The Second Great Depression
from David Ruccio
For some time, I’ve been calling the current crisis in capitalism the Second Great Depression.*
Now, it seems, fears of a repeat of the First Great Depression are becoming more widespread.
Will Hutton [ht: db] is one example:
Eighty years ago, faced with today’s economic events, nobody would have been in any doubt: we would obviously be living through a crisis in capitalism. Instead, there is a collective unwillingness to call a spade a spade. This is variously a crisis of the European Union, a crisis of the euro, a debt crisis or a crisis of political will. It is all those things, but they are subplots of a much bigger story: the way capitalism has been conceived and practised for the last 30 years has hit the buffers. Unless and until that is recognised, western economies will be locked in stagnation which could even transmute into a major economic disaster.
John B. Judis is another:
TODAY’S RECESSION does not merely resemble the Great Depression; it is, to a real extent, a recurrence of it. It has the same unique causes and the same initial trajectory. Both downturns were triggered by a financial crisis coming on top of, and then deepening, a slowdown in industrial production and employment that had begun earlier and that was caused in part by rapid technological innovation. The 1920s saw the spread of electrification in industry; the 1990s saw the triumph of computerization in manufacturing and services. The recessions in 1926 and 2001 were both followed by “jobless recoveries.”
In each case, the financial crisis generated an overhang of consumer and business debt that—along with growing unemployment and underemployment, and the failure of real wages to rise—reduced effective demand to the point where the economy, without extensive government intervention, spun into a downward spiral of joblessness. The accumulation of debt also undermined the use of monetary policy to revive the economy. Even zero-percent interest rates could not induce private investment.
Finally, in contrast to the usual post-World War II recession, our current downturn, like the Great Depression, is global in character. Financial disturbances—aggravated by an unstable international monetary system—have spread globally. During the typical recession, a country suffering a downturn might hope to revive itself by cutting its spending. That might temporarily increase unemployment, but it would also depress wages and prices, simultaneously cutting the demand for imports and making a country’s exports more competitive against those of its rivals. But, when the recession is global, you get what John Maynard Keynes called the “paradox of thrift” writ large: As all nations cut their spending and attempt to devalue their currencies (which makes their exports cheaper), global demand shrinks still more, and the recession deepens.
Right now, we’re witnessing a crisis in capitalism and not a crisis of capitalism. The question is, how much more punishment needs to be meted out to save capitalism from itself before we seriously consider alternatives to capitalism?
* Although, in all honesty, I don’t know if I coined the term or borrowed it from someone else.
Capitalism is the capture of government by big capitalists and landowners to get subsidies and privileges at the expense of the public. It seems to me that there is no crisis in capitalism; their subsidies are bigger than ever.
What about government spending on military? Isn’t that socialism? If we(USA) would cut back spending in the defense sector what would happen?
David stated”
“Right now, we’re witnessing a crisis in capitalism and not a crisis of capitalism. The question is, how much more punishment needs to be meted out to save capitalism from itself before we seriously consider alternatives to capitalism?”
The disease is running its course in the body politic and the immune response will be severe
once the immune system springs into action: Expect severe swelling and pain as a precursor to healing. The body will reform itself into a functioning regulated system and discard the cancer cells by way of the large intestine….
I believe that the American economy is becoming increasingly dependent upon activity in the military/industrial sector, both for jobs and cash flow generation. That is a dangerous path to follow as the hostility of the rest of the world towards the US will steadily increase and leave Americans more and more isolated.
When the US dollar finally looses its special status, all hell will likely break loose.
To me it seems like the main difference with the GREAT DEPRESSION is the absence of alternatives in the world. The 1930s were a period where Capitalism (western style) was confronted with the alternatives of the Soviet Union (planned alleged communism) and fascism Mussolini style, soon to be followed by Hitler’s version.
In that context, thinking of alternatives to capitalism was logical.
Today, we are in the era of Margaret Thatcher’s TINA (there is no alternative) and it appears the argument is between a Reagan-Thatcher version of capitalism and a more extreme 19th century version preached by so-called libertarians (like Ron Paul).
The old New Deal version of capitalism has been slowly replaced since the beginning of the Reagan Revolution in the US — with a major assault being mounted now as the right-wing pushes for “austerity” and Obama resists weakly.
In this context what are the rest of us to do?
Should be be part of a dispirited coalition attempting to preserve what is left of the New Deal or should we ignore that fight and attempt to create some interest in real alternatives –
Interesting point.
I would say another difference between this and the first Depression is the existence of New Deal style institutions that prevent the collapse of demand and the brutal poverty from reaching us too obviously.
