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The Capitalists and their Economists Are at War Over Stimulus

Bourgeois economists, like the politicians they serve, are fighting over the Biden stimulus plan. Helping those of us who might get checks is not the aim. It’s a battle over the best way to rescue capitalism from another crisis of its own making.

Scott Cooper

January 31, 2021
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The image is a close-up on a check that has the statue of liberty is on a light green background. Text that reads "United States" is at the top of the image, the Bureau of Fiscal Services seal is in the middle, and text that reads "pay to the order of" is below the seal.

Right now, capitalism finds itself forced to confront a demon of its own making. Before the pandemic hit, the global institutions of capital were already forecasting a slowdown and even a possible recession — a forecast significantly worsened by the spread of Covid-19. The result has been a crisis of unexpected proportions, one that has already decimated some sectors of the economy and is sending more and more people into poverty.

Now, there’s an increasingly public battle over what to do next to save the system. The question (with apologies to Shakespeare): To stimulus or not to stimulus?

At issue is whether the government should again inject money into the economy in a number of forms — as was done in early 2020, when the virus first erupted, through the Coronavirus Aid, Relief, and Economic Security (CARES) Act — including direct payments to individuals and families, grants and loans to businesses and state and local governments, and so on. The Biden administration has already proposed a $1.9 trillion package, and so also at issue is whether that’s the “right” amount, both overall and in terms of how the spending would break down.

This debate gets at the heart of the “free market” and pits bourgeois economists — all dedicated to capitalism and its exploitation as a system — against each other. There are those who support more or less stimulus, and those who decry it completely as anathema to the “free market.” Understanding the debate reveals a lot about capitalism, which depends on increasing profit and exploitation to survive even the best of times.

The capitalists desperately need some help to get through this moment of crisis. There will surely be some stimulus; the ruling class just wants to make sure they don’t have to pay for it in the form of higher taxes or lower profits. The debate that is unfolding masks — not very well — a shared ruling-class commitment to ensuring that workers and the poor bear the brunt of any plan. Part of that will be in the form of austerity: at the same moment we may get some extra money in our pockets that the rulers hope we’ll give back to them through our spending, they’re likely to slash all sorts of social programs.

That debate has a long history.

Stimulus Versus the “Free Market”

On December 15, 2008, serving out the remainder of his presidency as a lame duck and watching the global economy sink into what became known as the Great Recession, George W. Bush told a CNN interviewer, “I’ve abandoned free-market principles to save the free-market system.” Referring to the government intervention he had ordered “to make sure the economy doesn’t collapse,” he added, “I am sorry we’re having to do it.”

Bush was talking about government intervention to bail out failing banks and automobile companies in the early days of the Great Recession. It provoked the same old arguments about the “free market,” including from Anthony Randazzo — a senior fellow at the libertarian Reason Foundation — the next day:

Bush and [then President-elect] Obama like the free market when it is driving a prosperous society, but they don’t like the negatives that come with it: that there will always be some unemployment, that there will be wealth gaps, that there will be some poverty, and that there will be downturns in the business cycle. And so, as Keynesian economics tried to do, they want to tinker with the system to see if they can perfect capitalism with a little bit of central planning. … You can’t abandon the principles of the system just when it seems like the going is tough. It is precisely at the times when we need to stand by our principles.

Of course, the ruling classes have always created the rules for the economy, and — through the governments that serve their interests — intervened whenever and however they think is necessary for stability or survival. In that context, the very idea of a genuinely “free market” is patently ridiculous. Acknowledging that reality is at the core of the underlying economic theory behind stimulus in times of economic crisis.

It was British economist John Maynard Keynes who promoted the idea during the Great Depression. Until the 1930s, there had been little challenge to the prevailing neoclassical economics view that the “free market” could be counted on to provide full employment automatically — even if it didn’t happen immediately — as long as those pesky workers were flexible when it came to wage demands. Along came Keynes to argue something different: the total spending in an economy (aggregate demand) is what determines the overall level of economic activity, and absent enough aggregate demand there could be long periods of high unemployment. He was describing the situation that had erupted and worsened in the Great Depression.

