Ongoing Crisis and Liberal Blindness

The double dip of this crisis is upon us. The latest data agree: the housing market has been in full double-dip mode for five months as home prices keep declining. The foreclosure disaster keeps increasing the combination of homeless families and empty homes. Think capitalist efficiency. Unemployment rose back above 9 % again. The average length of unemployment is now 39.7 weeks, the longest since these records began in 1948. Investments by businesses are decelerating and governments keep dropping workers.

Over 20 million workers are unemployed or underemployed. Over a quarter of the nation’s productive capacity remains unutilized, gathering rust and dust. Annual output of $ 1 trillion is lost by wasting these resources. Think capitalist efficiency again.

The so-called “recovery” benefitted US banks, larger corporations, and the stock market. It bypassed everyone else and is now over. Still wondering what hit them, victims of the crisis – the mass of working people – now face paying for that recovery. “Their” government borrowed massively to bail out the corporations. That boosted the national debt. And that now “requires” cutting government spending by “absolutely necessary” reductions in government jobs, services, social security, Medicaid and Medicare. What money the government saves by cutting public services it can then turn over to the corporations, the rich, and the foreign governments (led by China) who lent it the funds to produce that short-lived recovery (for them).

Paul Krugman is better than most mainstream economists. He pushes his liberal views against most of that mainstream. But Krugman shares the classic liberal blindnesses. Accounting for today’s economic wreckage he worries about “fatalism.” The problem for him is subjective. People – Krugman likes to obliterate differences with that term – accept that “recovery from financial crisis is usually slow.” Krugman admits that previous governments similarly responded to crises slowly because of their shared “fatalism and learned helplessness.” What he proposes instead is the usual liberal set of economic solutions as “obvious”: aggressive fiscal policy (bigger deficits), aggressive mortgage debt reduction (mechanism unspecified), and so forth. The people should do these things because not doing them is “simply crazy” and because “fatalism…is the main enemy of prosperity.”

Krugman argues that the grotesque injustice of the government’s response to crisis is caused by a psychological disposition – fatalism – ascribed to the people. That’s like Keynes’s blaming capitalist crises on the problem of making investment decisions faced with uncertainty about the future – we all struggle with uncertainty, right? Liberals like Krugman avoid locating economic problems in the core capitalist structure of production – in struggles between employer and employee.

Krugman does not explain why “fatalism” keeps following crises. He does not ask, let alone answer, what structural factors might explain that. Instead he wants smart people to correct the mistaken fatalism afflicting lesser minds. Condescension toward those he disagrees with reinforces his point that lack of smarts explains fatalism. Governments’ slow responses to capitalist crises reveal stupidity.

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Here is the explanation Krugman lacks. Capitalism has always been unstable. Governments have never prevented the boom and bust cycles despite nearly every leader having promised, as each cycle’s downturn hit, not only to get through it “but also to make sure to prevent the next one.” Of course, governments could rush in and offset cycles with massive programs of public employment, public investments, etc. Liberals often urge that. But governments refuse unless massive pressure from labor unions and socialist and communist parties from below force partial and temporary steps in that direction (as happened with FDR after 1933).

Capitalism’s instability arises in good part from struggles between employer and employee. Crises arise when enterprise profits do not suffice for employers and their shareholders. They then reduce production, fire workers, cut their purchases of inputs. These steps reduce other employers’ profits who react likewise. Spiral into recession ensues. Capitalism long ago evolved a way to manage its inherent instability. As unemployment grows and lasts, the jobless become willing to work for less than before driving wages down. As businesses fail, the resulting glut of second-hand machinery and equipment, empty factory and office space, etc. drives down those business costs. Eventually, when the labor and materials costs have dropped enough, employers see sufficient profit possibilities. Their investments resume and therewith the bust phase gives way to the boom phase.

Why should government intervene in capitalism’s method of self-healing from its interminable instability affliction? After all, for most capitalists the decline of business costs constitutes an attractive method of coping with crises. Likewise most capitalists do not welcome the precedent set if governments intervene to rescue the masses from the system’s dysfunction. And capitalists most certainly do not want to pay the costs of such government interventions.

So capitalists have good, structural reasons – grounded in their positions inside the enterprises they run – for opposing liberal solutions to the immense social costs of capitalist crises. Fatalism is not the cause of the problem. It is merely the outward, superficial face of the political system’s unwillingness to contest the message coming from its chief patrons, capitalist employers.

When mass suffering in protracted downturns threatens to move toward attacking the system itself, capitalist employers – and hence their government – sometimes recognize the need for a small and temporary dose of the liberal solution. Even then, government action has less to do with the fiscal stimuli liberals endorse and more with a different task: shifting mass suffering and anger away from anti-capitalism and toward celebration of benevolent government. That is what FDR accomplished by establishing Social Security and unemployment insurance in the 1930s.

Liberalism’s outdated antipathy to Marxism – and ignorance of the new developments in Marxian thinking of recent decades – is its key problem, a debilitating legacy of the Cold War. That antipathy and ignorance undermine liberalism’s capacity to think its propositions through, to ground them in economics and history, and to explain the key “whys” needed to shore up its arguments about what is happening, what should be happening, and why those two diverge.