The Great Recession and the Deficit

Paddy Quick

The Great Recession will take a long time to come to an end. Even the most optimistic forecasters expect the official unemployment rate in the U.S. to stay above 9 per cent through 2011, and it may be 4 or even more years before we get back to the same level of employment we had before the recession began. The arguments I want to make are (1) that we should not fall for the line that “we,” i.e. workers, need to cut back to get out of this recession and (2) that propaganda about the problems of the deficits is being used to justify a multi-pronged attack on the standard of living of working families.

You don't need me to go over how bad things are for working people, the working class. And I'm not going to review what led to the Great Recession, other than to say that recessions are regular occurrences in the capitalist system in which we live. (Oh dear, a “bad word” – “capitalism” – but we're all adults here, and the time for euphemisms is long past.) This recession is indeed the worst since the Great Depression of the 1930s, and it resembles it in both its probable length and its international character, although the decline in production and the level of unemployment are less than then. It is, however, in some ways, potentially far more serious and likely to have a far worse long-term effect.

Key Feature of the Great Recession

Here we come to the key feature of today's Great Recession – namely the multipronged attack on our standard of living. This attack comes in several forms and it is important to understand all of them:

• The first, and most obvious, is actual reductions in wages. Even corporations that are profitable are brazenly cutting wages for the simple reason that they want higher profits. The threat to move production within the country or to other countries can force even strong unions to take substantial cuts. Other people, such as federal government workers, are seeing wage freezes, despite continuing (although mild) inflation. More common, but less in the news, is the slow process through which the unemployed who do manage to get new jobs do so at reduced wages. Even less well publicized is the process through which starting wages, for people getting their first jobs, are lower that the wages of the people hired into the same jobs in previous years.
  
• The second form of attack is on the government programs that go to benefit the working class, and in particular Social Security and Medicare, the so-called “entitlement programs” i.e. programs that do not require fresh appropriation votes in Congress on an annual basis. Here the government is playing the old game of asking us whether we would prefer to cut benefits or raise taxes, rather like asking us which arm we would prefer them to cut off. A growing economy (and it will grow again when the recession is over) can easily provide for the health and well-being of its residents, but the cuts, once made, are extremely unlikely to be restored when the recession does end. And, despite the government's lip-service to the importance of education, local government employment in education in December 2010 was 463,000 less than in December 2009.
  
• The third form of attack is on the poor, and I don't mean simply that the people at the lower end of the income distribution suffer more from all the program cuts than everyone else, although that is true. I mean that the attacks are making the lives of those who are unemployed, and those who fall into poverty for this and other reasons (such as serious illness), more and more miserable. This weakens the working class as a whole. Unemployment is becoming more and more of a threat to those who do hold jobs, and fear of unemployment makes those who are employed weaker and weaker when it comes to fighting pay cuts and resisting increases in workloads. Being unemployed in the U.S. is terrifying. Even a short spell of unemployment can do considerable damage, and longer spells destroy lives. The cuts in the funding of Medicaid (as distinct from Medicare which is for the elderly and disabled) are particularly severe. And of course President Clinton long ago ended “welfare as we knew it.” There are massive holes in our “safety net,” and far too many people are falling through it. It must be said here that this is one of the many areas where racism is deadly. It is of increasing importance to confront the widespread racism which leads many white workers to believe that somehow the massive poverty in the Black and Latino communities is due to their inadequacies, and that such poverty will, therefore, never happen to “fine upstanding (white) workers like them.” Thus racism can and does lead some workers to actually support cuts in programs such as Medicaid and subsidized housing that are limited to those with low incomes.
  
• The fourth major form of attack is of a different nature. It takes the form of attacks on the ability of workers to organize. The percentage of workers who are unionized is now below 12 per cent, and the percentage of unionized workers in the private sector is only 7 per cent. The more heavily unionized public sector workers are seeing attempts at the state level to withdraw their right to collective bargaining. (This attack is combined with the attempt to reduce the public services that they provide, which is in turn presented as a way to reduce taxes on workers.) There are movements underway in at least seven states to pass “right to work” laws which would forbid unions to collect dues from all those that they represent. For those who are not unionized, the quickest way to join the ranks of the unemployed is to be identified by management as “likely to try to form a union.” On a national level, the control of our government by the capitalist class is hardly limited at all by the working class – the capitalists, as they say, have two parties and we don't even have one.

The Crisis in Europe?

