How the Left Should Respond to a New Global Slump


From Jacobin, September 4, 2019:

Interview by Ashley Smith

The world economy is slowing, and all the usual signs of yet another crisis are accumulating. Ashley Smith interviews David McNally about the causes of all of this and the political implications of a global slump for the socialist movement in the United States and internationally.David McNally teaches history at the University of Houston. He is the author of Global Slump: The Economics and Politics of Crisis and Resistance. His new book, Blood and Money: War, Slavery, Finance, and Empire will be published next year by Haymarket Books.

The news is filled with stories about crisis signs in the US and world economy. What is happening?

The global economy is skidding to a jarring halt at the moment. World trade is contracting — down more than 3 percent since last October. Manufacturing industries in China, the United States, Japan, Germany, and Britain are in recession. In the United States, corporate profits — always the key to growth in a capitalist economy — are sliding.

Meanwhile, “emerging economies” like Mexico, Turkey, and Argentina have already plunged into deep slumps. Just before Labor Day, Argentina defaulted on $100 billion of its debts, a harbinger of turmoil in world financial markets. Not surprisingly, ruling class circles are panicked about an impending collapse.

And for working-class people around the world, already suffering through the weakest economic expansion since the Second World War, the implications are ominous. All the problems that have dogged them throughout the “lost decade” since the Great Recession of 2008–9 — poverty, insecurity, precarious employment, and deteriorating conditions of life — are likely to worsen dramatically. The emerging global slump, and the intensified social conflict it engenders, represent a moment of danger as well as radical opportunity.

Is this new crisis a result of the unresolved problems that triggered the Great Recession, or are there new features to it? Will it be as deep as the last one?

This crisis is the logical outcome of the last one. But, at the same time, it will have a number of unique features. As I have argued elsewhere, capitalism undergoes regular crises because of its in-built tendency toward over-accumulation. In a nutshell, competition for markets and profits induces corporations to invest frenetically in order to get an edge on their rivals.

Each one attempts to purchase new machines and technologies, build new structures — from factories to shopping malls — and expand their operations, all with an eye on seizing market share. The end result of frenetic investment is that capitalists massively overshoot. They produce buildings and machines far in excess of what the actual level of profits can justify.

As profits per dollar of investment fall, a great contraction takes place. Factories close, workers are laid off, banks collapse. That was the scenario in the Great Depression of the 1930s, just as it was in the Great Recession of a decade ago. The latter, of course, was triggered by a meltdown in financial markets tied to real estate.

But triggers are not fundamental causes; they simply arrive at a tipping point. This time, the trigger appears to be Trump’s trade war with China. This will give this crisis distinct dynamics. Moreover, it may not be possible for governments to respond in the same way this time.

A decade ago, in 2009, the major capitalist states did something unprecedented: they injected tens of trillions of dollars into the world banking system in order to prevent a complete financial meltdown. As major banks began collapsing, they worried — rightly — that a global financial crash could imperil the capitalist system as a whole. Arguing that global banks were “too big to fail,” they demanded that public funds should be used to bail out private banks — as they were on an enormous scale. Next, they pushed interest rates (particularly the price at which commercial banks can borrow money from the central bank) to record lows. While this “quantitative easing” kept the banking system afloat, it had other effects.

One of these is that cheap money allowed loads of relatively unprofitable firms to stay alive. No need to declare bankruptcy after all, if you can stay in business by borrowing free money. Paradoxically, this blocked the kind of deep restructuring that capitalism needs to reenergize itself.

In a classic slump, the least efficient enterprises get wiped out, and this allows the more profitable to expand their share of sales and profits. In the recessions of the mid-1970s and early 1980s, for instance, scores of steel mills shut down across the United States, resulting in two-thirds of all steelworker jobs disappearing. But those companies that survived then had huge new market opportunities available. And it is this that induces the remaining firms to launch new waves of investment. From there, the cycle of boom and slump resumes.

But throughout the Great Recession, thanks to the free money policy that kept banks afloat, corporate bankruptcies were not widespread. “Zombie firms” lived on by borrowing. However, this meant that the most efficient companies did not perceive prospects for a new wave of growth and expansion. As a result, business investment has been anemic since 2009, and so has the overall economy. Rates of growth have been well below the norm for economic recoveries.