The understanding I have is that we are in 1932 (not of course, 1937 as Krugman and others have suggested). That is, we had the crash, and we haven’t done the structural fixes to the financial sector, the casino, nor to private debt loads that was done in 1933. Consequently we get the next leg down, the next failure of the banks, and this time without the political sponsorship of O’Hoover that will let them avoid their just desserts.
We do have the brown shirts of the Tea Party and the corporate socialism that are not that dissimilar to fascism. The Chinese party capitalism is not so dissimilar to Stalinist communism (or as you say, “alleged communism”) Certainly the Washington Consensus as applied to developing economies is a kind of corporate colonialism.
One way of stimulating the economy is on the demand side by guaranteeing a basic income for all, irrespective of circumstances. A steady flow of cash into the hands of consumers that will purchase basic goods and services will alleviate social tensions and encourage companies to invest in enterprises that provide these goods and services, rather than simply speculating in financial markets. A possible win-win for all.
Absolutely right, Helge – and that resolves most of the problems of small business and communal activity (as in government) financing.
What needs to go with it is a culture of doing any work that needs doing, trusting habitual workers rather than banks and big business, and understanding that cash simply authorises society to give credit in the form of goods, which as used need to be gratefully regenerated if the system is to keep going.
There is an international problem, though. An economy is like a hot water central heating system in which the banks act as expansion tank.
As a critique of the current austerity measures, if a central heating system leaks you don’t take water out of the radiators to refill the header tank: you stop up the leak, then put more water in. Here, the hole has been “liberalisation” of trade, allowing foreign speculators financed by banks printing money to buy up a nation’s utilities and productive assets so it cannot earn its keep. We need to stop that, and – I suggest – internationally reduce banks to vetting and issuing your constitutionally-authorised rations of credit to current accounts, and to where real resources are needed to maintain or regenerate productive capacity, housing and social facilities.
Quite so, Dave. The financial system has to be re-regulated in a major way to stop the leakage of money into speculative activities.
Right now we have huge pools of money wandering around in the various commodity classes and artificially inflating and deflating prices in the quest for quick monetary gains.
Those who depend on stable prices for life’s necessities pay the price for this short sighted predatory behavior.
It is time for the Big Stick to be used on the financial sector where the only measure of success is the bottom line without any regard for societal consequences.
An improvement to the allocation of land and labour to best use via markets would be for those factors to be owned by those that use them.
Can I please put in a further plug for Fred Harrison’s Boom Bust: House Prices, Banking and the Depression of 2010 (2005).
There is no “more extreme 19th century version [of capitalism] preached by so-called libertarians.” The 19th century had slavery, the theft of land from American Indians, the subjugation of women, and colonialism. All these are rejected by libertarians. The USA is much more libertarian today than it was in the 1800s.
Fred – more is the pity (US more libertarian than in the 1800s) because the U.S. in rather a mess right now.
If its too much libertarianism that was responsible for the current mess (and I point the finger at Greenspan and Ayn Rand in this regard, the latter whom could hardly have been said to carry the message of salvation for the U.S. when she came from the background of a nation who made the mistake of going too far down the command economy road, which is not (then or now) the U.S. problem, even when Ayn Rand arrived in the U.S. sometime pre 1970s(and therefore her remedies were not appropriate for the U.S. despite her own prejudices.
Fred Foldvary – would you recognise it if the U.S. went too far down the libertarian road?, because I am inclined to think that is the problem now in the U.S.. It is responsible for a lot of industrial destruction by handing “too many freedoms” to the so called job generators / entrepreneurs along with no social obligatiobns whatsoever.
It was Greenspan, disciple of Rand who helped the U.S. economy along that pathway (but all that freedom given to the entrepreneurs and wealthy class) has only enabled them to avoid their wider social obligations and their tax..
Libertarianism was not responsible for the current mess, since the US is still far from being fully libertarian. Greenspan may claim to be a free-marketeer, but he was the head of the government agency that coercively imposes central planning on money and interest rates.
A nation cannot go too far towards freedom. More liberty is always better. How can you see too much freedom is a problem when we have a central bank, punitive taxes, stifling restrictions, and massive subsidies? Blaming a non-existent free market for our problems is like blaming unicorns for global warming.
When government abolishes taxes on labor, eliminates subsidies to land values, and allows all non-harmful activities, then we will have a libertarian society.