In his 1936 book The General Theory of Employment, Interest and Money, Keynes advocated governments use a combination of fiscal and monetary policies to address the effects of the Depression. Fiscal policy refers to government taxation and spending to influence economic conditions that aren’t self-correcting because the private sector isn’t helping out. Monetary policy is all about what a country’s monetary authority — such as the U.S. Federal Reserve (the Fed) — does to control the quantity of money in the economy.

Government intervention to stimulate economic output would, through a concept Keynes popularized known as the “multiplier effect,” result in a larger final increase in national income. For example, if the U.S. government were to increase spending by $1 billion, and that caused real GDP to increase by a total of $1.7 billion, the multiplier would have a value of 1.7 — with economic output stimulated and living standards improved. Absent intervention, there was a negative multiplier effect: firms reducing investment, people losing their jobs, and thus higher unemployment leading to lower spending that then affects everyone in the economy.

Kickstart the economy in a slump, Keynes argued. He wasn’t advocating socialism or governments taking control of the means of production — despite what some critics continue to maintain. Nor did he ever advocate expanding the welfare state per se, or that spending should be higher as a percentage of GDP. His argument was straightforward: increase spending only in an economic downturn if you want to turn things around.

The Keynes idea was a large part of the U.S. government’s decision to adopt President Roosevelt’s New Deal in the 1930s as a way to “save” capitalism. Of course, the New Deal went further than Keynes had advocated — for example, he never explicitly discussed expanding the social welfare system, as the New Deal did. But the Depression was a moment of instability for capitalism that went well beyond reviving profit. As class struggle erupted in the 1930s, fueled by economic collapse and growing impoverishment, it forced the ruling class to make a calculation: give up some exploitation over the short term to save the system for longer, rather than face the guillotines if things got worse. The existence of the Soviet Union did not help the situation for the capitalists; despite the Stalinization of the workers’ state, the Russian Revolution and the gains made in the workers’ state were a significant pressure point on the American bourgeoisie.

Still, the New Deal isn’t what saved capitalism. There was some recovery from 1933 to 1937, but there was a sharp downturn once again in 1937 and 1938, when economic indices plummeted again and unemployment rose, hitting 19 percent (it had been 25 percent or more in 1933). Over the entire 1930s, whatever “recovery” was achieved returned U.S. capitalism to its pre-Depression levels, and unemployment never dipped below 10 percent. In 1940, it still stood at a Depression-level 14.6 percent. But then the ruling class got the gift that would save its system: World War II.

Contrary to what Keynes argued, it was the war that really stimulated the economy, got the United States out of the Depression, and led to the “Thirty Glorious Years” of post-war economic growth, the creation of the U.S. “middle class” (most just relatively well-paid members of the working class), and American economic domination across the globe. Defense spending in 1941 and 1942 was the jump-start to the U.S. economy the New Deal had failed to provide. U.S. GDP rose from $91 billion in 1939 to $126 billion in 1941, $193 billion in 1943, and $214 billion in 1945. Civilian employment increased by 8 million workers between 1939 and 1944 thanks to the war effort, and the armed forces contributed “jobs,” too — expanding from a little over 300,000 to 11.5 million during the war. Unemployment virtually vanished, falling to just 1.2 percent in 1944.

The United States prospered, the war destroyed the economies of the world’s other major nations, and by 1947 the United States was producing about half of the world’s manufactured goods, three-fifths of the world’s oil and steel, and four-fifths of the world’s automobiles, while growing new industries such as electronics and aviation.

There’s your economic stimulus: a devastating war, mostly over markets, that killed about 3 percent of the world’s population at the time, laid waste to vast swaths of territory, and destroyed a very substantial part of the world’s productive forces.

War is not openly on the agenda today, although capital will wage one if that’s what it takes. For now, the debate reverts back to Keynesian fiscal stimulus: the government deciding to increase spending by using our money (“cash on hand” or through borrowing, since the federal government has none of its own), and through what’s called “quantitative easing.” The latter involves the Fed injecting “new” money (as if it had actually printed new bills) into the commercial banking system by purchasing government bonds or other financial assets. That money goes largely into the pockets of billionaires and millionaires, via the banks that essentially have “accounts” at the Fed the way you might have a checking account at your local bank.

