In This article, Krugman hypothesises what the Marxists have explained many times since the onset of the current crisis: that this is no ordinary period of recession, but that depression has become the new normality for the world economy. What we are witnessing is not a temporary phenomena, but an organic crisis of the capitalist system.
Krugman, who famously stated in 2009 that mainstream economic theory over the past 30 years was “spectacularly useless at best, and positively harmful at worst”, is one of a number of bourgeois economists and commentators who are beginning to think that there may in fact be no return to the “good old days” of boom and growth, but rather that the world now faces decades of stagnation. Writing for the New York Times (17th November 2013), Krugman asks:
“But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?”
And what – or who – was the inspiration for this questioning by Krugman? None other than Larry Summers - the former Secretary of the US Treasury, a key economic advisor to President Obama between 2009-10, and a recent candidate for the Chairman of the US Federal Reserve – who recently warned attendees of an IMF-organised conference of the dangerous possibility of “secular [i.e. permanent] stagnation” in the US and European economies. As Krugman comments:
“You might imagine that speculations along these lines are the province of a radical fringe. And they are indeed radical; but fringe, not so much. A number of economists have been flirting with such thoughts for a while. And now they’ve moved into the mainstream. In fact, the case for “secular stagnation” — a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between — was made forcefully recently at the most ultrarespectable of venues, the I.M.F.’s big annual research conference. And the person making that case was none other than Larry Summers. Yes, that Larry Summers.
“And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time.”
The Great Stagnation
Krugman goes on to note several key points made by Summers in his speech:
“Mr. Summers began with a point that should be obvious but is often missed: The financial crisis that started the Great Recession is now far behind us. Indeed, by most measures it ended more than four years ago. Yet our economy remains depressed.
“He then made a related point: Before the crisis we had a huge housing and debt bubble. Yet even with this huge bubble boosting spending, the overall economy was only so-so — the job market was O.K. but not great, and the boom was never powerful enough to produce significant inflationary pressure.
“Mr. Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.
“...we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.” [our emphasis]
In other words, Krugman and Summers are postulating that the current crisis is not simply the product of the 2007-08 financial collapse, but is in fact part of a process going back many decades. We are not simply in a “Great Recession”, but a “Great Stagnation”.
As we have noted elsewhere, such a theory is increasingly being raised by bourgeois economists, who have cited, for example, evidence suggesting that there has been a slowdown in productivity growth that goes back 30 or 40 years, long before the current crisis.
The thoughts raised recently by Krugman and Summers are the same as the explanations given by the Marxists for many years: the size and scale of the current crisis is a product of the way in which the capitalists have attempted to avoid and delay - ever since the crisis of the 70s – the onset of a new crisis.
For decades, the capitalists, on the one hand, attacked real wages to increase profits, whilst, on the other, allowed ordinary households to carry on consuming through the use of credit – through mortgages, credit cards, and loans. In other words, the capitalists artificially expanded the market – i.e. effective demand; the ability for people to buy – through a massive expansion of credit; what Krugman describes as a “huge housing and debt bubble”. Indeed, writing elsewhere, Krugman provides figures indicating that the debt-to-income ratio of US households doubled between 1985 and the beginning of the current crisis. In the UK, household debt-to-income ratios increased by between 3-4 times in the same period, going from an average of 45% in 1980 to 157% in 2005.
The use of credit to artificially maintain demand and avoid a crisis is a symptom of the contradictions of capitalism itself: primarily the contradiction of overproduction, due to the nature of capitalism as a system whereby production is in private hands and is only for profit, which means that – since profit is nothing but the unpaid labour of the working class – the working class (as a whole) can never afford to buy back (with wages alone) all that they produce.
The current crisis is a reflection of this contradiction unravelling itself on a global scale. All the chickens have come home to roost for the capitalists, and now they –and society as a whole – are faced with an organic crisis of capitalism and a new normality.
No more weapons in the arsenal
As Krugman and Summers note, the only thing preventing the economy from collapsing for the past few decades was an unsustainable expansion of credit. Now, with the bubble burst, the ruling class have run out of options in terms of how to get the economy going again. All the methods traditionally used by the capitalists for getting out of a crisis have been used up already in trying to avoid the current crisis in the previous period. There are no more weapons in the arsenal. As Marx and Engels explained in the Communist Manifesto, the capitalists can always get out of a crisis, but only “by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.”
