Puzzle or Misreading? Stagnation, Austerity and Left Politics

That the many attempts to theorize the crisis of 2008, the deepest crisis since the Depression, have at best been inconclusive should not be all that surprising. After all, as Michael Bernstein noted in the late 1980s, a half-century after the Great Depression there was not yet any general agreement on the causes of that economic collapse. Another quarter century later, such a consensus over that long passed crisis has still not emerged. Yet if we on the left want to assess the likely outcome of the recent crash and develop a meaningful response, we need to at least clarify some of the issues involved.

Is the problem insufficient demand and if so, why have the state and industry tolerated finance’s insistence on austerity? Is it
overaccumulation and the need to devalue (destroy) excess capacity – in which case wouldn’t stimulus only postpone the problem? Is it, as the left often argues in regards to their own countries, that industrial capital is too weak and so micro competitiveness and ‘industrial strategies’ are the key concern? Or is it that capital is already too strong and needs to be reigned in – whatever that would if fact mean? Does the problem lie in a financial sector that separated itself from the ‘real’ economy? Is the problem a lack of international coordination suggesting the need to give greater weight to such cross-national institutions as seems underway in Europe, or are the main conflicts and contradictions at home?

And we need especially to figure out, as Michal Rozworski asks of Canada in a recent Bullet but with much wider application, why Canada has stagnated in spite of the profitability of its corporate sector (“Canada’s Profitability and Stagnation Puzzle,” Bullet No. 912, December 18, 2013). After all, he notes, aren’t profits – especially within Marxism – understood to be the driver of accumulation and economic growth?

Each Crisis is Unique

One reason that the great crises of capitalism are so hard to clearly explicate is that every one is in fact ‘special.’ The present crisis is only the fourth such crisis (the others being in the 1880s, 1930s, and 1970s) in some 150 years and this means each has occurred in a historically distinct era. The world of the late 19th century or the 1930s is radically different than the world of today in terms of the development of the corporate form, the nature of finance, the organizational capacity of workers, the role of the state. Though the backdrop of these crises is the common dynamics of capitalism (competition, class conflict, uneven technological development, the volatility of finance, etc.) each crisis demands not an already-discovered general law but an analysis sensitive to its particularities.

It is the failure, on the one hand, to locate these diverse events within that common context of capitalism and/or, on the other, to try and squeeze these events into the straightjacket of a trans-historical causality (such as the falling rate of profit or production as the sole site of crisis-creation) that create sterile ‘paradoxes.’ Theory must, as Philip McMichael has emphasized, be historicized in the sense that we need to combine a theoretically-grounded understanding of the contours within which capitalist societies develop, with a material investigation of the particular social forces, institutions, and contradictions that lead to contingent, rather than pre-determined, outcomes. It is this kind of orientation that historical materialism tries to apply.

A Long Stagnation?

In his article Rozworski quotes Paul Krugman (Nobel Prize winner in Economics) and Larry Summers (former Secretary of the Treasury) as raising the spectre of a “permanent slump” and “secular stagnation” and goes ahead to point out that:

“Many Marxist and other radical economists have, of course, been making the same point for years, citing a variety of structural changes and imbalances in the economy, particularly those that characterize the neoliberal period that began in the 1970s when the great post-war boom lost steam.”

But there’s the rub. It is one thing to project a coming long period of stagnation – we will return to this – and another to identify this crisis as a continuation of something that has been going on for more than three decades. Referring to the period since the 1970s as a continuing crisis trivializes the notion of crisis. Growth over these three decades was indeed slower than in the golden age of 1950-68. But that period was rather short-lived and exceptional, lasting less than two decades and benefitting from the postponed production and consumption through the Depression and War. It hardly qualifies as the standard for assessing economic performance.

In any case, between 1982 and 2012, GDP – even after subtracting the effects of population and inflation – increased by 56 per cent (76 per cent in the U.S.) and it is hardly credible to simply write this off as a crisis of capitalism. In fact, a powerful argument can be made that the decades preceding the recent financial crisis were one of the most dynamic in capitalism’s history. These were years of major technological advances and of massive restructuring of industry whether inside the workplace, across workplaces or regions. Capitalism dramatically expanded, in these years, into new spheres of accumulation at home with the opening of the public sphere to private investors, and abroad with new opportunities in the global south from Brazil to India and South-East Asia. And of course there was the collapse of the Soviet Union and the capitalist turn in China.

