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Socialists and the US financial crisis

Peter Solenberger

25 October 2008

This article was written for the Italian Partito Comunista dei Lavoratori publication PCL is a Trotskyist led party that left the PRC when the PRC went into the government.  They received a modest .57 vote (208,000) in the last election, which the highest vote for a party to the left of the PRC.  Peter Solenberger is a US Trotskyist in the Detroit area.

The US financial crisis, in the context of the underlying world economic crisis, gives revolutionaries in the US an opportunity to discuss our socialist politics with many more workers and youth than we’ve been able to reach for many years. For years we've mainly participated in stumbling reform movements that failed to win reforms and discussed socialist politics with the few activists who cared to listen.

Now with the capitalists throwing off their neoliberal pretensions and demanding that the government bail them out, we're able to say,’ Yes, government intervention, but for the workers, not for the capitalists, and under the democratic control of the workers, not the dictatorship of capital.'

Workers are angry. For thirty years they've been told that there's no money for jobs, no money for wages, no money for pensions and health insurance, no money for Social Security, Medicare and Medicaid, no money for education, and no money for infrastructure. They've mostly accepted the government's spending a trillion dollars a year on past, present and future wars, since that's for 'national security.'

But now they're being asked to accept the government's spending trillions of dollars ($2.25 trillion paid or pledged so far) to bailout the banks, insurance companies, and other financial institutions whose speculation has gotten them into trouble. They feel lied to and cheated. Much of the middle class feels the same way. A sign held up to the Wall Street skyscrapers in a September protest of the bailout captured this sentiment with the words, 'Jump, you fuckers!'

Ratcheting up the rate of exploitation

Thirty years of ratcheting up the rate of exploitation underlie this anger. Average weekly earnings for US workers peaked in 1972.Working-class and lower-middle-class families have struggled to maintain their living standards since then by having more family members work more hours for more years. Women, including the mothers of young children, men and women of retirement age, and teenagers generally have jobs, if they can get them.

The real after-tax income of working-class households has risen modestly for all but the poorest, but nearly all of the increase has been needed to compensate for the unpaid labor that family members can no longer provide. Labor productivity has continued to rise, but workers have gained little from this, as the capitalists have shifted income and wealth to themselves and their entourage.

Workers are particularly incensed because they know that the US economy is entering a recession and there will be no bailout for them.  The recovery from the 2000-2001 recession was weak. Many workers laid off then, especially older and less skilled workers, couldn't find new jobs or could find only jobs at much lower pay, often part-time or temporary.

Since then, although overall employment has risen, layoffs have continued and workers laid off or entering or reentering the workforce have often had to take low-paid, part-time or temporary jobs. Many who have kept their jobs have had to take cuts in pay and benefits.  Inflation has reduced the real wages of nearly all workers. The real average hourly earnings of production and nonsupervisory workers, 80percent of the workforce, have fallen 2 percent in the past year alone.
While the US gross domestic product continued to grow through the first half of 2008, by most other measures the US economy has already entered a recession. By the official government statistics the number of unemployed workers has increased by more than two million from a year ago. The real number is much higher, counting those who are working fewer hours than they want to work and those who have given up looking for work. Conditions will worsen as the recession deepens.

The impact of the financial turmoil

Workers have been hurt by the housing bubble and the ensuing financial turmoil. During the bubble speculators bought apartment buildings and houses and raised rents. Now many renters are being evicted as the speculators dump their properties or declare bankruptcy.  During the bubble many workers paid more for houses than they could afford, thinking that their value would continue to rise. Many took adjustable rate mortgages with low down payments and low initial interest rates, thinking that their economic situation would improve enough to pay the higher rates later. Now millions of these buyers are losing their houses to foreclosures, because they can't pay their mortgages and can't sell their houses.

Most workers are heavily in debt with mortgages, car notes, student loans, and credit cards. While credit was easy, they could juggle loans to ensure that all got paid, although sometimes with penalties for late payment. Now they can't get the credit they need to juggle the loans and are having to forgo not just luxuries but necessities. They no longer have the refuge of bankruptcy, since a 2005 law makes declaring bankruptcy more difficult and less protective.

