Gérard Duménil and Dominique Lévy are the authors of The Crisis of Neoliberalism, which is new in paperback this spring. The book examines the financial crisis in the context of neoliberal globalization, arguing that repairing our economy will require a dramatic reversal of the free market ethos that’s enveloped most of the world over the past few decades. Below, the authors take stock of the movement toward “recovery” since their book’s original 2011 publication.
The last quarter of 2008 was a key period in the progress of the current crisis in the United States and Europe. It marked the culmination of the financial component of the crisis, with the failure of major institutions in the United States, the beginning of the “great contraction,” and the export of the crisis worldwide. The trough was reached in the second quarter of 2009, a 4.6 percent fall of GDP in the United States (from the second quarter of 2008 to the second quarter of 2009), and 5.1 percent in the euro zone (from the first quarter of 2008 to the second quarter of 2009). The slow recovery of output that followed is commonly interpreted as the final stage of “the crisis.” This optimistic assessment is, we believe, erroneous.
A first observation is that the recovery was obtained at the cost of dramatic government deficits, 8.6 percent of GDP in the United States (for the third quarter of 2012), much less in the euro zone, but still 4.4 percent. Beginning with the contraction of output, then, the crisis entered a second phase, the “crisis of sovereign debts.” The growth of these debts peaked at 40 percent (annualized rate) in the third quarter of 2008 in the United States, and 18 percent in the third quarter of 2009 in the euro zone. At the end of 2012, in the United States, this growth rate was still larger than 10 percent, much more than the growth rate of GDP.
But the worst of everything is that the distinct paths in the two regions testify to the relationship between the levels of deficits and the levels of growth rates. Only government deficits can support demand levels. In the United States, consumer borrowing (which sustains the consumer spending that drives so much of the economy) is still nearly negligible compared to the average 8.9 percent of GDP it represented between 2003 and 2006, and the rate of default in households’ mortgages did not significantly decline from its peak value. In Europe, government deficits are much lower and a deflationary policy is conducted to further reduce them. Thus, instead of the low growth rates (1.5 percent for 2012) in the United States, the euro zone is entering into recession (-0.9 percent in 2012). Practically the entire zone is affected. Unemployment is soaring and the political situation is deteriorating. Overall, the alternative is between the U.S. model thus far, namely the preservation of (poor) growth rates thanks to record expansion rates of sovereign debts or, the euro model, the contraction of deficits and the new plunge.
At a broader level of analysis, the mistake in the conduct of policies must be sought in the diagnosis concerning the nature of the crisis. The crisis is a “structural crisis,” such as those affecting the course of capitalism about every forty years, namely the late 19th century, the Great Depression, the 1970s, and the crisis of neoliberalism. Its fundamental causes are the strategy of upper classes (large capitalist owners and high managers) to increase their powers and incomes. The main aspects of these new trends are: new forms of management targeted to stock markets, deregulation, financialization, and globalization. Europe followed a similar path. But one must add here the trajectory of disequilibria of the U.S. economy (the growing deficit of foreign trade, the financing of the economy by the rest of the world, and the exploding debt of households).
In the absence of treatment of the causes of the crisis in the old centers, only the stimulation of demand by government deficits is capable of preserving current levels of activity on domestic territory. The bonanza of new technologies during the second half of the 1990s was ephemeral and the green technologies will probably not do the job. The boosting of mortgage loans in the United States after 2000 had disastrous effects, and cannot be repeated. Treating a structural crisis by deficits is possible for a number of years, but these policies cannot be continued if no treatment is given to the underlying causes of the crisis.
On both sides of the Atlantic, the effects of the deflationary spiral will be gradually felt, to the point where labor costs would be so depressed (given the increase of these costs in other regions of the world, like China), that a halt would be put to the haemorrhage of capital toward the rest of the world. This is the unscrupulous neoliberal long-run objective of upper classes. Independently of the cost for popular classes in the old countries of the center and the nature of the new society such trends prepare, there is still a long way to go. And, we hope, the duration and severity of the process will render it unsustainable at some point.