The illusion of recovery

 Isn't a focus on the sources of the crisis only academic now? Isn't the economy back on track? It's seeing slower growth, to be sure, and faces a number of external shocks that threaten it (unrest in the Middle East, earthquake and nuclear fears in Japan), but the crisis is over, right?

Well, no. For one thing, events in the Middle East are a feature of the crisis, which has always been global in scope. But more to the point, the brave new era of slow growth and anemic job creation is not a "new normal", beyond our control or comprehension, as if the economy was a force of nature. They are evidence of the ongoing crisis, and a prelude to further breakdown.

It's true that the US economy has been growing for over a year and a half. The unemployment rate, stuck around 9.7 percent for most of 2010, has now declined three months in a row to 8.9 percent in February. Investment growth - a key barometer of the health of the economy under capitalism - has been rising for a year. Even consumer spending seems to be growing.

The short-term trend is clear, but the real question is how sustainable the "recovery" is. If the foregoing analysis is correct and the increasing exploitation of workers is the underlying cause of the crisis, then a true recovery is still well beyond our grasp.

First, there is some evidence that the improving figures are at least in part being driven by a return to debt-financed consumption. As the Wall Street Journal notes, "banks’ and investors’ charge-offs — the result of defaults — lopped $822 billion off [American] households’ debt load from mid-2008 to the end of 2010. In other words, net of defaults, consumers actually borrowed an added $163 billion."

So the problem of unsustainable levels of consumer debt hasn't been confronted at all. Even with large write-offs, total household debt in the US has only fallen to 116 percent of disposable income - that is, it's only down to the crushing level of 2004. Consumers simply aren't earning enough money to actually pay down their debts, and as credit starts to become available again they're already back to spending beyond their means.

Without a dramatic increase in wages that could simultaneously support rising consumption and lower debts, there are only two possibilities: consumers will pay down their debts and demand will stagnate; or consumers will return to borrowing and demand will grow in the short term, but once debt again reaches intolerable levels we'll see a collapse in demand and another recession.

The way the crisis has played out has, if anything, only exacerbated the massive imbalances that crippled the economy. The income generated by the economy can be divided between wages (going to workers) and profits (going to corporations and investors). Part of profits is paid out in taxes, which finances part of government spending (mostly consumption rather than investment). So the share of the economy taken by after-tax profits is a good indication of the balance between investment and consumption - the higher it is, the less money that can be devoted to buying the output of the economy.

This graph illustrates how severe this imbalance has become:

Figure 1: Source

Profits now occupy a postwar position of unprecedented strength against wages. Corporations took a hit from the financial crisis, but quickly recovered to extremely high rates of profit. In part this was fueled by the need to cut payroll and squeeze even more efficiency from the remaining employees just to survive the crash. This explains the leap in productivity that accompanied the recession - a measure that had been sliding for the previous seven years (figure 2 - see this article for a number of concrete examples in the Chicago area).

Figure 2: Source

The process behind this jump in productivity is the exact opposite of that behind the Fordist productivity increases: rather than being facilitated by rising wages, it was won thru the increasing insecurity and rising joblessness among workers. As such, it marks a deepening of the conditions that produced the crisis in the first place.

The other source of the profits recovery was the massive government bailout program and stimulus effort, including a huge injection of liquidity into the economy. The recipients of the bailout funds and most of the credit were corporations - especially the financial corporations, which account for a significant share of rising profits. The banks are back to the same share of corporate profits as a decade ago (figure 3), and that alone should set off warning bells.

Figure 3: Source

All this is to say that the tremendous destruction wrought by the crisis did nothing to address the underlying imbalances and dysfunctions. Rather than using it as an opportunity to restructure the economy and return it to growth on a new basis, the American state and corporate elite have simply sought to regenerate the old structures. Progressives, weak and confused, have done nothing. The Tea Party is stronger but, it goes without saying, far more profoundly confused.

