Economy / The recovery

Waiting for the great depression

As the new coalition government in Britain readies itself for an all-out assault on the public sector and the unemployed, it has become fashionable on the left to compare the current crisis with the Great Depression of the 1930s. Alex Callinicos in his recent book Bonfire of Illusions makes just such a comparison. It is repeated in the latest issue of International Socialism (ISJ), which talks of the similarities between the two crises.1 The ISJ points out that the Great Depression lasted ten years moving through several phases. It explains that this recession too has moved through several phases the latest of which, the sovereign debt crisis, has shocked the markets over the last few weeks, ergo it is implied this too must be a Great Depression. Joseph Choonara in Socialist Review explains that: A year ago economists Barry Eichengreen and Kevin ORourke published research showing that the Great Recession, as it has been dubbed, was closely tracking the trajectory of the Great Depression that began in 1929. But history seldom repeats itself. In a recent update to their original paper they show how the global economy has begun to diverge from the path of that earlier meltdown.2 Eichengreen and ORoukes data shows that this crisis followed the path of the Great Depression for four months over the winter of 2008-09. If output had continued on the downward path at that rate for another three years then this really would have been a Great Depression. But that did not happen. From the spring of 2009 the world economy began to recover, limiting the decline in world GDP in 2009 to -0.8%. Choonara escapes the contradiction, by simply asserting that the crisis is really at the beginning, of course every Hegelian knows that every beginning is an end and every end a beginning. But the tail of an elephant is not its trunk in spite of their superficial similarity. Neil Faulkner from Counterfire, the former comrades of Callinicos, says that the present crisis is not like the Great Depression according to Faulkner, it is actually worse! He claims that combination of the economic crisis, the environmental crisis and the political crisis means The world faces what may be the biggest crisis in human history.3 page 26 / permanentrevolution

A case of metropolitan myopia

The post-2007 recession and weak recovery in Europe and the US stands in contrast to the resilience of emerging market Asia. Bill Jefferies argues that most of the left do not grasp its significance
It is difficult not to speculate that Faulkners latter day catastrophism is a response to the split itself. Counterfire separated from the SWP over the claimed tardiness of the SWPs response to the recession amongst other things. They may or may not have had a point. But it appears that, as the SWP now argue that the recession is a rerun of the Great Depression, then Counterfire following the same logic have produced an even more catastrophic perspective. Faulkners analysis seamlessly conflates the fifty year climate crisis with the fifty day time scale for the Tories forthcoming budget, to breathlessly claim that everything imaginable disastrous is happening NOW! But before accepting this catastrophist re-write of history perhaps its worth considering to what extent the crisis is a re-run of the 1930s and to what extent it is different.

Great Depression or not?

The crisis of the inter-war years grew out of the unresolved contradictions of World War One. That war was itself a product of the suffocation of the world economy under the colonial system. The colonies had enabled the worlds major imperialist powers to enjoy strong growth in the period of the belle poque, the two decades up to the war. The development of Germany and the US and their exclusion from the colonies dominated by the old imperialists, notably France and Britain, meant a war for the re-division of the world was inevitable. Germany in particular needed access to markets abroad, supplies of raw materials and outlets for the export of finance capital. Its defeat in World War One meant that the war did not resolve the crisis that had caused its outbreak, but indeed exacerbated it. The Russian Revolution of 1917 not only withdrew further vast territories from the world market, it sparked social revolutions, civil wars and national liberation struggles throughout the world. During the 1920s the US was the only major nation still growing through the exploitation of its enormous internal market, enjoying indeed the roaring twenties. But all that ended with the bank crash of 1929. The decision of the worlds governments to allow their banks to collapse was not some terrible mistake. The authorities already knew how to halt a financial crisis, as they had demonstrated during the banking crisis of 1907-08. But on this occasion they had neither the means nor the incentive to intervene. World profits were low and falling, trade contracting and industrial production collapsing. The 1930s Great Depression was the result; world output fell by 30% over three years and did not recover until the re-armament of the late 1930s. Economic nationalism meant that in the immediate years after 1929 tariffs were erected which further restricted the world market, intensifying the suffocation of the colonial system, which was the origin of the crisis in the first place. The Nazis came to power in 1933. The Spanish civil war deepened. The Chinese national war for independence grew. The USSRs successful five-year plans increased its autarchy and isolation from world capitalism. The French Popular Front only just saw off a revolution. In Britain the navy mutinied. National liberation struggles intensified. Trade slumped and did not recover before the war. Profits did likewise. Unemployment reached a third of the work force. Wages were slashed and living standards collapsed. General poverty became more absolute. It was the midnight of the century. Our catastrophists should ask themselves the question Does todays world really look anything like this?

