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Roots of the Current Crisis

An analysis by the Research Section of the Workers Party of Ireland

The global background

The current global crisis emerged from the workings of the capitalist class structure, initially in the USA and subsequently around the world. Since the mid-1970s, workers' average real wages in the USA stopped rising partly because the computerisation of production displaced workers and partly because of capitalists decision to increasingly move production to more profitable foreign locations. Because employers needed fewer workers in the USA, wages fell there for the first time in 150 years (18201970).

However, productivity kept rising, partly because of the computerisation of production processes and partly because workers were being pressurised to produce more. Workers in the USA produced ever more for their employers to sell and yet their wages remained stagnant. The last 30 years realised capitalists' wildest dreams- a new gilded age was upon them. The surpluses extracted by capitalist employers rose. Yet, stagnant wages and huge surpluses eventually plunged US capitalism into deep crisis. (Wolff) Progression of real incomes (including capital gains) of the top percent and the lower 90% in United States 1950-2005 (1979=100)

Source : Estimates based on Emmanuel Saez et Thomas Piketty, "Income Inequality in the United States, 1913-2006", Tables and figures updated to 2006, July 2008 : From Houben

This contradiction between overproduction on the one hand and stagnating wages on the other is a

core contradiction of the capitalist system and leads to its cyclical crises. The super rich can only buy so many yachts, Dubai island retreats and football teams. They tend to rely on working people to be the main consumers of goods in capitalist societies. But with workers being increasingly exploited and new technologies developing so that even more can be produced, capitalism produces more goods than workers can afford to consume.

The capitalist crisis appears in the form of overproduction, i.e. a surplus of production or of the production capacities in use in relation to what can be sold. In this regard, it is different from pre-capitalist recessions which were mainly caused by phenomena which created underproduction. And overproduction in a world which underfeeds the majority of the population, which does not supply them with enough drinking water, shelter, clothes, etc., is simply shocking. (Houben)

The condition of the working class in the rich countries was also affected by the global growth in the number of people working under capitalist relations of exploitation. Beginning in the early 80s there was an unprecedented rise in the number of people working in the global capitalist market. In this period the USSR and most of the other Socialist Bloc countries collapsed, and China and India were opened up to exploitation by imperialist transnational corporations. The International Labour Organisation estimates that by 2000 the global capitalist labour force had more than doubled from 1.46 billion to 2.93 billion This growth has placed a downward pressure on workers wages in the rich countries, on their terms and conditions of work, and on their job security as has the growth in the numbers of people unemployed around the world- a global reserve army, many millions of whom scratch a living in the huge slums that have grown up in the poor world in recent decades . The development of (relatively small) fabulously wealthy indigenous elites in these new markets has also created new markets for capitalist goods and services. (Goldstein)

So, who received all the surplus money gained from increasing exploitation of workers, new technology and the globalisation of production? Corporate boards of directors received most of those surpluses. A huge chunk went as payouts to top executives while another portion served as increased dividends to shareholders in corporations. Other parts of this surplus bonanza financed the transfer of production abroad, increased the computerization of workplaces in order to reduce payrolls, and were paid out in lobbying for beneficial state actions such as reducing corporate taxes. (Wolff)

Corporations deposited mounting surpluses in banks, which in turn grew and invented new financial instruments to profit further from those surpluses. It was believed by some economists that the explosion of new financial instruments was an attempt by capitalists to offset the sluggish or stagnating rates of profit that had been in existence in the USA since the mid-1970s. These radical economists believe that in future capitalists will not be able to ensure sufficient profits in the real economy and as result we have entered a new period in which capitalists will increasingly pursue profits in the financial sector. As a result, according to this perspective further financial crashes are almost inevitable under the present system, barring the development of epochal new technology - as powerful a lever of growth as the automobile was a hundred years ago. (Despite the mania of the late 90s, the Internet has not proven to have anything near the same potential as an engine of economic growth as automobiles were when they first came off the production lines.) (Foster and Magdoff) Other more sanguine thinkers, such as Gordon Brown, believed that the era of cyclical boom and bust was over and that we had arrived at a New Economy, something like the ideally balanced economy of neo-liberal myth. History not yet over- has proved them wrong. In any case, financial capital unmediated by the actual production of goods and services has been increasingly important to the workings of the global economy since the mid 1970s.

