The cover of last week’s Economist magazine boasted the headline “Grow, dammit, grow!” above a picture of a bald man looking up at a tiny sprout of hair on his pate.
As the Great Recession continues to grind on with no end in sight – with growth remaining anemic and unemployment stubbornly high in North America and Europe – mainstream economic thinkers seem stumped about what to do about this state of affairs. In spite of low inflation, miniscule interest rates and government stimulus packages, the world economy refuses to get off the mat. Things are so dire that US Federal Reserve chairman Ben Bernanke is now floating the idea of pumping more money into the American economy by resuming purchases of government and private debt in order to lower interest rates, hoping this will give things a boost.
Meanwhile, in recent months, liberal economists like Princeton’s Paul Krugman and Columbia’s Joseph Stiglitz have been calling on governments to spend more stimulus funds to get the wheels moving again.
While Bernanke’s remedies and government stimulus will lower the threat of unemployment and ease some pain, they won’t actually end this recession. In fact, the Great Recession will go on and on for one simple reason – its real cause is being overlooked. As is the real solution to bring it to a close.
The real cause of the Great Recession is the fact that workers, consumers and the middle class are simply too broke to buy the goods necessary to stimulate the global economy and get people back to work. They no longer earn enough disposable income and are swimming in too much debt to accomplish this.
In a broader sense, the Great Recession is really the consequence of the long and excruciating death of Fordism, that century-old notion that you need to pay workers a decent wage in order to have a market for your goods. Or, to put it more bluntly, the Great Recession is the result of the brilliantly effective plan by the corporate elites and their minions in government to impoverish and disempower the working class over the past 30 years. A plan that has had the consequence of destroying the very market capitalists need.
It’s not news, of course, that economic crises are usually caused by an overproduction of goods and an underconsumption of those same goods by workers. Now we are just seeing this phenomenon on a global scale.
Indeed, the past 60 years could by bifurcated by two important periods of economic history. The first period spanned from the late ‘40s to the late ‘70s when Fordism flourished: workers and the middle class saw an unprecedented growth in their standard of living and wages kept up with the cost of living. This was largely due to the strength of organized labour, progressive social programs, the dominance of American capital, and the fear of socialism. By the end of the ‘70s, your average CEO earned about 30 times what your worker made. Back then, workers could afford the goods that capitalists wanted to sell them.
Beginning in the 1980s, however, with the rise of Reagan, Thatcher, Mulroney and other neo-conservative politicians, and the move by the corporate sector to wage a brutal war against labour, the last 30 years has been a period marked by the erosion of those post-war gains. Labour was effectively cowed and social programs weakened. One consequences was wage stagnation. In 1980, the median family income was $58,000. In 2006, that number had actually dropped to $57,700. (Both figures are expressed in 2005 dollars to remove the effects of inflation.)
To keep wages down and workers in fear for their jobs, free trade deals and globalization made it possible for capital to move manufacturing and service sector jobs to low-wage developing countries.
The result of these actions was a widening gap in wealth between rich and poor, with more of the wealth concentrated by the elites. The average CEO now earns 300 to 350 times what your average worker makes. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income. Naturally, this has meant less money in the pockets of workers, and therefore less money to spend on goods. In 1972, the middle 60 per cent of families accounted for about 57 per cent of all income earned in Canada. By 2006 that number had dropped to 53 per cent.
And the wealth the rich were collecting? Where did it go? Most it ended up in the hands of the financial industry. By 2000, there was $36-trillion sloshing around the global financial system. By 2008, it was up to $50-trillion. And this money was put to work.
In fact, the only reason the Great Recession didn’t occur earlier was because capital decided to lend its money to the increasingly impoverished middle and working classes. After all, banks and brokerage houses could securitize this debt and increase their wealth. Suddenly cheap credit became readily available to anyone who wanted it. Which led to the emergence of things like subprime mortgages and the expansion of consumer debt.
As recently as 1990 we socked away 13 per cent of our disposable incomes—but the average debt carried by Canadian households has jumped 71 per cent since then to $90,700, growing six times faster than the average household income. Today we only save 3% of the money coming in the door. According to the consulting firm Deloitte & Touche, the average Canadian family now owes more than 1.3 times its disposable income. Overall, Canadian households owe a staggering $1.3-trillion in consumer debt.
This access to credit allowed the economy to boom during the ‘90s and early 2000s. But it was a false boom.
Today, things are much worse. Unable to take on any more debt, and with wages continuing to decline, workers simply don’t have the cash on hand to pay for all the goods corporations want to sell them. In effect, the economy is in a corner, trapped by its own contradictions.
Thus, unless workers earn bigger paycheques, and unless wealth gets more evenly distributed, the Great Recession will go on indefinitely. More stimulus dollars from governments and lowering interest rates won’t address this reality.