Let's compare what is happening in Europe with what is happening here. In Europe the “safety net” has long been far, far stronger than in the United States. Universal health care, paid maternity leave, unemployment benefits that are very generous by U.S. standards, far higher levels of job security... the list could go on. These have been coming under attack for many years, often in the form of the promotion of what the IMF and others call “labour market flexibility” – a code phrase that can be translated as “reducing the power of workers.” But the attacks are taking place in a new and much more virulent form today. In response there have been massive protests and general strikes. European workers are vigorously defending their standard of living.

In the U.S., in contrast, there has been very little protest. In fact a recent poll showed that, when people were asked about whether higher taxes “on people like you” were necessary, 41 per cent said they were. And 55 per cent believed it was necessary to cut back “government programs that benefit people like [them.]” Why do people believe this? The short answer is that they have been scared into this by those who cite the need to cut the government's deficit and its debt.

Personal Debt vs Government Debt

So let's look at this. People understand debt all too well from their personal experience, including those whose homes have been foreclosed. One in five of all homes with mortgages are “under water” i.e. people owe more than their homes are worth. And of course those who are unemployed quickly run up additional debts. But government debt is very different. In the first place, the U.S. government can always borrow what it wants because it can pay the lenders back with money raised by taxes. But more importantly, when the government increases its spending or allows households to increase their spending by cutting taxes, the increase in spending leads to an increase in production and employment. Thus the increase in the government's debt, unlike any increase in the debt of individuals, has the effect of putting idle labour (and idle plant and equipment) back into production. Then, when the economy is back at full employment, it can pay off its debt by increasing taxes, or reducing spending without damaging total production.

It is useful to distinguish between the short-term deficit and the issue of long-term debt. The deficit always increases during a recession because tax revenues fall and expenditure rises (for example on unemployment benefits). But in a serious recession like this one, a government stimulus program (consisting of increased government spending and cuts in taxes either or both of which increase the deficit) can pull the economy out of the recession. In order for tax cuts to work, however, they have to go to the working class, because this is the only form of tax cuts that leads to increased spending. The very rich (who are of course capitalists, because you don't get rich by working!) barely alter their spending. And giving tax cuts to corporations does not lead to increased spending. Corporations aren't going to carry out new investment by buying new machinery and building new factories and office buildings, as long as they have some of their offices half-empty, much of their machinery sitting idle, and their factories shut down. So that leaves government spending as a way to stimulate the economy. One step desperately needed is the transfer of federal money to states and local governments, but we hear little about this. President Obama, in his State of the Union address, spoke instead about government “investment” i.e. spending money in ways that would benefit private corporations. (Food for the hungry and housing for the homeless aren't considered “investment.”) But the amounts proposed were small, and Obama proposed a “freeze” in federal spending when in fact more, rather than less spending is needed. The disagreement between the Republicans and the Democrats is over how much to reduce the deficit, not on how much of a deficit-increasing stimulus we need.

The capitalist class is taking advantage of this Great Recession, both here and in other countries, to reduce the standard of living of the working class and thus increase its own income, in the form of profits and interest. We need to understand that even a long recession can eventually be “profitable” if it can accomplish that, and big capital thinks long-term. Thus it is not at all clear that big capital even wants to end this recession quickly. Instead, it seems to see this as a wonderful opportunity to make long-term gains at the expense of the working class. To see this we need to look more carefully at the role that recessions play in the development of capitalism.

It is during recessions that weaker capitalists fail and the big corporations take over their markets and grow ever bigger and ever stronger. Then, as this happens, they start investing again and the economic recovery begins. That is how the relatively mild recessions in the post-world War II period have generally come to an end. Recessions also keep down wages, and this is also good for profits. But reducing wages is usually a relatively slow process, and the short recessions which have taken place since World War II have not made much of a dent in wages. [In the U.S., of course, unlike in Europe, wages have not increased even during the good years. U.S. wages today, after allowing for inflation, are no higher than they were 40 years ago. (Check it out online: Economic Report of the President, 2010, Table 47.) This is the basic reason for the fact that the share of income going to the top one per cent of U.S. households has more than doubled between 1979 and 2007.]

