By Greg Godels
October 20, 2022
There is a profound difference between the economic crisis of 2007-2009 and the evolving crisis of 2022. In 2007, capitalists feared the collapse of their own enterprises, but they had no doubt that the system was salvageable, albeit at costs that might prove difficult to impose. They knew that if the politicians could be won over to endorsing Wall Street’s prescriptions, if the people kept their pitchforks tucked away, and if the capitalists, in their greed, could be kept from devouring each other, then there was a good chance that an elite economic version of an “EMS” rescue team could save capitalism from further decline. Sure, the executives at Lehman Brothers, Bank of America, AIG, and many other firms had every right to fear for the future of their companies. But few capitalists imagined an existential threat to the system; few failed to believe in a way out.
This time is different.
Stagflation is a different kind of beast and that beast has the bourgeoisie, its friends, and its hangers-on terrified. The problem is that economic “science,” as they know it, only offers one possible escape and it has dire economic and political consequences. Once they recognized that inflation was not simply a momentary speed bump (as I predicted nearly a year ago), Central Bankers and economic gurus who have studied the 1970s– the long, painful decade of stagflation– prescribed a drastic remedy of slamming on the brakes of economic growth to contain inflation. Some nonetheless fear a long period of inflation and stagnant growth.
The 1970s taught that cheerleading, patience, and half-measures would not work. The Whip Inflation Now (WIN) campaign, price controls, and other approaches failed until the then-Federal Reserve chair, Paul Volcker, boldly imposed draconian interest-rate increases that threw the economy into deep recession. Inflation tamed. Lesson learned.
Certainly, no political regime wants to be associated with income-and-wealth-devouring inflation. But neither would it want to suffer through a job-devouring, wage-declining recession. Voters and subjects seek to punish the politicians in office when either situation arises.
Thus, politicians and rulers are caught on the horns of a dilemma. If they ignore inflation, they pay a political price. If they attack inflation and bring on economic decline, they also incur the wrath of the electorate or their subjects. Either option taken constitutes a deep threat to the incumbent party or the ruling regime.
Recently, some politicians have chosen to ignore the lesson that bourgeois economists have drawn from the 1970s bout with stagflation. Turkish president Erdogan decided to defy the convention by coercing the country’s central bank into lowering interest rates in the face of growing inflation, betting that the benefits of economic growth would outweigh any increase in inflation. He was wrong. Inflation has soared with devastating results on the people’s living standards and security.
Even more recently, the newly selected Conservative UK prime minister, Liz Truss, out of sheer arrogance or a profound economic ignorance, offered a budget based upon promoting growth (predictably through tax cuts for the rich!) and ignoring the anti-inflation moves of the Bank of England (BOE). Financial markets immediately reacted violently, forcing the BOE to go on a corrective bond-buying spree, and earning a rare rebuke of European government policy from the International Monetary Fund. Once again, the lesson of the 1970s stagnation crisis was harshly driven home.
With an interim election only weeks away, the ruling party in the US fears a severe beatdown from the angry electorate, devastated by sharp price increases imposed by profit-hungry monopoly corporations, declining incomes, and exploding interest payments on loans. At best, President Biden can only browbeat his Saudi allies for sustaining high energy prices in a global market disrupted by US corporate interests and US-instigated war, while the Federal Reserve slams on the economic brakes.
Liberal and social democratic labor leaders, party leaders, and pundits correctly object to the frequent blaming of inflation upon “greedy” workers or bloated union contracts. Even a cursory glance at the Bureau of Labor Statistics demonstrates that throughout this inflationary period income growth trailed and did not lead the growth in prices. That said, what do they think caused this persisting inflation? What can they offer in response to the bitter pill prescribed by bourgeois economists and the Central Banks?
Hell bent on saving capitalism from itself, some liberal and left thinkers like Dean Baker and Richard Wolff see price controls, ration cards, or public commissions as possible approaches (I refute these solutions here). Even if these fixes were likely to be enforced by governments thoroughly captured by capitalism, it would be unlikely that they could even be adopted in today’s volatile political atmosphere. The impending severe crisis cannot be met by wishful bromides or failed tactics.
More seriously, some on the left point to “financialization” as the cause of capitalism’s ills today. While the much-abused term begs many questions, it does describe one side of the restructuring of roles assumed by the leading capitalist countries as a response to the previous, 1970s version of stagflation. That is, so-called “financialization” was the new role of some advanced capitalist countries that deindustrialized after the stagflation of the 1970s. The flight of industry to low-wage countries was part of the answer to 1970s stagflation, stabilizing global capitalism and restoring the rate of profit for most of the next two decades.
“Financialization” was the accompanying new role for those capitalist countries that surrendered their industries to emergent low-wage countries.
The stagflation of the 1970s caused the demise of the Keynesian consensus that had come to dominate economic policy since the Great Depression. That toolbox contained nothing to fix what was over a decade of roaring inflation. Indeed, many orthodox economists blamed the Keynesian tools for creating the conditions that led to that round of stagflation. In any event, it was the “financialization” era that superseded 1970s stagflation and was then believed to restore capitalist accumulation after its assault by stagflation. Therefore, it’s difficult to envision “financialization” as both a solution and cause of stagflation.
While it is fashionable, since the crisis of 2007-2009, to see the dramatic rise of financial engineering and activity– centered on the development of the many new financial instruments– as the sand in the gears of capitalism, there is no reason to believe that it is any more than another adaptive stage in a resilient, but constantly crisis-plagued socio-economic system.
It is difficult to foresee an easy, relatively painless capitalist solution to stagflation. That is not to discount the durability of capitalism. But the history of the 1970s teaches that any answer comes with enormous pain. We are only beginning to experience the rising costs from interest payments on top of the rising consumer prices. We are only beginning to feel the effects of galloping inflation compounded by stagnant incomes and growing unemployment. We are only beginning to recognize the strain on retirement funds and 401k’s. The lessons of the 1970s are distant and poorly remembered. But they are there for those who wish to heed them.
It should not be lost to anyone studying those lessons that hourly wages in the US adjusted for inflation have remained stagnant since the 1970s. More families now have two or more earners to compensate. Household debt has risen to counteract the loss in earning power. And income and wealth inequality has exploded, topping any other historic period.
With a lost decade to stagflation and forty subsequent years of a tepid, crisis-ridden “recovery,” it is hard to imagine how people can endure another round of stagflation. It is hard to imagine how people can fail to explore the alternative to the capitalist system that brings so much unnecessary pain and misery.
Of course, part of the reason for ideological stagnation lies with the political parties, institutions, and misleaders that are so deeply invested in seeing capitalism persist. There would be no “social justice” industry– the tens of thousands of foundations, NGOs, and charities– without capitalism. Their criticism of capitalism ends, when the subject of socialism arises. Similarly, educators, writers, and media figures cannot risk alienating those who guarantee their stature and incomes. It goes without saying that both major US political parties are entirely invested in capitalism.
Yet their cynicism and hypocrisy would evaporate if it weren’t for the enormous material resources that capitalism makes available to those who safeguard the system’s future. That will not change until the masses of the people use the power of their numbers to change it.
Whatever joy we may derive from the ruling class’s fears and anxiety over the current crisis is overshadowed by the hardships yet to disrupt the lives of millions of working people.
Socialism is the alternative.