – fn35

    Moreover, Jack Rasmus argues that one legacy of declining wages in the USA is that Americans are working longer and harder:

    The overall picture is abundantly clear: real average hourly ages of more than 100 million of American workers’ are less today than 25 years ago; real wages of college educated workers have risen only modestly in the late 1990s and fallen since under Bush II; and real wages of the 10 million lowest paid workers have declined more than 21%.

    Given this irrefutable array of facts, one might ask ‘how has the American worker and his or her family survived the last quarter century under Reagan and Bush’? The answer is by working longer hours -individually and as a family unit- and by taking on more and more household debt – both in lieu of hourly wage gains.

    Let’s look at hours worked: The American worker not only works more hours in a year than his counterpart in other industrialized nations, but is the only worker in the 13 major industrialized countries whose hours worked per year actually increased since 1979.

    Workers in all the other industrialized countries have enjoyed an actual decrease in their total hours worked per year in a comparable period.

    For example, there are approximately 2080 hours of work in a year. In 1979 the American worker individually worked 1905 hours out of the possible 2080. But by 1998 he or she was now working 1966 hours a year. That’s an increase of 61 hours. In contrast, a worker in Germany saw his working hours decline from 1764 to 1562. A worker in France from 1813 to 1634. And in the United Kingdom from 1821 to 1737. The picture is similar in all 13 industrialized countries recently surveyed.

    As a family unit, while real wages of male workers as heads of households in the US have fallen, the American family has worked longer hours by adding more family members to the workforce. Since 1973 this increase in family average hours worked is the equivalent of adding 5 months of work in a year to the 2080 hours. Wives in working families have assumed the major share of this increase in total family hours worked, contributing more than 500 additional hours of work per year. But the male worker in the family has also worked more overtime hours, and both husbands and wives have taken on second part time jobs as well. All three developments add up to the 5 additional months of work American workers’ families now work in order to offset declining hourly wages and just to make ends meet.

    If it were not for working these longer hours worked, or adding record amounts of family debt (installment, mortgage, student loan, etc), the standard of living of the American worker and his family would have certainly collapsed.

    Kruspskaya further argues that “there has been a chronic decline in both economic growth in corporate profitability”. The figures show that s/he is correct.

    Growth in real GDP 1930-2007

    Source: National Income and Products Accounts Table 1.1.1. Percent Change from Preceding Period in Real Gross Domestic Product, Bureau of Economic Analysis (From Fred Magdoff and John Bellamy Foster)

    But to agree with this is not to make a “nonsense” of the analysis of workers whose stagnating wages led them to work longer and get deeper into debt kindly provided by financialised banks.

    The ROC document then goes on to show how some of the huge amount of money in the hands of the American elite went on to find its way to Ireland. This is followed by an analysis of the disastrous deflationary politics of FF|Greens no specific criticisms have so far been made of this.

  4. krupskaya

    July 14, 2010 8:50 pm

    The ‘brief overview’ at the beginning of the original post may be familiar to readers of the Monthly Review. But that doesn’t make correct.

    The authors, both in relation to the original post and their reply goes to great lengths, for example, reproducing table of 40 years of wage growth (taken from wikipedia when mine were from the Bureau of Labour Statistics to 2009), yet effectvely concedes the point of contention. Average hourly wages have risen a little but hours worked have fallen, so total weekly wages have fallen.

    Likewise, the decline in growth and profitability.

    The substantive point is this; it is the decline in the latter, the fall in the profit rate which is the cause of the crisis. Not jobs shifting to Asia, not computerisation, nor FF’s cronyism, etc.

    But, after all this negative comment on analysis, it is possible have very substantial points of agreement on policy. The State can direct investment and overcome the slump by so doing. That can revive the economy and get people back to work, which wlll close the deficit.

    And put pressure on LP to break from FG.

  5. Research Section, The Workers\' Party

    July 15, 2010 8:11 am

    The information provided does not concede the point that “Average hourly wages have risen a little but hours worked have fallen, so total weekly wages have fallen.” The information – from workinglife.org based on Bureau of labor Stats – shows that wages have fell during the period but the information provided by Jack Rasmus indicates that hours worked rose.

    Important, though, that we can agree on what needs to be done, despite these differences.

  6. Research Section

    July 16, 2010 12:51 pm

    It is probably of little value to continue to debate this issue given that it is not central to the ROC document and given Krupskaya’s unwillingness to seriously engage with the counter-argument.

    We would note that the whole question of whether hours worked has risen or fallen over the past three decades is a complex one which is hotly debated by those academics who research the issue. An overview of the issues is provided by Juliet Schor and is available at http://www2.bc.edu/~schorj/pdf/pressure.pdf

    Schor’s conclusion is as follows: “The controversy about trends in time use has mainly been of a technical nature, revolving around issues of data quality, sample selection, and so forth. However, its significance is of far more than academic interest, in part because it has important political, social and gender dimensions. If time-squeeze is only a “perceptual” or “entitlement” problem it can be solved merely by lowering expectations. There is no need for public policy, institutional change, or a renegotiation of household work between men and women. Corporations (as employers) play no role here, nor does government. We only think we don’t have time for our children, our or communities. By contrast, if work has indeed become more demanding, crowding out family and community time, there is a larger public interest involved.”

    Although not central to this debate, it seems to us that this is a debate worth having

  7. LeftAtTheCross

    July 16, 2010 2:34 pm

    Interesting discussion.

    On the question of whether people are working longer hours now, it poses another question in relation to what period in our history are we comparing the present against, and in what sectors of the economy.

    If we compare against the golden years of post-WWII social democracy and the historic compromise between labour and capital then it’s probably a different comparison to the not so rosy years before that era, the depression of the 30s, the casual labour market of the pre-unionised workforce etc.

    One would expect, regardless of the academic data to back up the hunch, that the number of hours worked in the future by workers will probably decrease for some, and increase for others.

    The latter group to include unionised workers, trades and professions, public servants, workers in relatively secure employment but becoming less so. More hours because employers will squeeze their skilled employees for reater productivity.

    The former group to include the casualised almost transient work force of the call centres, retail sector, black market etc., those most exploited by capital when the balance of power in recession swings towards employers. Less hours because employers will treat these workers as disposable commodities with which to fill staffing rotas in as flexible a manner as possible.

  8. Justin

    July 16, 2010 6:19 pm

    LeftAtTheCross wrote “One would expect, regardless of the academic data to back up the hunch, that the number of hours worked in the future by workers will probably decrease for some, and increase for others.”

    Juliet Schor – in the paper previously mentioned- backs up your hunch. She writes:

    …. the estimates which show the largest increases in hours are those which
    exclude those labor force participants who are either unemployed or involuntarily underemployed (i.e., working part-week or part-year, but preferring to work longer hours). We [Shcor and Laura Lete] differentiate between the “unconstrained labor force,” that is employed persons who are not involuntarily underemployed, and the “constrained labor force” [who are involuntarily unemployed]. The trends in hours between these two groups are quite marked, as the unconstrained group has seen quite substantial increases in their annual hours, and the latter the reverse. Indeed, while subsequent authors … have made similar points (sometimes to “refute” the idea of the average “overworked American”), we believe this finding was one of our most important. While the majority of Americans did experience an increase in hours of work over this time, a growing minority found themselves unable to find adequate amounts of work.