From Cambridge University in 1932-1933, John Maynard Keynes observed a promising new U.S. president presiding over what he saw as half-baked and confused policies, while labor insurgency was mounting. Roosevelt’s measures were, Keynes conceded, without precedent, but novelty was not enough. Long-term commitment to direct federal employment was required. For Keynes, this was the bottom line. (For a detailed analysis of Keynes’s prescriptions for eliminating unemployment, see Alan Nasser, “What Keynes Really Prescribed,” CounterPunch subscription edition, volume 19, number 19, 2012)
Existing programs were not only too small, but they were also either temporary (Civilian Conservation Corps and Civil Works Administration) or irrationally tied to the severely weakened states’ ability to raise substantial revenues on their own (Federal Emergency Relief Act and Public Works Administration). CWA had come closest to the kind of commitment Keynes thought indispensable, but it suffered two fatal defects: it was temporary, designed only to help workers get through the harsh winter of 1933, and of all these programs it was the object of Roosevelt’s greatest suspicion. Roosevelt feared that CWA would raise workers’ expectations of what they could permanently expect from government.
The Dawn of the New Deal and Keynes’s 1933 Letter
The president’s instincts were solidly anti-federalist; there must be no permanent direct government provision of what it is the proper function of the private sector to provide. (1) Roosevelt wanted relatively small, temporary federal efforts on behalf of workers, with the states primarily responsible for the provision of social benefits in the long run. Keynes urged large, permanent programs supplying employment during both economic contractions and expansions, provided directly by the federal government. He communicated his concern to Roosevelt in an open letter published in The New York Times on December 31, 1933. (2)
In the letter he expressed his extreme distress at Roosevelt’s timid policy. “At the moment your sympathizers in England are nervous and sometimes despondent. We wonder whether the order of different urgencies is rightly understood, whether there is a confusion of aim, and whether some of the advice you get is not crack-brained and queer.” He then outlined his alternative analysis.
The basic issue, Keynes insisted, is “Recovery,” whose object is “to increase the national output and put more men to work.” An increase in output depends on “the amount of purchasing power… which is expected to come on the market.” Recovery depends upon increasing purchasing power. There are, Keynes pointed out, three factors operating to raise purchasing power and output. The first is increased consumer spending out of current income, the second is increased investment by capitalists, and the third is that “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”
Since the vast majority of consumers are workers, increased consumption expenditure is impossible on the required scale during a period of high unemployment and low wages. Business investment will eventually materialize, but only “after the tide has been turned by the expenditures of public authority.” Government investment in employment-generating public works must come first. Only after large-scale government investment can private investment be expected to kick in.
A compelling logic is implicit in that observation. According to the orthodoxy Keynes is criticizing, a revival of aggregate investment by the class of capitalists is necessary and sufficient to constitute recovery. But investment by an individual capitalist in a severe downturn would be irrational. So each capitalist will defer investment until there is evidence of recovery, i.e. evidence that the other capitalists have undertaken productive outlays. Uh-oh: a structural contradiction is in place. If each investor refrains from investment until all the others invest, no capitalist will invest. Each will die waiting for the others to come across. In the absence of an external impetus to the private investment system, the depression will be endless. Recovery is possible, then, only if a force external to the private market gets the ball rolling. Enter government to the rescue. “[T]he tide has been turned.”
Hence Keynes’s conviction that only government expenditures on a grand scale can breathe life back into a depressed economy. Keynes suggested as an example of what he had in mind “the rehabilitation of the physical condition of the railroads.” He would later, in a 1938 letter, recommend a national program of public housing as a project on the required scale.
The crisis was not merely economic. Keynes had witnessed the rise of revolutionary movements in response to the protracted inability of capitalism to meet the needs of working people. He had written about both the Bolshevik revolution and the tendency of austerity to spawn revolt from the Right. Keynes was antipathetic to both fascist and worker rule, and feared revolutionary consequences should the New Deal fail. “If you fail,” he wrote Roosevelt, “rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.” The political stakes were high, as they must be under conditions of protracted capitalist austerity.
