Download The Global Economic Crisis: Its Origins, Nature and Impact

The Global Capitalist Crisis:
Its Origins, Nature and Impact
Prof. Berch Berberoglu
Department of Sociology
University of Nevada, Reno
© Copyright 2011 by Berch Berberoglu
No part of this power point presentation can be used for any purpose without prior
written authorization and permission obtained from the author.
Introduction

The U.S. and the global economy have been – and
continue to be – in serious crisis, and the current global
recession is the worst economic downturn since the
Great Depression of the early twentieth century

The Dow Jones plunged more than 50 percent from its
highs of 14,000 in late 2007 to below 6,500 in early
2009, with more than a trillion dollars of value lost
in the stock market in little over a year

Although the Dow rose to around 12,500 a
little over two years after its worst decline,
the recent turmoil on Wall Street over the past
two weeks, which pushed the Dow down to
the 10,000 level could make things worse – a
“double-dip recession” turning into a depression
the

Clearly, the global capitalist economy is going
through its deepest crisis since the Great
Depression of 1929, and this signals serious
challenges for global capital over the next
decade, especially for the United States

The best example of this impact, and what is
in store for us over the next few years, is what
has been happening with the sovereign debt
crisis in Greece, Portugal, Spain, Ireland, and
Italy, as well as the United States (and with
what has happened to the icons of U.S. big
business – General Motors, AIG, Citigroup,
and other big corporations and banks)

Let’s take a brief look at these once-powerful
icons of the U.S. economy to assess the
magnitude of the damage…
Figure 1. Lehman Brothers stock, 2007-2011 (in dollars and volume traded)
$80
$18
4 cents
Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.
Figure 2. General Motors Corporation stock, 2007-2011 (in dollars and volume traded)
$40
$5
$1
4 cents
Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.
Figure 3. Citigroup, Inc. stock, 2007-2011 (in dollars and volume traded)
$55
$26
$2.68
Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.
Figure 4. American International Group stock, 2007-2011 (in dollars and volume traded)
$1,450
$1,0000
$600
$22
Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.
Figure 5. Fannie Mae stock, 2007-2011 (in dollars and volume traded)
$50
$22
20 cents
Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.
Figure 6. Freddie Mac stock, 2007-2011 (in dollars and volume traded)
$70
$63
$32
31 cents
Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.
Origins of the Crisis



The periodic crises resulting from the capitalist
business cycle now unfolds at the global level
The current crisis of the world economy is
an outcome of the consolidation of economic
power that the globalization of capital has
secured for the transnational corporations
This has led to a string of problems associated
with the financial, banking, real estate, and
productive sectors of the economy that
have triggered the current economic crisis
Nature of the crisis
The central problem of our present capitalist
economic system is the recurrent business cycle
which is now operating at the global level. It
manifests itself in a number of ways, including:
 The problem of overproduction/underconsumption
 Increasing unemployment and underemployment
 Decline in real wages and rise in super-profits
 The sub-prime mortgage and credit card debt
 Speculative corporate financial activities
 Increased polarization of wealth and income
Table 1. Share of Aggregate Income Received by Each Fifth and Top 5 Percent
of Households, 1975 to 2009 (in percentages)
_____________________________________________________________________
Lowest
Second
Third
Fourth
Highest
Top
Year
20%
20%
20%
20%
20%
5%
_____________________________________________________________________
1975
4.3
10.4
17.0
24.7
43.6
16.5
1980
4.2
10.2
16.8
24.7
44.1
16.5
1985
3.9
9.8
16.2
24.4
45.6
17.6
1990
3.8
9.6
15.9
24.0
46.6
18.5
1995
3.7
9.1
15.2
23.3
48.7
21.0
2000
3.6
8.9
14.8
23.0
49.8
22.1
2005
3.4
8.6
14.6
23.0
50.4
22.2
2009
3.4
8.6
14.6
23.2
50.3
21.7
______________________________________________________________________
Source: U.S. Bureau of the Census, Current Population Reports, P60-235, August 2008;
Statistical Abstract of the United States, 2012, Table 694, p. 454.
Table 2. Distribution of Wealth in the United States, 2007, by Type of Asset
(in percentages)
__________________________________________________________________
Investment Assets
Top 1%
Top 10%
Bottom 90%
__________________________________________________________________
Stocks and mutual funds
49.3
89.4
10.6
Financial securities
60.6
98.5
1.5
Trusts
38.9
79.4
20.6
Business equity
62.4
93.3
6.7
Non-home real estate
28.3
76.9
23.1
__________________________________________________________________
Total for group
49.7
87.8
12.2
__________________________________________________________________
Source: Edward N. Wolff, “Recent Trends in Household Wealth in the United
States: Rising Debt and the Middle Class Squeeze,” Working Paper No. 589 (March
2010), p. 51.
How Did All This Happen?
According to Prof. Richard D. Wolff
Department of Economics, University of Massachusetts at Amherst
Richard D. Wolff, “Capitalism Hits the Fan,” in Gerald Friedman et al. (eds.), The Economic Crisis Reader (Boston: Dollars & Sense, 2009).