Retirees with money in stocks or mutual funds have been hard hit, since the value of their assets has fallen by a third or more and they have no way to replenish them. Workers trying to save money for their children’s college education and their own retirement have been hit too.

As always, the situation of Blacks and Latinos is worse than that of whites. Blacks and Latinos have higher rates of unemployment, lower wages and income, fewer assets, and more poverty than whites. With manufacturing and government retrenching, Black and Latino workers have less access to the relatively well-paid, unionized jobs that once provided a way out of poverty. Last hired and first fired, they have less to fall back on, since the neoliberal regime of the past thirty years has shredded the social safety net. Immigrant workers are even more vulnerable, since they can't invoke the little protection the law gives citizens and they may be forced to leave the country if they lose their jobs.

Women have been especially hurt by the deteriorating economy, since in this patriarchal society they are usually the primary caregivers, as well as wage laborers. Even in the best of times trying to hold a job or develop a career and simultaneously take care of children, partners and often parents is daunting. With the loss of jobs, wages, benefits, social welfare, and homes the demands on women can become overwhelming, especially if they have to face them alone.

The underlying crisis of the real economy

Capitalism in its imperialist stage is the root cause of the economic crisis. In Imperialism: The Highest Stage of Capitalism Vladimir Lenin described imperialism in words as appropriate today as they were nearly 100 years ago when he wrote them.

But very brief definitions, although convenient, for they sum up the main points, are nevertheless inadequate, since we have to deduce from them some especially important features of the phenomenon that has to be defined. And so, without forgetting the conditional and relative value of all definitions in general, which can never embrace all the concatenations of a phenomenon in its full development, we must give a definition of imperialism that will include the following five of its basic features:

(1) the concentration of production and capital has developed to such a high stage that it has created monopolies which play a decisive role in economic life; (2) the merging of bank capital with industrial capital, and the creation, on the basis of this’ finance capital', of a financial oligarchy; (3) the export of capital as distinguished from the export of commodities acquires exceptional importance; (4) the formation of international monopolist capitalist associations which share the world among themselves, and (5) the territorial division of the whole world among the biggest capitalist powers is completed. Imperialism is capitalism at that stage of development at which the dominance of monopolies and finance capital is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun, in which the division of all territories of the globe among the biggest capitalist powers has been completed.

The curve of world capitalist development combines three underlying curves: a secular rise in labor productivity and production, a fifty or more year alternation of periods of relatively rapid expansion followed by periods of relative stagnation, and an eight to ten year business cycle.

In the early 1920s the Russian economist Nikolai Kondratiev first noted the fifty or more year alternation of periods of relative expansion and stagnation and wrongly described them as 'long waves,’ thinking they could be explained by purely economic factors analogous to those explaining the business cycle but acting over a longer period of time. Leon Trotsky rejected this purely economic understanding of the phenomenon and explained it in terms of capitalist equilibrium and disequilibrium involving not just the dynamics of capital accumulation but also the social, political and military relations among classes and among nations. Ernest Mandel and others revived Trotsky's concept in the 1970s.

World War I through the aftermath of World War II was a period of capitalist disequilibrium marked by economic convulsion, wars and revolutions. The 1950s and 1960s were a period of capitalist equilibrium. The period saw several recessions and many struggles, including union struggles, national liberation struggles, struggles by racially and nationally oppressed groups, and struggles by women, lesbians and gay men, and youth. But these were in the context of a world economy that was expanding relatively rapidly and class and international relations defined by bourgeois democracy and the welfare state in the imperialist countries, the Cold War coexistence of Stalinism and imperialism, and the shift from colonialism to neocolonialism.

The 1970s opened a period of capitalist disequilibrium which continues today with no end in sight. Economically, capitalism had accumulated such immense productive forces that further investment on the scale of the previous twenty years wasn't profitable enough for the capitalists to undertake it. In the 1950s and 1960s the world economy had expanded rapidly enough so that the capitalists could make massive concessions to the workers and the oppressed to buy social peace. As economic growth slowed, the capitalists shifted their strategy from investing to expand productive capacity to jacking up the rate of exploitation. Socially and politically, the demands of the workers and the oppressed collided with the capitalists' diminished ability to make concessions and profits at the same time. The capitalists retreated through the first half of the 1970s and then, as the movements of the workers and the oppressed lost momentum, launched a counteroffensive.

