Monday, 27 August 2012

Could Keynesian policies solve the global economic crisis?

Much debate is raging in America and among leading economists as to whether Keynesian policies could be an escape route for global capitalism. While we cannot rule anything out in the class struggle when the ruling class get desperate as no doubt they will do as their system grinds itself into a deeper recession and depressions in many places calls for state intervention will become louder and louder from certain economists. One of the most outspoken economists who promote such policies is Paul KRUGMAN who is a Liberal at the end of the day but does speak out and opposes austerity. He doesn’t line up with the working class though lets be clear. Hefundemenatlly supports the capitalist system still but wish’s to see different tactics used. Extracts below are taken from Comrade Lynn Walsh (who is editor of Socialism today) excellent review of Paul Krugman’s recent book full article can be read: Political leaders, according to Paul Krugman, have failed to learn the lessons of the 1930s. Through a combination of distorted ideology and economic self-interest they exerted pressure for a return to deficit reduction policies in 2010, undermining the fiscal stimulus policy. Obama lacked the “Rooseveltian resolve” demonstrated by President Franklin D Roosevelt during the great depression. Krugman recognises that Obama faced bitter opposition from the Republican-dominated Congress, but criticises his failure to make the case for a bigger stimulus package. Obama failed to effectively mobilise public opinion behind such an intervention. The result is the current, lamentable state of the US economy. So Krugman has written a tract for the times. Its title suggests that it is a campaigning pamphlet rather than an academic analysis. It is succinct, polemical, and satirical in places, advocating unashamedly Keynesian policies which, in his view, could rapidly end the recession and produce sustained growth. Krugman is a prominent academic economist in the US, but best known for his informative and polemical columns in the New York Times. He is the most prominent of the Keynesian economists (including people like Joseph Stiglitz) who advocate more state intervention to stimulate recovery, and are severely critical of the voodoo economics of the ultra-free-marketeers, now championed by the Republican presidential candidate Mitt Romney, and especially by his vice-presidential candidate, Paul Ryan. Without state intervention in the US and elsewhere to rescue the banks there would have been a worldwide collapse of the financial system. There has been a trend of a turn by the capitalists away from investment in manufacturing and towards ever greater investment in the financial sector. Short-term profits through financial speculation, which tended to concentrate profits increasingly in the hands of the top 1% - or, more accurately, the top 0.01% - became a dominant economic trend. Ultra-free-market ideology was promoted to legitimise the shift. Financialisation changed the structure of the US economy and other advanced capitalist countries. They concentrated more and more on services, boosted consumer demand through the expansion of cheap credit and the boom in housing and financial assets, and outsourced manufacturing to low-cost economies such as China. The Keynesian approach is a very simple looks at things a very one-sided view that things could be different if we just changed our macro economic policy. Of course the crisis is far more far reaching and fundamental than that. The Keynesian argument is that in this situation the state has to step in and stimulate demand. Lowering interest rates (even to zero) is not enough. By borrowing money to finance deficit spending – or by printing money – the state should inject demand into the economy. Increases in the social safety net (for instance, unemployment benefit) and job creation schemes (such as, infrastructure projects) could reduce unemployment and support increased demand. However, in isolating the factor of ‘demand’ as the crucial factor, Krugman fails to get to the root of the problem. The Keynesian idea is that a spurt of state spending will jump-start the economy, creating jobs, stimulating investment, and so on, “until the private sector is ready to carry the economy forward again”. But it is far from certain (leaving aside capitalist hostility to an increase in the economic role of the state) that a short-term stimulus of this type would actually revive investment and production by the big corporations. Capital investment has been declining as a share of GDP in the US and other advanced capitalist countries since the early 1980s, despite the increased share of profits in national income. The stagnation of capital investment continued in the US in the 1990s and the 2000s despite the high level of demand (which was sustained by credit/debt). Keynes believed that ‘equilibrium’ of the market would break down at a certain point because of the capitalists’ so-called ‘liquidity preference’. In other words, they would save more than they invested, preferring to hoard their cash rather than invest it productively. Keynes explained this through the factor of ‘confidence’, a subjective explanation. In reality, the lack of confidence is rooted in an estimation of a much more objective factor: the prospects of making adequate profits. ARE