Thursday, 18 January 2018
THE “NEW NORMAL” IN CYCLICAL RECESSIONS
There is a ‘new normal’ in cyclical recessions, namely, that the recovery cycle is itself recessionary for the vast majority of the population, not just in periphery countries that invariably suffer much more during contracting economic cycles, but in core countries as well. One of the biggest myths about the contracting cycles is the underlying assumption that they have an evenhanded impact on all people across the board regardless of income level and across all geographic regions. If there is GDP contraction of 3% then every person’s personal income must be declining by a corresponding amount, therefore recessions are the great equalizers. This is simply a myth that apologists of capitalism perpetuate so they the working class and middle class have a sense of “shared sacrifice” rather than one that disproportionately impacts them while capital becomes even more concentrated among the wealth during recessionary cycles. When the economy begins to stabilize and the expansionary cycle takes hold, mainstream economists, politicians and journalists want people to believe that the expansion and rise in GDP is evenly distributed and all people benefit, when in fact all statistical evidence compiled by governments and independent researchers demonstrate that the benefits go to the capitalist class with ‘trickle-down’ effect minimally impacting the rest of the population, and even less so across the developing nations. (For more on this topic see Tom Clark and Anthony Heath, Hard Times: Inequality, Recession and Aftermath, 2014)
Cyclical recessions and economic depressions have always been an integral part of the market economy in the last five centuries. With each contracting cycle occurring on average every five to ten years within longer cycles of structural expansion of contraction, capital becomes more concentrated. Consequently, more people fall into poverty while upward social mobility becomes problematic as the population expands and the market economy operates under the law of surplus labor that keeps wages at the lowest possible level. It is important to stress that while recessions were more frequent between 1945 and 1980, they were also not as severe while the recovery cycle was sufficiently strong to absorb most of the surplus labor force from the ranks of the unemployed and to create opportunities for upward socioeconomic mobility especially for those with a college degree. After 1980 with the new era of neoliberal policies from Reagan to the present, recessions are farther apart, the period of cyclical recoveries is so weak that the vast majority of the population continues to experience recessionary pressures, often forced to have the spouse work to supplement the family income, and people with a college degree no longer have the opportunities for upward social mobility that their parents enjoyed.
Apologists of the market economy place all blame for the cyclical contractions on government policy – fiscal monetary, trade, regulatory measures, labor policy, etc. This assumes that government policy is intended to undermine rather than strengthen capitalism which government faithfully serves considering its pro-capital policies. A survey of scholars in the study of ‘crisis theory’ from David Ricardo, Karl Marx and John Stuart Mill in the 19th century, to Joseph Schumpeter, John Meynard Keynes and John Kenneth Galbraith in the 20th century points to structural dynamics in the economy as the underlying causes of cyclical contractions, rather than any specific government policy or policies whether on trade, money supply, all intended to promote capital accumulation. http://www.left-dis.nl/uk/ecomatt.pdf
From the tulip bubble of the 17th century when Holland was the world’s preeminent financial and economic center of capitalism, until the subprime bubble of 2008 in the US, recessionary cycles emanate from core countries of the integrated world economy. Hence, the impact is worse for the periphery economies than for the core where capital is heavily concentrated and where there is retrenchment from the periphery to support the base in the advanced capitalist countries. If the trigger for a cyclical downturn starts in the periphery, as in the case of the 1970s energy crisis amid geopolitical disputes in the Middle East, structural causes for the crisis rest within the core that wields inordinate geopolitical and economic influence in the demand rather than supply side of the equation in everything from pricing to speculation on investment in commodity markets of core countries. After all, traders – speculators – make money on the down cycle shorting the market as they do on the up-cycle staying ‘long’. The inevitability of expansion and contraction is built into the market driven by the goal of maximizing capital accumulation thus undermining the manipulated government-supported market by creating overproduction while seeking greater profits by keeping wages at levels as low as the market will withstand.
Since the 1987 market crash, the integration of the former Soviet bloc countries and China’s rapid evolution from a command economy into a market one poised to overtake the US as the world’s richest country are catalytic variables in the prevention of even deeper recessions than we have experienced. In fact, Australia has not had a recession comparable to other countries for about 26 years largely because of China stimulating demand for Australian exports. Although mainstream economists attribute Australia’s phenomenal absence of recession on neoliberal reforms of the 1980s rather than China’s trade relations with Australia, they are unable explain why all other countries on earth that have also undertaken even more reforms than Australia have failed to match Australia’s record.