In Europe, the better-organized working class managed to keep wages growing in the post WWII period. Minimum wage in Ireland, before Ireland fell victim to the crisis, translated into above $13 an hour! Now the European workers, like us, are taking pay cuts, sometimes very large ones. Latvian government employees took a 50 per cent pay cut. But this is because it is a Great Recession, and is lasting a very long time. A lengthy recession is capable of doing much more damage to wages than a short one, and major sections of capital are therefore in no hurry to end the recession because of this. Of course, when the recession does end, there is no reason on earth to expect corporations to “give back” the cuts they have forced on us. Instead, they can look forward to permanently higher profits as a result of the recession.

Long-Term Deficits and Taxes

The issue of long-term deficits is a different one. The projections of federal government revenue and expenditure if no changes are made in either our tax structure or in government programs undoubtedly show a growing gap between the two – hence the received wisdom says this is a major long-term problem that will continue to exist when the recession is over. It may sound flippant, but the solution to this problem is really very simple – tax the capitalist class and cut back expenditures on the wars and other programs that benefit them. (In the United States in the 1950s, hardly a heyday of liberalism, the top tax rate on personal income was 91 per cent – a quite reasonable figure and perhaps we should go back to those “good old days!”) The capitalist class's proposed “solution” is, not surprisingly, to increase taxes on the working class and cut back the programs that benefit us. Thus we need to look at the federal budget as a whole, and ask both who pays taxes and who gets the benefit of the government's expenditures. Then we can look more clearly at the role of the federal government in the distribution of the wealth of our society between the working class and the capitalist class. It is not the projected deficits that are the “problem” but the very real intent of the capitalist class to use the federal government to further enrich itself.

Let me lead into my conclusion by looking at a recent decision by President Obama which has important symbolic significance – the appointment of Jeffrey Immelt, Chairman and CEO of General Electric (GE) as chair of a “Council on Jobs and Competitiveness.” Competitiveness, you may remember, was an important theme in Obama's State of the Union Address. GE is a multinational corporation, which, incidentally, was helped by a $16-billion purchase by the U.S. government of its short-term debt when it was in trouble. Over half of its workers are employed in other countries and over half of its profits are earned outside the United States. Its “competitiveness” would be enhanced, and its profits increased, by lower wages in both the U.S. and other countries. The word “competitiveness” needs to be translated as “lower wages.”

The “Great Recession” is providing the multinational capitalist class with the opportunity to launch a major assault on the standard of living of the working class in developed countries such as the United States and the countries of Europe. Unlike previous recessions, the Great Recession is taking place mainly in the developed countries. Developing countries have not been greatly affected and production in those countries continues to grow far faster than in the developed world, although of course the workers there get to share in very little of this. Today's multinational corporations are increasingly able to pit workers in the U.S. and Europe against those in Indonesia, India and China. Of course in the long run, they would like to employ all of us, in all of these countries – but at lower wages. The problem cannot be understood as one of “outsourcing” – a continuous movement of jobs away from the U.S. to other countries, particularly those with lower wages. If this were the problem, unemployment would have been increasing steadily over at least the past 30 years, if not the last 200, rather than fluctuating around the 5 per cent mark. In fact the proportion of workers in the U.S. employed by foreign multinational corporations is increasing – other countries' multinationals are “outsourcing” jobs to the U.S., just as U.S. multinational corporations are increasing their hiring of foreign workers! No, the problem is the continuous effort of all these multinational corporations to lower wages everywhere.

Did we and other workers in developed countries really believe that we could, without a fight, continue to draw wages many times greater than those of equally intelligent, hard-working, and, today, increasingly, equally skilled workers in Asia and other parts of the world who are working for the same corporations that we are working for? Corporations can, of course, well afford to pay us these higher wages (as they could afford to pay higher wages to workers in developing countries.) Obviously they are making a profit by employing workers in the U.S. and other developed countries, or they would lay us all off! But wages are not based on what the capitalists can afford to pay but on what the working class is able to make them pay. This Great Recession is making it clear, to those who look at it realistically, that the working class must be organized on a multinational basis in order to confront the multinational capitalist class if we are to share in the wealth that we produce.

Right now, the task in the U.S. is a more limited one – we must recognize, and get everyone else to recognize, that there is no need at all for the working class to “cut back.” Doing so will only encourage further attacks on our standard of living, and prolong the recession. Instead we must ORGANIZE, ORGANIZE, ORGANIZE! NO CUTS IN WAGES, NO CUTS IN PUBLIC SERVICES, REPAIR THE SAFETY NET, TAX CAPITALISTS, NOT WORKERS! END THE WARS! •

http://www.socialistproject.ca/bullet/458.php