A crisis is the method by which a capitalist economy partially purges itself of the effects of past mistakes while imposing misery on the masses.
Economists often characterize the outcomes as by the shape of letters of the alphabet. A “V” indicates a quick collapse and an equally quick recovery. “L” suggests a collapse followed by a very weak recovery. And a “W” indicates a double-dip in which the quick recovery is followed by another collapse. Ironically, our previous president was known as “W” will and our present president could be known as zero, which approximates the first letter of his last name.
A V-shaped recovery suggests that the economy was fundamentally strong, allowing the economy to quickly pick up steam. A W-shaped outcome is a telltale sign of an economy that was leaked to begin with, propped up by external support, which was withdrawn prematurely. For example, Roosevelt succumbed to outside pressure in 1937, leading to an expected setback. Under far less pressure, Obama followed suit.
Both the crisis and the recovery can only be understood in terms of the long-term processes that caused the initial collapse. In “The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression” I tried to tell the story of the gradual weakening of the US economy. The book explained how the unusual postwar prosperity was created by a sequence of the Great Depression and then the war. The postwar period up to the late 1960s is often described as The Golden Age because the economy performed better than ever before.
The business class believed that this exceptional performance was the norm. As the economy began to falter in the late 1960s, capitalists set out to restore their sagging profits. During the Golden Age, prosperity also meant that competitive pressures were not strong. In the absence of competitive pressures, business had little need to improve productivity. Management could coast along assuming that high profits were due to their outstanding managerial skills.
Unprepared and unwilling to adapt to the new economic conditions, capitalists set out to remake the economic structure in a way that would allow profits to recover. However, they did so by subtracting from the rest of society, rather than by contributing anything productive. Anything that stood in the way of profit maximization, whether unions, regulation, or taxes, had to be swept away. Business was surprisingly successful in this endeavor, but it did nothing to make the economy stronger. In fact, this strategy undermined economic strength.
Obscene inequality of wealth and income meant that business would be unlikely to prosper by selling goods to the masses. The rise of international competition made that strategy less likely. Instead, business turned to finance, at the same time as the regulatory forces that might have imposed a modicum of rationality were no longer operative.
I use the term Confiscation of American Prosperity to indicate that in this period from the late 1960s until 2007, when the book was published, to indicate that growing profits were not a sign of strength, but an indication of how much capitalism was subtracting, or as Marx would say, vampire-like parasitically sucking away the strength of the economy.
I will not speculate whether the money thrown at the banks was a continuation of the process of confiscation or whether the people in charge actually believed that this misconceived strategy would be sufficient to create a quick recovery. In any case, it did little to the bleeding – except for the large mass of the public, which had been being bled her for more than three decades, since the end of the Golden Age.
On top of the withdrawal of the federal life support for the economy, the confiscatory strategy has been escalated. The attack on unions, regulation, and taxes is now on steroids. If the previous attack was crucial in creating the present crisis, this all-out attack seems certain to make things considerably worse. A double-dip may be just an ice cream cone and any expectation of a W-like outcome may be overly optimistic.
This article originally appeared on Michael’s blog, Unsettling Economics on the 3rd of June. Republished here with the kind permission of the author.
Note: In comments on Michael’s post someone said:
Postwar recovery obviously occurred, but presumably that by itself could not propel 25 years of relative prosperity. Europe had plenty of industrialization to complete even after it got back to prewar economic levels.
To which Michael responded
Actually, the Depression was more important. The postwar period was not exactly a recovery. It merely tapped into the savings from the wartime and the efficiency created by the pressures of the Depression.