Stimulus is meant to trigger spending and push aggregate demand higher — that is, demand for things capitalists can sell to make money. They want us to spend so we (re)line their pockets with profit. They want to make sure that economic activity continues at a pace that keeps people employed, because unemployed people cannot spend on anything other than basic necessities at most. And they want to make sure workers can reproduce their labor power — by eating and staying just warm enough in their homes not to die — so they can come back to work the next day and be exploited. All those objectives are behind the Keynes idea. It’s not about rescuing people and their lives, only their labor power.

Still, many bourgeois economists formally reject Keynes. The pages of the business press are filled with the musings of Wall Street analysts, hedge fund managers, and others who decry stimulus repeatedly — although it should be noted that except perhaps for the libertarian ideologues, they would never refuse a government handout or an intervention with rules to shore up their privileged positions like in the recent GameStop incident. J. Matthew Bennett, who blogs at Capitalism.com, summed up the anti-Keynesian view quite well back in 2016. His foil was the “Recovery Act” undertaken at the beginning of the Obama administration, which inherited the crisis for which Bush was throwing “free-market principles” under the bus. Bennett characterized that stimulus as “doomed from the very start because it was predicated on a false premise” that spending translates into prosperity. He cited a working paper from the National Bureau of Economic Research that reported on a survey revealing what the anti-Keynesians fear most: what if the capitalists give people money and they don’t spend to give it back?

The debate in 2008 was instructive. For every anti-Keynesian screed against the Obama Recovery Act, there was a criticism that it didn’t go far enough and, therefore, wasn’t going to save capitalism the way Keynes intended. Two prominent Keynesians — Paul Krugman, the Princeton University professor with his newly minted Nobel Prize in economics — and former Treasury Secretary Larry Summers (both of whom figure in the debate unfolding today) — criticized the number explicitly, a criticism that looms large today in discussions of the Biden plan.

“I’d like to see it bigger,” Krugman said in a television interview, and criticized the incoming administration’s fear of the “T word” — for trillion. The same day, Summers published an opinion piece in the Washington Post that endorsed the Obama plan but hinted it wasn’t sufficient. “In this crisis,” he wrote, “doing too little poses a greater threat than doing too much. … Failure to create enough jobs in the short term would put the prospect of recovery at risk. Failure to start undertaking necessary long-term investments would endanger the foundation of our recovery and, ultimately, our children’s prosperity.”

The 2020 CARES Act

The fact that the Recovery Act did not stem the tide of long-term crisis — but only kept the global economy from an immediate collapse — is certainly known to the bourgeoisie’s economists. Before the pandemic accentuated everything, the “capitalist economy had been dragging along,” as Paula Bach describes it, “relative stagnation, endemic weakness, and a particular lack of strength.” So, again, the size of the intervention became a debate, especially since the U.S. economy — indeed, the global economy — was already forecast to be heading for a slowdown or recession before the coronavirus hit America’s shores to widen and deepen the impending crisis.

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By late March 2020, Congress had passed and Trump had signed a $2.2 trillion stimulus bill known as the CARES Act to shore up the economy. It included one-time cash payments to many, but not all, individuals in the United States; increased unemployment benefits; a half-trillion in loans for corporations; and hundreds of billions for state and local governments. There was also money for loans to “small” businesses as part of the Paycheck Protection Program (PPP) so they could keep workers on the books while they quarantined at home, or make up for shortfalls in revenue from the lack of customers. Not surprisingly, a lot of PPP money was stolen by huge companies that found loopholes to get their hands on it — but the quotidian abuse of the economic system under our dog-eat-dog system isn’t the subject of this article.

The CARES Act is the largest economic stimulus package in U.S. history and amounted to 10 percent of U.S. GDP — and hence was expected to have a massive Keynesian multiplier effect. It was also projected to add $1.7 billion to the federal deficit over the period of 2020–2030.