From 1820 to 1970, every decade U.S. workers
experienced a rising level of wages
In the 1970s this came to an end; real wages
stopped rising and they have never resumed since
U.S. workers became more productive, but got paid
the same; wages began to stagnate and decline
The gap between labor and capital grew bigger
1859 69
79
89
99
1909 19
29
1939
1947
1955
1965
1975
1985
1995
2005
The large corporations made huge profits and
had much money at their disposal
They bought other corporations (mergers and
acquisitions) and they put their money into banks
The banks loaned that money (with interest) to
workers who didn’t have money to consume
This was done to raise their purchasing power
because their wages weren’t enough to buy things
Then What?
Since employers no longer raised workers’ wages,
the workers had to go into debt to survive
Debt went up and up and things got out of control
The banks continued to loan money through new
loans (secondary mortgages) at high interest rates,
and this was a profit bonanza for the banks
As corporations increasingly began to
invest abroad (outsourcing production
and services), U.S. workers lost their jobs,
and this led to greater unemployment and
underemployment
Unemployed workers with a lot of debt
were unable to make their mortgage and
credit card payments, and this led to
foreclosures and bankruptcies
This, in turn, led to the collapse of
the banking system, necessitating a
government bailout of the banks
It is only through the nearly trillion dollar
stimulus funds that the U.S. government poured
into the economy to save the banks from default
that a financial collapse was averted
Here’s a view of the housing bubble in 2006 by looking at the stock chart
of one home builder – Hovnanian Enterprises (HOV)
Stock price: $70 per share in 2006; $1.30 per share in 2012.
$ 70
Source: http://finance.yahoo.com retrieved on December 28, 2011.
Extent of the Crisis





The current economic crisis has been deep and
widespread on a global basis, especially in the U.S.
In the epicenter of the crisis, in the United States,
unemployment increased from 7 million in December
2007 to 16 million in October 2010
Counting the discouraged and part-time workers, the
unemployment rate reached 18% in 2010
Foreclosures have been running over 1 million a year
Poverty is on the rise (now 44 million Americans –
1 in 7 – live at or below the poverty line)
With the steady decline of the manufacturing sector in the United States through outsourcing of
production to cheap labor areas abroad, 2.9 million well-paying manufacturing jobs have
disappeared in the period 2005-2008 alone. And that’s on top of a loss of more than 3 million
jobs in manufacturing from 1998 to 2003, with millions more lost in the entire postwar period.
Long-term Unemployment and
Underemployment (as of January 2011)




The mean unemployment duration was 36.9 weeks,
and the median was 21.8 weeks.
The share of unemployed workers who have been
without work for over six months was 43.8%, one of
the highest on record.
A total of 6.2 million workers have been unemployed
for longer than six months.
There were 25.1 million workers who were either
unemployed or underemployed.
Average Annual Unemployment Rate, 2007-2010 (in percent)
Source: Bureau of Labor Statistics.