KEYNESIAN POLICIES now ruled out? Some people undoubtedly think so. “In the current market environment”, says a Deutsche Bank analyst, “there is no room for using a Keynesian-type expansionary fiscal policy to boost demand in countries with low growth – the markets will simply not accept such a strategy”. (International Herald Tribune, 10 January). Global financial markets are now far bigger than they were in Keynes’s time, or even before the 1980 neo-liberal ‘revolution’. In 1980 financial assets (in reality, credit/debt securities) were equal to one year’s output of the global economy. By 2006 such assets amounted to four times global output. This scale gives speculators – the so-called ‘bond-market vigilantes’ – the power to speculate against any governments that carry out policies of which they disapprove. The bond traders, moreover, are reinforced by ultra-free-market ideology, which now dominates the thinking of capitalist governments and international agencies such as the OECD. Despite the deepening of the current world recession, they really believe that unfettered markets will produce growth – and mass unemployment and impoverishment of sections of the working class will not dent this growth. The kind of policies advocated by Krugman, if effectively implemented, could cushion the downswing in the US and elsewhere. But they would not overcome the underlying problems of capitalist accumulation. In any case, many Keynesians feel that it is already too late. For instance, Keynes’s biographer, Robert Skidelsky, writes: “At last, opinion is starting to shift [in favour of Keynesian policies] – but too slowly and too late to save the world from years of stagnation”. (The New Republic, 12 July) Yet things can change. The capitalist crisis will produce social explosions and eruptions of class conflict. In the US, for instance, in the event of Romney winning the presidency and implementing the policies advocated by Ryan, they are likely to provoke an even worse slump. (It is possible that even a Romney-Ryan presidency would be forced more by pressure from big business to temper its crazy ideas with more pragmatic policies.) Explosive movements of the working class and deep social crisis will, under certain conditions, push capitalist governments into adopting Keynesian-type measures to avoid a mortal threat to their system. Keynes himself said that his policies were designed to avoid revolution. When it is a question of saving their system, the capitalist class will, at least temporarily, make concessions to the working class. To reduce mass unemployment they may well adopt public works programmes. They will be forced to repair the social safety net. But such policies will be a temporary expedient. They will not be a return to the long-term, sustained Keynesian policies of the post-war upswing, when the state increased its intervention in the economy and developed an extensive social welfare infrastructure. Keynesian policies may buy time for the ruling class but they cannot resolve the crisis of capitalism. How, as socialists, should we regard a stimulus package or programme of public works? In the face of mass unemployment and the prospect of prolonged economic stagnation, the leaders of workers’ organisations should indeed be calling for a massive programme of public works to provide jobs and stimulate growth. To be effective, a public works programme would have to be on a much bigger scale than that proposed by Krugman. It would mean the refurbishment and addition of new infrastructure, especially homes, schools, hospitals, community facilities, etc. Workers should be employed on a living wage with full trade union rights. Effective economic stimulus would require a big increase in social spending, increasing pensions and other benefits. Tax rates for the wealthy and big corporations should be substantially increased, with a levy on the uninvested cash piles of big companies. Effective measures should be taken against tax evasion and avoidance. It has to be recognised in advance, however, that the capitalists will vehemently resist a bigger role for the state and increased taxation. A programme to provide jobs and stimulate growth would require the mobilisation of the working class. Moreover, increased taxation in itself will not be sufficient to develop the economy. The dramatic raising of the living standards of the majority of the population would require the resources (additional real wealth) created by increased production. The banks and finance houses would have to be nationalised (not bailed out and propped up at public expense), and run under democratic workers’ control and management. This would ensure the credit required to develop all sectors of the economy. There would also have to be capital controls to prevent any flight of capital. Such measures would undoubtedly meet the entrenched resistance of the capitalist class. State intervention in favour of the working class would unavoidably pose the question of the takeover of the commanding heights of the economy, to form the basis of a democratic plan of production (run by elected representatives of the workers and the wider community). Any government carrying out such a policy would need an international perspective, collaborating with the workers’ movement in other countries to develop socialist planning at an international level.

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