The Soviet Union, although not capitalist, went through an analogous process in which its economy slowed to a point where it could no longer deliver the rising living standards that, combined with diminishing repression, had held the country together. As the Soviet Union collapsed, the Stalinist bureaucrats transformed themselves into capitalists or administrators of newly capitalist states. The Eastern European bureaucrats generally failed to transform themselves into capitalists but instead became social-democratic or nationalist politicians in capitalist states quickly drawn into the orbit of European and US imperialism. The Chinese bureaucrats, learning from these experiences, have carried out a transition to capitalism under tight party and state control. The workers in the new capitalist states, like those in the old, are exploited at a level that would have seemed impossible thirty years ago.

Capitalist restructuring and working-class retreat

Workers have lost ground partly as a result of technological changes that have allowed corporations to restructure themselves at workers’ expense. Improvements in computers and telecommunications have allowed employers to replace workers with machines and to decentralize production. They no longer need the huge concentrations of workers they once needed. They can more easily shift production to other parts of the country or abroad, where unions are weaker, wages are lower, and governmental regulation is more lax. They can sell or spin off operations, subcontract, and outsource.

The technological changes and restructuring have increased labor productivity, but their main goal and effect has been to weaken the ability of workers to organize and resist, as the capitalists promote competition by playing off one group of workers against another.

Workers could have countered these developments by higher consciousness, better organization, and more militancy, as they have in the past. But they've been blocked by the bureaucratic leaders of the unions, the social movements, and the reformist political parties.  These leaders do not want to risk their careers and social positions by leading militant struggles. They try to steer their organizations toward collaboration with the capitalists, rather than struggle, despite overwhelming evidence that collaboration leads to surrender or defeat.

In the US the Democratic Party occupies the space that a reformist workers' party would occupy in a more politically developed country.  The union and movement bureaucrats claim that backing the Democrats is the way to get the government 'on the side of the people' and a prerequisite for improving the situation. The Democratic Party politicians welcome this endorsement, since without it they would have no leverage, but they take their orders from the capitalists who fund them and whose media can make or break them. Al Gore won the 2000 presidential election, initially protested George Bush's theft of the election, and then stood down when the ruling class told him to do so’ for the good of the nation.' Barack Obama was once a community organizer and a believer in Black liberation theology, but he renounced his former beliefs to get the $700 million in campaign contributions and the media blessing he needed to win the presidency.

The recession and the financial crisis

The world capitalist economy is entering a recession. The business cycle has peaked and is turning downward. The capitalists are cutting back investment, because they have excess capacity in most industries and are able to produce far more than they can sell. They can still make killings in the bottleneck sectors of oil and other commodities, but the high prices there are mostly a drag on the rest of the economy and are coming down as the recession develops.

The workers and the lower strata of the middle class are cutting back consumption, because they have lost jobs to layoffs and income towage cuts and inflation and have too much debt. Foreign demand for US goods and services has picked up some with increased US productivity and the falling value of the dollar, but the US still imports far more than it exports, reducing demand for US production. Government spending, mainly on war, is the economy's last prop, but short of a world war that alone can't hold off a recession for long.

The financial crisis dramatically underlines the problem of speculation in the current capitalist economy. Unable to make as much as they want through jacking up the rate of exploitation of workers in the real economy, the capitalists resort to financial manipulation to increase their take. Some of this is simply swindling workers or each other by fraud or enticing their victims into lending or borrowing that they would not have agreed to if they'd known the true risk. But much of it is the collective irrationality of speculation.

Looking for extraordinary short-term gains, the speculators bid up the prices of stocks, futures, derivatives and other financial instruments that are or purport to be claims on future profits. They bid the prices well above what could be justified by the profits that the real economy of production and distribution of goods and services can yield.

