New Left Project Underestimating Capital, Overestimating Labour: A Response to Andrew Kliman What caused the 2008 economic

crisis? In an article published earlier this year by Jacobin, the Canadian political economist Sam Gindin explained it as 'a prima rily financial crisis.' Writing for New Left Project, Andrew Kliman rejected thi s analysis, arguing that, had the crisis really been mainly financial, the econo my would have recovered by now. Here, Gindin responds to Kliman's critique. There could not be a sharper analytical difference between Andrew Kliman and I o n how we understand the trajectory of US capital and US labour over the quarter century leading to the Great Financial Crisis. He sees it as a period of secular stagnation i.e. protracted low growth while I argue, along with my co-author Leo Pani tch, that it has been one of the most dynamic eras for capital in American histo ry.[1] He views the alleged stagnation of that period as rooted in a profitabili ty crisis that was temporarily masked by a credit bubble, which allowed the US e conomy to limp on until it burst. We argue that corporate profits have in genera l not been squeezed and that the role of finance in creating the conditions for the crisis went far beyond advancing credit. He sees labour as largely holding i ts own over this period; we understand labour as having suffered a most profound defeat. For Kliman, the crisis of the 1970s never ended. As a crisis of overaccumulation (i.e. overcapacity), it could only have been overcome by the destruction of a s ignificant proportion of the economy s capital stock (its factories, offices and e quipment) that is, by a deeper and longer recession. This was, he argues, avoided by state policies, low interest rates in particular, that only postponed the day of reckoning. We in contrast argue that the crisis of the 1970s was successfull y resolved and that the present crisis reflects a new set of contradictions embe dded in a fundamentally different context. The crisis of the 70s was rooted in a strong working class, the present crisis has emerged in the context of a weak w orking class; the crisis of the 70s had to deal with inflation and a threat to t he dollar, while inflation was non-existent in the recent crisis and the dollar became stronger; and in the 70s, global finance in anywhere near its present for m was only a gleam in someone s eye. The relevance of all this lies in its implications for the emergence of a radica l class politics. Kliman s view is that a weak capitalist class and a relatively r esilient labour movement give cause for optimism. On the other hand, if capital remains strong and labour is weak, then the kind of politics that will be needed in order to mount a serious challenge to existing economic arrangements is corr espondingly more demanding. Moreover, the dependence on a collapsing capitalism to politicize workers is misplaced. A capitalism in trouble invites workers who are dependent on it, and who see alternatives as uncertain and very risky, to su pport its fixing. The real political challenge is to convince workers that capit alism is a barrier to human development even when it is working well. American capital, 1982-2007: on a roll It is difficult not to see Kliman s argument for continuing stagnation since the 1 970s as narrowly technical. The dynamism of American capitalism in the quarter c entury after 1982 is most clearly evidenced not in graphs not that graphs are unim portant but in broader terms: the dramatic restructuring of the American and globa l economies, and the expansion of capitalist social relations and institutions. There were of course contradictions in this process but we must not underestimat e the profound impact these changes wrought on capitalist strength and working c lass weakness. For Kliman, the current crisis is rooted in the fact that capital was not destroy ed to a suf?cient degree during the global economic slump of the mid-1970s. [2] It

is of course always possible to argue that the destruction wasn t deep enough. Bu t the fact is, as workers can testify, the pervasive devaluation of capital sinc e the early 1980s was a primary characteristic of this period. The number of pla nt closings accelerated, plants moved from urban to rural areas and from the mid -west to the American south, and moved abroad. But beyond closings, capital was restructuring: workplaces were transformed; new technologies applied; supply cha ins took on new dimensions through outsourcing at home and the formation of glob al networks of production; there were considerably more mergers; and some sector s virtually disappeared while entirely new sectors emerged. This was a capitalism in motion, not decline. That dynamism extended to the deep ening of capitalism at home and its stunning expansion abroad. Products and serv ices that were never private became privatized in whole or in part. The communis t world that once stood outside of capitalism was brought in, most dramatically (in terms of degree of integration) in the case of China. Key areas of the globa l south, from South East Asia to India and Brazil, became major sites of accumul ation not just in resource extraction but in manufacturing.[3] Not to be ignored was the role of states, themselves transformed, in promoting these developments . And in spite of the pressures and inequalities all this placed on working peop le, resistance was contained and virtually no country in the world looked to exi t from global capitalism. So how was this manifested in corporate profits? Was there, as Kliman maintains, a protracted crisis of profitability after the 70s? A straightforward plotting of the official statistics on after-tax corporate profits as a share of GDP is v ery clear (see below). It shows that the downward slide in profit share ended wi th the recession of the early 1980s, then trended upwards. By 2005-7 it surpasse d the peak in the mid-1960s (again, itself not a standard but a special moment) and the share of profits in GDP now stands at the highest level in post-war hist ory.