Unemployment in Spain is 22% – and increasing. That’s without any doubt a second Great Depression. That’s a national emergency. But all we care about is debts…. The OECD, in a report on the Spanish labor market, just states that the Spanish labor market has to become more flexible (which indeed might lower unemployment with 0,2%, or so). A quote from Franklin D. Roosevelt which describes exactly this situation: “Demoralization caused by vast unemployment is our greatest extravagance”, Indeed, Europe is extravagant at the moment.
I’m surely not a libertarian. But in the situation described above, the idea to drastically lower the present 18 or (Greece) even 23% VAT rates on labor intensive services and to finance this by a land tax seems worth a try (understatement). It’s at least a policy which is aimed at increasing demand for labor instead of crushing the economy. Can you believe this – unemployment is going through the roof and they are actually increasing VAT on labor intensive services, to please the IMF.http://www.tmf-vat.com/tmf-in-the-media/spain-increases-vat-rate-from-16-to-18.html
By the way – I don’t see any reason why lower VAT rates exclude fiscal policy.
I think it is prudent to look down the tunnel at this time and see where this is all heading:
Internal strife will inevitably lead towards finding an external enemy which can be demonized.
The Falklands war comes to mind. Here, an unpopular militaristic Argentinian government looked for a popular cause to divert the public’s attention away from itself: Argentinian claims on the Malvinas (Falkland) Islands.
Right now, tensions between Turkey, Israel and Greece (yes, Greece) are very high over gas field ownership and control in the inner Mediterranean. The divided (between Turkey and Greece) island of Cyprus is right in the middle of the dispute. DEBKAfile, an Israeli intelligence website, is warning about a very dangerous situation developing right now.
The financial system is inherently flawed, like that great airship, the Hindenburg, with its hydrogen gas. The crew that runs the financial system is largely oblivious to the nature of the course they have set, like the crew of the Titanic. Narrow self interest is the overriding driving factor (Getting across the Atlantic in record time). That great iceberg of Debt is waiting to claim the unsinkable ship.
Put your life jackets on, please.
Titanic musical Deck Chairs or more Ponzi Casino Shell Game darlings? Let’s face it, putting a new face of anykind on a crooked world game of, by, and for ego demons and corporate devils will never be anything else. The Plutonomy and its colossal cartels will keep colluding and getting away with whatever they can grab & suck the life force out of until there is a final reckoning with the 99% of the rest of us and/or nature. Why is it so hard to consider creating a hybrid dual system? It works for armies in wartime emergencies when official currencies are either too scarce or too bogus to be acceptable. And, economics is going to grow up and fully beyond the autistic/delusional stage of its arrested development into geonomics or macronomics or analytical realistics or just honest accounting with a viable paradigm, valid epistemics, decent semantics, and good maths, then isn’t it time to start initiating the transition to that sustainable future? Otherwise, all the debate about what’s going wrong, where the blows came from, which came when & who did what are starting to remind me of Buddha’s analogy of the great warrior shot with arrows, refusing help, and sitting on the battlefield inspecting the arrows, analysing their qualities, trying to identify the makers, speculating on the damage, the nature of the poison, and so on… If this is not necessarily the End Game Scenario of Demonocracy or Plutocracy, it may as well be. Don’t you think…? After all, the only thing that really keeps it going is the self-delusion, self-disempowerment, and willing collusion of the victims, all 99% of us. The fact is, we can start an alternative credit system of any scale, based on whatever we want to base it on, awarding credit for whatever we value most, however green, noble, divine, or silly. Yes, we can, as easily as we decide toplay another game when we grow bored with Monopoly, the board game. And what could be a nobler occupation for a RWE scientist than inventing and studying the best of all possible alternatives to the economics of ecocidal mania? In fact, you could study the performance of both subsystems (of the dual economy) and the relationship and effects of both and of their interaction. This latter notion, as I envision it, would involve study of a hybrid with a nonprofit side and whatever’s left of the for-profit game. Done properly, a nonprofit pure credit system could be supported by the IMF, World Bank, all other banks, Visa, PayPal, eBay, Facebook, Google, Amazon, Microsoft, etc. It would rapidly create about 4 billion new consumers (account holders). This could be done as a more “rational” option than an ultimate DemandSide monetary game where people are paid by automated producers for taking their products off their shelves & showroom floors. So, let’s design a really fun yet sustainable new game to play. OK? With blissings to all & to all a good night (with wonderfully deep, healing, refreshing sleep) every night… PS: My Greenbook is not written for economists only, but as a motivational, one-stop strategic resource for a broad variety of professionals & students of sustainability (who want to prevent total collapse of civilization & the biosphere).