Today, the labor market remains 8.1 million jobs
below where it was at the start of the recession over
three years ago in December 2007.

This number vastly understates the size of the gap in
the labor market because keeping up with the
growth in the working-age population would require
adding another 3.4 million jobs over this period.

Thus, with the above 9% unemployment rate today,
the labor market is now 11.5 million jobs below the
level needed to restore the pre-recession
unemployment rate of 5.0% in December 2007.

So, to achieve the pre-recession unemployment rate in
five years, the labor market would have to add 285,000
jobs every month for the next 60 months.

But, more importantly than that, beyond the impact of
the great recession and the slow recovery in the years
ahead, the big issue is the impact of globalization on the
labor force structure and job creation in the United States

And that will depend in large part how the problem of
outsourcing is addressed in conjunction with the role of
the state in providing stimulus funds to create jobs in the
public sector – jobs that private industry is unable or
unwilling to create in the era of neoliberal globalization.
A boom in corporate profits, a bust in jobs, wages
Economic disconnect: Corporate profits surge while jobs and wages
remain at recession levels
Paul Wiseman, AP Economics Writer, Friday, July 22, 2011.





WASHINGTON (AP) -- Strong second-quarter earnings from McDonald's, General Electric and
Caterpillar on Friday are just the latest proof that booming profits have allowed Corporate America to
leave the Great Recession far behind.
But millions of ordinary Americans are stranded in a labor market that looks like it's still in recession.
Unemployment is stuck at 9.2 percent, two years into what economists call a recovery. Job growth has
been slow and wages stagnant.
"I've never seen labor markets this weak in 35 years of research," says Andrew Sum, director of the
Center for Labor Market Studies at Northeastern University.
Wages and salaries accounted for just 1 percent of economic growth in the first 18 months after
economists declared that the recession had ended in June 2009, according to Sum and other Northeastern
researchers.
In the same period after the 2001 recession, wages and salaries accounted for 15 percent. They were 50
percent after the 1991-92 recession and 25 percent after the 1981-82 recession.
Corporate profits, by contrast, accounted for an unprecedented 88 percent of economic growth during
those first 18 months. That's compared with 53 percent after the 2001 recession, nothing after the 199192 recession and 28 percent after the 1981-82 recession. (For full text of this article, see the appendix at
the end of this power point presentation).
A Second Great Depression, or Worse?
SIMON JOHNSON, Thursday, August 18, 2011
Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of "13 Bankers."
With the United States and European economies having slowed markedly according to the latest data, and with global growth
continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?
The easy answer is "no" - the main features of the Great Depression have not yet manifested themselves and still seem unlikely.
But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind
seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous
direction.
The Great Depression had three main characteristics, seen in the United States and most other countries that were severely
affected. None of these have been part of our collective experience since 2007.
First, output dropped sharply after 1929, by over 25 percent in real terms in the United States (using the Bureau of Economic
Analysis data, from its Web site, for real gross domestic product, using chained 1937 dollars). In contrast, the United States had
a relatively small decline in G.D.P. after the latest boom peaked. According to the bureau's most recent online data, G.D.P.
peaked in the second quarter of 2008 at $14.4155 trillion and bottomed out in the second quarter of 2009 at $13.8541 trillion, a
decline of about 4 percent.
Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we
experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly
touched 10 percent (in the fourth quarter of 2009; see the Bureau of Labor Statistics Web site).
Even by the highest estimates - which include people discouraged from looking for a job, thus not registered as unemployed the jobless rate reached around 16 to 17 percent. It's a jobs disaster, to be sure, but not the same scale as the Great Depression.
(For full text of this article see the Appendix at the end of this power point presentation).
Which Way Out of the Crisis?