Let us look at a few modern examples. Firstly, interest rates, which would normally be lowered in a crisis in order to encourage businesses to invest and those with savings to consume. But interest rates are already near zero and can go no lower, and yet big business sits on mountains of idle cash that it refuses to invest; meanwhile, households are not increasing their consumption, but are instead trying to pay off past debts.
Secondly, government (Keynesian) stimulus, i.e. investment spending by governments to try put money in the pockets of workers and boost the economy, as was seen during the Great Depression of the 1930s. As a self-confessed Keynesian, it is measures such as these that Krugman wishes to see. But today, governments across the world are already drowning in public debt as a result of bailing out the banks and there is no more money for any Keynesian stimulus. Indeed, far from spending more, the financial markets are telling governments of all colours to cut and implement austerity.
One only has to look at the case of Francois Hollande - the Socialist Party French President, who came to power less than 18 months ago promising “policies for growth” and extra taxes on the rich, but who has more recently done a volte face and is now carrying out cuts to “restore competitiveness” – to see that all talk of Keynesian measures are just that: talk.
In Britain also, the leaders of the Labour Party, have stated that they cannot promise to reverse any of the cuts. The reality is that, under capitalism, there is no alternative but austerity. And yet – as the examples of Greece, Portugal, and Spain show -austerity only leads to a deepening of the recession. This is the insoluble contradiction that the capitalists face.
Meanwhile, in China, where the largest Keynesian experiment in history has been undertaken in recent years to avoid a crisis, we can see the impact of such stimulus: a huge credit bubble, a massive expansion of debt, and an exacerbation of overproduction in China – and on a world scale –in the form of even larger excess capacity in key sectors, all due to this surge in investment.
With all the traditional methods of getting out of a crisis used up, the ruling class has been pushed towards increasingly desperate measures, such as the policy of “quantitative easing” – i.e. printing money – whereby governments flood the economy with new money by buying up assets and securities. But one cannot perform magic tricks under capitalism and simply pull a rabbit from a hat. Indeed, quantitative easing (QE) has done very little – at best – to help the economy, with little sign of increased investment. At worst, QE has been disastrous, fuelling credit and housing bubbles in emerging economies, thus helping spread the crisis globally.
No solution under capitalism
Commenting on the analysis of Krugman and Summers, an article on Yahoo Finance states that:
“Another reason for slack demand is that American consumers, who account for about 70% of the spending in the economy, are now reducing the amount they borrow instead of increasing it as they did for the three decades leading up to the financial crisis.
“Because consumers aren't spending aggressively, the companies that sell to them aren't spending and investing aggressively. Instead, the companies are hoarding their cash, cutting their costs, and maximizing short-term profits.
“Government spending cuts, meanwhile, have reduced "demand" from the public sector, which is further dampening economic growth.
“The answer, Krugman and Summers suggest, is to somehow persuade consumers, businesses, and the government to start spending more aggressively.
“But, especially in the current political environment, that is obviously easier said than done.”
These statements accurately reflect the insoluble problem facing the capitalists. Governments have no money to spend; nor do working families, who already have a mountain of debt and who have faced – and are still facing – a fall in real wages. And as we have pointed out elsewhere, big business internationally is sitting on piles of idle money – over £700bn in the UK; around $2trn and €2trn in the USA and the EU respectively – that they do not invest because of the excess capacity and stockpiles of unsold commodities that already exist; in other words, because of the contradiction of overproduction on a world scale.
In concluding his article, Krugman comments that:
“More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time.
“I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people’s expense, naturally). It’s not supposed to be about persuading people to spend more.
“But as Mr. Summers said, the crisis “is not over until it is over” — and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.”
We agree with Krugman that “economic reality is what it is”. But the reality is that ordinary people have been made asked to pay for a crisis they did not cause – to pay off the public debts through austerity; through cuts to jobs, pensions, and public services; through attacks on their living standards. However, there is only so much that workers and youth can take – you cannot squeeze blood from a stone. And with regards to big business, the reality is that, under capitalism, you cannot “persuade” the capitalists to invest – they will only invest if they can make and realise a profit.
Yet the solution is staring us in the face: to take the enormous wealth that exists in society and put it to use for public need, not for profit; to nationalise the banks and the major monopolies and put them under a rational and democratic plan of production; to abolish the anarchy and chaos of competition and the market through the socialist transformation of society.
This is the only alternative to a “permanent slump”; to years of economic stagnation; to decades of crisis, austerity, and falling living standards. This – the socialist alternative – is what the Marxists of Socialist Appeal and the IMT are fighting for internationally.