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May 2011, Week 4

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The Crisis Enters Year Five

by Richard Wolff
Submitted to Portside by the author

May 24, 2011

http://rdwolff.com/content/crisis-enters-year-five

The current capitalist global crisis began with the severe
contraction in the housing markets in mid-2007. Therefore
welcome to Year Five.  This inventory of where things stand
may begin with the good news: the major banks, the stock
market, and corporate profits have largely or completely
"recovered" from the lows they reached early in 2009. The US
dollar has fallen sharply against many currencies of
countries with which the US trades and that has enabled US
exports to rebound from their crisis lows.

However, the bad news is what prevails notwithstanding the
political and media hypes about "recovery." The most widely
cited unemployment rate remains at 9 % for workers without
jobs but looking. If instead we use the more indicative U-6
unemployment statistic of the US Labor Department's Bureau
of Labor Statistics, then the rate is 15%.  The latter rate
counts also those who want full-time but can only find part-
time work and those who want work but have given up looking.
One in six members of the US labor force brings home little
or no money, burdening family and friends, using up savings,
cutting back on spending, etc. At the same time, the housing
market remains deeply depressed as 1.5 to 2 million home
foreclosures are scheduled for 2011, separating more
millions from their homes. After a short upturn, housing
prices nationally have resumed their fall: one of those
feared "double dips" downward is thus already under way in
the economically vital housing market.

The combination of high unemployment and high home
foreclosures assures a deeply depressed economy. The mass of
US citizens cannot work more hours - the US already is
number 1 in the world in the average number of hours of paid
labor done per year per worker. The mass of US citizens
cannot borrow much more because of debt levels already
teetering on the edge of unsustainability for most
consumers. Real wages are going nowhere because of high
unemployment enabling employers everywhere to refuse
significant wage increases. Job-related benefits (pensions,
medical insurance, holidays, etc.) are being pared back.
There is thus no discernible basis for a substantial
recovery for the mass of Americans. The US economy, like so
many others, is caught in a serious stagnation situation
flowing partly from the economic crisis that began in 2007
and partly from the way in which most governments responded
to that crisis.

Thus US businesses and investors increasingly look elsewhere
to make money. Rapidly rising consumption is not foreseeable
in the US, but it is already happening where production is
booming: China, India, Brazil, Russia, parts of Europe
(especially Germany). Growth-oriented activity is leaving
the US economy, where it used to be so concentrated. The US
was already becoming less important as a production center
as profit-driven major US corporations shifted manufacturing
jobs to cheaper workers overseas, especially in China. In
recent decades, those corporations' export of jobs expanded
to include more and more white-collar and skilled work
outsourced to India and elsewhere. Now, US corporations are
also spending their money on office, advertising, legal,
lobbying, and other budgets increasingly where the expanding
markets are and not inside the US.

Republicans are now celebrating "American exceptionalism,"
the unique greatness of living conditions in the US. Yet
again their politics stress vanishing social conditions
whose disappearance frightens Americans who counted on them.
In reality, the US is fast becoming more and more like so
many countries where a rich, cosmopolitan elite occupies
major cities with a vast hinterland of people struggling to
make ends meet. The vaunted US "middle class" - so
celebrated after World War Two even as it slowly shrank - is
now fast evaporating as the economic crisis and the
government's "austerity" response both favor the top 10 % of
the population at the expense of everyone else.

The US budget for Fiscal Year 2011 is scheduled to spend $
3.5 trillion while taking in $2.0 in taxes. It is borrowing
the other $ 1.5 trillion - the deficit - and thereby adding
to the US national Debt (already over $ 14 trillion, roughly
the same as the annual output - GDP -of the US). Such
massive borrowing is what got Greece, Portugal, Spain,
Italy, and other countries into their current massive
crises. The "great debate" between Republicans and Democrats
over the first few months of 2011 haggled over $60 billion
in cuts versus $30 billion with the final compromise of $38
billion.  That $ 38 billion cannot and will not make any
significant difference to a 2011 deficit of $ 1,500 billion
(the equivalent of $ 1.5trillion). Obviously both
Republicans and Democrats are agreed to do nothing more that
quibble over insignificant margins of so huge a deficit.
Meanwhile they perform live political theater about their
"deep concern about deficits and debts" for a bemused,
bored, and ever-more alienated public.

Neither party can shake off its utter dependence now on
corporate and rich citizens' monies for all their financial
sustenance. Therefore neither party imagines, let alone
explores, alternatives to massive deficits and debts. After
all, government deficits and debts mean (a) the government
is not taxing corporations and the rich, and (b) the
government is instead borrowing from them and paying them
interest.  So the two parties quibble over how much to cut
which government jobs and public services.