In 1980, the value of financial instruments was estimated to be equivalent to the world Gross Domestic Product (GDP). In 1993, that value was twice as high. And, by the end of 2005, it was more than three times higher i.e. 316% of world GDP. Between 2000 and 2004, government and private debt securities accounted for over half of this increase. This shows the growing role of debt and leveraged buyouts as the motor of this process. In 2004, daily trade of derivatives totaled 5.7 billion dollars and trade of currency 1.9 billion dollars. Together amounting to 7.6 billion dollars daily. That's more than the value of annual exports. (Cottenier and Houben)

In the USA, when the bubble burst in the late 90s the Fed under Alan Greenspan, fearing a recession, reduced interest rates and ushered in the era of extremely easy business and household credit. The banks and financial institutions responded with a plethora of new financial instruments through which debt was bought and sold on the international financial markets.

New instruments included securities such as "collateralized debt obligations" (comprised of mortgage, credit card, corporate, and student-loan debt); "credit default swaps" (deals to insure

such new securities); and other "derivatives" for trading the risks of fast multiplying new credit instruments among those with the surpluses to invest. Because the new instruments operated completely outside existing regulations in a "shadow credit system" ever bigger risks were undertaken for ever bigger profits. Specialized enterprises such as hedge funds arose to invest rising corporate surpluses and exploding executive incomes in the murky shadows of high finance. Huge profits were made over the last 20 years, but the resulting capitalist exuberance once again overreached its limits. (Wolff)

With their wages stagnating, how were workers able to consume the things they produced? In the USA and in other rich countries, such as Ireland, this was facilitated by an extraordinary rise in levels of household debt. Workers were suffering increased exploitation and stagnating wages and they offset this by taking out loans- credit card loans, student loans, second (and even third) mortgages. Instead of paying workers higher wages, capitalists arranged it so that workers got enough to live at the level they expected by taking out high interest loans. Annual savings made by all families in the USA fell from 8% of GDP in 1980 to 5% in 1990 and 1.5% in 2000. At the same time the debts of US families rose from about 50% of GDP in 1980 to 65% in 1990, 75% in 2000 and 100% in 2007. (Cottenier and Houben) Even the poorest and those with poor credit histories, who had previously been unable to avail of easy credit, were able to buy into the property market through sub-prime mortgages. It must have seemed like the perfect system for capitalists. Until it all began to unravel.

...defaults on credit card debt, auto loans, student loans, and mortgages took off in 2008. The new kinds of securities based on workers' debts began to lose value in the markets. Banks, hedge funds, and others holding those securities faced mounting losses. Corporations that insured those securities via credit default swaps, etc., could not pay when so many securities' values collapsed. Banks had used their depositors' money and borrowed still more to buy such securities. Banks' losses prevented repaying those loans or guaranteeing their depositors' money. Financial markets froze as borrowers and lenders stopped trusting one another and drastically reduced transactions. Bust followed bubble followed boom, once again. (Wolff)

Irelands part

Ireland was a beneficiary of the rising surpluses being enjoyed by the US ruling class in the 1990s. American firms invested more capital overseas in the 1990s- in excess of $750 billion- than in the previous four decades combined. Of this, roughly half went to Europe and after 1993 25% of all US investment in the EU went to Ireland (which has just 1% of the EU population). (OToole (a)) This represented the culmination of a decades-long process of opening up of the Irish state to foreign business. Ireland represented a good deal for American capital for a number of reasons. It had low corporate taxes, wage moderation expressed through a partnership process, active state involvement in attracting overseas jobs and was the recipient of EU structural funds which may have raised Irelands GNP by up to 4%. (OToole (a)) As it transpires, the Irish state was also willing to turn a blind eye to a whole range of financial misdeeds and crimes in pursuit of its share of the global pot, although Ireland was not alone in this. In the manufacturing sphere, US pharmaceutical and computer firms took advantage of Irelands low-tax regime. By 1999 half of all Irish manufacturing jobs in were in foreignbased companies compared to an EU average of 20% and by 2000, foreign investors spent the equivalent of $38,000 for every man, woman and child in Ireland. (OToole (b))

In keeping with the development of the globalised financial sector, Ireland was also a recipient of inward investment in this sphere. Founded by Charles Haughey in 1987, the International Financial Services Centre (IFSC) came to play an increasingly important role in the Celtic Tiger economy. In 2002 Ireland was the largest location for declared pre-tax profits for US firms and in 2005 the IFSC accounted for 75% of all foreign investment in Ireland. By 2008 the IFSC was dealing with 1 trillion per year. At its height the IFSC had 25,000 employees and garnered 1.2 billion in taxes. In return for this boost to the Irish economy the Irish government ensured that regulators operated what the IDA called a flexible and business focused tax and regulatory system. (Quoted in OToole (b): 130) This allowed for the development of apparently vast financial operations with huge paper assets but almost no substance. (OToole (b):129) In 1998 the Irish government allowed the treasury arms of transnational corporations (TNCs) to set themselves up as banks and by 2007 400 of these banks were in existence, whose chief aim was to ensure that the parent TNC paid as little tax as possible. These banks were mostly front companies with few employees and engaged in no real banking activity. Ireland was a global centre of tax avoidance (legal) and evasion (illegal). The IDA itself boasted of Ireland having become the new Bermuda.