Another measure of profitability, the rate of profit (i.e. profits relative to i nvested capital), is more difficult to work with because of debates over how pro perly to quantify capital. Moreover, Kliman s profitability graph (Figure 4) only be gins in 1980 so any longer term trend is difficult to discern. Elsewhere, howeve r, Kliman s own data, basically reproduced below, demonstrate a modest upward tren d in the rate of profit from the early 1980s on. (Kliman should be credited for making his data so readily available to others).[4] Kliman cannot reverse the weight of evidence stacked against him. The annual dat a provided by the US Department of Commerce show a clear upward trend in both th e profit shares and the profit rates of nonfinancial corporations.[5] The centri st economists Kliman repeatedly quotes on the risk of secular stagnation Lawrence Su mmers, Paul Krugman, Martin Wolf do not point to a lack of profits, but lament the lack of investment from the obviously high profits.[6] Other Marxists who share Kliman's falling-rate-of-profit thesis, like Anwar Shaikh and Michael Roberts, have nevertheless acknowledged the upturn.[7] The business press takes it as sel f-evident that there was a profit recovery. And so too do the corporations thems elves, using it to justify higher salaries to executives (which essentially also hides higher profits as a compensation cost). There was no crisis of profitability heading into the financial crisis and there is even more clearly no profitability crisis now. If anything, the quarter cent ury from the early 1980s on was a second golden age for capital (the first being the two decades following World War II). The real question, rather, is: why wer e corporations not investing their high profits in ways that expanded the produc tion of goods and services?

The investment paradox The answer is: they were. While conventional measures of the share of GDP going to non-residential investment have clearly fallen since the early 80s, this down ward trend in the investment-GDP ratio reflects a price illusion. When the price index of GDP and that of investment goods are roughly in line as they were before the 1980s the ratio of investment-GDP will be roughly the same whether measured i n nominal or real (i.e. after inflation) terms. But since the early 1980s they d iverged and so this must be taken into account. From 1982-2007, the price index for GDP rose by 89% while it rose only 22% for non-residential investment, prima rily because equipment was rising as a share of investment and prices for equipm ent actually fell through these years.[8] Adjusted for prices, the apparent slo wer growth in investment relative to GDP is reversed: real non residential inves tment increased by a respectable 4.7% per year between 1982-2007, as against 3.6 % for GDP. And in the four years before the crisis (2004-2007) real non-resident ial investment increased at an annual average rate of 6.3%.[9] Kliman and others are nevertheless right to raise concerns about more recent tre nds. After the 2001 recession, investment lagged in real as well as nominal term s. Whether this was a matter of running down the extra capacity put in place in the earlier boom, using profits to pay off debt, concentrating on mergers, or so mething more fundamental is not clear. Moreover, the solid growth in investment that occurred in 2004-7 was from a very low base and, because of the interruptio n of the financial collapse, we don t know whether or not it represented the begin ning of a new uptick. It is also true that investment growth still lagged behind the increases in prof its and this remains true even with the official end of the recent crisis. It is too early to decisively determine whether the structural shift in the economy t owards services and the impact of computers on factory size imply relatively low er investment needs for the same impact or if there is an exhaustion of breakthr ough opportunities.[10] (My own tentative view is that as uncertainty fades, pr ospects for profits and the drive of competition will lead corporations to again invest their hoards of cash at more traditional levels). The new weight of finance In Kliman s schema, finance is not much more than a functional response to support a flagging economy. So conceived, finance can indeed be only a symptom of somet hing deeper. Finance needs, however, to be taken much more seriously than that. Finance was already growing very significantly in the 1950s and 60s as worker mo rtgages and pensions expanded and as corporations went international. But since the crisis of the 1970s, finance has taken on a much greater weight, linked very tightly to the non-financial economy. Without finance and its role as a hedge against fluctuating exchange rates and o ther uncertainties, globalization could not have reached the levels it has. And finance, because of the ease of its mobility in and out of particular sites of p roduction, has been fundamental to enforcing greater discipline in workplaces, r eallocating capital to activities with higher rates of return, facilitating rest ructuring through mergers, and supporting venture capitalists. With high profits leaving corporations well-positioned to fund their own investment, finance has developed new services for business and vastly expanded its relationships to wor kers (above all in regards to mortgages and pensions), further integrating worke rs into the workings of capitalism . Finally, finance has been fundamental to br inging global savings at low interest rates to the US, thereby contributing to d omestic investment in the mid- to late-90s and supporting household consumption and mortgages in the subsequent years. Finance has therefore been both critical to the real economy and taken on a life o