There is yet another problem with trying to impose continuities between the 1970s and the present: it tends to downplay key economic factors that have changed in the interim. In the crisis of the 70s, profits were squeezed; today, as Rozworski points out, corporations are rolling in cash. Earlier, the concern of capital was with a working-class flexing its muscles; today the working-class is floundering. Then, there was great uncertainty about the U.S. dollar; today, occasional griping aside, the centrality of the dollar is taken for granted. The American dollar and Treasury Bills are the pre-eminent secure asset in a world of uncertainty even when, as has recently been the case, the U.S. was the center of a spectacular economic failure and Treasury Bills were yielding virtually zero (or even negative) returns.

The effective crisis since the early 1980s has not been that of capitalism’s weakness but of the weakness of labour and the left. While capital has prospered in terms of profits, accumulation and new opportunities, the devastation in workers’ lives and the explosion in inequality occurred with distressingly little resistance. This has been true not only at home but also internationally, where the once threatening challenge from national bourgeoisies and liberation movements had largely faded.

The Great Financial Crisis and Marxist Theory

The significant question about crises, as Leo Panitch and I have argued, is not about why there are regular downturns in capitalism (according to the U.S. Bureau of National Research there have been 33 such downturns since 1857 and 11 since the end of World War I). Rather it is why a small subset of these downturns have come up against barriers that were only overcome over long stretches of time and involved major institutional innovations, very significant rebalancing of social forces, and the advent of new capitalist and state capacities. A common characteristic of such crises was the great uncertainty – often panic – over when, how and even if the crisis would end. After each such ‘structural’ crisis capitalism consequently emerged radically different than it was before and so future crises brought their own new dynamic.

Before the crisis of 2008, there were certainly indicators of trouble. Auto had been experiencing excess capacity for a number of years and the housing boom had peaked at the end of 2005. Given the weight of these two sectors (especially housing), the possibility of a recession could not be written off. But again, the issue of interest isn’t what caused a downturn in the economy but why that downturn turned into such a generalized and profound economic catastrophe. The answer to this question does not lie in any remarkable problems in what is often called the ‘real’ economy. The crisis first emerged in the U.S. but profits there in non-financial sectors had been at near peak levels before the crisis hit in 2007; nonresidential investment had grown, in real terms, by 5.2%, 7.0%, and 7.1% respectively in 2004-06 (even in 2007, it increased by 5.9% for the year as a whole); the general level of excess capacity was somewhat high but not especially so; and corporate debt, given the high profits and cash flow, seemed manageable.

The 2008 crisis needs to be understood primarily as a financial crisis. The financial system had experienced stunning growth as its role within capitalism took on new features, but this also brought especially destabilizing contradictions. The roots of the explosion in financial growth, originating in the U.S. and subsequently exported abroad, go back to at least the 1950s and 60s with the growth of mortgages and private pension plans at home alongside support for the acceleration of foreign direct investment, especially in Europe. That financial growth was given a further boost with the end of fixed exchange rates and the scramble on the part of international business to find ways to deal with the uncertainties of exchange rates. The restoration of corporate profits under neoliberalism reduced corporate requirements for normal borrowing at the same time as the stagnation of worker incomes created new lending opportunities – workers came to depend heavily on their homes as collateral for borrowings to sustain their consumption patterns (household debt soon surpassed each of corporate and government debts).

These factors led to financial institutions providing new services to both business and consumers. Especially important, as money flowed in from abroad it reinforced low U.S. interest rates and increased competitive pressures among financial institutions to find ways to protect and raise their profits. With the acquiescence of the American state, finance very significantly increased its ‘leverage’ (loaned ever more on their limited base of borrowed assets) and developed new products to radically extend their ‘risk boundaries’ (expanded loans to very vulnerable borrowers or projects for higher premiums). As mortgages were bundled into new securities to be sold across financial markets, the ‘low finance’ of workers and the increasingly complex ‘high finance’ of Wall Street (Bay Street in Canada) became inextricably linked.

When the housing bubble burst, it directly affected the economy (construction, furniture, appliances, and the impact on demand of the destroyed value of workers’ main asset). This would ‘normally’ have meant a significant downturn. But given the degree to which overstretched financial companies were now vulnerable to disruptions in the flow of capital, and the extent to which each of these companies was integrated with other companies, what capitalism faced was a financial wildfire. That wildfire stopped the economy in its tracks.

It is crucial to recognize that to insist on the centrality of finance is not to explain the crisis in terms of predatory speculation (though much speculation did of course take place). While finance is a distinct part of the economy in terms of its institutions and role, it isn’t separate from the rest of the economy. That workers had become so dependent on credit was linked to the weakening of unions and the decline or slow growth in wages. That finance grew exponentially and had become so fundamental to the functioning of the economy, in spite of high profits seemingly making credit less important, was tied to finance providing the special funds and services for capitalist restructuring, such as advice and funds for mergers and venture funds, and instruments like derivatives and hedge funds that supported managing risks central to operating in a global environment.