The Workers Party has previously outlined its view on how the Irish government conspired with big builders and the banks to squander the monies that came into the exchequer and developed the housing bubble with little or no thought as to the long-term consequences so that when the global

collapse came, Ireland was in no position to deal with it. What follows is an attempt to outline where we are now and a brief outline of options open to the Left in Ireland at this time.

Ireland 2010

While the largely unregulated financial economy was booming, and US investment was creating industrial and financial jobs, not everybody in Ireland was living the dream. In fact, the gap between rich and poor widened to one of the worst in the world. In the last three years of the boom (2004 to 2007) alone, the richest 400 people in Ireland added 41 billion to their combined personal wealth. Yet, somehow, Irish people went on believing that they lived in a relatively classless society. (OToole (b): 76) The idea that were all in this together remains powerful and is used by the government, by most commentators to construct a fictional divide between vested interests and the rest of the country. In the current climate these vested interests include public service workers, nasty bankers (Seanie Fitzpatrick, Richard Boucher, Michael Fingleton), dinosaur trade unions and their venal leaders. The underlying idea is that if we can disentangle the cronies from crony capitalism and put good bankers in place, all will be well again. It is an evident piece of fiction but as propaganda it may be working. For example, a recent Sunday Independent poll found that 55% of respondents would favour an all party government in the current economic climate. (25th April 2010). The Workers Party does not believe that a unity government made up of two right-wing parties and a few others would be able to deal with economic woes to the benefit of the majority. We have no time for the bankers and their buddies in construction and in Fianna Fil .We believe that a privileged golden circle was partly responsible for the way things have panned out here. But we are aware that Irelands fate has been tied up with an increasingly globalised capitalism. We are equally aware that a squeakyclean Fine Gael-led coalition government wouldnt be of any help to the vast majority of the Irish people. A new direction will have to be coursed if we are to develop a society which looks after the interests of the majority. Economic Crisis: a Deflationary Approach Broadly speaking, within the capitalist system, there are two main approaches to dealing with large government deficits. One approach is to cut wages, and government spending and use the money saved to pay back the debt including interest. Cutting workers wages and entitlements is also supposed to make the economy more globally competitive. There are problems with this approach. The first problem is that even fewer people will be able to afford goods and services at their current prices. Cuts

will lead to higher unemployment and wage cuts put less money in workers pockets. People have less money to put into the economy. A lack of demand may in turn lead to a need on the part of sellers to lower prices and a general deflationary tendency in the economy. There is also the risk that the people at the bottom end of the wealth pyramid might start taking to the streets, as they are currently doing in Greece. The alternative approach involves the government spending money on social services (or anything it could equally involve the government spending money on weapons and wars), which in turn will get more people working, producing, spending and paying taxes, which in the longer run will help to clear the deficit. As we might expect of a government which is hardly interested in the plight of that special special interest, the vast majority, the government has chosen a potentially deflationary and socially painful course of cuts, tax increases (aimed at the most vulnerable) and shut-downs.

According to the latest ESRI Quarterly Economic Commentary (Spring 2010), economic output has been flat between 2009 and 2010. They expect economic growth of 2.5% of GDP in 2011. As for the job foecast..

...we expect unemployment to fall between 2010 and 2011, averaging 13 per cent in 2010 and 13 per cent in 2011. This expected fall in the rate of unemployment is related to expected migratory outflows 60,000 in the year ending April 2010 and 40,000 in the year ending April 2011. (p.1)

In the ESRI report there are clear signs that government policy is undermining demand in the economy. In tune with government thinking the report notes that rising public debt and concerns about mediumterm fiscal sustainability in many advanced economies could potentially derail the recovery process by unsettling financial markets and increasing the cost of borrowing, thereby crowding out private consumption and investment But it also notes that

... there remains a concern that the outstanding impairments in financial systems and in housing markets, together with rising unemployment levels, may impede the recovery in household spending to a greater extent than currently expected. In addition, much of the rebound in global economic activity has been driven by the extraordinary policy stimuli and there are still few indications that autonomous private demand is taking hold in the advanced economies. One of

the key risks is that a premature termination of supportive policies may undermine the recovery. (p.6)

The Fianna Fil /Green government is very much about terminating supportive policies. As implied in the quotation above, other governments have followed a different approach to that of the Fianna Fil / Green coalition by putting extraordinary amounts of money into the economy in the hope of stimulating growth. Later, the ESRI Commentary notes that government figures show that the volume of investment spending fell by 29.7 per cent in 2009. This figure was made up of a fall of 33.8 per cent in building and 15.7 per cent in machinery and equipment. Figures for consumption also show a fall for the period.