since their peak in the mid-1960s. Foreign Direct Investment (FDI) grew tenfold between 1990 and 2008. Trade tripled as a proportion of GDP. The ICT revolution qualitatively increased global manufacturing productivity. The circulation time of capital was slashed. The defeats of the working class in the metropolitan centres inflicted in the neo-liberal onslaught of the 1980s were consolidated. A new period of capitalist expansion known as globali-

These stagnation theorists, by focusing only on the decline of traditional manufacturing in the imperialist powers, claim this is a period of general decline
sation came into existence. But not according to the catastrophists. Alex Callinicos, David Harvey, the late Chris Harman, Robert Brenner and now Neil Faulkner claim that this period was one of general stagnation across the world economy. They claim that the period of globalisation which saw the hi-tech revolution, the generalised application of computer software to production processes, a sustained increase in the living standards of hundreds of millions of people across the emerging markets was in fact one of general decline. This perverse claim rests on a systematic downplaying of the significance of the expansion of the world market with the restoration of capitalism in the former Stalinist states, the ex-USSR, Central and Eastern Europe and China. Something that should come as no surprise, as these theorists thought those economies were capitalist before the collapse of the Stalinist states in the early 1990s and therefore were blind to the momentous change that had occurred. The creation of these new capitalist states out of the bureaucratically planned economies led to the wholesale transfer of capitalist manufacturing to these now aptly named emerging markets. China, for example, now accounts for half of the worlds steel production. However, these stagnation theorists, by focusing only on the decline of traditional manufacturing in the old imperialist powers, claim that this is a period of general decline. But a steel plant is a steel plant whether it produces in China or the UK. Robert Brenners statistics, faithfully reproduced by them all, do not include the expansion of the world capitalist market into the new markets of Brazil, China, Central and Eastern Europe and the USSR. After excluding all those areas of the world economy that are growing most strongly, they conclude that growth has stagnated. A worse case of metropolitan myopia could not be found. Most Marxist economists Dumenil and Levy, Fred Moseley, Michel Husson, Costas Lapavitsas recognise that profits have risen through the period of globalisation. Even Andrew Kliman, who claims that this is not the case, has produced graphs which demonstrate an exceptional surge in the rate of profit in the period up to 2007. Klimans Summer 2010 / page 27

Todays crisis
The credit crunch followed what the Economist magazine called the strongest period of capitalist growth in history between 2003 and 2007. According to the late Angus Maddison, a world renowned economic historian, between 2000 and 2008 world GDP per capita grew at its fastest rate for any decade since World War Two, faster even than the long post-war boom. Profit rates soared to levels not seen

Economy / The recovery

figures, which are based on the historic, that is last years value of fixed capital stock, divided by this years profits, will show an exceptional growth in the rate of profit this year, when they are eventually produced. 2009 was the only year since World War Two to see depreciation outstrip investment, while profits in the first quarter of 2010 were already close to their previous peak. Robert Brenner bases his profit rate on domestic, nonfinancial production, leaving out financial profits, corporate remuneration and foreign profits in other words, all those sectors that have grown strongest with the period of globalisation. Unsurprisingly, after excluding a majority of the mass of profits from his calculation, he shows that the profit rate has stagnated. Only by such a method it is possible to prove that a trunk is a tail.