f its own with its own contradictions. Competition pushed financial firms to seek higher returns by extending the boundaries of risk (households were more vulnera ble because of their restrained income and sub-prime mortgages were extended to poorer households) and increasing the leverage of their assets, dramatically exa cerbating the inherent volatility of finance. In the past, the bursting of a hou sing bubble would have meant a significant recession. Now, however, the greater complexity and interconnection wrought by finance brought on the deepest economi c crisis since the Great Depression. Kliman counters that finance could not have been the cause of the crisis because even after finance was repaired, the crisis continued. In spite of substantive federal stimulus, he argues, growth and investment remain sluggish, suggesting t hat the cause of our economic malaise was more fundamental than a mere crisis in finance. This, however, confuses the causes of a crisis with the circumstances of exiting them. Once the crisis hits, a different set of factors come into play f or example, excess capacity and under consumption become very relevant factors i n overcoming a crisis, even if they did not precipitate it. This was an especial ly traumatic crisis, and it understandably left consumers and investors hesitant to spend. The level of government stimulus required to overcome this would hav e had to be exceptionally high, but the structural power of the banks, who were nervous about inflation and have a built-in bias towards austerity, moderated th e stimulus attempted. In any case, the federal stimulus was significantly offset by cutbacks at state and local levels the net two year stimulus was therefore abo ut one third of the $780 Billion in the American Recovery and Reinvestment Act.[ 11] To repeat a point made in my earlier article, it cannot be assumed that all capi talist crises must inevitably follow the pattern of an accumulation crisis. Stru ctural crises are historical events. Each crisis restructures institutions and r ebalances class forces, setting new conditions for future crises. The crisis thi s time was not caused by a profit squeeze or by a generalized condition of exces s capacity. The development of finance not separate from the non-financial sector but linked, as we ve emphasized, to developments within capitalism as a whole create d the foundation for a new kind of crisis: an explicitly financial crisis.[12] Minimizing working class defeat The most controversial aspect of Kliman s argument is that from the 1970s, contrar y to virtually all perceptions, working people as a whole, including the poor, we re able to buy a bigger share of the output than before and that until the late 9 0s, this did not especially depend on credit. Elements of this argument are vali d. Though consumption exceeded personal income through much of this period it di d not seem to have been because of any special increase in credit, but rather by the eating up of personal savings (the personal savings rate fell from over 11% in the early 80s to 3% in 2007).[13] The explosion in credit, primarily in mort gages, and the explosion in borrowing on mortgage assets, did not emerge until t he late 90s. As for the rise in personal income at the macro level, this was pri marily due to (as Kliman notes) the increased participation of women in the work force (though overtime and multiple job holding of men increased as well). But the story of how workers were doing hardly ends there. Unionization rates fe ll as unions failed to penetrate the most rapidly growing sectors of the workfor ce. Worker concessions were rampant in working conditions as well as wages. Neol iberalism demoralized workers, increasingly individualized the working class, an d successfully lowered worker expectations. Kliman points out that hourly compensation (i.e. wages plus benefits) rose signi ficantly over this period, but between 1982 and 2007, the cumulative increase in hourly compensation in the nonfarm business sector (35%) totalled less than hal f that of productivity (75%).[14] As for the increase in household income that K

liman identifies, this was based not so much on higher pay as on increased hours of paid work per family and thus represented an increase in working class explo itation. Moreover, household income is an aggregate measure that includes househol ds of quite different kinds. Between 1982 and 2007, according to the US census, while the bottom 80% of households saw their real income increase by 24% (i.e. l ess than 1% per year), the top 5% of households generally not of the working class s aw an increase of 86%. Put differently, of the total increase in household incom e over this period, the top 10% got more than the bottom 80%; trends in overall household income thus give a misleading read of the fate of the working class ov er this period.[15] Conclusion The US economy seems to be emerging from the latest crisis, albeit hesitatingly and with remaining fragility. A solid recovery would require a much greater and more consistent investment in infrastructure. This is unlikely to materialise so long as there is no organised working class threatening instability if governme nts don t move to radically greater economic stimulus. By understating the extent of working class defeat, on the one hand, and the con tinued resilience of American capitalism, on the other, Kliman dangerously misle ads on how difficult the political project of challenging American capital will be. It will not do to point to sporadic struggles as signs of hope. These are of course encouraging but they do not begin to approach the scale of the problem t he working class confronts. Nor will it do to point to polls showing support for socialism, as Kliman has done. In American discourse, socialism means support for greater state intervention and whatever openings this implies for challenging n eoliberalism, it hardly reflects an imminent challenge to capitalism either ideo logically or politically. Nor, finally, will it do to explain the limited scale of popular resistance in terms of the flaws of the labour bureaucracy. Sure, uni on officials should be criticized for betraying the responsibilities they were a ppointed to carry out, but we need to take very seriously the demonstrated ineff ectiveness of challenges to union bureaucracy from below all the more so when we b elieve that this same working class has the potential to shoulder the infinitely greater challenge of taking on capitalism. This brings us to the left itself. Some humility on our part is very much in or der. In spite of the vacuum within the unions, the frustrations of the rank-andfile, and the abject failure of the Democratic Party (and social democracy elsew here) to address popular concerns, the left has generally made little progress i n penetrating the working class. We have been unable to provide the structures t hrough which workers can educate themselves, develop their capacities, strategiz e and confidently act as a class transforming themselves as a condition for transf orming society. This is the crisis we need to spend more time addressing. Sam Gindin is the former Research Director of the Canadian Autoworkers Union and Packer Visiting Chair in Social Justice at York University. He is the co-author , with Leo Panitch, of The Making of Global Capitalism: The Political Economy of American Empire (Verso, 2012). [1] Kliman s critique, published on New Left Project, is directed against my short response to Michal Rozworski. For a more developed discussion of these issues s ee Leo Panitch and Sam Gindin, The Making of Global Capitalism: The Political Ec onomy of American Empire (New York: Verso, 2012). [2] Andrew Kliman, The Destruction of Capital and the Current Economic Crisis, lism and Democracy 23.2 (July 2009), p. 47. [3] Kliman has noted that the rates of growth per capita in the global economy w Socia