The ESRI Commentary bases its budget forecast for 2011 on the pre-announced targets included in Budget 2010.

In the (2010)[Budget] document these include total cuts of 3 billion, with 2 billion targeted at the current side of the budget and a 1 billion reduction in capital expenditure. ...we have assumed a freeze in welfare payments and public sector pay rates together with further reductions in the volume of public consumption which is forecast to fall by 2 per cent in 2011. ...we have implemented these measures to estimate the impact of the pre-announced budget plans on the public finances and the wider economy.

We estimate that such a budget package would reduce the General Government Deficit by between 1 and 2 percentage points of GDP. The impact on the wider economy is to reduce the growth rate by approximately one percentage point. In addition, the level of employment is lower and emigration flows higher than in the absence of such a package. These are real costs attached to the programme of fiscal consolidation being pursued by the government. Despite these costs it is the view of this Commentary that such measures are necessary to ensure the medium-term sustainability of the public finances. Given the range of measures which have already been introduced, the 2011 budget is likely to involve some very difficult choices. While there are likely to be significant cost savings to be made in the capital programme which should mitigate the effects of the cuts on the levels of volume investment, it is nevertheless the case that by 2011 public investment levels in current prices will be one-third lower than in 2008. Implementing further cuts in current expenditure and increases in taxation will also be challenging...

The recently announced plans for providing support to the banking system involve very significant increases in the level of government involvement in the financial sector. It is very difficult to put exact figures on the level of government monies involved. However, a tentative estimate of the order of 73 billion, equivalent to 47 per cent of GDP in 2010, can provide a guideline. ... Of course these are gross figures and much of this liability is matched by assets both within NAMA and in AIB and Bank of Ireland. Nevertheless, it is possible that the net cost to the taxpayer of this support to the banking system, based on the latest figures available, will be of the order of 25 billion or more. (p.23. Our Italics)

The picture which emerges here is clear. On the one hand, the vast majority are expected to suffer a contraction in the economy, a growth in unemployment and emigration, in 2011 public investment will be a third lower than it was in 2008 and more cuts in taxation and government expenditure, although challenging, are expected. On the other hand, the government is going to give around 73 billion to the banks and might get 48 billion back meaning that generations of Irish people will end up paying for 25 billion or more that this government has given to the banks. In the immediate term, the Workers party is in favour of government policies which will put money into workers pockets and which will ensure that social services are maintained at 2008 levels and even expanded. We seek a coalition of all parties which are opposed to the deflationary anti-worker policies of Fianna Fil and its hangers on. We do not believe that a Fine Gael-led coalition, even with sincere social democrats in cabinet positions, will even begin to protect the living conditions and livelihoods of the majority of our people. We note that in his recent leaders speech to the Labour Party conference Eamonn Gilmores big ideas on healthcare and a constitutional convention are already part of Fine Gael policy so that at the same time as he was challenging Fine Gaels bid to become the largest party in the state, Gilmore was setting out policy positions which would fit comfortably with *Enda+ Kennys platform. (Back Room, Sunday Business Post, April 25th 2010) We hope that this does not mean that the Labour Party is planning to throw its lot in with Fine Gael after the next election. The Labour Party is - as usual- at a crossroads. This time it should turn to the Left, with the goal of finding allies and building lasting coalitions in that direction. The Workers Party also notes with dismay the way in which most of the leaders of the Trade Unions have accepted a public sector agreement which offers Irelands 300,000 public sector workers very little. Indeed the little that it does offer in relation to voluntary redundancies and no further pay cuts is subject to no currently unforeseen budgetary deterioration and will almost certainly be taken away again. Jack OConnor of SPITU has argued that we are living in a ruined economy, and any action we