Yet the tax burdens of US corporations and the richest
citizens (what they actually pay) are significantly lower
than in most other advanced industrial economies. Indeed,
they are far lower than they were inside the US a few years
ago. In the mid-1940s, the corporate income tax brought
Washington 50% more than the individual income tax. Today,
the corporate income tax brings the federal government 25%
of what is taken from individuals. In the 1950s and 1960s,
the top individual income tax rate in the United States (the
rate paid by the richest citizens on all their income over
about $100,000) was 91%. Today that rate is 35%, a
staggering cut in the taxes on the richest Americans, far
larger than the cuts in anyone else's tax rates. Half or
more of today's federal deficits would be gone if we simply
taxed the richest US citizens at the rates in effect in the
1050s and 1960s. If we also taxed corporations in relation
to individuals as we did in the 1940s, the entire deficit
would vanish.

In summary, shifting the burden of federal taxation from
corporations to individuals and from the richest individuals
to the rest of us contributed to massive deficits and debts.
Instead of correcting and reversing that unjust shift,
Republicans and Democrats plan instead to deal with deficits
and debts by cutting Medicaid and Medicare and threatening
Social Security.

A revealing historical incident can introduce our conclusion
about the capitalist crisis as it enters Year Five. In May,
2011, as gasoline prices rose to between $4 and $5 per
gallon, a US Senate Committee run by Democrats summoned the
heads of major oil companies to testify. The senators asked
why the federal government should continue to provide them
with special tax loopholes and direct subsidies of $4
billion per year when their companies were earning record
high profits. The Democrats had offered a meek plan to
merely cut those loopholes and subsidies from $4 to $2
billion per year. After the hearings, the US Senate voted
not to cut the loopholes and subsidies at al.

The largest corporations and richest citizens long ago
learned that if you want to sustain an extremely unequal
distribution of wealth and income, you need an equally
unequal distribution of political power. Those corporations
use their profits to pay huge salaries and bonuses to their
executives, to pay big dividends to their major
shareholders, and to "contribute" to politics. The
corporations, their top executives, and the major
shareholders whom they enrich all regularly finance the
political campaigns and politicians who perform that
sustaining function. An increasingly unequal capitalist
economy pays for the increasingly undemocratic politics it
needs.

Any serious effort to change the basic situation, functions
and direction of government policy must change the answer
our society now gives to this basic question: who gets and
disposes of the profits of producing goods and services in
the US economy? So long as the answer remains corporations'
boards of directors and major shareholders (the status quo),
current trends will continue until bigger economic collapses
bring the system to self-destruction.  Then we will have
graduated from a crisis with banks "too big to fail" to a
crisis that is itself "too big to overcome."

A changed system - perhaps called "economic democracy" - in
which the workers themselves collectively operate their
enterprises would immediately redirect enterprise profits in
different ways with very different social consequences. For
example, according the Bureau of Labor Statistics, during
2010, the pay for average workers rose 2% while the pay for
CEOs rose 23% (Time magazine, May 16, 2011). Workers who
collectively directed their own enterprises would distribute
pay increases very differently and far less unequally.
Likewise, to take another example, self-directing workers
would allocate their enterprises' profits to the government
(i.e. pay taxes) but demand in return the sorts of mass-
focused social programs that the current CEOs and Boards of
Directors want government to cut. Democratic enterprises
would have to work out collaborations and agreements with
democratically run residential units (cities, states, etc.)
where their decisions impact one another.

This short article is hardly the place to work out the
details of so changed an economic system. That is, after
all, the task of democratic economic and political
institutions to do together once the change has been
discussed, adopted and set in motion.

Throughout the Cold War decades and even after the USSR
dissolved in 1989, we remained, as a nation, afraid openly
to discuss and debate a basic economic issue. Does our
economic system, capitalism, serve our needs sufficiently;
does it need basic changes; or might a change to another
economic system be best? Instead of a debate over
alternative answers to such questions, we permitted little
beyond self-congratulatory cheerleading for capitalism.
Seriously questioning capitalism (let alone challenging it)
remained taboo, an activity to keep repressed. That
repression encouraged an unquestioned and unchecked US
capitalism to become ever more unequal, delivering more
"bads" than "goods" to ever larger majorities of people.
This unsustainable situation is being strained toward the
breaking point by the crisis that now enters Year Five.

[Richard D. Wolff is Professor of Economics Emeritus,
University of Massachusetts, Amherst where he taught
economics from 1973 to 2008. He is currently a Visiting
Professor in the Graduate Program in International Affairs
of the New School University, New York City. He also teaches
classes regularly at the Brecht Forum in Manhattan.

Earlier he taught economics at Yale University (1967-1969)
and at the City College of the City University of New York
(1969-1973). In 1994, he was a Visiting Professor of
Economics at the University of Paris (France), I
(Sorbonne).]

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