ere almost half in the period 1974-2003 compared to the period 1950-1973 ( The Des truction, pp. 49-50). There are two problems here. First, 1950-73 was a period of unique global growth and is therefore not a good benchmark for comparison; that global growth slowed down from this golden age is not an indicator of secular st agnation. Second, capitalist development is a process. It was only over time tha t the deepening of global capitalism since the early 1980s led to faster global growth: from the mid-90s through 2007 per capital global growth was almost as h igh as in 1950-73 (2.7% vs. 2.9%) and between the millennium and the crisis (200 0-2007) average global growth, at 3.1%, has actually exceeded Kliman s base years. The data on global growth Kliman s as well as mine are based on Angus Maddison s most recent historical tables. [4] See Kliman, The Destruction of Capital, p. 51, Figure 2. Where Kliman acknowle dges this, he declares it unsustainable, though as the current corporate performan ce suggest, profits have on the contrary been remarkably sustainable. Note that if the graph was reconstructed to include before-tax profits, the recent period wo uld be flatter, though the upturn would remain. And if the graph was based on th e current cost of capital preferred by most analysts, not the historical costs Kli man prefers, the upturn would be slightly more pronounced. (Current cost is fav oured because it captures the actual cost of replacing depreciating capital). [5] Returns for Domestic Financial Business, ), Chart 1. Survey of Current Business (June 2013

[6] As Krugman has noted, from a profits point of view it s not a depressed economy at all. [7] Anwar Shaikh, The First Great Depression of the 21st Century, in Leo Panitch, Greg Albo and Vivek Chibber, eds., Socialist Register 2011: The Crisis This Time (London: Merlin, 2010); Michael Roberts, Measuring the US rate of profit: up or down? (November 2011). [8] NIPA, Table 1.1.4, Price indices for GDP. [9] NIPA, Table 1.1.1, Percent Change in Real GDP. [10] Net investment investment after depreciation is now exceptionally low and what needs clarification in this case is the extent to which this reflects misleading measures of depreciation and underestimates the actual technological gains of j ust replacing existing technology. [11] Dean Baker and Rivka Deutsch, The State and Local Drag on the Stimulus, CEPR, (May 2009). And as Council of Economic Advisers chair Christina Romer noted, to some extent we are seeing a replay of what happened during the recovery from the Great Depression, when a significant part of the fiscal stimulus by the Federal government was offset by fiscal contraction at the state and local level. [12] In an interview, Kliman speculates on whether finance will itself undermine the American economy: You have to wonder whether we are going to reach the point that the financial markets are going to say that they no longer have confidence in the US government. This in particular misunderstands the relationship between finance and the American state. As the crisis sharpened, finance looked even mo re to the protection of the US state. [13] NIPA, Table 2.1. Personal Income and its Disposition. [14] The increase in benefits was significant but it, too, must be qualified. Fo r example, if a union negotiated no increases in benefits but the costs rose as th ey very much did for health care, in particular this shows up as an increase in co mpensation to workers at the expense of profits. But something more is happening

: while the worker is indeed protected against inflation, the insurance companie s see their profits increase. The shift in distribution is not just from the com pany to workers but also from the company to the insurance sector and so total b usiness profits are not as damaged by rising compensation as it at first seems. [15] US Census, Historical Income Tables, Table F-3.