People's Democracy

Jayati Ghosh

WHAT happens in the US economy, and the effects of the policy stance of the US administration, are of much more than academic interest. We are all of us, everywhere in the world; affected by even the smallest changes in interest rates, public expenditure patterns, trade policies, investment practices and even labour markets in the US.

Given this unfortunate but currently inevitable process of ripple effects upon all other economies, there is really inadequate understanding of the economic processes within the US economy: the political economy of government policies, the causes of the recent expansion and recession, the likely effects of current US economic strategy.

Fortunately, a new book by the American economist Robert Pollin (Contours of Descent: US economic fractures and the landscape of global austerity, Verso Books, London, 2003) clarifies the true nature of boom and bust in the US, identifies the effects on different sections of US society as well as on the rest of the world, and puts forward viable alternative economic policies.

Capitalism, even in the world’s most powerful country, has some inherent problems. Pollin’s analysis begins by identifying three types of problems which mean that the market mechanism’s ability to promote sustained economic growth (not to mention stable and egalitarian growth) is severely limited. He describes these as "the Marx problem", "the Keynes problem" and "the Polanyi problem".

The Marx problem, according to Pollin, is that capitalist profitability requires strong bargaining power vis-à-vis labour, which in turn requires a reserve army of labour, in the form of unemployment or underemployment. The global economic integration brought about by neoliberalism has eroded the position of US workers, even as it has also undermined the bargaining power of workers in developing countries, where remunerative jobs have not increased with the increases in labour force.

The Keynes problem (following on the work of the English economist John Maynard Keynes) relates to the inherent instability of private investment activity, which generates the mass unemployment, financial crises and recessions associated with capitalism. Financial markets in particular are prone to speculative behaviour, and neoliberal policies, which minimise government intervention to stabilise investment and regulate finance, have contributed to such social pathologies.

The Polanyi problem (relating to Karl Polanyi who wrote The Great Transformation is that markets that are not "embedded" in social norms and institutions that refer to some notions of fairness and the common good, will give unfettered play to acquisitiveness and competition as dominating cultural forces. This does more than create an unpleasant society; the excessive promotion of private greed tends to encourage lawlessness and make the market system itself dysfunctional.

Attempts to resolve these problems gave rise to the emergence of different forms of social democratic capitalism and reliance on the welfare state, in the second half of the twentieth century. Pollin recognises these systems as having serious and persistent difficulties. But the social and political backlash against such difficulties generated a reversal towards the cruder forms of free market capitalism which have brought all these problems back in a much more dramatic way.

Pollin uses this background to uncover the true nature of the "hollow boom" associated with the Clinton years. In its fundamentals, Clintonomics was broadly similar to the earlier Reagan-Bush policies. Trade policy was similar in terms of proclaiming the universal virtues of free trade. Little was done to advance the interests of organised labour or working people in general. The tax policies did reduce to some extent the regressive effects of the Reagan-Bush tax policies, but not completely.

Under president Clinton, the US government was obsessed by reducing government deficits by cutting expenditure, which affected workers and the poor adversely. At the same time the administration went in for wide-ranging financial deregulation, and avoidance of any action to curb financial speculation, all of which contributed to generating the stock market boom.

We now know that the boom was associated with major corporate fraud, but financial deregulation and other government policies also actively encouraged the speculative bubble. The extraordinary "Wall Street levitation" of the 1990s was therefore not just historically unique; it enabled changing patterns of consumption and investment that created the real economic expansion of the period. The factors behind that bubble are still being explored. While Pollin recognises the role of corporate fraud and of expectations created by the Internet, he suggests that three other interconnected factors were crucial. They were: first, policy influences, including both financial deregulation and the actions of the central bank (the Federal Reserve), which effectively encouraged the bubble; second, the rise in inequality and corporate profitability; and third, changes in the stock market itself involving a contraction in the supply of shares along with an increase in the demand for them.

This boom was in turn responsible for the increase in broader economic growth over that period, by generating a big increase in private consumption and then private investment expansion in the US. In fact, the increase in consumer spending because of money made on the stock markets was really limited to only the top 20 per cent of households, whose consumption ratio (consumption spending to income) increased dramatically from 95 per cent to more than 104 per cent. Other segments of the population had stagnant or declining consumption ratios.

The growth did not lead to inflation because of changes in the balance of forces between capital and labour. Greater integration into the world economy increased the difficulty of US firms getting price increases and US workers getting wage increases, so that inflation did not accelerate even at low unemployment rates. The heightened sense of job insecurity, because of credible threats of job loss or relocation by employers, was a major part of the economic legacy of the Clinton era, and it has continued into the present time.

Of course, the subsequent administration of George W Bush proved to be even more comprehensively disastrous in terms of affecting the conditions of life and work of ordinary US people. The Bush regime sought to deal with the complex results of the stock market collapse through a straightforward agenda of massive tax cuts designed to benefit the wealthy and further cuts in state spending for the people at large.

Bush never wavered from this agenda even after the situation of national emergency caused by the September 2001 attacks. The tax cuts were comprehensively oriented towards large capitalists and the richest households. Meanwhile, the big increase in spending was obviously on the military, because of the need to finance the wars against and continuing occupation of Afghanistan and Iraq.

So there was a sudden and massive increase in government deficits. These did generate some growth, but less than could be expected given the size of the fiscal stance. The large deficits also changed once again the debt position of the US government.

In fact, the US economy probably did need to increase deficit spending on workers and the poor, whose real incomes and access to public services were actually being cut. Instead, the Bush combination of tax cuts for the rich and increased military spending, along with less spending on health, education and other social services, intensifies the already aggressive attacks on labour.

The neoliberal agenda has more international ramifications, in particular in moving away from the developmental states across the less developed world. This has led to increased global inequality as well as greater inequities within countries and slower rates of poverty reduction.

In this context, those who argue for more aid to poor countries may be missing the point. Neoliberal policies have destroyed the capacity of many of these countries to achieve anything like the growth rates of even their own past. Rather than aid, a return to some of the strategies associated with developmental states would be far more significant in improving the conditions of the poor in these countries. In fact, foreign aid in itself can act as a constraint on autonomous growth.

The declining conditions of workers and the absence of social protection (which can be most effectively accomplished) has created the recent push for protectionism even among US workers. This is because they face much worse conditions, which they are taught to believe is because of competition from workers in developing countries. But actually, progressive macroeconomic policies along with financial and labour market regulation would be far better for US workers, and would have positive ramifications for workers in the rest of the world as well.

Obviously, this would have to be combined with more regulation of financial markets and capital controls. For developing countries, directed credit, control over capital flows, regulating financial markets, regulating trade patterns, infant industry protection – which have all been essential for any economy that has achieved developed status – are still necessary.

Pollin’s work exposes the myth that everyone in the US benefited from the boom or can ride through the subsequent collapse. The class nature of economic policies comes out very starkly. It also shows that even workers in the US are affected by the workings of current-day capitalism and its imperialist manifestations. So the real struggle of workers and peasants in India and other developing countries is not against workers and farmers in the US and Europe, but with large corporations and the governments that push their interests against those of everyone else.