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Where we are in this economic crisis is a result of what happened before… June 7, 2011

Posted by WorldbyStorm in Economy, The Left.

It’s the day after a bank holiday weekend so I won’t dwell on what has turned into a quiet enough weekend in terms of Irish politics, but I mentioned the Little Atoms podcast recently, and here’s another one for people to consider, an interview with John Lanchester who has written a very interesting book, Whoops! Why everyone owes everyone and no one can pay.

It takes a profoundly skeptical view of the events of the past three years. It’s an useful overview of the crisis, how it developed and how it has played out. Lanchester is particularly critical of New Labour, for – as he terms it ‘digging the hole’ into which the UK economy slid. But he’s also very very persuasive on how the Conservative/Liberal Democrat coalition has used the crisis in order to refashion the nature of the state quite at odds with their rhetoric of not doing so.

But another point he raises – for which he admits he has no empirical evidence – is a sense that the end of the Cold War was central to a slowing of progressive initiatives in the West. While this isn’t entirely novel, he points to the remarkable fact that median incomes in the US remain precisely where they were in 1974 [when other factors are accounted] and also to the unbridled aspect of capitalism – or neo-liberalism as a face of capitalism – subsequently. He attributes the swing away from welfare states and the concept of social nets to the removal of a competitive social system rooted – at least in some sense – in the left and a range of concepts intrinsic to this, however fallible this system turned out to be in practice. It’s also important to point out that that is not an apologia for those systems, but rather a reason for a strongly critical examination of the processes at work in the West during this time period and after. Because if so much of what was achieved was simply the function of a grudging partial and time limited response from advanced capitalism it points to a very grim future as it is removed.

If the gains of the post-1945 era were a function to a greater or lesser extent of that competition then it might be interesting too to consider how this functioned in relation to the left itself in the west, and not simply for those who were cheerleaders of soviet style socialism but all other formations into the social democratic left. Again that’s not particularly novel, but it’s very very apparent when one looks at how social democracy itself has shifted rightwards at some speed that in part that seems to have been a function of an inability to envisage the possibility that it could go leftwards.

The instrumentality of the state and state intervention has been not exactly removed, but diminished radically in the intervening years. And there seems to me to be a real sense that options are simply unexplored or dismissed now when it comes to a range of socio-economic issues.

Now, for a somewhat different analysis Larry Elliott in the Guardian last week suggested the following:

The position, seen from this perspective, is as follows. For the first half of the postwar period, the strength of trade unions ensured that income gains were shared across all sections of the population and income inequality declined. Since the 1970s, real wages for those in the middle and at the bottom of the income distribution have been squeezed hard. Income inequality has increased as trade unions have declined in influence. Equity withdrawal from rising property prices and much higher levels of debt filled the gap left by the stagnation of real wages until the summer of 2007, but the pressures on the so-called “squeezed middle” are now intense. These pressures will not be eased without pro-growth macro-economic policies, activist industrial strategies, stronger unions, higher real incomes across the board, and tougher action against inequality. A return to the Anglo-Saxon model will lead to stagnation, higher unemployment and even bigger public-sector deficits.

Obviously strong trade unions ensure at least a potential point of resistance to income inequality as well as to lower level and continual, but no less real, events which impact on the working class. But shifting slightly back to Lanchester’s thoughts it’s interesting to reflect on how they were tolerated to a much greater degree in the 1945 to 1970 period – a full quarter of a century – than subsequently. And anyone who has studied their history during that period will see some interesting material as regards their relationship to governments in the west.

Anyhow, Elliott’s thoughts are offered in the course of a broader analysis as to how the socio-economic orthodoxy, blown well off course by the financial crisis, has now reasserted itself.

There was always going to be a backlash against more interventionist policies because those who fervently believe that markets never lie, that budgets should always balance and that government is always bad were well dug in on university campuses, in finance ministries and in some central banks.
Even so, the world has returned to the pre-crisis mindset with remarkable speed. In 2008, policymakers prescribed a strong dose of John Maynard Keynes to stave off a full-scale slump. Today, the solution for Greece, burdened with debts it has not a hope of paying, is belt-tightening and privatisation. The way to bring down global unemployment, which stands at more than 200 million, is wage flexibility. The blueprint for reform of the financial sector is to do as little as possible lest it deter the money-changers from returning to the temple.

Though Elliott points to one unexpected area of resistance to the orthodoxy:

Barack Obama persists in his heretical view that the United States should restore its economy to health before cutting the deficit. The Federal Reserve and the Bank of England are holding out against the clamour for higher interest rates to tackle inflation. But prospects for a fundamental shift in economic policy, which looked promising two years ago, have dimmed.

Of course Obama isn’t a leftist, at least not one that is readily identifiable as such in European or global terms. A liberal centrist would appear much closer to the truth (though it’s interesting to reflect on how and why his administration has resisted the orthodoxy). But even the mild brand of oppositional thinking he exemplifies at its most activist has been blunted in 24 months and more. That said part of the slowing of the Obama approach is due to the rise of a strongly antagonistic political dynamic in the form of newish political formations within the US. And that this is a populist – or semi-populist – expression of political activism demonstrates how successfully the tropes of the orthodoxy have proliferated amongst populations and been reiterated – albeit with a subtle shift away from overt support of the financial sector.

And in that regard Elliott’s rationale as to why the orthodoxy was so rapidly able to reassert itself has a ring of truth:

Why did this happen? It is a complex story, but the explanation perhaps lies in the fact that it took the born-again Keynesians of 2008-09 an awful long time to admit the error of their ways. Having bought fully into the free-market consensus, they received precious little credit for abandoning the old dogma when the collapse of Lehman Brothers threatened a return to the 1930s.