Moreover, finance didn’t just provide specific services but played a central role in the overall working of the system. It reallocated capital across sectors, disciplining both workers and business to maximizing overall returns. It brought global savings to the U.S., reinforcing the ability of the American state to manage its own economy and superintend the making of global capitalism. And, there was one other factor, perhaps more difficult to grasp, but central to all this. The exponential growth of financial trades that seemed to the outside world as no more than an insider’s casino divorced from the functioning economy served, as Bryan and Rafferty have argued, to create the deep financial markets that allowed for some degree of price setting or ‘commensurability’ of assets across time and space, without which capitalist decisions would be especially compromised.

That finance was so fundamental to the ‘real’ economy was reflected in the lack of conflict between finance and industry through the crisis. But there were contradictions of another kind. Corporations and consumers had become especially dependent on the low interest rates and expanded or new services provided by finance, but this also came with the explosive volatility of finance as liberalized ‘abstract’ capital. There appeared to be a need for a new regulatory regime to limit the social madness of finance; the dilemma for the state was how to ease that volatility without undermining the pluses a liberalized financial system offered. This dilemma could, for a time, perhaps be alleviated but it wasn’t about to go away.

Back to Keynes?

Given the comparisons often made to the Great Depression, it seems especially useful to ask if Keynesianism, which first gained its credibility through that earlier crisis, holds the answer again to the crisis of 2008. This is amplified by an apparent delegitimation of neoliberalism and nostalgic references to the 1950s and 60s, when the alleged readiness of governments to stimulate while supporting a welfare state of growing unions and expanding social services brought a ‘golden age’ to the developed capitalist core.

Before turning to the economics of Keynesian stimulus in the present context, its earlier history needs some demystification. Whatever its achievements – and they were indeed significant – we should not forget the status of women in those decades, the actual growth in poverty, and the direct colonial interventions of those years. Nor should we ignore the fact that it was in this very era that the stage was set for neoliberalism. It was, after all, in the 1950s and 1960s that freer trade was institutionalized, MNCs accelerated their foreign investments, finance was liberalized and expanded dramatically, and whatever left had merged in the unions was marginalized as workers and unions were integrated into a capitalism that prioritized individualist, consumerist growth. Moreover, it was the instability of (close-to) full employment – unstable because it left workers with the capacity to resist arbitrary authority in the workplace and wage restraint in bargaining – that contributed to the profit squeeze and crisis of the 1970s. And it was that crisis that was so central to the consequent neoliberal attack on the working-class and the institutions that supported it.

The present crisis was not caused by a lack of demand; consumption as a share of GDP was in fact at historic highs when the crisis hit and the growth in after-inflation nonresidential investment had averaged over 6 per cent annually in the four years before the crash. Nevertheless, with consumer spending uncertain today and business investment hesitant, significant stimulus is in fact a crucial dimension of returning the economy to stable growth. But there should be no illusions about this having the potential to introduce a new ‘social contract’ with business and reverse the neoliberalism we’ve been saddled with over past thirty years.

Austerity is not just a whim on the part of politicians (something that should be abundantly evident from the extent to which austerity has been applied across virtually all states and whether conservatives, liberals or social democrats have been in office). There was a very concrete reason for why any stimulus was approached so gingerly. For capitalist economies that are based on private finance to function, the confidence of financial institutions is paramount. This implied bailing out and consolidating the banks and others (workers) paying for this in terms of both income and if necessary, jobs – i.e. austerity rather than direct economic expansion. And even as banks returned to solid footing, that same concern to not upset the financial ‘community’ meant that governments were reluctant to ignore financiers’ warnings of stimulus leading to inflation and the erosion of the financial systems’ assets.

As it turned out, at least some stimulus could not be avoided given the scale of the crisis but the main form this tended to take was through the financial system itself (quantitative easing and low interest rates). The reason is clear: doing it through central banks as opposed to fiscal expenditures distanced it from the political system (i.e. democratic) system; the timing, level and especially reversibility of such stimulus could be decided by ‘technical’ means, not public debate and it could operate through private incentives rather than the expansion of state planning capacities that might serve public needs such as infrastructure and social services.

“To return to conditions similar to the golden age would mean a long struggle to rebuild the working-class as a social force and reverse the international liberalization in trade, finance and integrated networks of production that have occurred since the 1950s.”

More significant stimulus of a direct fiscal kind may still occur, especially if there is another downturn and economic scare. Even the ultra-liberal Economist has cautiously called for more public investment in infrastructure. But this is seen as temporary rather than a new direction, a limited step backward as a condition for continuing steps toward neoliberalism.

