[This article is drawn from the review essay “Labor, Sustainability, and Justice“  by the Labor Network for Sustainability. The review essay discusses the report Exiting from the Crisis: A Model for More Equitable and Sustainable Growth, prepared by a group of labor-allied economists from around the world and released this April by the AFL-CIO. Unless otherwise linked, all references are to essays in Exiting from the Crisis; full references are provided in “Labor, Sustainability, and Justice.”]
What’s wrong with the world economy? What needs to be done to fix it? We are told that we are facing the lingering effects of the “Great Recession,” the worst economic downturn since the Great Depression of the 1930s. That is true. We are also told that the solution is to restore the kind of economic growth that preceded the Great Recession. But the international labor movement’s report Exiting from the Crisis argues that the problems lie far deeper, and unless we address them now, we are likely to face greater and greater recessions “” and worse “” in the future. Without a new model, the problems of the Great Recession will persist, and our economy will become progressively more unjust “” and more unsustainable.
The era of Bretton Woods
How did we get here?
At the end of World War II, the generation that had lived through the Great Depression established the so-called “Bretton Woods” institutions they hoped would prevent a return to the mass unemployment and misery of the 1930s. They established the General Agreement on Tariffs and Trade (GATT) to prevent the trade discrimination and trade wars that had so aggravated the Depression. They established the World Bank for Reconstruction and Development to finance the rebuilding of the war-torn world. And they established the International Monetary Fund (IMF) to help countries maintain full employment by growing domestic demand through fiscal and monetary policy rather than by capturing the markets of other countries. As Robert Kuttner puts it in Exiting from the Crisis, their goal was “to create a global financial system biased toward full employment policies domestically.”
The next quarter century saw the longest period of sustained growth in modern economic history. With low unemployment, relatively mild recessions, and rising wages and profits, it has often been called “the Golden Age of Capitalism.”
In the late 1960s, however, the global economy stumbled, with a sharp drop in profits, soaring unemployment, devastating recessions, stagnant real wages, and stagflation worldwide. Despite a variety of policy responses, these conditions persisted through the 1970s.
The era of neoliberal globalization
In response to the crisis of the global economy, many economists, corporations, and political leaders abandoned the economic strategy designed to maintain full employment through domestic demand and turned to a radically different approach variously known as neo-liberalism, Reaganomics, free-market globalization, and the Washington Consensus.
The guiding idea of this approach was to eliminate anything that interfered with capitalists trying to maximize their profits by competing in markets. The GATT was replaced by a World Trade Organization (WTO) dedicated to reducing labor, environmental, consumer, and other regulations as “barriers to trade.” The IMF abandoned its role as supporter of domestic-led economic growth and became the promoter of export-led growth based on cutting wages and public programs. The World Bank became a vehicle for imposing such policies on poor countries under the guise of “structural adjustment.” Most of the world’s governments adopted such neoliberal policies voluntarily or as a result of international pressure. Corporations took advantage of such conditions to go global, producing and selling their goods directly and through dependent suppliers and vendors around the world.
The consequences of neoliberal globalization
For most of the world’s people the thirty-year reign of neoliberalism has been disastrous.
In the developed countries, deregulation of labor led to falling wage share in national production and increased inequality. Europe largely abandoned the “European social model” of redistributive tax systems, welfare states, codified industrial relations, and social dialogue. Its Stability and Growth Pact and the freedom of movement of capital largely nullified measures promoting domestic employment. Precarious work proliferated and threatened the standards of those who continued in regular employment.
While “Washington Consensus” policies were supposed to help poor countries develop, in fact “GDP growth rates in developing regions that applied the policies most diligently, such as Latin America and Sub-Saharan Africa, were actually lower in the 1980s and 1990s than in the previous two decades.” Inequality and the number of poor increased in most developing countries. The great exception was East Asia, which “had not followed the Washington Consensus policies and had grown faster than any other region of the world.”
The debt problems of less developed countries deepened. International capital flows became much more volatile. The era has been marked by a string of global financial crises. While given labels like the “Mexican,” “Asian,” and “Argentinean” crises, they actually were world crises in which catastrophe ricocheted from one country to another.
Meanwhile, there was a huge shift of resources from the real economy to the financial economy “” what came to be known as “financialization.” In the US, “The financial sector’s share of total corporate profit reached 42 percent before the crisis, up from about 25 percent in the early 1980s.” During the 2000s, “less than 40 percent of the profits of non-financial firms in developed countries were used to invest in physical capacity,” 8% below the early1980s.
Who gained from neoliberalism? From 1976 to 2007, the share of US national income of the top one percent of Americans grew from nine percent to more than twenty-three percent.
The Great Recession
Inadequate incomes for ordinary people around the world inevitably led to inadequate purchasing power, aka economic demand. But this was hidden for years by the growth of debt “” the other side of “financialization.” Every possible way to make money without making something of value was pursued. Banks lent recklessly; mortgages were sold to impoverished purchasers and bundled for sale to investors; exotic derivatives were invented and sold; credit default swaps purported to insure against financial losses. Rating agencies endorsed the value of these “products” “” while being paid by the very companies that produced them.
Inevitably the bubble burst. Credit crunched. Banks refused to lend even to each other. Capital became unavailable.
For a brief period, governments abandoned neoliberalism and “resorted to the supposedly discredited old-fashioned Keynesian recipes” to control the crisis. Policies “that had been off the agenda for the previous thirty years “” such as deficit spending and public ownership “” were suddenly back in vogue.” Governments “substituted private debt-led demand with public debt-led stimulus.” Fiscal stimulus in 2009 represented 1.7% of world GDP. With the support of the IMF, demand-promoting measures like “coordinated global fiscal stimulus,” “quantitative easing” to inject liquidity into the system, and improved unemployment benefits to increase purchasing power became the order of the day. The IMF estimates that such stimulus policies saved 7-11 million jobs worldwide.