And again, this links directly into the problematics of social democracy, a social democracy that effectively – though with little rhetoric – gave up on itself in the period between 1970 and 2010.

Though Elliott points to another factor too, and this I think has real import:

In one sense, the arguments of the orthodox school are right on the money. The crisis of 2007-08 was caused by an excess of debt, so why, they argue, should the solution to that crisis be still more debt? Voters seem to buy the idea that there is no easy way out of this predicament, and in over-leveraged countries like the US and the UK they are right about that. But it was interesting last week to find the Organisation for Economic Co-operation and Development – hitherto a bastion of fiscal rectitude and George Osborne’s number-one supporter – starting to get cold feet about the pace of budget cuts in the UK. The OECD has cut its forecasts for UK growth this year and next; if the thinktank is right, Britain will have its weakest recovery from recession since the 1920s.

Simply put the idea that to rise out of debt demands debt is so counterintuitive that many understandably resile from it. But the irony is that simplistic models of economic structuring are scattered across the landscape of the past decade and long before and are in no small way responsible for many of the excesses that took place, from an incredible – at this remove – belief in deregulation of financial markets, to a basic misunderstanding [and worse] of the dynamics of booms and bubbles and a dangerous and ultimately disastrous elision of the latter with concepts of economic growth.

And this has real-world implications:

But Keynes’s [essay] is a clear warning to finance ministers who believe they can slash their way to prosperity.A more contemporary critique of the current policy configuration emerged last week from one of Keynes’s modern disciples, Joe Stiglitz. In the foreword to a book produced by the European Trade Union Institute (Exiting from the crisis: towards a model of more equitable and sustainable growth), Stiglitz argues that fiscal consolidations almost always lead to cutbacks in services to working men and women, while austerity leads to even higher unemployment, putting further pressure on wages and, therefore, overall demand in the economy.

That’s how this works. That’s how this almost always works. In a way it is irrelevant whether it was a fracturing of trade unions, or the social democratic compact, or indeed the end of the Cold War which singly [unlikely] or in combination [more likely] led to the current situation. In Ireland we merely see a more pointed transfer from citizenry to supporting capital. That’s bad enough, but hardly less dispiriting is how weak even residual social democratic instincts are in the face of this. But weak they are.


1. sonofstan - June 7, 2011

The instrumentality of the state and state intervention has been not exactly removed, but diminished radically in the intervening years.

I know what you mean, but you might argue that in actual fact, despite the nostrums of the global market doing away with borders and so on, the instrumentality of the state has, if anything increased in the past 20 years, it’s just not directed anymore at sustaining its own citizens directly, but rather at attracting investment, facilitating business and finance etc. For illustration, look no further than our corporate tax policy, where the whole tax gathering mechanism of the state is distorted towards winning a fragile competitive advantage.

The utopian hippy-capitalist one iWorld vision, of national borders swept away and democracy and human rights advancing under the flag of competition is obviously a lie, because capital demand disequilibrium and assymetry as basic conditions – you need to be able to make cheaply in one place and sell dear somewhere else. And the job of preserving those assymetries falls to governments.


sonofstan - June 7, 2011

‘asymmetry’ two ‘m’s one ‘s’


2. EWI - June 7, 2011

“Barack Obama persists in his heretical view that the United States should restore its economy to health before cutting the deficit.”

This just isn’t true. Obama has been to the forefront in pre-emptive debt-reduction initiatives, and the Republicans have (predictably) thrown this Seriousness back in his face. Their latest demand has been that emergency disaster relief for that town destroyed by tornado (Joplin) be offset by cuts in the federal budget.


WorldbyStorm - June 7, 2011

That’s true, but that’s seems to be a response to the political environment post the elections in 2010 where he lost control of Congress and saw his majority in the Senate whittled away to almost nothing. In terms of shaping budgets his room for movement has been constrained, hence the throwing of bones to the Republicans. But even if he decided not to there’s very mixed polling data on how a direct head to head between Congressional Republicans and the administration would go in terms of public perception and in any event the options consequent to that seem to be few if any. I think though it is fair to say that prior to 2010 his was one of the most avowedly first growth, second deficit lines globally.


EWI - June 7, 2011

His strategy has been to Be Serious, and to offer compromise in good faith. The reaction of the GOP has been to use this against him *from the left* – as seen in their claims that the Dems are threatening Medicare. They are simultaneously attacking him from the right, as the Dems stupidly validated the ‘deficit’ codology.

The stupidity of this approach leaves me nearly speechless.


WorldbyStorm - June 8, 2011

I don’t disagree at all that the ‘Serious’ tactic has backfired [not least because it feeds into a discourse of detached passivity], but I think that there are genuine constraints within which he has to operate.


3. CL - June 10, 2011

Obama’s mistake was that his fiscal stimulus-the addition to aggregate demand through the budget deficit,-was insufficient to compensate for the fall of private demand. This is a point made constantly by Keynesians such as Krugman but also by Martin Feldstein, who was chairman of the Reagan’s Council of Economic Advisers.
Obama’s dilemma now is that since the Republicans control Congress there is no hope of any additional stimulus. The most likely outcome of the talks on the debt ceiling is deficit reduction and more unemployment.
Obama’s re-election prospects are looking shaky, especially if the Republicans select a candidate who is reasonably sane and not a product of Tea Party right-wing populism.


4. John Lanchester on Marx « The Cedar Lounge Revolution - April 10, 2012

[…] of Books some extremely interesting stuff on the economic crisis (we’ve discussed him here, here, and here). I’ve just come across a podcast and article by him from the LRB. The podcast is […]


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