Will government plans to avert recession work?

The global financial crisis has led to a major policy shift among many representatives of the ruling class. The 30 year neo-liberal dominance is over for now and Keynesianism and government pump priming is the order of the day.

Australian Prime Minister Kevin Rudd has been one such convert to more government intervention in the economy. In February he released a major essay where he viciously attacked neo-liberalism and argued for a return to the economic policies of Keynesianism, in the process totally whitewashing the Labor Party’s leading role in the neo-liberal push.

For example, it was only in 2007 that Rudd told Parliament: “If elected, the government I will lead will be grounded in the discipline of not spending more than we earn. We will maintain a budget surplus on average over the economic cycle. We will also not increase taxation as a proportion of gross domestic product.”

A little over a year ago the Prime Minister and the Finance and ‘Deregulation’ (!) Minister, Lindsay Tanner, were talking up budget surpluses, not spending more than we earn and the deregulation of the economy. Today they are talking about deficit financing, budget deficits and re-regulation! Perhaps they will even have to change Tanners’ Ministerial title! How quickly things can change.

Many strategists of capitalism, having previously worshiped the market and promoted privatisation, are now changing their tune. The main reason for this shift is that unrestrained capitalism is now threatening an ‘unrestrained’ slump. They understand the potential for the economic crisis to turn into a political crisis and are trying to intervene.

Governments have not wanted to step in but they have been forced to. In Australia Rudd has introduced six rescue packages in the last four months alone, including the latest $42 billion stimulus plan. Other governments around the world have introduced similar stimulus packages and some have gone even further by nationalising banks and insurance companies. The question is will government intervention, or the ideas of Keynesianism, be enough to stave of a recession?

What is Keynesianism?

Keynesian economic policies are based on the ideas of British economist John Maynard Keynes. The basic ideas of Keynesian economics are that the state should stimulate economic growth mainly through fiscal policy during a cyclical downturn to help stabilise the private sector and do the opposite in an upturn.

Some of the methods to do this include adjusting taxes and interest rates, as well as funding major public projects - in effect, spending money to ‘prime the pump’. Keynesianism is also sometimes known as deficit financing – where the state spends money it does not have to give the economy a kick start.

Some Keynesians argue that these policies can help smooth over the worst excesses of capitalism, in effect eliminating or reducing the normal boom bust cycle. Marxists disagree. The current capitalist crisis stems from fundamental flaws in the system. The problem is that capitalism is not suffering from inadequate demand or a lack of markets, it is suffering from a lack of profitable markets.

Capitalism is a system which is dominated by the private ownership of production – that means production is primarily for the market not for human need. The fundamental problem is that under capitalism workers do not get paid the full amount of the wealth that they produce. Therefore they can never afford to buy back the goods that are made. This leads to overproduction and the boom-bust cycle, which is endemic to capitalism.

Increased spending from the state cannot overcome this basic contradiction. At the end of the day you can not make something from nothing. The income of the state comes from the taxes of companies and the taxes paid by working people. So, at base, all taxes must come from the economy itself. In reality, the lions share either come from the profits of the bosses or from the income of the working class. When you eat into the income of the employers it cuts into the rate of profit. Similarly, to cut the income of the working class eats into the market for consumer goods.

An increase in the public debt by deficit financing ultimately has to be paid for, either through increased taxes on employers or increased taxes on working people. The only other solution is for the government to print more money. If this is not compensated for by an increase in goods, it would fuel inflation. This would cancel out any benefits.

At base, any attempt to boost profits reduces the ability for workers to buy goods while any attempt at boosting markets by increasing wages is a threat to profits. This is the basic contradiction of the capitalist system and no amount of manipulation or increase in government spending can overcome this flaw. Rudd forgets that the capitalists turned to neo-liberalism in the mid-1970s precisely because Keynesian policies had caused stagflation (recession plus inflation).

Can the measures work?

So what effects will Rudd’s Keynesian policies actually have? The government has pumped billions of dollars into the economy in the form of stimulus packages. This has obviously had some effect, in the same way that a sinking boat will temporarily stay afloat if water is pumped out temporarily.

However, the budget surplus has been wiped out, thereby escalating the national debt. These debts will have to be paid back at some stage by future generations in the form of taxes or cuts. In other words, there is no such thing as a free lunch.

The government claims that the package will create 90,000 jobs but against the backdrop of more than 300,000 unemployed by the middle of next year this is a drop in the ocean. In fact, some economists are claiming that as many as two million people could be jobless or under-employed by mid-2010.

Apart from the $950 cash hand outs, the other main part of the plan is infrastructure funding for new roads, houses and schools. This is in effect a hand out to the big private building developers, many of whom face ruin as the recession bites. Many more billions of dollars will be allocated to subsidise the banks and car companies but not a cent has been put aside for the unemployed or very low paid.