The stakes are no less high now. The current contraction emerged from a political-economic settlement, the post-Golden-Age period from 1974 to the present, resembling in relevant respects the Depression-prone economy of the 1920s.
I want to review both those features of the 1920s which generated the economic debacle Keynes addressed, and the corresponding precipitating causes of today’s crisis. The similarity of the origins of both contractions is striking. If Keynes was right to argue -and we shall see that he was- that large-scale public employment is the only remedy for a severe and extended economic contraction, it will be clear that the same prescription applies to the present depression. We will then be in a position better to grasp the urgency of public employment as a policy without which the United States faces a future of long-term stagnation and intolerable unemployment.
The 1920s as Exemplar of Mature Capitalism: the Stage-Setting for the Great Depression
The 1920s was the benchmark decade for mature pre-Keynesian capitalism. The major capital-intensive industries were in place and oligopolized (or rapidly becoming so), technological development raced ahead and production and profit levels were high. By 1919 union power had been dealt a crippling blow; labor was almost entirely unorganized during the 1920s.
The remarkable increases, between 1919 and 1929, in GDP (40 percent), production (64 percent in manufacturing), productivity (43 percent in industry as a whole, 98 percent in automobiles) and profits (200 percent) were not matched by a comparable increase in wages. Productivity advances did not lead to higher wages; wages were no higher in 1929 than they were in 1922. Nor did they bring about falling prices; industrial concentration made for “downwardly sticky” prices. The result was inexorable: national income was distributed upward so that by 1928 the nation exhibited the greatest inequality of the century to that point.
In his landmark study of the economy of the1920s (3), George Soule spelled out the consequences of that settlement:
“…toward the end of [the decade] large amounts of cash remained in the hands of of the big manufacturing and public-utility corporations that they did not distribute either in dividends or by means of new investment… the large corporations accumulated even more cash than they needed for their own uses… This money eventually spilled over into stock speculation. … [T]he surplus funds of large business corporations were now being lent directly to speculators… A curious commentary on the state of the American economy at the time is the fact that business could make less money by using its surplus funds in production than it could by lending the money to purchasers of stocks, the value of which was supposed to be determined by the profit on that production.”
The lessons of the 1920s are clear, and they bear directly on the build-up to the present crisis. Developed capitalism without social democracy and strong labor unions leads to productivity increases far outpacing wage growth, extreme inequality, insufficient working-class purchasing power, an unprecedented buildup of household debt and nowhere for profits to go but into capitalist consumption and financial speculation. With financial growth not reflecting comparable health in the productive economy, a bubble formed in stock market speculation and household debt grew faster than household income. By their nature, bubbles break. The popping of the speculative bubble brought about the stock market crash of 1929.
The crash and ensuing Depression afflicted what we have seen was a highly vulnerable economy. Because the economy had by the 1920s become industrially mature, growth no longer depended upon the breakneck expansion of the capital goods sector, but was now, and for the first time, fuelled by the production and consumption of consumer durable goods like refrigerators, radios, vacuum cleaners and, most importantly, automobiles. Consumption replaced investment as the driver of economic growth. (4) Robust growth would now require high wages.
With wages stagnant, working-class households’ ability to sustain the consumer durables boom became dependent, as it would again from the mid-1970s onward, on unsustainable household debt levels. Supplementing income-based purchasing power with credit had been a fact of life since the late nineteenth century, but the debt increments increased especially rapidly during the 1920s. The proportion of total retail sales financed by credit increased from 10 percent in 1910 to 15 percent in 1927 to 50 percent in 1929. When working-class purchasing power and household debt approached their limit by 1926-1927, the rate of growth of consumer purchases began to decline. Key growth markets like autos and construction became saturated and excess productive capacity became conspicuous. Production fell and profits were directed to financial speculation and bubble creation. The stock market and the economy responded accordingly. The Great Depression was at the door.