Just as in 2009, after Obama’s stimulus went into effect, the anti-Keynesians began railing against the CARES Act after it was implemented — because, of course, the ruling class they work for wanted the money. Most of the harshest criticism was based firmly on the mythology of the free market. For instance, the CFA Institute, a professional organization for chartered financial analysts, reported “frustration that securities markets and financial analysis have become unnervingly detached from economics” and a fear that stimulus was causing “serious price discovery disruptions for investors and markets” while “perpetuating zombie companies and propping up zombie markets.”

Price discovery is, in essence, the process by which the point where supply and demand meet is found and a price is set for a commodity, security, asset, or currency. Zombie companies are ones that earn just enough money to keep operating and service their debt but not to pay it off. Quantitative easing has a nasty habit of keeping zombies alive. The “free market” should be killing them.

Of course, there was the usual hyperbole. One CFA managing director blogged, “Before free-market capitalism as we know it is completely demolished, we must ask honest questions about what comes next and for how long.”

Ruchir Sharma, a global strategist at Morgan Stanley, wrote for the Wall Street Journal in July 2020 and argued, “Easy money and constant stimulus have undermined the basic dynamics of the free market.” He warned, “Our growing intolerance for economic risk and loss is undermining the natural resilience of capitalism and now threatens its very survival.” And he blamed the “easy money” of Keynesian stimulus for “low productivity — the prime contributor to the slowdown in economic growth.”

Productivity is the measure of output per unit of input. It could be labor, capital, or any other resource, and when calculated for an entire economy it is a ratio of GDP to hours worked. Tightly linked to productivity are corporate profits and shareholder returns, which grow as it grows. That’s what the capitalists care about, and Sharma spoke for all of them with his question of how much further capitalism would “be deformed by government intervention on this scale.” Begging for the nonexistent free market, he decried, “The process of competitive capital allocation [how financial resources are allocated to different areas of a business to increase efficiency and maximize profits], which is critical to raising productivity, has broken down.”

That brings us to the current debate over a new stimulus package — at a moment when the weak economy and Covid-19 have pushed more and more people toward the precipice of destitution. 

The Current Debate

In late December, before Trump left office, an additional $900 billion in stimulus — mostly to renew elements of the CARES Act that had already expired — became law. Then, even before his inauguration, Biden proposed his new $1.9 trillion plan. Its main features include $1,400 checks to top off the $600 of the December legislation; $400 per week in supplemental unemployment insurance; an increase in the federal minimum wage to $15 an hour, with an end to the tipped minimum wage; money for “safe” reopening of most kindergarten-to-eighth grade schools in the first 100 days of the Biden administration; emergency funding for state and local governments; a national Covid-19 vaccination program; expansion of paid leave from jobs; and a temporary increase in the tax credits for families with children.

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It is a one-time, stopgap measure that does absolutely nothing to address the deep, long-term crisis through which capitalism continues to slog. It includes nothing that will improve the structural situation of jobs across the country and the world, which have been so terribly degraded under decades of neoliberalism policies — and especially in the post-2008 period, as precariousness and instability have taken stronger root. Biden’s partial measures will only ensure that crappy, precarious jobs continue to expand with each new crisis — and there will be new ones.

Right off the bat, Biden’s stimulus proposal provoked the usual suspects into a debate. There are the pearl-clutchers crying about the obliteration of free-market capitalism. There are the “deficit hawks” — mostly Republicans, but not exclusively — suddenly worried about leaving “future generations” hamstrung by stimulus spending today, after exploding the national debt with Trump’s tax giveaway to the rich. All this has led some news analysts to be “skeptical that Democrats will be able to pass anything by March 14, which is when $300 weekly federal unemployment payments run out.

There’s also the argument over the Biden plan’s amount not being big enough. This time around, however, there’s a new twist: economists formerly united around their adherence to Keynesianism — especially Paul Krugman and Larry Summers — seem to have parted company.