That was only one side of the response, however. Governments in one way or another took on much of the colossal debts that were crushing the financial companies. And they did so with little change in the practices that had led to the financial collapse in the first place. The trillions of dollars they spent under various schemes to bail out and support the finance industry dwarfed the economic stimulus that went to support the wellbeing of ordinary people.
Further, within a year, economists, investors, politicians, and pundits began warning of excessive government debt. (Public debt had indeed grown, less as a result of profligate spending than because of falling tax revenues and the public assumption of private debt.) They called for “consolidation,” aka fiscal austerity. Financial crisis in Greece and elsewhere began to reveal that there was a “sovereign debt crisis.”
The austerity drive included a demand for “wage flexibility.” As Joseph Stiglitz put it mockingly, “If workers were only “˜flexible’ in their wage demands, we could get the world back to work.” Wage flexibility represented “a hidden call” for “reducing the wages of the most vulnerable.”
Such “neoliberalism on steroids” further weakened aggregate demand, thus threatening to prevent economic recovery and bring about a “double-dip” recession. Exiting from the Crisis warns that “policymakers are now, through fear of the bond markets, about to plunge the global economy into a prolonged slump.”
The crisis continues
Despite claims of recovery, the devastating effects of the Great Recession on poor and working people continue unabated. In developed countries unemployment rates are 50 percent higher than in 2008. The youth unemployment rate is now nearly 2.5 times that of adults. Worldwide, there are one hundred million more people in extreme poverty than before the Great Recession began.
The revival of neoliberal policies is aggravating this situation in multiple ways. “Consolidation” is creating cutbacks in public services and weakening the “automatic stabilizers” like unemployment compensation that normally boost demand when employment falls. These austerity policies put downward pressure on wages, further reducing effective demand.
While for many companies profits have returned to pre-crisis levels, many profitable companies are still reducing investment. “The companies are sitting on piles of cash, and using low and even negative interest rates to boost dividends.”
In the US, manufacturing investment remains weak because of “global excess capacity.” Construction remains weak as a “hangover from the property bubble.” Consumer spending remains weak because “households are deleveraging and increasing savings.” Such is the touted recovery from the Great Recession.
Pillars of a global labor alternative
It is clear that a further continuation of neoliberal globalization will only aggravate the Great Recession. But Exiting from the Crisis does not propose a simple reversal of neoliberal policies and a return to those of an earlier era. Indeed it notes, “Simply to call for a return to the policies of the post-war boom period would be a catastrophic mistake.” New realities like globalization and climate change require new solutions that may incorporate elements of past programs but also must go far beyond them.
The approach laid out in Exiting from the Crisis can be summarized in the following “pillars”:
Redefining growth: The apparent economic growth of the past thirty years, as measured by Gross Domestic Product (GDP), has left the rich richer, the poor poorer, the global economy in ruins, and the world threatened by devastating climate change and other forms of environmental destruction. We need a new gage to measure our economic success, one based on real human needs and environmental impacts.
Equalization: The benefits of neoliberal globalization have gone to a tiny minority; the costs have been paid by the overwhelming majority. Not only is that unjust, it has led to the very lack of purchasing power “” aka economic demand “” that is producing recession and unemployment. Raising the incomes of workers and the poor is central both to economic justice and to the kind of economic growth that benefits people and the planet. Worker organization and collective bargaining locally, nationally, and internationally are critical aspects of that process.
Public investment for a green and sustainable future: Hundreds of millions of people are unemployed and underemployed while billions suffer from poverty, climate catastrophe, and other preventable problems. We need to develop forms of global public investment to use our human and natural resources to meet our needs.
Countering the downsides of globalization: While globalization was supposed to “lift all the boats,” for most it has led instead to a race to the bottom in which workforces and countries compete to attract footloose capital by lowering their labor, environmental, tax, and social standards. Countering the race to the bottom requires global labor rights, limits on financial speculation, and a focus on producing for home markets rather than for export.
Definancialization: As financial institutions have taken over more and more of the economy, ordinary people have become so much the poorer. Instead of dictating to society, finance should be a tool that society uses. Downsizing, regulation, taxation, public accountability, and the creation of public purpose financial institutions can all help make that so.
Making corporations accountable to people: The original justification for laws allowing incorporation was to encourage people to join together for socially beneficial purposes. In neoliberal doctrine, however, corporations instead should aim exclusively to “maximize stockholder value.” A worldwide movement is developing to make corporations accountable to a wide range of “stakeholders,” including workers, communities, and citizens, and to pressure them to adopt sustainable practices.
Shifting power: Neoliberal globalization has not prevailed because its proponents had better ideas, but because they were able to amass more power. The policies that can make it possible to “exit from the crisis” will only be implemented if labor, popular movements, and their allies grow strong enough to impose them.
Exiting from the Crisis makes one thing clear: “Markets, if left to themselves, will never develop effective institutions for global economic governance.” Markets alone “cannot solve global imbalances, deal with exchange rate questions, establish a fair trading regime, tackle climate change, or reduce income inequality.” That will take people, acting through their unions, social movements, and governments.
[The next piece in this series, “Growth for What? Growth for Whom?,” argues that current definitions of economic growth, based on Gross Domestic Product (GDP), are counterproductive for both our livelihoods and our environments, and how they can be replaced by a new gage that actually measure our wellbeing.]