The point is that in contrast to the balance of social forces and the pent-up productive capacity and demand after World War II, a ‘social contract’ is simply not on today. To return to conditions similar to the golden age would mean a long struggle to rebuild the working-class as a social force and reverse the international liberalization in trade, finance and integrated networks of production that have occurred since the 1950s. It would, in other words, mean radical structural changes that go far beyond Keynesianism. This is even more true once we ask what kind of stimulus we want. Will it, for example, incorporate concerns with other social contradictions like the environment and social inequality (low-cost housing, which roads get fixed, which neighborhoods keep their schools)?

Progressive Competitiveness

The notion of ‘progressive competitiveness’ purports, as a complement to the Keynesian focus on macro policy, to address the micro structural changes essential to success in an intensely competitive world. The progressive dimension stems from the call for a more interventionist state, a populist bias against finance in favour of manufacturing, and union involvement in the economic planning process. This is all directed to the end of finding a ‘high road’ to competitiveness that doesn’t put the onus on sacrificing working conditions and restraining compensation and social programs.

However, in contrast to Keynesian stimulus which – while naïve and incomplete – is worthy of support as being on the right track, progressive competitiveness is a most dangerous ‘alternative.’ Progressive competitiveness is in fact no more than a seductive fig-leaf for the integration of workers into the neoliberal project. The economic problem is defined as nationally-based corporations being too weak or the national environment being too unattractive to win in international competition. And so unions and workers are drawn onto a terrain –strengthening corporations and prioritizing competitiveness – which undermines the very independence from capital and the priority of capitalist accumulation unions emerged to challenge.

Progressive competitiveness pulls workers into identifying with ‘their’ corporation and so fragments them from the rest of the class. This occurs even within particular workplaces; as workers are encouraged to ask not what they can do for themselves or fellow workers but for the corporations they depend on, workers who resist this logic – for example in regards to health and safety – find themselves isolated. The invitation to an alliance with ‘productive’ capital against finance reinforces that integration with capital with no counter-balance since the real alliance, as experience unambiguously demonstrates, includes industrial, retail and financial capital against unions. Since ‘state intervention’ is not inherently progressive, the actual interventions this strategy contemplates given the balance of power includes no intention of challenging private property and so the onus of competitiveness returns to tightening working conditions, making labour more flexible, reducing the ‘drain’ on competition of government services, and calling for ‘temporary’ restraints on working-class demands that unless resisted are regularly renewed. Greg Albo has, consequently, appropriately renamed progressive competitiveness as “competitive austerity.”

There may of course be sweeteners to bring skeptical workers and unions in (training is always one such consensus-builder between labour and capital), but the actual prospects of success in terms of the promise of jobs has proven an illusion while jumping on this bandwagon lethally undermines the capacity of workers to address security, equality, a more meaningful democracy and qualitatively richer lives.

Are We Stuck in Stagnation?

It would be foolish for the left to try and make predictions one way or another, given the contingency inherent in structural crises (how workers, capital and states will respond; how historically new forms of production and regulation will work out). There are certainly reasons to expect capitalism in Canada and the U.S. to be revived: corporations are flush with cash; banks have generally restored their balance sheets through the generosity, intended or not, of the public; credit is starting to flow again to business; and there are signs of new investments. Though Rozworski is right to point to the limited investment relative to the level of profit, the after-inflation level of nonresidential investment in Canada increased by an impressive 11.3%, 10.5% and 7.4% in 2010-2012. As for markets to sustain this potential, the rich have proven quite adept at spending the income they deny to the rest of society; though wages are in general unlikely to rise by much, militant attempts at unionization at Walmart’s, fast-food outlets and in the personal care sector may raise the wages of low paid service workers; and consumers seem ready to borrow again (though banks will now likely restrict credit to lower income groups).

On the other hand, the increases in Canadian investment cited above were from a very low base, the data for 2013 is expected to show only the slightest increase, and the impact on growth has been very modest. Moreover, though corporate hoarding of cash is now common throughout the developed world, it is particularly high in Canada. And the degree to which Canadian corporations are hoarding cash is strikingly high even by international standards, the hoarding in Canada is particularly high. Business is clearly waiting to see how substantial the recovery will be before it makes sustained commitments to investment and the Canadian recovery will depend very much on how much unemployment falls, how far average wages rise, how strong and sustainable is the return of consumer spending; and uncertain developments abroad such as the global demand for resources and the return to stable growth in the United States. Especially important is whether popular pressures can push the state toward radical stimulus (whether this can happen without the economy threatening to tank again is an open question).