The stimulus packages may keep Australia out of negative growth for one or two quarters but they will not stop Australia following the rest of the world into recession. The state debt will only end up increasing further as a result of lower tax receipts from employers and higher unemployment benefits as the jobless rate increases. That is why vicious cuts to the public sector are guaranteed in this impending recession as the government try to cut costs.

Interest rates have also been cut to new lows in an attempt to shock the economy back into life. But no matter how low rates are, they only lead to more debt if the banks actually loan out the money. Rather, banks have already tightened their lending criteria for fear of more bad debts. Essentially free money in Japan in the 1990s meant little as banks refused to loan.

The government and the big retail companies hope that the cash hand outs which form part of the latest stimulus plan, will be spent quickly and resuscitate consumer demand, thereby giving the retail giants a profit boost. This is unlikely as big chunks of the $950 handouts are more likely to be spent on reducing personal debt levels.

The other side to the handouts is that they are also designed to soothe the population and quell any social unrest. Rudd knows only too well that this economic crisis can quickly turn into a political crisis. He hopes the handouts will buy him some time, perhaps even until the next election is called.

Bewilderment can turn to anger

Rudd actually alludes to the impact that the crisis can have on unrest in his recent essay published in ‘The Monthly’. Referring to the crisis he says. “Bewilderment, however, rapidly turns to anger when the economic crisis touches the lives of families through rising unemployment, reduced wage growth and collapsing asset values”

Rudd says the blame for the crisis lies with “extreme capitalism and excessive greed”. While he admits that capitalism has “inevitable inequalities” and that “the crisis was generated by the system itself”, he does not want to replace capitalism with a more equal and democratic system. Instead, he only wants to try and iron out the worst of the problems.

Rudd’s essay does make some good criticisms of the neo-liberal period but it totally ignores Labor’s ideological and practical support for neo-liberalism. It was the Labor Hawke-Keating governments that opened up for foreign banks, introduced HECS and user pays and fast-tracked privatisation. Rudd attacks investment banks yet the Labor Party happily accepted $117,000 from the now-failed investment bank Babcock and Brown.

While Labor is talking about more state intervention at a national level, State Labor governments and local councils are continuing to push ahead with more privatisations and cuts.

The reality is that the discrediting of deregulated capitalism and the intervention of the state to save the system, does not mean the abandonment of neo-liberalism. Deregulation and privatisation will be resorted to again, as soon as the government believe they can get away with it again.

The government is likely to adopt a two-sided approach. On the one hand, they have pumped money into stimulus packages and will continue to dish out subsidies to big business. They will do whatever it takes to try and massage the unemployment and growth figures while looking to cut state spending in the public sector and in areas like health and education.

When talking about the bank nationalisations in the US, Rudd says, “These measures have not been implemented on the basis of socialist ideology, nor are they a return to state ownership and control. When the financial system stabilises and the recession eases, we can expect to see governments pulling back from direct involvement in the ownership and operation of the banking sector.”

He also says, “The challenge for new Keynesians is also to ensure that this stimulus is targeted, timely and temporary.” This is basically an admission that these are only temporary measures to avert economic collapse and political upheavals. Afterwards, capitalist leaders will attempt to return to fiscal conservatism - the exact policies that got us into this mess!

Apart from trying to head off a political crisis Rudd also makes mention in his essay of the possibility of an interest in “far Left” ideas or the ideas of socialism. He says “For Social Democrats, it is crucial that we get it right – not just to save the system of open markets from self destruction, but also to rebuild confidence in properly regulated markets, so as to prevent extreme reactions from the far Left or the far Right taking hold.”

Rudd instinctively fears that an era of mass radicalisation where socialist ideas can gain mass support if he does not do all he can to fix the capitalist system.

Socialist solution

State intervention and ideas of Keynesianism are in reality a confession of bankruptcy by capitalism. It is a system that has outlived its usefulness, as it is incapable of further developing the means of production and society.

Just regulating capitalism without changing the system will not lead to the further development of the productive forces. The fact is that in a market economy only a minority of people decide what we produce and in what quantities, regardless of the needs of the majority. While the capitalist class continues to own the means of production it will continue to exploit the working class.

That is why socialists call for the nationalisation of the main corporations and privatised services. Socialists campaign for nationalisation to be fully in the interests of workers and not just temporary measures to save a rotten system. We campaign to establish a system of elected committees of workers’ representatives at local and national level to control and manage the economy and society.

On the basis of public ownership a socialist government could put in place a democratic plan of production. Resources would be utilised according to need instead of what is profitable as is the case now.

A socialist economy would be a democratically run economy, set up to meet the needs of all, rather than make profit. This is the only alternative to the boom-bust system of capitalism.

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