But the popular forms of subjectivity that once made neoliberalism robust can no longer support the old structures. Consumers may, for the moment, return to debt-based consumption, but they will do so only tentatively, leaving demand feeble. The austerity mania that is now setting the political agenda will cripple the government demand that up till now has propped up the whole slumping edifice. State and local cut-backs will further decimate employment.

These dark prospects stand in sharp contrast to the incredible reemergence of speculative bubbles, in internet companies, farmland, and elsewhere. What the speculators still don't understand is that the incredible amounts of liquidity sloshing around the global economy - fueling not only their bidding wars but a destructive wave of inflation as well - mark the death throes of neoliberalism, not its regeneration. Their speculation has merely put off the final accounting.

Debt, continued

There is a man I know who is a CEO. He makes well into the six figures. For his anniversary his wife bought him a $12,000 watch, on credit. This man loves this watch. This watch for him is a sign that he has succeeded, that he is what he thinks he is. The worth of the watch is his self worth. This is to say that by spending this money (credit) he affirms his position in the world and affirms his belief that the order of the world is such that this decision will not negatively impact him. It is a statement that he believes the present will lead to a certain future in which he is able to pay for and enjoy the watch. This man has no savings. This man largely lives hand to mouth, because of purchasing decisions like the watch. How is such a decision possible?

I think most of what has been said so far is on track. Indebtedness (of the consumer debt type) is a product of the slippage between expectations and realities. In this way it is a neat expression of the structural conditions of neoliberalism and subjectivity under these. But the relationship is complicated.

As the original post pointed out, compensation has stagnated, yet there has been a constant growth of productivity. Under such conditions debt is the means to keep production going. But the subjective element is crucial here. At the point where wages and productivity diverge, two options are available, to press for the re-establishment of parity or to find other means to partake in society’s wealth. Workers, have, for the most part chose the latter. I think that Walker’s follow-up point that “Capitalism's seemingly automatic self-expansion (except for periods of crisis) is fundamentally what makes this kind of thinking plausible,” goes a long ways towards explaining this. Debt is a manageable prospect so long as one continues to anticipate a maintenance or increase in wages and worth. So the idea seems to be that workers conflate ongoing self-expansion at the level of capital with their own position within the the system, that is, the expansion of their own means of consumption. This seems to hold at the level of history -- increasing standards of living over time (in material terms), and holds in so far as individuals do see their wages go up over time, usually through promotions. In other words, the prospect of successfully participating in the process makes debt a reasonable choice. The ability to refinance and take second loans out on homes is a perfect expression of faith in the constant expansion of capital. These loans make sense in so far as the worth of one’s home (like one’s own worth on the job) is constantly on the up and up. The ugly reality that capital does not need you to be employed to continue to grow does not enter into the picture for most people. Afterall, there are always jobs. Therefore, when crisis occurs, what should be a critique of capital becomes a critique of the individual. Another way of thinking about this, is that in so far as capitalism is understood as a system of individual possibilities and individual actions, not as a social totality, individuals will continue to conflate the trajectory of their own lives with the trajectory of capital.

But none of this explains why people want to go into debt. The CEO cited above also has a million-dollar home currently “under water.” And yet, his wife buys the watch. Here, I am more speculative. My sense is that it has to do with the truncating of species capacity that takes place under capital. Or to be more Smithian, it is because we become more stunted as individuals. Both Marx and Smith observed that under capital our abilities, our self-understanding, our practices as human beings become more and more narrow. Not only in the work place, but also outside of work, in recreation. Now, I believe the majority of consumer debt (other than medical expenses) is related to recreation. By recreation I mean all those activities that are not work, in which we try to experience our lives as enjoyable. Of course, under neoliberalism, recreation, that is consumption of goods and services beyond that required for subsistence, became the major marker of self. (Now, with the fetish for all natural, all organic, all local food, even subsistence is becoming an means of neoliberal self-expression. ) Here I am even reading the home as recreation. Its role has evolved beyond that of shelter to an expression of lifestyle fantasies, and yes, fun. I am also reading self-fashioning (clothing, make-up, hair styling, tattooing) as recreation. Of course, all recreation -- bowling or home decorating, time at the make-up counter, or at the gym -- requires expenditures. These are narrow expressions of ourselves as human beings because they are all confined to a single activity -- purchasing. Physical activities, like bowling or exercise, may be more than purchasing as they involve the use of our bodies, and in the case of the former, camaraderie. But they are also purchasing. We spend in order to enjoy. And the more rarefied our enjoyments become, the more we spend. It is a treadmill effect, in which what was sufficient before is no longer. And why should it be when society is continually producing more and better?

