Published online 27 March 2009.
Mostly this is an explanation of a theory behind the current economic crisis. Robert Brenner, who teaches economic history at UCLA, suggests that the fundamental root of the crisis is the stagnant nature of the neoliberal economy, which attempts to evade its problems with overcapacity by intensifying borrowing.
In plain English: once the loans dry up, the neoliberal economy tends to sink. Turn the page to discover why.
(crossposted at Docudharma)
The investigation behind this diary begun when I was reading an article in yesterday’s Counterpunch, titled “Why the Geithner Plan Will Fail.” It’s by Patrick Madden, a graduate student at UC Santa Cruz. Sure, this is a piece by a graduate student; some of our best researchers are graduate students, though, so this was one thing that interested me about it. At any rate, one meaningful thing about this piece is that it summarizes the anti-Geithner plan argument concisely. Madden breaks down the arguments against Geithner’s plan into three planks:
Geithner’s wager is based on three erroneous assumptions. First, that hidden in that titanic morass of debt backed securities is value. Second, that the fundamentals of the US economy are essentially sound. And third, that the foreign governments that buy up our debt will continue to do so regardless of the fiscal and monetary profligacy of the Obama administration and the huge global imbalances that have been growing for half a generation. There are significant problems with each of these assumptions…
Readers of my diaries will know that I don’t think much of the arguments in favor of the Geithner plan. Like Jerome, I think the “partnership” will miss the mark. But, just because arguments in favor don’t work out, doesn’t mean that arguments against will be sufficient. So let’s take a look at Madden’s summary, and see if any of his Big Three of arguments is a winner.
Argument number one, in a nutshell, is that the US government is buying “toxic assets” under the assumption that they in fact have some value, but that they really don’t, and so the cost of a real bailout of Wall Street is going to be too high.
The problem with this argument is that the US government has already printed $11 trillion and spread it out there, so there’s no reason to believe it won’t just continue to print out enough to buy all of those “toxic assets.”
Will all this money-printing cause a catastrophic decline in the value of the dollar? Perhaps. But, generally, not even the foreign banks want this, because they will in all likelihood be stuck with the surplus of dollars in case of the dollar’s possible collapse. The dollars have to go somewhere. If the world’s banks can manage to take those dollars out of circulation some time after they’re used to bail out the banks, then, perhaps the damage to the world economy can be minimized.
Let’s skip to argument number three, because I think it is related to argument number one. This one suggests, more to the point, that the national debt is too high, and that at some point the foreign banks will attempt stop securing further US indebtedness. Oh, sure, the US dollar hangs like a millstone around their necks and they want to get rid of their dollars, but one has to wonder: at what point would they actually risk jettisoning the US economy (and putting at risk the rest of the world economy, thus unified under “globalization”) just to get rid of their dollars? Talking about it without doing it seems like more of an attempt at leverage than an actual threat.
Madden’s argument number two, however, is IMHO a winner, and to understand where it’s coming from, one has to hunt down the Robert Brenner interview Madden quotes without referencing. Brenner teaches economic history at UCLA, and his book The Economics of Global Turbulence is something I’ve quoted more than once in these diaries.
Brenner says, most pointedly:
The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000. Economic performance in the U.S., Western Europe, and Japan has steadily deteriorated, business cycle by business cycle, in terms of every standard macroeconomic indicator — GDP, investment, real wages, and so forth. Most telling, the business cycle that just ended, from 2001 through 2007, was — by far — the weakest of the postwar period, and this despite the greatest government-sponsored economic stimulus in U.S. peacetime history.
This, then, is the problem: even as the capitalist system strengthens its political foundations, triumphing over “Communism” and securing its regimes through US military dominance, the global economic system protected therein (i.e. global capitalism) has been grinding slowly to a halt.
For Brenner, moreover, this phenomenon is caused by a persistent tendency to “overcapacity.” Brenner explains how he sees this pushing down the rate of profit:
The main cause, though not the only cause, of the decline in the rate of profit has been a persistent tendency to overcapacity in global manufacturing industries. What happened was that, one-after-another, new manufacturing power entered the world market — Germany and Japan, the Northeast Asian NICs (Newly Industrializing Countries), the Southeast Asian Tigers, and, finally, the Chinese Leviathan. These later-developing economies produced the same goods that were already being produced by the earlier developers, only cheaper. The result was too much supply compared to demand in one industry after another, and this forced down prices and, in that way, profits.
So the idea of “overcapacity,” then, is one of “too much supply compared to demand.” But these terms, “supply” and “demand,” need to be decoded here. “Demand” doesn’t mean human demand. Just because some homeless guy wants a Mercedes-Benz doesn’t mean he’s going to get it. “Demand,” here, means effective demand, which is demand backed by money. Effective demand is a variable — it can be calculated by multiplying the number of paying customers by the price of each item. Effective demand is the “demand” aspect of what a business calls “receipts” or “income.”
So the idea of “overcapacity,” more intimately, comes from the way sales, and salespeople, try to separate consumers from their money. “Overcapacity” means too many products chasing not enough money — thus, not enough profit for those who make the products.
Why isn’t there enough money for all of those products the businesses are manufacturing and putting out there on the global market? Now, don’t all raise your hands at once. You, in the corner, with your hand raised to the ceiling. Did you say that there isn’t enough money to buy those products because we’re underpaid? 😉 And you, in the other corner. Did you say that stuff is too expensive these days?
OK, back to Brenner’s explanation. Why wasn’t the economy uniformly bad throughout the period in question, from the 1970s to the present day? There was, for instance, the economic upturn of the Clinton era, at the end of the 20th century. Brenner explains:
Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private.
So everyone got to borrow a lot of money. How did this create “prosperity” during the Clinton era?
By keeping interest rates low, the Federal Reserve made it easy to borrow so as to encourage investment in financial assets. As asset prices soared, corporations and households experienced huge increases in their wealth, at least on paper. They were therefore able to borrow on a titanic scale, vastly increase their investment and consumption, and in that way, drive the economy.
Thus there was growth during the last part of the Clinton era. But this sort of growth wasn’t sustainable, because it was based on a lot of debt.
Brenner is, moreover, skeptical that some new round of spending will save us. First off, he imagines that what most people will be doing with more government money will be paying off their debts, and not buying a bunch of products. Thus more money, up to a point, will not increase demand, or deal with “overcapacity.” Second, he thinks that Obama’s hand will have to be forced by a public revolt if decisive action is to be taken:
The bottom line is that, like Roosevelt, Obama can be expected to take decisive action in defense of working people only if he is pushed by way of organized direct action from below.
So this is one key to understanding the impact of the Geithner plan: it may deal with some ad hoc need by banks, but it does nothing to deal with the overall malaise of the neoliberal economy, its main hindrance to the continued making of profits: “overcapacity.” Too many products chasing too little money. Yeah, print and spend a few trillions; save the banks so they can loan us some money so we can blow it on stuff — except, of course, that me, personally, I’m living off my credit cards, and am likely to blow my next loan on food (more beans would be nice), clothing (new shoes maybe), and shelter (maybe paying off rent for a month or two).
Well, OK, I just had to get that off my chest, esp. as regards “overcapacity.” In reality, I cast a jaundiced eye at the whole eceonomic regime that fears “overcapacity.” Even if we were to have a regime which could endlessly satisfy our demand for consumer junk, the world would be full of consumer junk. Would we be any happier for it? I rather doubt it.