For a while the speculators get fabulously and fictitiously rich, because every bad investment they make they can find some other sucker to take off their hands for even more. They play musical chairs moving from one bad deal to another until the music stops. Those who are left standing go bankrupt, and the others move on to the next game. In the past ten years we've seen the stock market bubble that burst in 2000,the real estate bubble that burst in 2007, and the commodities bubble that is bursting now.

A sharp recession is inevitable because of massive overproduction and over accumulation in the real economy. An obvious question is whether the financial crisis will transform the recession into a depression. We can't know for sure, but at this point that seems unlikely.

Having learned from the disastrous stock market crash of 1929 and the contained crashes of 1987 and 2000, the capitalist governments are moving quickly to shore up the banking and insurance system by guaranteeing loans, deposits and exchanges, arranging mergers, buying risky mortgages and other bad assets, infusing capital by buying on-voting preferred stocks that give them no managerial control, and in some cases temporarily nationalizing the institution. The US government has paid or pledged $2.25 trillion so far, and the Japanese, European, Canadian and Russian governments have paid or pledged correspondingly large amounts.

At this point it seems that the outcome of the financial crisis will be a massive consolidation of the US and world financial system. In thus half a dozen banks with one to two trillion dollars in assets each will survive, linked to a network of smaller regional and local banks.  Fannie Mae and Freddie Mac, the two big mortgage holders now in government conservatorship, will be returned to their stockholders, possibly broken up into more manageable pieces. The financial system will be more regulated but basically back in business.

Even if the US and world economies escape a depression, we can expect a continued ratcheting up of the rate of exploitation through the sharp recession developing now and the weak recovery that will follow. The conditions of the workers and of the lower middle class will continue to deteriorate, as the capitalists continue to shift income and wealth to themselves and the upper middle class.

The deteriorating conditions of life, the increasing social inequality, the wars in Afghanistan, Iraq and whatever country US imperialism targets next, political shocks like Hurricanes Katrina and Rita and the Sensenbrenner anti-immigrant bill, and the daily corruption, violence and injustice of capitalist society will eventually provoke a fight back. At that point all the parameters will change.  Revolutionaries will participate in and lead mass struggles that could actually realize the socialist vision we propose.

A socialist response to the crisis

Meanwhile, revolutionaries should take advantage of the moment, which may be a moment of political epiphany for the working class.  Workers are angry. They feel lied to and cheated. They are also scared.  In their thinking, if not yet in their action, they are more open to collective and radical solutions than they have been in many years, since the situation seems desperate and the capitalists have resorted to collective and radical solutions for themselves.

Socialists should propose solutions to the crisis on the theme, 'Bail out the workers, not the bankers,' following the transitional approach of the Communist Manifesto:

This cannot be effected except by means of despotic inroads on the rights of property, and on the conditions of bourgeois production; by means of measures, therefore, which appear economically insufficient and untenable, but which, in the course of the movement, outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionizing the mode of production.

The solutions should include:

  • No evictions, foreclosures or utility shutoffs. 
  • No bailout of the Wall Street speculators. Reclaim their stolen wealth and prosecute them for theft. 
  • Nationalize the banks, insurance companies and other financial institutions. Allocate investment and credit for human needs, not speculative profits. 
  • Nationalize the transportation and energy industries. Develop mass transportation and clean, safe, sustainable alternatives to fossil fuels. 
  • End the wars in Afghanistan and Iraq. Bring the troops home now. Not a penny, not a person for imperialist war. 
  • Fund jobs, wages, pensions, healthcare, education, housing, mass transportation, and alternative energy. 
  • Elect committees of workers and consumers at all levels from workplaces and neighborhoods to a national planning commission to oversee the nationalized industries and the public sector generally, to ensure that they serve the people, not business, and to prevent abuses in what remains of the private sector.

The thousands of organized socialists and tens of thousands of unorganized socialists in the US can't realize such a program of action or even much more modest reforms. Only the workers and the oppressed can emancipate themselves. But we can participate in struggles as they emerge and in the political discussions they provoke. By this we can contribute to building the mass revolutionary parties and other organizations the working class needs to emancipate itself.


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