The evolution of global integration in the last three decades with China rapidly moving into the core of world capitalism has a few years more of global stimulus partly because of “The Silk Road Economic Belt and the 21st-century Maritime Silk Road”, known as the One Belt and One Road Initiative (OBOR). However, despite pursuing a mix of quasi-statism within the neoliberal global status quo, the Chinese economy is as much subject to the dynamics of capitalism as any other globally-integrated national economy. The idea that China, Australia or any country for that matter will experience uninterrupted economic growth without any recessions or depressions is naïve and goes against the path of capitalism’s cyclical nature for five centuries. China has been bankrolling the US dollar buying bonds to keep the currency relatively stable; at least until China’s reserve currency has become sufficiently strong in the world economy and the dollar along with the US market sufficiently less significant in its overall contribution to global GDP.
In an article about the next imminent recession, The Atlantic, hardly a leftwing critic of the market economy, warned about the vulnerabilities of the US economy and society where the elites have accepted massive capital accumulation and chronic downward social mobility as the new normal. “Roughly half of respondents to a Federal Reserve survey conducted in 2015 said that they could not come up with $400 in an emergency, with a third saying they could not cover three months of expenses, even if they sold assets, dipped into retirement accounts, and asked friends and family for help. Outsize wealth and income continue to accumulate at the very top of the scale, and the finances of millions of American families remain fragile. Americans are no worse off than they were when the last recession hit, in other words, but a decade of growth has not made them more secure, either. American businesses, on the other hand, have rarely had it so good. Rising demand from overseas and a weaker dollar have boosted corporate earnings across the board, so much so that four in five companies beat analysts’ earnings expectations in the second quarter—the highest share in more than a decade, Bloomberg reports. The stock market is at or near record highs, and America’s firms are sitting on trillions of dollars of cash that would help tide them over in the event of any downturn and concomitant fall in sales and profits. That said, there is no sign that businesses would use that cash to preserve jobs and help average workers. Indeed, companies would likely do what they did last time around, using a downturn as an opportunity to fire workers, pour resources into technologies that reduce the need for workers, and “upskill” their labor forces, meaning the less-educated workers who have recovered least from the last recession would again be hardest hit. The economy has had three jobless recoveries following the last three recessions, and the next recession would likely prompt a fourth.”
Politicians, mainstream media, think tanks, and academics serving the market economy want people to ‘feel good’ about the rise in GDP and the phenomenal rise of the markets, regardless of the average person’s deteriorating living standards. Moreover, the apologists of the market economy want the average person to be unconcerned about government raising the level of public debt to redistribute income now for the richest 10% of the population, debt that will be paid by the average taxpayer in the future thus further undercutting living standards. According to former Republican congressman Ron Paul, financial collapse is imminent because the US Federal Reserve Bank printed trillions of dollars to lift the economy out of the great recession of 2008. Adamantly opposed to any stimulus to manage the economy, libertarian Ron Paul agrees with others who caution that central bank tightening throughout the world is inevitable because assets - everything from real estate to securities and commodities - is overvalued above the pre-2008 levels.
At some point, bonds will sell off as China, Japan and Saudi Arabia will look to diversify away from their dollar holdings to protect their own assets. If we throw into the mix the rapid pace of computerization of the economy, which will mean higher unemployment rates and lower wages with people working several part time jobs, then the consumer stimulus weakens thus slowing down the economy. The combined impact of all factors mentioned above, become more complicated when added to the extraordinary rise of global markets in 2017 reflecting continued capital concentration and posing greater risk for a deep recession ahead because of grossly uneven income distribution. Markets rose ten times higher than global GDP in 2017, a level of capital concentration as reflected in securities markets invariably witnessed right before recessionary cycles begin and which spells a prescription for an inevitable recession simply because all asset valuations at these levels are unsustainable and mass consumer demand is undercut by rapidly rising personal debt.
