The Restructuring of Capitalism in Our Time

The Restructuring of Capitalism in Our TimeThe following excerpt is from our featured book The Restructuring of Capitalism in Our Time, by William K. Tabb:

Not long ago the near collapse of the financial system discredited the excessive financialization central to contemporary American capitalism. By the end of 2010 total output in the U.S. economy had regained prerecession levels (although not on a per capita basis, and spending increases by those below the richest 10 percent of households had increased only modestly). As banks and the stock market recovered, the conversation moved to worrying about public debt. Financial reform was presumed to have been achieved; the financial crisis safely consigned to history. This book is a protest against this premature dismissal and suggests we need to understand the damaging role finance has assumed in the economy, the continuing problem of global capital flow imbalances, and the danger of a still worse crisis.

According to the National Bureau of Economic Research committee that dates business cycles, this severe crisis began in December 2007 and ended eighteen months later, in June 2009; the longest and, by most measures, deepest recession since the Second World War. However, efforts to bracket the period 2007–9 as the Great Recession, with a beginning and an end followed by an economic recovery, obscure the manner in which excess financialization continues to contribute to high unemployment, extreme inequality, and stagnant living standards. It also underestimates how close the world came to another Great Depression. Federal Reserve Chairman Ben Bernanke told the federal inquiry commission in a closed-door session on November 2009 that “as a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression.” He estimated that of the thirteen most important financial institutions in the United States, twelve were at risk of failure with a period of a week or two (Financial Crisis Inquiry Commission 2011:354). At the time he was hardly alone in this judgment.

Three years on, however, some academics, Wall Street leaders, and a libertarian former chair of the Federal Reserve argued that the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, would create regulatory-induced market distortions, be impossible to implement, and was a possible threat to U.S. living standards. That is, once the banks had been saved with multitrillion-dollar government assistance, they, and economists with strong free-market convictions, no longer saw any flaw in the system or accepted that it could be made to operate better through stronger regulation.

Although the crisis originated in the United States, expanded across the globe, and came as a surprise to many, some economists and investigators predicted such a disaster. They saw an expanding bubble that could only end badly. In 2002 Dean Baker concluded that a housing bubble was under way; he offered increasingly sharp warnings of the systemic implications of a housing collapse. In the summer of 2005 Nouriel Roubini predicted that real home prices in the United States were likely to fall at least 30 percent over the next three years. He warned that subprime lending might be the proverbial canary in the mine—or tip of the iceberg—and signal a broader economic recession with falling wealth, reduced real incomes, and lost jobs, a disaster affecting millions of households. Other respected economic observers, including Joseph Stiglitz, Robert Schiller, George Soros, and Paul Krugman, publicly predicted the crisis. And heterodox economists such as Steve Keen, Wynne Godley, and Michael Hudson early on developed models of how financial markets interacted with the macro economy to forecast a severe collapse.

Such financial and banking crises are historically not that unusual, and their consequences have often been painful. Economists at the International Monetary Fund (Balakrishnan et al. 2009) report on the medium-term impact of eighty-eight banking crises over the previous forty years in a wide range of developing and developed countries. They conclude that for the average country seven years after the crisis, the output level is around 10 percent below its precrisis trend. They find that because a crisis typically depresses investment, employment suffers lasting losses as well. Carmen Reinhart and Kenneth Rogoff (2010) show that on average a modern banking crisis is responsible for an 86 percent increase in government debt in the three years following it (an important finding given that overpaid government workers and welfare-state spending were to be blamed for deficits). Their examination of fifteen post–World War II financial crises in advanced and emerging market economies and three synchronized global contractions finds real per capita gross domestic product (GDP) growth rates significantly lower during the decade following severe financial upheavals. In past financial crises it has taken an average of seven years for households and businesses to bring their debt and debt service back to tolerable levels relative to income.

Remarkably, given the depth of the Great Recession, “large corporations had a good crisis, which they used to make their operations leaner and boost productivity while piling up cheap finance,” as the Financial Times noted editorially (2011). But it was a weak recovery, seen from a working-class viewpoint, with continued exceedingly high levels of sustained unemployment. And while job creation typically lags business recovery coming out of a recession, the manner in which societies carry out necessary deleveraging of debt varies. Daniel Costello (2011) begins a report on executive pay by noting, “Rarely has the view from the corner office seemed so at odds with the view from the street corner. At a time when millions of Americans are trying to hang on to their homes and millions more are trying to hang on to jobs, the chief executives of major corporations like 3M, General Electric and Cisco Systems are making as much today as they were before the recession it. Indeed, some are making even more.”

In the years following the official end of the Great Recession, cuts in entitlements and public goods were declared necessary to bring government spending under control. The question—and it is a political one rather than simply a matter of economics—is how the shortfall should be addressed. Keynesians proposed increased public spending to stimulate economic growth, and paying down the increased public debt from the increased revenues an adequate stimulus would presumably generate. Conservatives disagreed and called for cutting spending to reduce the deficit. An alternative to such austerity is to look for more income on the revenue side. For three decades and more, the share of total taxes paid by the corporate sector has declined, and tax reforms have disproportionately lowered the taxes paid by the very wealthy. Liberals argued that this would be unfair and that raising taxes on wealthy people was unlikely to lower consumption and investment much under the circumstances.

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