Interviewed on the PBS television program “Amanpour and Company” on January 18, Krugman — who had criticized the Obama stimulus for being too small — said that for the coming period,

Life is going to be very, very hard. Lots of jobs cannot come back until the virus is under control. And on the other side, money is not a constraint. The U.S. government can borrow at incredibly low interest rates, well below the rate of inflation and even further below the growth rate of the economy, which is what really matters. So there really is effectively no budget constraint. This is a time to spend a lot of money on keeping people, keeping governments, keeping businesses whole until the pandemic is under control.

Classic Keynesian economics, and par for the Krugman course. For his part, though, Summers seems to be breaking with Keynes. He’s gone on the attack against saving people from the economic effects of the pandemic. It began on Christmas Day in a Bloomberg interview, with dire warnings about “overheating” the economy — when the supply of goods and services cannot keep up with the aggregate demand Keynes wrote about. That leads to “overusing” resources, including workers and machinery — something the capitalists hate because it gets in the way of the most efficient management of the system to maximize exploitation. It also tends to cause inflation.

Summers doubled-down on his argument in early January: “It is far from clear what problem would be solved with universal checks [of $2,000] reaching 94 percent of the population.” He was referencing an estimate from a fellow at the American Enterprise Institute — a conservative think tank long opposed to fiscal stimulus in the interest of “saving” the free market” — about the reach of the Biden plan. And on January 14, he said, “If we get Covid behind us, we will have an economy that is on fire.”

The Economist took special note of that, writing that the criticisms of Summers “are notable both because he was an adviser to Mr. Obama and because he was hitherto perhaps the world’s foremost advocate of deficit spending.”

That Krugman and Summers find themselves at odds is a significant shift in one branch of bourgeois economics. Summers is generally credited with resurrecting an old idea from the 1930s in the early 2010s — secular stagnation, which is the absence of (or negligible) growth in a market-based economy over the long term, as opposed to cyclical or short-term stagnation. Krugman fawned over Summers for reviving the concept and — ever the Keynesian — even went so far as to advocate stimulus as the solution to that problem for economies not specifically in recession in a 2013 New York Times column.

Meanwhile, while the bourgeois economists argue, the great majority of people in this country sink deeper into the abyss capitalism has created.

The Bottom Line

Running through all of this is a simple fact: there may not be a way to stimulate capitalism out of its dual crisis just with a straightforward injection of money into the economy. What if today’s desperation amplifies class struggle and grows class consciousness, as it did in the 1930s? Will sticking to the limits of Keynesian stimulus be enough? Will the capitalist decide they need to go further, as did Roosevelt? Would they even decide war is the solution? What about open war against the working class itself?

The objective will always be to save capitalism — at any cost. Keynes had that aim: save capitalism during the Depression. Krugman advocates spending to save capitalism. Summers advocates not overheating the capitalist economy because he fears it would make it more difficult to save capitalism. Robert Reich, the former labor secretary in the Clinton administration, wrote a book titled Saving Capitalism.

All this “saving” unfolds today in the context of a capitalism with diminishing ability to find new terrain for profits and exploitation that would improve its conditions, and so it can only be “saved” — beyond any partial concessions — by a frontal assault on the standard of living, the remaining jobs, and the very existence of the working class and the world’s poorest people.

Whatever checks some of us might receive as a result of the Biden plan — money that is already ours sent back to us — and whatever other stimulus is injected into the economy is aimed only at keeping the cogs in a giant wheel of capitalist growth and productivity greased, buying time to prepare for whatever else challenges profit. 

We are those cogs. And every crisis, including a global pandemic, is the direct result of the system of exploitation. We need to fight back, not accept concessions like the Biden plan that are aimed first and foremost at rescuing our exploiters. Examples abound. Last summer, the Black Lives Matter movement showed that we can have power in the streets. At Hunts Point market in New York city, striking workers demonstrated how essential workers can confront the bosses in the midst of a crisis, just as the Amazon workers in Bessemer, Alabama, through their struggle to unionize, are illustrating.

The only way out for us is to organize to destroy the system that oppresses us, not accept some pittance to help the oppressors put their system on life support.

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Scott Cooper

Scott is a writer, editor, and longtime socialist activist who lives in the Boston area.

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