Accurate prediction regarding the timing of recessions is hardly more than a guessing game. Although historical averages of the frequency of recessions help – on average every five years for the US if we consider the Past 150 years - the only sure prediction is that a recession will take place and it will do so given all the variables in the core countries where massive capital concentration hastens the process, as many mainstream economists and journalists agree while looking to a Keynesian policy mix as a solution to preserve not only capitalism but the pluralistic society resting on 18th century bourgeois values. Considering that the US will not deviate from a long-standing policy of foreign interventionism, destabilization and military solutions as leverage to gain strategic, political and economic benefits around the globe, combined with the possible prospect for economic nationalism manifesting itself in less cooperation on regional or global trade issues, disequilibrium can be hastened if certain multinational corporations press their government for hardline trade policy as a means of securing market share – e.g. the US steel or timber industry, or the EU foodstuffs industry, Chinese financial sector, etc.
While a recession is more than likely once again to begin in the US as was the case in 2008, the trigger could be the creation of a more exclusive trading regional bloc in Asia that affords preferential treatment to member nations – something similar to the Sterling Area of the 1930s amid the Great Depression. Although this is unlikely because the world economy is much more highly integrated today than in the 1930s, global competition for market share has not changed, but has in fact become more intense under the neoliberal status quo. Despite the US under Trump withdrawing from the Trans-Pacific Partnership (TPP) that Obama had negotiated as a free trade agreement with Japan’s insistence to curb China’s economic expansion, China is more likely to remain committed to global integration and continue with import-substitution growth policies that benefit raw material exporting countries. Therefore, an Asia-based recession resulting from Chinese Communist Party policies is much more unlikely than a US-based one resulting from a mix of economic nationalism within the neoliberal regime to capture greater market share.
As was the case with the Great Depression of the 1930s and the Great Recession of 2008, the very forceful state intervention to stimulate the economy and sustain capitalism combined with the efforts by bilateral, regional, and international organizations will entail a recovery with unprecedented capital concentration and further downward trend in living standards for the working class and middle class not just in core countries but especially in the developing nations. Although capital concentration is at the root of cyclical downturns, neoliberal policies with variations of a mi, which includes aspects of Keynesianism are in place globally will hasten the frequency of recessions. The glaring contradiction following the next recessionary cycle will be as it has been a thriving stock market will ensue where the vast majority of the population is not invested and which does not reflect the “real economy” as compared with continued downward living standards that will serve as the foundation for the next recession. Nevertheless, the media, politicians, and academics faithful to neoliberalism will insist that a rise in GDP and in the stock market ought to be sufficient for people to feel good about their future.
The unprecedented rise of personal debt driving the consumer economy will continue while real wages will remain stagnant even in the expansionary cycle after the next recession. Even former IMF chief economist Raghuram Rajan among other apologists of capitalism acknowledge the unsustainability of a debt-ridden consumer in an economy where ‘financialization’ (speculation) transcends the empirical productivity standard. More rather than less neoliberalism, as was the case following the great recession of 2008, will lead to more corporate fraud, higher prices for everything from energy to health care, and a possible return to trade wars between the declining American empire using its military muscle and sanctions as leverage; all of which could entail unraveling of the well-integrated world economy. As safety nets and to avoid austerity measures, some governments could introduce versions of ‘crypto-currencies’ while others will ban them, thus undermining the IMF-recognized basket of hard currencies on which global trade is based and further muddling the formal economy with the growing underground economy of shadow banking, tax havens, and everything from money laundering to drug trafficking flowing back and forth from the formal economy to the crypto-economy.
Despite the US and some of its allies desperately trying to argue that if a crisis comes it would be the fault of North Korea, Iran, perhaps Venezuela in the Western Hemisphere, and despite the very remote possibility of an accidental missile strike by any of the ‘nuclear club’ countries, all empirical evidence points to the US as the superpower seeking conflict and destabilization as leverage for geopolitical and economic influence. Considering that only a core country or countries could hasten international financial chaos and among core nations the US is the most likely candidate partly because it is more immersed in ‘financialization’ and ‘military Kyenesianism’ than any country on earth, it appears that it defies logic such a course would be a deliberate option because the assumption is market instability favors capital accumulation. As Jan Kregel, Augusto Graziani and Guido M. Rey argued in “Instability, Volatility and the Process of Capital Accumulation”, the neoliberal regime has done away with Keynesian assumptions about stability, opting for the “failure of the perfectly competitive market to allocate information efficiently.” (https://link.springer.com/chapter/10.1007/978-1-349-26981-5_8)
Because the state will bail out financial institutions, but also because of the corporate welfare system transferring income from the middle and lower classes to corporations, neoliberal capitalism has a free hand to pursue what many describe as casino capitalism manifesting itself in “irrational exuberance” that defies Keynesian logic or any assumptions about the rationalizing capitalist democracy. This raises the question of whether governments are prepared for the eventuality of the next recessionary cycle whatever its causes, or whether government policies driven by corporate lobbyists are oblivious to the welfare of society. Market economy apologists argue that it is mostly the job of central banks to adjust interest rates and the money supply as a means of maintaining financial equilibrium, while governments need to keep privatizing, deregulating, and cutting social welfare programs that are a burden on the budget as the only means to secure a strong stock market equated with a strong economy an society.
