As Rome Burned, the Emperor Fiddled
by Rick Wolff
As global finance's house of cards implodes, Bush and Congress fiddle and Bernanke Fedles. When sub-prime mortgages defaulted, debt-backed securities tanked, and credit everywhere contracted. Business investment then shrank as did consumer spending. Recession now looms in the US if it is not already here. Worry deepens that it might get very bad and last a long time. A fearful private economy appeals to the state, the very institution it had denounced for useless economic meddling for decades. Leaders of private enterprise and their mouthpieces in the media and academia begin to reverse themselves. Suddenly they want the state -- that wasteful, corrupt, and inept intrusion on the efficiency of private enterprise and deregulated ("free") markets -- to intervene massively in the economy to fix the mess made by private enterprise.
What they wanted and got from Bush and Bernanke are very limited steps likely to fail. They cannot shake the neo-liberal notion -- even in today's economic crises -- that the best government -- even when needed urgently -- is the one that does the least possible.
So Bernanke's FED lowered interest rates for a shell-shocked business community and consumers who are already in debt over their capacities and looking to reduce their debts as they head into bad economic times. Lower interest rates will likely not stimulate borrowing and spending (the point of lowering interest rates) the way they did before in far different and better circumstances.
Meanwhile Bush and the Congress are collaborating on a fiscal "stimulus" plan whose major components are the rebate of past tax payments back to businesses and individuals. Once again, businesses will likely not rush to invest (spend) the returned taxes for the same reason they have been reducing their investments over recent months: namely, that the prospects for making profits are now somewhere between poor and non-existent. If businesses don't spend their returned taxes on more goods and services, more won't be produced, so more people won't be hired, and the current economic downturn will not be reversed.
Consumers reeling under unmanageable debts are also more likely than ever to use rebated taxes to reduce their debts. A recent Associated Press-Ipos poll asked what Americans planned to do with tax rebates: 45 per cent said they would repay debts; 32 per cent would save or invest it in securities, and only 19 per cent planned to spend it on goods and services. Those few consumers who do spend tax rebates on goods will, more than ever before, spend them on imported consumer goods. Thus what increased consumer pending occurs will disproportionately stimulate not the US but rather the Chinese economy as well as the economies of other sources of US consumer goods imports.
So the picture emerging has the US economy's private sector arranging for the government to make a minimalist, hesitant intervention. Partly this is driven by the wounded but still alive neo-liberal consensus against government interventions in the "free market." The hope is that such little steps will, somehow, magically be enough, so that the unwanted reliance on much more massive state intervention will not be required.
What might such heavier intervention look like? The state could do the spending itself -- say on housing, schools, day-care centers, health facilities, etc. That is, instead of returning taxes to businesses and people who might well not spend that money or spend it on importing other economies' outputs, the government could do the spending directly and on goods and services produced here. The state might also go into production itself, hiring workers and buying the tools, equipment, and raw materials needed for that production. This would generate income for workers and businesses as well as produce socially needed outputs of products now in short supply (housing for the homeless, good new schools, clinics, etc.). By doing this, the state would no longer leave business investment up to private enterprises' "free choice." The businesses' "freedom" to not invest yielded unacceptable social consequences (deepening recession). In effect, the state would tell private business: you made this mess, so now either you invest enough to correct it or else we the government will replace or supplement private with public investment.
All these steps -- and more -- have been taken before in American history on other occasions when free, private enterprise produced disastrous economic downturns. Roosevelt's New Deal was forced on him by Americans no longer willing to wait as his government's hesitant, too-little and too-late steps proved inadequate to reverse the Great Depression early in the 1930s. In 2008, the failures of Bush and Bernanke will focus the outrage of Americans on whoever arrives next, McCain, Clinton, or Obama.
Of course, this time history need not and likely will not repeat itself. Many Americans have understood what went wrong with the New Deal. All its achievements (social security, state regulation of private industry, public works and public employment, unemployment insurance, etc.) always stopped short of taking away from private corporations' boards of directors their control and use of profits. Those boards thus used the profits across recent decades first to evade and then to attack, weaken, and eventually overthrow most of what the New Deal accomplished.
So this time, massive state intervention may well expand to prevent corporate boards of directors from again using profits to undermine the government's regulations and interventions. Either the state itself may undertake that expansion, or the workers in each enterprise may demand control over profits that, after all, their labor generated. Imagine that: workers insisting that since their jobs, communities, and families depend on what corporations do with profits and since their labor produces those profits, they want half the seats on every enterprise's board of directors to go to democratically elected workers. That, they say, will make sure profits are used for the benefit of everyone dependent on the corporation: not just the managers, directors, and shareholders, but also the workers who are, after all, the majority. Imagine that.
Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006).