Profits recovered, of course, though much of this had to do with squeezing workers harder by holding down their wages and benefits and speeding up the pace of work. Alongside squeezing workers, the rich were able to parlay free money into financial investments, like stocks and bonds, that made them wealthier, thereby exacerbating social inequality. We should not forget that the twenty-six richest people on the planet now have as much wealth as the bottom half of humankind (3.8 billion people).

Yet while profits and incomes of the wealthy rebounded, living standards for working-class people did not. In fact, levels of impoverishment today are utterly shocking. Recent reports indicate that four out of every ten families in the United States struggle to meet the costs of food, housing, health care, and utilities every month.

In Britain, fully 4 million people are in “deep poverty,” and living standards have been declining for a longer period than ever before recorded. British life expectancy is falling, with the poor dying ten years earlier than the rich, and the number of children in poverty rising by 200,000 per year. In Argentina, 3 million more people have fallen into poverty in the last year.

It is rightly said that working-class people around the world — and workers of color in particular — have been living through a “lost decade” in terms of human well-being. While the top 1 percent in the United States has doubled its wealth since 2003, for instance, the bottom half of households are 32 percent poorer. If that is the situation during the recovery phase of the capitalist business cycle, one shudders about what is coming. As profits contract and the economy turns down, pressures on working-class people are going to get drastically worse — unless there is mass social resistance.

There have been many articles in the business press expressing concern that the methods they used to overcome the last crisis won’t work this time. Why? What could they do in the event of a new one to get the system back on track?

Governments and central banks confront a dilemma as the economy slides into recession. Because they have kept interest rates near zero and bought up so many toxic financial assets (particularly mortgage-backed securities), it is not clear how they can combat a new economic collapse. Ordinarily, governments cut interest rates as a slump begins in order to encourage businesses and consumers to borrow money and spend it.

But in an almost unprecedented move, central banks have kept rates low for a decade. They have done this so that commercial banks will borrow more from the central bank (which they pay for by creating loans at rates higher than what they pay the Fed). In the United States, the Federal Reserve’s key rate is now 2.25, percent while the rate of inflation is 1.8 percent.

For the banks, this means the real cost of borrowing from the Fed is 0.7 percent. So, the Fed does not have a lot of room to counter the recession by cutting its lending rates without going into negative territory (paying banks to borrow money). Japan has already gone there, and it has utterly failed to revive a moribund economy.

Another way the central bank can inject money into the economy is by purchasing private assets. That’s what it did after 2009, when the Fed bought trillions of dollars in mortgage-backed assets from the banks, effectively rescuing them by giving them good money for toxic paper. But in so doing, the Federal Reserve more than quadrupled the assets it holds (known as its balance sheet) between 2009 and 2016 — adding over $3 trillion to its books — and it is not clear what it could now accomplish by buying up trillions more in an effort to stimulate the economy.

The Japanese government went down just that road more than twenty years ago. It kept buying up private bank assets in an effort to stimulate growth. It intensified these purchases after 2009. Yet, rather than restart the economy, Japan has suffered through a quarter century of stagnation, with far and away the lowest growth rates of any major economy.

The problem it encountered is endemic to a capitalist economy. If profits are low and there are few reasons to invest, businesses would rather speculate with free money — often creating financial bubbles in the process — rather than make industrial investments with no prospect of a return. As much as productive investments would create jobs and put more money in people’s pockets, capitalists won’t do this simply for the public good.

Their criterion is profits, not economic well-being. So, while Japan’s central bank continually injected billions into the financial system, it has done nothing to fuel sustained growth. This is the dilemma that now confronts governments in Europe and North America. They are out of ammunition at this point, having used it all up fighting the last recession. This is why we might see the world economy as a whole drift into a prolonged period of stagnation of the sort that Japan has been living through.

Some left-leaning economists (often influenced by the thought of John Maynard Keynes) will retort that this is the moment when governments need to jump in with New Deal–style spending projects to boost economic activity. Now, I am all for public spending to boost employment and the quality of life in our communities. But public expenditure does not address the unwillingness of private business to invest when profitability is depressed.