A comparable dynamic was in effect during the period preceding September 2008. From the mid-1970s to the year before the housing bubble began to leak, 2005, the gap between productivity growth and flat wages grew wider and wider. As in the 1920s, national income shifted steadily and increasingly to the top. Inequality approximating that of the 1920s grew. 1928 and 2007 were the highest inequality years since 1900. (Each year, not coincidentally, was followed by a major meltdown.) Workers once again resorted to debt to maintain living standards. The ratio of outstanding consumer debt to disposable income had more than doubled, from 62 percent in 1975 to 127.2 percent in 2005. Since 1995 the debt burden, measured by the percentage of household income pledged to debt service, had become increasingly concentrated in the lower three income quintiles. Financial speculation, which had accelerated since the mid-1970s, took off with a vengeance after 1999. Echoes of the 1920s were loud and clear.
When 2008 ushered in today’s depression, the political-economic legacy of the New Deal had long given way to the neoliberal religion of market-only solutions harkening back to the pre-Keynesian 1920s. The Great Depression’s lesson that only public employment on a grand scale could remedy persistent joblessness was cast aside as incompatible with born-again free market fundamentalism. Obama’s remarks at the December 3, 2009 “jobs summit” express the current elite consensus that any politically acceptable remedy for intractable joblessness must be market-based: “[While] government has a critical role in creating the conditions for economic growth, ultimately true economic recovery is only going to come from the private sector.” That’s a recipe for endless depression.
We shall see below that Big Guns from Larry Summers to Paul Krugman have finally drawn the appropriate conclusion: America faces a future of long-term, perhaps permanent, stagnation and high unemployment. This is indeed the price working people will pay for the total exclusion of public employment from current policy discussions. We can see this more clearly after we first have a look at the course of the Great Depression and the alternative Keynes urged upon Roosevelt when the New Deal recovery fizzled in 1937.
The Big Contraction, the Aborted Recovery and Keynes’s Response
From 1929 to 1933 the economy plummeted, leaving 24.9 percent of workers unemployed and many more underemployed. By 1932 more than 32,000 businesses would go bankrupt. National output fell by 50 percent. Investment plunged. 20 percent of U.S. banks, at least 5,000, failed. This is what created the grist for Keynes’s mill.
The Depression reversed the euphoria of the 1920s and initiated a profound sense of desperation frequently referred to by president Roosevelt as a national “emergency.” Motivated by advisors more radical than he and mounting worker impatience, Roosevelt initiated experimental stimulus measures.
The WPA and other modest public employment measures provided sufficient momentum to the economy that a sharp upturn began in late 1933 and lasted until 1937. This was one of the two longest cyclical expansions in the nation’s history, and the steepest ever. The upturn is typically but misleadingly thought to be a direct result of the New Deal’s enormous increase in deficit spending. The lesson “Keynesians” have drawn is that mature capitalism is capable only of brief periods of stability left to its own private devices, so that government intervention during economic downturns is a recurrent necessity built into the system. Private investment, then, is necessary but insufficient to drive the accumulation process; deficit-financed government investment is also required if economic growth is to be accompanied by full employment.
This can be seriously misleading. Government investment is not merely necessary; it is the only form of investment, Keynes claimed, capable of bringing about full employment. Keynes was emphatic that reducing taxes and interest rates, and providing temporary unemployment benefits, were no substitute for direct government job creation. The lesson that matters is that the elimination of unemployment is not the direct result of government deficit spending as such. Public works projects, for example, put people to work, and this provides workers with a wage, the household spending power Keynes underscored as the key to recovery. Without restoring the purchasing power of the working majority, there would be no recovery.
Wages turned into effective demand, then, is the direct cause of a revival of production and employment. But niggardly wages will not do. The nation’s human and non-human resources are vast, and marshalling them for production at full employment calls for aggregate household spending power sufficient to that task. The 1920s and the period from 1974 to the present display those features of mature industrial capitalism which generate the kind of crisis which only high wages can reverse.
The End of the Recovery and the Triumph of Sound Finance
The recovery of 1933-1937 exhibited the fastest growth rates of the twentieth century. At the peak of the expansion industrial output and national income had returned to 1929 levels and purchases of new autos surpassed 1929 sales. (5) New auto sales were fuelled by consumer spending. The consumer demand that drove this exceptional recovery was created by public, not private, investment. It is not investment as such that capitalist development renders otiose, but private investment.