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7/29/09

Obama is pissing me off, so I need to rant!

The recent cover of Newsweek magazine shows a blue ballon with a title saying that the recession is over, not so fast. The "green-shoots" in the economy, like those that Obama is talking about, higher stock market valuations, higher house prices, etc., suggest, at least superficially that the recssion is over; however, it is not. The recession is not solved because the fundamental problem underlying the recession has not been solved, primarily that workers are not making enough to consume what they consume. The problem is summed up by liberal economist Nouriel Roubini:

"Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses. As a result, total labor income – the product of jobs times hours worked times average hourly wages – has fallen dramatically...falling labor income implies falling consumption for households, which have already been hard hit by a massive loss of wealth (as the value of equities and homes has fallen) and a sharp rise in their debt ratios. With consumption accounting for 70% of US GDP in the US, and a similarly high percent in other advanced economies, this implies that the recession will last longer, and that economic recovery next year will be anemic (less than 1% growth in the US and even lower growth rates in Europe and Japan)."

The problem then, as Roubini sees it will be how the government will manage to contain the crisis of underconsumption, with rapidly deteriorating fiscal accounts and high debt loads the government will be under pressure from capital for higher interest rates that will choke off any recovery. As Roubini states:

"the higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilizers reduce revenue and increase spending (for example, on unemployment benefits). Thus, an already unsustainable US fiscal path, with budget deficits above 10% of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse."

However, Roubini sees the problem yet ignores it at the same time. As Louis Althusser states about any "theory", particularly in reference to economics:

"They [e.g. exploitation, surplus, class, etc] are invisible because they are rejected in principle, repressed from the field of the visible: and that is why their fleeting presence in the field when it does occur (in very peculiar and symptomatic circumstances) goes unperceived, and becomes literally an undivulgeable absence -- since the whole function of the field is not to see them, to forbid any sighting of them"

The crux of the problem--something that Roubini refuses to see or is unable to see because his theoretical lens denies that visibility of the problem--is that workers are not being compensated in accordance with their productivity and the implications that holds. Therefore, we have an imbalance in the economy, where the surplus is going disproportionately to the rich and finance; this led to the speculation that lead us to this crisis in first place. This is known as "financialization" of the economy and this has been happening since the 1980s when the collapse of the labour movement and globalization led to a structural readjustment of incomes to the rich. Globalization did not just emerge, it is a consequence of the strengthening of the labour movement in teh West during the Keynesian era. As Giovanni Arrighi notes,

"For what could more effectively restore company profit margins, lowered by the unruliness of the labour force, than the decentralization of production?...a company can only re-establish the internal hierarchial order so necessary for its functioning by organizing its productive and distributive operations at a work level...in order to escape the decline of the rate of profit in teh 'mother-country' " (Geometry of Imeperialism, 144).

The objective, therefore, was to undermine high-income labour that was undermining accumulation in the West. This was not hidden by politicians or economists, it was proclaimed with pride as "supply-side economics"--neoliberalism. The new saviours of the economy were the rich. The logic went, give the money to those who invest, cut their taxes and let the free market flourish. We now are living with the consequences of that logic, the 'rich' have not invested more than before Reagan in fixed investment (productive investment); indeed, they have invested less, ergo less employment and lower incomes. The money that they have retained through the tax cuts have increasingly gone to the stock market, bond markets, etc., where speculation and higher profits reign. Employment has, in turn, become increasingly service based with low wages and precariousness as the rule.

What has been occurring in the US is that workers are making less in real terms than they were 30 years ago and the share of national income going to wages is at near, if not, historic lows. Workers are being "exploited" more than they were since at least the 1920s. Ergo, we have a crisis of under-consumption, although this crisis took a while to materialize and as a result the crisis is embedded very deep into the heart of the economy. The consumption of workers has been propped up through the credit mechanism and for 30 years it has worked at preventing the crisis from occurring, as long as the credit loop remained stable, but it was not going to and it set up, from the very beginning its own demise. This is how:

Workers are paid less, more money goes into profits and therefore investment in financial instruments. Finance capital gives back to the workers incomes through the debt mechanism, with interest, sucking more income out of the working classes. Finance gave consumers increasing larger and larger amounts of credit with lower and lower standards as the limits of the system began to show, e.g. NINJA loans. Then finance bundled these debts as securities selling them off for profit. This reduced individual risk for the firm, leading to riskier and riskier loans, but this increased systemic risk. Since the credit agencies were paid by the banks, they made these inherently unstable securities Triple-A, the highest rating you can get. The assumption was that workers would do everything in their power not to default on their homes and other assets. Eventually, workers could no longer sustain the debt payments as interest rates went up in 2007, the bet of the financial industry failed. Defaults occurred, especially with 'sub-prime' mortgages leading to the foreclosure crisis and erasing hundreds of billions worth of wealth and due to the downward pressure on house prices, home owners could no longer depend on their houses to pay for their consumption. Eventually, those Tripe-A securities became junk and the system almost collapsed; because no one knew the actual value of those securities, the assets of firms were under scrutiny and therefore the firms became insolvent. The government stepped in to re-capitalize the firms and take the "bad assets" off the books to make the firms solvent again.

Therefore, what Obama sees as green shoots signaling a revival of the economy is really just the rehashing of the old economy. As Paul Krugman states about the recent mega-profits of Goldman Sachs:

"The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?...it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away...it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely...What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong...You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole."

Firstly, what this crisis amounts to then is the effective privatization of state coffers by finance capital. The thing is now that the banks are now, as Krugman states, are implicitly covered by the tax payer. This is akin to what happened in Argentina when the state was captured by finance capital and socialized private debt--otherwise known as 'right-wing populism'.

So what Obama is bleating on about is not a recovery, but the stage for a even greater crisis in the future. Obama has NOT fundamentally changed the structural problem at the heart of the American economy, instead he has PRESERVED the same system that got us into the crisis in the first place. Ultimately, workers are not being paid enough. The solution is to emphasize consumption, to redistribute wealth to workers, to increase government spending on social programs and to tax the rich to pay for it; otherwise that excess income will go into speculation and we have this problem all over again. Indeed, the crisis that Roubini talks about, that the country is on the precipice of a financial collapse is true if you assume that tax rates are immutable. Its time to come to grip with reality, the rich have not lived up to their share of the social contract and have caused immense damage to the general economy for their own parochial interests. There has to be a strengthened union movement to reverse the 'taproot' of the problem, which is underconsumption. Otherwise, we will be in the same boat again very soon. As Roubini warns:

"The irrational exuberance that drove a three-month bear-market rally in the spring is now giving way to a sober realization among investors that the global recession will not be over until year end, that the recovery will be weak and well below trend, and that the risks of a double-dip W-shaped recession are rising."

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