World trade and industrial production

Following the Great Depression in the 1930s world trade and industrial production collapsed as countries erected tariff barriers and national protectionism gripped world capitalism. Following the 2007-08 credit crunch, while there was some increase in tariffs in general, trade barriers remain at very low levels. As a result, once trade finance had been restored, trade began to recover very fast. By March 2010 world trade volumes were 4% below the peak level reached in April 2008 and 21% above the trough reached in May 2009. In other words, by the end of the spring world trade will have a recovered its entire fall a little over a year after the crisis. Imports into emerging Asia are already 13% higher than their April 2008 peak. The strong recovery of trade is matched in industrial production taking the world as a whole. In March global industrial production was 1.9% below the peak level reached in March 2008. It has risen by an accumulated 12% from the March 2009 trough. In the first quarter of 2010 production was up by 10.9% on year ago, the highest rate of increase in at least two decades.4 So comparisons of the current crisis with the Great Depression are fantastic. Profits, trade and industrial production are all at levels approaching their previous peaks.

The real situation

This crisis saw profit rates peak in 2006 as the business cycle entered its downward phase. They declined up to the demise of Lehman Brothers in September 2008 and then briefly collapsed. The fall in profit rates deepened sharply during the winter of 2008-09, as the banking crisis forced banks and financial institutions to very rapidly write down the value of their assets and the collapse of trade and industrial production caused manufacturing capitalists to experience very big losses as they sought to unload inventory in fear of a Great Depression. But there was no Great Depression. After four months of collapse the world economy stabilised and then from the spring of 2009 recommenced growth. And so did profits alongside it. By the first quarter of 2010 the US rate of profit had recovered nearly its entire fall and exceeded its levels at the peak of the hi-tech boom in 1996-97 (see table below). US profit margins, including those of non-financial corporations, are running substantially higher than in the early stages of the recovery from the prior recession in 2001. US Current production rate of prot 2000-Q1 2010 Source: BEA table 1.12 US current production rate of profit 2000-Q1 2010
32% 30% 28% 26% 24% 22% 20%

The decline of the west

But this does not mean that the crisis is over. The recovery has been very uneven, with levels of output in the old imperialist economies still well below those of their recent highs. In Germany for example industrial production plummeted by more than 23% peak-to-trough. Output has since increased by 13% leaving the current production level of German industrial production roughly 10% below its peak, while German factory orders in April gained 30% from a year earlier, with the rate of expansion accelerating through the spring. Sovereign debt has piled up as national governments in the European Union paid for the crisis. Unemployment remains at very high levels, particularly in the US, where in spite of recovery, jobs growth remains very weak. In the UK joblessness reached its highest levels since the mid-1990s whereas in Europe it remains near its recent peaks. As the governments of the major imperialist nations withdraw stimulus towards the end of the 2010 and engage in austerity cuts in public spending there is a real risk of stagnation, even of a return to recession. There remains the possibility that further financial crises could jeopardise the system itself. The recovery remains at its early stage still scarred by the legacy of the recession. EU governments simply cross their fingers and hope that a weak euro (boosting competitiveness) will stimulate export growth into growing Asian economies.

Sovereign debt
The main legacy of the banking crisis was for the state to guarantee the viability of financial institutions. Its direct costs related to equity injections, debt assumed by the