Keynes believed that capitalism gets into trouble due to insufficient consumer spending. When it does so, he urged, government ought to boost its spending to restore growth. The assumption here is that capitalism could provide endless growth, without slumps, so long as governments pursued correct policies.

But Keynes failed to see that it is not a drop in spending that causes capitalist crises — it is a drop in profits (due to capitalist over-investment). What the crisis highlights therefore is the need to replace a system ruled by the pursuit of private profit with one based on public ownership and social planning. Rather than seeking to revive the capitalist economy, the job of the Left is to mobilize the multiracial and multigendered working class to resist the effects of the crisis while building forces for a socialist alternative.

What is the likely impact of a new crisis on politics within nation-states and between them? Will this intensify political polarization and inter-state antagonisms?

A global crisis intensifies all the world’s antagonisms. It produces instabilities and conflicts on multiple scales. Ruling classes will attempt to protect their interests by displacing the effects of crisis onto the poor and the oppressed, and by making their elite rivals absorb more of its costs. At the level of class conflicts, capitalists will try to weaken unions, slash wages, cut social entitlements, and scapegoat those they see as most vulnerable — immigrants, trans people, workers of color, women, and queers.

In one capitalist nation-state after another, this has involved racist immigration and border-control policies. That is why the Left needs to respond with working-class politics that are anti-racist, feminist, pro-queer, and pro-trans. It is also why the Left needs to be in the forefront of building the campaign to close Trump’s concentration camps. And now, more than ever, radical politics must also be resolutely eco-socialist.

Overlaying the antagonism between classes is another level where dominant classes turn on one another. Through the mechanism of the nation-state, they engage in trade and currency wars, technological espionage, and forms of geopolitical rivalry. At the same time, there will be counterpressures to prevent these rivalries from blowing up into global conflicts.

This is why sections of corporate America are unhappy with Trump’s trade war with China. To be sure, they want to get the edge over China’s companies. But they also hope to avoid escalating battles and their destabilizing effects. Under the intense pressures of crisis, however, these confrontations can quickly spiral out of control. It is, after all, an old ruling-class trick to foment national hostilities at times of social discontent.

This is a crucial reason why the Left needs to adopt intransigently internationalist politics. We have no skin in the game of rivalries among the world’s powerful states. Our commitment should be to overcoming national rivalries, protectionism, imperialism, and militarism. “Workers of the world unite” is not meant as a ritual slogan. It needs to be a guiding principle of our politics.

What implications does this have for the Left? What should we be preparing for and organizing?

We need to begin by recognizing three things. First, they are coming for us. They are going to attack our communities and conditions of life with ferocity. Consequently, our resistance is going to have to be determined, collective, and uncompromising.

Second, a new economic slump will fuel the forces of the right. White supremacy, transphobia, misogyny, Islamophobia, and anti-immigrant politics will all be on the march.

But, finally, so will there be new openings for the radical left. We need to understand that while the Left is institutionally weak — our organizations are frequently small and beleaguered — there has been a huge shift in political sentiment in our direction. Socialism as a political idea is enjoying its greatest revival in half a century.

The crisis will foment political polarization — movements of people to boththe right and left. Since 2009, for every Trump and Bolsonaro, for example, we have also seen surges to the left, as with the Bernie Sanders campaign in the United States and the Jeremy Corbyn campaign in Britain. But most important has been struggle on the ground.

The upsurge of radical left movements since 2009 — Occupy, Black Lives Matter, the International Women’s Strikes, Solidarity with Standing Rock, the inspiring teachers’ strike wave in the United States, movements against white supremacy, the Global Climate Strike — all speak to a new openness, particularly among young people, to anti-capitalist resistance.

Our challenge is to help forge these anti-capitalist resistances into a powerful socialist, working-class movement. This will not be done by exhorting people to unite. It will be done by demonstrating in practice that solidarities of the oppressed can be built — solidarities that do not neglect the needs and interests of those subjected to specific forms of oppression, be they based on race, gender, sexuality, indigeneity, ability, or legal status.

The multiracial and multigendered working class that makes the system turn has yet to find its common identity. But if we can chart democratic and collective ways to create it, we will rediscover that there really is no power greater than the oppressed of the world. Overturning a system that breeds crises in the manic pursuit of private profit might then become an issue of practical politics.