How to make sense of this? At the level of structure, I am struck by the parallel in the escalation in our expectations for spending and capital, which needs ever increasing value to sustain itself. Indeed, the two form a self-reinforcing circuit. At the level of subjectivity, the problem seems to be one of self-understanding. If under Fordism, our sense of self became deeply tied to our work, it remains so today, but manifested in a mirror image. Our sense of self is tied to how and what we spend. In so far as work enables one to spend at the desired level, debt is avoidable. But we increasingly desire more. Not necessarily in quantity, but in quality. And to tell someone not to spend is to attack their sense of the order of the world and their place in it.

To illustrate this last point, I want to come back to the CEO. For him to reject the watch would have meant admitting that he was in a precarious financial position. That the income he has today might not be the income that he has tomorrow. That the future might hold uncertainties for which he should be planning (saving) today. He would have to recognize that some CEOs don’t have $12,000 watches, that frugality is not a mark of failure, and spending is not a mark of success. But for such realizations not to completely shatter his sense of the world and place in it, he would need to have non-material measures for failure and success. He would need to separate his life’s trajectory from that of capital. He would need to have a broader sense of human capacities and the ability to enjoy life through them. That is, he would need to be able to put into action the idea that we can do more than produce and consume value.

First steps in explaining the crisis of neoliberalism

This is an initial specification of my current understanding of the basic dynamic underlying the crisis of neoliberalism. It is schematic and lacks detail, it largely excludes the crucial dimension of subjectivity and culture, it restricts to one country what is inherently a global process, and it doesn't even begin to confront the difficult question of value. Hopefully we can begin to address these deficiencies going forward.

Like all other forms of capitalism, neoliberalism is fundamentally animated by the ongoing accumulation of capital. What marks neoliberalism as economically different from other regimes of accumulation is its particular solution to the problem of maintaining profits as capital cycles thru the realms of production and consumption.

Every producer needs to find a consumer willing to buy his or her product. This is a common-sense observation, but it runs into some tricky problems under capitalism. The issue is that, since the 1950s and the advent of a mass-consumer society, most of consumers' buying-power has been represented by wage earners rather than the wealthy, other businesses, or the state. That means businesses have to pay their workers enough money so they can afford to buy those businesses' products.

In the 1950s and 1960s, businesses did just that. As workers became more productive, their wages increased in tandem. The economy produced more goods, but with higher wages workers could afford to buy them. Productivity was increasing so fast in this period that businesses could continuously increase wages even after taking a hefty share for themselves in profits. This was a key pillar of the system known as Fordism, which produced still-unmatched rates of growth, plummeting poverty rates, and prosperity around the globe.

But by the late 1960s this system was starting to break down, and had entered full-blown crisis by 1973. A declining rate in the increase of productivity was a key underlying cause of the crisis, and together with growing macroeconomic disorder doomed the practice of steadily raising wages while maintaining profitability. One of the two had to give, and under capitalism the only sine qua non is profits.

Figure 1: Source

A new organization of the economy emerged by the early 1980s: neoliberalism. With lower overall rates of productivity growth (see figure 1), profits now had to be bolstered at the expense of wages, rather than increased alongside them. This was achieved thru a brutal attack on organized labor carried out jointly by business and the state, and the dismantling of the system of secure jobs, good benefits, rising wages, and robust social insurance. The results are reflected in the striking divergence between productivity and compensation seen in figure 2: after the 1970s, workers were still becoming more productive, but their income stagnated.