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state and asset guarantees as well as emergency liquidity support for financial institutions. The indirect costs arose from lower tax revenues and higher government spending as production fell and unemployment rose, as well as increased interest costs resulting from higher debt levels and contingent liabilities. Of the two forms of subsidy the direct costs of the bail out were far lower than originally anticipated.4 To stem the panic of the financial markets in late 2008 and early 2009, governments issued implicit or explicit guarantees for much of the financial system, worth several trillion dollars in total. Initial gross commitments in major developed economies reached 20-30% of GDP. In the UK the potential bail out was twice that due to the enormous volume of its asset protection schemes for Royal Bank of Scotland and Lloyds Banking Group. But as these banks have returned to profitability they have repaid their loans and not required their asset guarantees. The final bill for the direct bail out of the financial institutions was not even close to its nominal figure. Direct costs will be an estimated 1% GDP in the US, 2% in Germany while the UK and France may even make money on the deal when governments sell their stakes in a few years time. The indirect costs of the bail out the anti-recessionary, stimulus measures were however far higher than the direct costs. Budget deficits in the advanced countries jumped from 1.2% of GDP in 2007 to 8.9% in 2009 according to the IMF. Gross government debt in the advanced G20 countries is expected to rise from 78% of GDP in 2007 to 107% 2010 and 118% in 2014, based on IMF projections. These projections may eventually prove too high. All of the forecasts for the sustainability or otherwise of the public debt need to be taken with a large pinch of salt they are in large part propaganda, preparing public opinion for the proposed slashing of the social wage by the new coalition government in Britain, for example, or the recently announced = C80bn cuts agreed by the German government. As a UK treasury official explained in June Anyone who thinks the spending review is just about saving money is missing the point, this is a once-in-a-generation opportunity to transform the way that government works.5 UK public debt without the financial bail-outs was around 53% of GDP in April 2010 about 10% higher with those banks included. That is not especially large for the down phase of a recession and lower than during similar financial crises of this kind. Projections for the level of deficit are widely inaccurate and prone to subsequent revision during turning points in the business cycle. The UK annual budget deficit for 2009-10 was originally estimated at 178bn (in the April 2009 budget) but as a result of the recovery of financial profits and the economy in general it eventually came in at 145bn, a whole 33bn lower than originally anticipated. This puts into perspective the pre-election disagreement between the parties about the 6bn of immediate cuts proposed by the Tories. The ongoing recovery in world output and profits 75% of the profits of the FTSE 100 companies are generated abroad means that, unless the Tories precipitate a slash-

and-burn double dip recession, the UK budget deficit will be substantially lower than estimated by the authorities with or without the assault on the public sector. The UK government owns a 41% share of Lloyds, 84% of RBS and 100% of Northern Rock. These stakes are worth hundreds of of billions of pounds if the shares approach anything like their pre-credit crunch levels. The government bought 45bn of RBS shares for 50p. These shares

These banks could pay the entire interest on the national debt if retained in public ownership; or if sold at a market price could pay it off in its entirety
averaged around 12 in the year up to the credit crunch. The combined profits of these institutions were around 30bn in 2007, not including the interest and fees paid to the government on the loans and credit guarantees extended to them. In other words these banks could pay the entire interest on the national debt if retained in public ownership; or if sold at a market price could pay it off in its entirety. Not that the government will ever allow that, preferring to sell them back cheap to the private sector or even discount them to the public in a pre-election sweetener. The impending attack on the public sector is driven in large part by an ideological desire to slash public services for the undeserving poor, disqualifying many of the long term sick, ill and unemployed while savaging the benefits of the rest. They will also open up public service provision to for-profit companies. They are ruthless capitalists and they intend to turn this crisis into their opportunity.
ENDNOTes 1. www.isj.org.uk/index.php4?id=634&issue=126 See also our review of Callinicos in this issue page 51 2. www.socialistreview.org.uk/article. php?articlenumber=11255 3. www.counterfire.org/index.php/theory/55-the-crisis/4900global-crisis-and-anti-capitalist-revolution 4. Most of the cost of bank bailouts in Britain, for example in the form of buying failing banks shares, are not included in government liabilities and are not part of the budget deficit 5. Quoted in Financial Times, 7 June 2010 www.ft.com/cms/s/0/ 9f396eac-71aa-11df-8eec-00144feabdc0.html

Summer 2010 / page 29