03 May 2013

Dynamic stagnation: The most dangerous game

The crisis of neoliberalism has seemingly reached an impasse. On the one hand, predictions of another global economic collapse have repeatedly been proved wrong. Every month or two, a new danger threatens to bring everything crashing down—the US government debt-limit debacle, Italian borrowing rates, the Greek elections, Spanish borrowing rates, the slumping Chinese real estate bubble, a seemingly endless series of huge banking scandals, the botched Cyprus bailout, Italian elections. Every time, the danger passes.

Yet every month also brings predictions that the next round of indicators will finally register a real turnaround in the course of the global economy, or that the next central bank intervention will get the economy going again. The real estate market has recovered! The stock market is surging! Spanish bond rates are down! China is growing! Abenomics is a success!

Yet every time the optimists, too, are proved wrong. Despite long-held hopes for a recovery, European growth projections keep getting revised downward and the experts have now given up hope that there will be any growth this year. European unemployment just hit another record high, and Germany risks being pulled into the recessions it has imposed on the southern EU countries. The US economy nearly contracted in the fourth quarter of 2012, the most recent jobs report fell far short of expectations, and first-quarter growth was disappointing. Chinese growth rates stabilized last year after some anxious moments, but recent indicators all look weak.

It’s a little sad watching the highly paid financial analysts and economic pundits—not to mention high government officials—try to make sense of these swings. Their dumb surprise at the persistent stagnation dramatizes how conceptually impoverished neoliberal common sense has left them. Every downward lurch they explain by appealing to external disruptions. Every uptick they project forward indefinitely and predict that the recovery is finally here—completely heedless of the last three, four, five cycles of unwarranted optimism.

To them the economy is merely a machine for growth, a completely one-dimensional, one-directional entity whose failure to act in line with its nature can only be ascribed to the unbidden interference of human beings. It never occurs to them that the nature of our society itself may have changed since the crash, because they don’t have the conceptual tools to think in that direction. Even if we allowed them their conceit that the economy is outside society (less a conceit than a first principle), they would still be incapable of realizing that growing volatility is not a result of external forces acting upon the economy but what has become the defining output of the global economy itself.

What actually is going on? As I’ve argued, 2008 marked the end of neoliberal society as a viable regime of accumulation, which means that a return to high rates of growth and healthy levels of job creation would require a complete economic and cultural restructuring extending across the globe. At the height of the crisis, such a prospect briefly appeared before us, as neoliberal ideologues began to publicly question their faith, to the point that desperate free marketeers began suggesting the nationalization of the financial system. It seems like a dream now, but at the height of the crisis people like Alan Greenspan and Lindsay Graham cheerfully counseled complete government takeover of the banks. Mainstream opinion was perfectly comfortable with the idea that, if the government nationalized the banks, then “[you] get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over.”

Yet as soon as some tentative stability returned to the financial sector, this moment passed. Around the world, the left had seen its critique vindicated but had been completely unprepared to offer a new vision. With no one pushing him from the left, Obama’s completely inadequate stimulus bill was soon followed by the notorious shift to austerity. The European left made an even worse showing during the crisis and no stimulus was even pursued; Germany imposed austerity on an ever-growing number of ever-more-sizable economies, with the predictable outcome of growing misery and economic failure. Only in China was a real stimulus implemented, but even this was essentially wasted because what it stimulated was primarily speculation and local government white elephants rather than the pursuit of fundamental economic and cultural reorganization.

Japan under Abe and Kuroda is something of a wild card. In contrast to leaders in the other rich countries, the new Japanese leadership has made noises about real restructuring. But the measures taken so far—primarily an extra-large injection of monetary easing—will only stimulate asset bubbles (case in point) if they aren’t accompanied by structural changes. Abe’s reform plan, which will be announced in June, will give us an important indication of Japan’s future path.

Despite the all-around failure of fiscal policy, the global economy has managed to stumble along without falling into the ditch for nearly four years. If we really were confronting an epochal “crisis of neoliberalism”, wouldn’t we expect rapidly mounting conflict and catastrophe? Instead we face stagnation and paralysis. Surely this is more in line with the analysis of the optimists that the crisis is basically past and the coming recovery has merely been delayed by politicians’ bickering.

Yet economic statistics only provide a superficial and static picture of the economy. They tell us nothing about the forces beneath the surface that actually produce the economic topography we can see. Does the placidity of stagnation that we observe really reflect a slow-moving recovery? Or is it the result of a fiercely waged battle among warring subterranean powers that—up until now—have fought to a draw? The kind of stalemate that could rapidly unravel if one side in the struggle gains the upper hand?

It may not come as a surprise that I will argue for the latter. The forces now locked in mortal struggle are, on the one hand, massive overcapacity within the global economy, and on the other, widespread and aggressive forms of state intervention desperately trying to hold things together. Overcapacity is exerting tremendous pressure on prices, threatening an onslaught of deflation worse than anything since the Great Depression. The signs of excess production are everywhere, from the astonishing refusal of corporations to invest their enormous cash reserves, to Amazon’s rapid growth through razor-thin margins and implacable price-cutting, to highly visible excess production in industries like steel that are foundational to the entire productive global economy.

This extremely dangerous situation has followed the breakdown of the neoliberal strategy of profitability through wage repression and rising exploitation, with consumer demand artificially maintained through high rates of personal and government debt. In the absence of an effective left response, the crisis actually intensified the first half of that equation, even as it discredited the second half. Years of individual and government austerity have followed, producing overcapacity by hollowing out market demand for huge parts of the global economy.

Yet demand—weak and precarious though it is—has been propped up enough to hold the specter of deflation at bay. We can gauge the looming threat of deflation by the completely unprecedented forms of state intervention, and the completely unprecedented geographic range of these interventions, that have been required to forestall it. In the next post I’ll take a look at how the central banks have saved us from a new Depression—for now.

1 comment:

  1. Errata: I initially referred to the Peterson Institute for International Economics as “Peter Peterson’s rightwing economic think tank”. Accepting Krugman’s authority on this matter, I’ve changed the reference. Krugman writes, “The Peterson Institute for International Economics sometimes pops up in conversation, and people assume that it’s part of the Committee for a Responsible Federal Budget/Concord Coalition//Fix the Debt nexus. But it isn’t — it used to be the good old Institute for International Economics, a boutique think tank doing very good work on international trade and finance issues, and the grant it got from Peterson hasn’t changed its character at all.”