For Canada, stimulus and structural change are especially linked. The U.S. has the capacity – at great cost to workers of course – to restructure so as to move the economy to high tech manufacturing and services jobs and achieve strong productivity growth and industrial exports. Canadian industry, in contrast, depends on mid-tech production; the 2012 level of research and development expenditures of General Motors (which ranks 5th in the U.S. in this regard) surpasses the total of all research and development done by all Canadian manufacturing. Canadian production also relies heavily on a favourable exchange rate. Though Canadian manufacturing jobs were not as hard hit as elsewhere through the 90s – the low Canadian dollar playing a significant role – Canada has caught up with a vengeance in terms of the decline over the past decade. If and when the global economy takes off again, the continuation of the resource boom will put pressure on the Canadian dollar to rise and further undermine manufacturing.


If the outcome of the latest crisis is indeed contingent, what it is that we might do to make a recovery – that is, a recovery of a particular kind that reverses neoliberal orientations – more likely?

Casserole protests in Montreal, 2012. [Photo: Bernard Brault]
1. Rebel! If we don’t assert that we refuse to take it anymore, the other side will simply keep demanding more from us.An outburst of pure anger at how the elites have enriched themselves while impoverishing and narrowing our lives would be a good first step. OCCUPY took over parks. Why aren’t workers, in the tradition of the sit-down strikes of the 1930s – the last time we faced circumstances in any way comparable to today – taking over factories scheduled for closure because their profits aren’t high enough or government buildings where services are being cut or given to the private sector so they have more mechanisms to rip the rest of us off? Why aren’t workers striking to match the gains the executives that employ them are getting or demanding an end to the increased workloads that cut decent jobs as they sacrifice quality services?2. The private sector is failing us. Expand the public sector.a) We need social programs – health care, good schools, pensions – now more than ever. We should be fighting for a moratorium on cuts in social services and turning that moratorium into an expansion of these and new services (universal pharmacare, pensions that allow everyone to lead a decent life in their remaining years).

b) No-one denies that Canada’s infrastructure needs massive repair and that pressures on the environment in particular require massive new investments. With finance so cheap today, with labour anxious to do useful work, with the private sector having proved that it won’t invest and provide the jobs and certainly not good jobs, with corporations sitting on vast pools of capital that could be put into government bonds to build the country, what are our governments waiting for?

3. Challenge the criteria for removing the productive capacities of our communities.

How many workers have seen their plants close, knowing that the machinery in the plant is still productive, the workers have the skills – or can readily be trained – to produce other products, and the facilities can be converted to producing socially useful products (including, again, all the demands that addressing the environment implies). Why are we letting that productive potential go to waste just because it isn’t profitable for the minority of owners? Why aren’t we developing regional and national plans to maintain our productive capacities and address our needs?

Rozworski’s emphasis on co-ops does seem to move in this direction. But his incorrect diagnosis that the problem is excess capacity seems to contradict this argument for co-ops: excess capacity implies that some capacity must be destroyed, but adding co-ops would increase, capacity. Moreover, while it is a matter of solidarity to support workers who, having no other alternative, look to taking over a facility via a co-op, this is too limiting. We need something on a much larger scale and based on different principles than competing in hostile markets. We need a plan that includes how new investments will be funded (so workers aren’t risking their limited savings), technical and training assistance, and who will buy the product. Eventually, this larger experience will hopefully pose the question of taking over not only failing plants but ones with some broader strategic significance.

4. The social importance of banks is acknowledged when they’re in trouble. Why not take this to its logical conclusion and make banks into public utilities?

As long as we channel our savings through the private financial system, they can be used against us. A democratic society demands democratic control over how society’s savings are allocated and in simple practical terms, if we do not control these savings we cannot carry out the agenda outlined above.

5. Build for the long term.

None of the above can happen by ‘asking’ for it. The underlying challenge is to build the working-class into a social force that can lead social change. This cannot happen overnight but it can be started now. Protests and resistance are a beginning, but what this means is creating the kinds of organizations that support actions in the workplace and in the streets, that facilitate educating ourselves and clarifying our goals, bring new people into the struggle, strategize collectively, learn from both defeats and partial victories, invent an alternative solidaristic culture and come to see that the problem we face is not just the threat of stagnation, but the nature of capitalism even when it is ‘prospering.’ •

Sam Gindin was research director of the Canadian Auto Workers from 1974–2000. He is co-author (with Leo Panitch) of The Making of Global Capitalism (Verso), and co-author with Leo Panitch and Steve Maher of The Socialist Challenge Today, the expanded and updated American edition (Haymarket).