Figure 2: Source

This kept profits at an acceptable level, but it produced a new problem. Workers were producing ever more goods and services, but with their wages stagnant who would buy the product of their labor? The solution was brilliant in its simplicity: the growing gap between what workers made and what they could afford to buy was filled by credit.

Increasing levels of government debt also played a key role in keeping the economy going, but that will have to be left for another post. And there is much more to be said about how Americans were convinced to take on ever higher levels of debt, but for now let the brute fact suffice:

Figure 3: Source

It is important to note here that, contra some popular explanations of the crisis, this is not a matter of people being overindulgent. Yes, people were purchasing beyond their means, and yes, they were often buying things they didn't really need and yes, banks often used extremely poor judgment in extending credit to risky borrowers. But that's not the point. If our society had not convinced people, in one way or another, to spend beyond their means, the crisis would have happened much sooner. The problem is not with self-control — it's not even with predatory banks tricking people into ill-advised real estate refinancing. The problem is the fundamental contradiction within the neoliberal system of accumulation between suppressing wages to maintain profits and successfully selling goods and services.

Of course, ever-increasing levels of personal indebtedness is an unsustainable sales strategy. As the burden of debt grew heavier and heavier, the only question was what sector would set off the crisis. Since the speculation on mortgage debt was pursued with the most abandon (figure 4), it's hardly surprising that housing was where the crisis hit first.

Figure 4: Source

But it is essential to understand that the housing finance collapse was the precipitating event for the crisis, not the fundamental cause. Nor was financial deregulation the fundamental cause of the crisis (tho it did play a central role in coordinating and propelling neoliberalism too complicated to detail here). The reason these events unleashed a general crisis in the US (and global) economy, rather than remaining isolated in the housing industry, was the underlying brittleness of the system. The contradictions within neoliberalism had been building for at least a decade; the housing collapse merely unleashed that pressure in a devastating explosion.

Glossary: The accumulation of capital

The essence of capitalism is an ongoing accumulation of value. All complex societies are characterized by a social division of labor. Under these conditions, everyday life is structured by the need for individuals to produce some good that others will exchange for money, so that the producers can in turn use the money to purchase the goods they need to live their lives. Marx represented this process as C-M-C: commodity for money for commodity.

Capitalism is defined as a system by the inversion of this process: M-C-M'. Under capitalism, the end of sustaining life becomes only a means, and the means of exchanging money becomes the defining end. Of course, exchanging money for the same amount of money would be pointless, so the second process ends with M': a greater amount of money than was initially exchanged. This highly simplified schema maps out the underlying property of capitalism as a system, namely an endless accumulation of capital - growth for the sake of growth. This helps explain why GDP growth, despite the fact that it tells us almost nothing about the quality of life going on beneath it, is the central indicator of economic health under capitalism.

In order to expand itself, capital must successfully cycle thru the realms of both production and consumption. Value must first be produced, and it must then be realized by finding a buyer. However, there are different social configurations that can facilitate accumulation, with dramatic consequences for the nature of culture, class, politics, and social relations. In its history, capitalism has found expression thru a number of more-or-less coherent social systems that superficially can seem quite different but are all structured by the underlying dynamic of endlessly expanding production and consumption. Examples we will be discussing include postwar Fordism (1950s-1960s), neoliberalism, and whatever might succeed neoliberalism.

All of these systems, however, are marked by the inherent contradictions of capitalism. They can proceed in good health for decades at a time, but inevitably will run up against their inherent limits. If problems crop up in either the realm of production or consumption or the juncture between the two, the regime of accumulation will need to be adjusted. If the problems are systemic in nature, a completely new configuration of society supporting a new regime of production and consumption must be pursued. The breakdown of a regime of accumulation finds expression in chronic global crisis. The Great Depression of the 1930s, the crisis of the 1970s, and, perhaps, the current crisis of neoliberalism are all examples.