take will be depicted as an attack on the citizens of the country. He seems to have bought into the arguments of those on the other side of the table. The Workers Party believes that it is incumbent on the Trade Union movement to show by word and deed that it represents the working class of Ireland in its broadest sense. The Trade Union movement needs to come out fighting against scare stories about sectional interests and cushy public sector jobs instead of giving in to them. In relation to jobs, Fianna Fil has recently been coming out with what can only be termed well-spun guff about post-recession Ireland becoming a smart, green economy- what the newspapers have started calling environomics. The economist Michael Hennigan at the finfacts website shows how unrealistic the aim of creating tens of thousands of Irish jobs in the green economy is. He notes(quoting Forfs) that between 1998-2008 fewer than 4,000 new jobs were added by Irish and foreign firms in tradeable goods and services while during the same period more than half a million new jobs were created in construction, the public sector, retail and distribution. Moreover, research from the USA a highly entrepreneurial culture - shows that only a small the number of business start-ups in tradeable goods and services last more than 10 years. Meanwhile, the government is talking about creating 80,000 sustainable jobs in the new green economy. They are even talking about a green IFSC which could create 20,000 jobs over the next five to 10 years. According to Eamon Ryan, the Minister for Communications, Energy and Natural Resources, It could specialise in clean energy project finance or carbon trading, Ryan said. It could also look at ethical fund management and administration. We would specialise in three or four key areas. The reference to ethical fund management is particularly choice.

Even those who did well out of the Celtic Tiger have to accept that those days are over. Speaking to business people in Dublins Mansion House, Craig Barrett former CEO at Intel, reminded his audience of the competitive pressures that faced them. He argued that with the collapse of the Soviet Union and the abandonment of socialist principles in nations like India, for example, an estimated 3 billion additional people entered the free world economic system.

And guess what, they also want good jobs and have a rich educational heritage. You have 3 billion new customers, you also have 3 billion new competitors ... The FDI [Foreign Direct Investment] era is over. Real economic investment will be indigenous and growth will come from investment in new ideas.(The FDI era is over, says Craig Barrett.

No new green tiger is going to emerge when the CEOs are speaking in those terms.

The State as the Key Driver

For the Workers Party the state should be the key driver in job creation because we seek a society were goods will be produced according to the agreed needs of the people and not the dicatatorship of the market. We note that during the final Tiger boom- between 2000 and 2008 the net capital stock of the Irish state more than doubled from 222 billion to 477 billion. Of course, given the priorities of the government, 70 billion of this went into housing and 27.5 billion went into upgrading the roads the latter an important, and arguably useful, investment. Road building accounted for almost 30% of the increase in 'core' productive capital stock (i.e. capital stock excluding dwellings, retail and transportation/storage). And most of the rest of the increase in Irelands 'core' productive capital stock was related to the state or semi-state sectors. It was not driven by private enterprise.

Of the 50bn rise in 2000-2008: 14.5bn is manifested in roads; 9bn went into schools, hospitals and buildings and equipment related to public administration; 7bn was invested by the semi-state companies that dominate electricity and gas supply; 3bn was pumped into water works, waste management and sewerage.

Private sector net investment in the capital stock apart from retail, storage, transportation and housebuilding was only 14.5bn in the eight years to 2008 (in constant 2007 prices). (finfacts team)

Even during the laissez-faire era of the Celtic Tiger at its height, the state was a crucial driver of core productive capital stock. This realisation must inform future policy.

A realistic radical approach to job creation has to put the basic needs of people first in terms of affordable housing, health, education and food and water provision. Radicals should ask why the government is not meeting basic needs in these areas and in the area of full employment. Will the government tax the wealthy and redistribute wealth to the benefit of the great majority? Will environmental concerns with the limits of our environmental systems and the necessity of sustainability assume more importance than the need to make a profit? If the global economy grows at 3% per annum, within thirty years it will have doubled in size. Can the global environment realistically

withstand such growth? The profit system is unable to find solutions to these problems. Another world is necessary.

References Jo Cottenier and Henri Houben ,System Crisis, International Communist Review , 2009 ESRI Quarterly Economic Commentary, Spring 2010 Finfacts Team Davy says Ireland was never a wealthy country; High income in 2000-2008 largely wasted,, February 19th, 2010 John Bellamy Foster and Fred Magdoff, The Great Financial Crisis, Causes and Consequences, Monthly Review Press, 2009 Fred Goldstein Low-wage capitalism: colossus with feet of clay what the new globalized, high-tech imperialism means for the class struggle in the U.S. World View Forum 2008 Henri Houben, Institute of Marxist Studies, Brussels Contribution to the Fourth World Association for Political Economy (WAPE) Conference, Nation, State, and Democratic Governance of the Global Economy and Politics Paris, 28-29 May 2009 Fintan OToole (a) After the Ball, Tasc at New Island, 2003 Fintan OToole (b) Ship of Fools, Faber and Faber, 2009 Rick Wolff, Capitalism's Crisis through a Marxian Lens