A fundamental cause of the Great Recession of 2008, ‘financialization’ is back in full force more than before the market crashed and sent the world economy into the worst contracting cycle since the 1930s. Whether in pharmaceuticals, minerals, or commodities, price fluctuations are directly linked to financialization rather than supply and demand. More than any other factor, market speculation plays a determining role in price volatility and carries the burden of market instability to the degree that it can have a ripples effect across the economy and hasten a recessionary cycle. Under neoliberal policies, the trend is even more deregulation to allow financialization greater freedom to determine the course of the world economy.
(Catherine Karyotis and Sharam Alijani, “Soft commodities and the global financial crisis: Implications for the economy, resources and institutions”
Along with the laws of supply and demand, government regulatory measures, the saturated market and surplus value appropriated from labor value by capitalists, the financialization of the economy rooted in stock market speculation plays a key role in precipitating recessionary cycles. It is rather ironic that the very apologists of capitalism crying out for removing all obstacles to growth including curbing labor rights and environmental regulation readily rationalize the low-growth cycle following a recession as “secular stagnation”. Even more interesting, neoliberal apologists in either the pluralist-diversity camp of the center, or the more conservative populist rightwing have no problem accepting ‘secular stagnation’ as ‘normal’ precisely because capitalist accumulation emanating from speculative investment and continued low taxes regime, corporate welfare, and low-interest-rate policies is the only thing that matters rather than real economic growth. In short, even the cyclical recoveries, at least in the Western core countries, are not sufficiently robust to account for a reversal of the previous recession’s impact on the middle and working class and the productivity foundation of the economy continues to weaken owing to financialization. https://newleftreview.org/II/87/wolfgang-streeck-how-will-capitalism-end
The rate of productivity in the developed economies dropped from 3.2% during the Johnson-Nixon presidencies to 0.8% during the Bush-Obama neoliberal era, while in the corresponding period productivity doubled in developing economies. While growth rates are expected to remain in the 2% ranged for the advanced capitalist countries, China and India are also expected to lead the world economy in the next decades. Low rates of productivity in Western countries will entail low living standards and continued downward social mobility. From 1972 until 2013, the bottom 90% experienced a negative 0.03% in their real income, while the top 10% gained almost 1.5%. This income disparity will intensify in the next decade after the Republican government passed a massive tax cut that will increase the public debt. The burden will fall inordinately on the bottom 90% who will pay higher direct and indirect taxes, suffer cuts in social programs, health and education and endure higher living standard costs amid stagnant wages. The rising rich-poor gap will translate into a rising political disillusionment with the system that fails to create opportunities. https://www.blackstone.com/media/press-releases/article/population-and-productivityhttps://qz.com/633080/the-rise-and-fall-of-american-productivity-growth/
The inevitability of cyclical recessions resulting in continued downward social mobility has already resulted in a politically polarizing society. A minority of the population has accepted the leadership of rightwing populist elements in the US and across much of the world as saviors. Most of those in the progressive camp have been co-opted by the neoliberal pluralist-diversity political wing only to discover that their policies effecting living standards are not very different from those in the rightwing also representing the same neoliberal system.
Contrary to mass distraction in the US about foreign enemies, including North Korea, Iran, and Russia, and contrary to European rightwing populist views that the non-white immigrant is the enemy of progress - still the ‘white man’s burden’ - the recessionary cycles of this century will precipitate internal crises that have nothing to do with foreign enemies and immigrants but with the decadence of the social order especially under neoliberal globalism. Although recessionary cycles do not necessarily lead to social discontinuity, the cumulative effect of such cycles under neoliberal policies that continue to result in socioeconomic polarization are leading society in core and periphery countries toward the path of systemic change, largely because the ‘new normal’ entails greater economic polarization. While systemic change is not imminent as recessionary cycles that will take place this century, the neoliberal phase of capitalism is hastening social discontinuity.