Economic remedies to save the system from collapse
are bound to fail so long as they remain within the
framework of the existing capitalist system
Changes that are required to revitalize the economy
and turn things around point to a redistribution of
wealth and income to increase mass consumption
This would increase demand for consumer goods,
hence increase production, and create jobs for the
unemployed, as well as raising revenue for the state
through corporate and individual income taxes



All these would require a restructuring of the economy
away from failed neoliberal corporate capitalist policies
and toward a new set of priorities that promote the
interests of working people
Such restructuring requires the transformation of our
current capitalist economic system and the existing
social order in the direction of providing greater rights
and benefits to working people
And this would, in turn, benefit society greatly and set
us on a prosperous course that would vastly improve
living standards and pull us out of the economic crisis
But, who listens ?
Thank You !
Appendix
Calculation of Rate of Surplus Value and Labor’s Share of Production,
U.S. Manufacturing Industry, 1984 (in billions of dollars)
__________________________________________________________
(1) Net Value Added by Manufacture
(value added less depreciation)
$931.1
(2) Wages
$231.8
(3) Surplus Value (1) minus (2)
$699.3
(4) Rate of Surplus Value (100 x (3) / (2))
302%
(5) Labor’s share (100 x (2) / (1))
24.9%
__________________________________________________________
Notes: To determine the rate of surplus value and labor’s share:
If wages = w, value added = v.a., then:
Rate of surplus value = 100% x (v.a. – w)
w
Labor’s share = 100% x w
v.a.
Source: Victor Perlo, Super Profits and Crises: Modern U.S. Capitalism. New York: International
Publishers, 1984, pp. 43 and 513.
Contact Information:
Prof. Berch Berberoglu
Department of Sociology
University of Nevada, Reno
Reno, NV 89557
E-mail:
[email protected]
Web Pages:
www.unr.edu/cla/soc/berchb.htm
Appendix
A boom in corporate profits, a bust in jobs, wages
Economic disconnect: Corporate profits surge while jobs and wages remain
at recession levels
Paul Wiseman, AP Economics Writer, Friday July 22, 2011.





WASHINGTON (AP) -- Strong second-quarter earnings from McDonald's, General Electric and
Caterpillar on Friday are just the latest proof that booming profits have allowed Corporate America to
leave the Great Recession far behind.
But millions of ordinary Americans are stranded in a labor market that looks like it's still in recession.
Unemployment is stuck at 9.2 percent, two years into what economists call a recovery. Job growth has
been slow and wages stagnant.
"I've never seen labor markets this weak in 35 years of research," says Andrew Sum, director of the
Center for Labor Market Studies at Northeastern University.
Wages and salaries accounted for just 1 percent of economic growth in the first 18 months after
economists declared that the recession had ended in June 2009, according to Sum and other Northeastern
researchers.
In the same period after the 2001 recession, wages and salaries accounted for 15 percent. They were 50
percent after the 1991-92 recession and 25 percent after the 1981-82 recession.
Corporate profits, by contrast, accounted for an unprecedented 88 percent of economic growth during
those first 18 months. That's compared with 53 percent after the 2001 recession, nothing after the 199192 recession and 28 percent after the 1981-82 recession.
What's behind the disconnect between strong corporate profits and a
weak labor market? Several factors:
-- U.S. corporations are expanding overseas, not so much at home. McDonalds and
Caterpillar said overseas sales growth outperformed the U.S. in the April-June quarter.
U.S.-based multinational companies have been focused overseas for years: In the 2000s,
they added 2.4 million jobs in foreign countries and cut 2.9 million jobs in the United
States, according to the Commerce Department.
-- Back in the U.S., companies are squeezing more productivity out of staffs thinned by
layoffs during the Great Recession. They don't need to hire. And they don't need to be
generous with pay raises; they know their employees have nowhere else to go.
-- Companies remain reluctant to spend the $1.9 trillion in cash they've accumulated,
especially in the United States, which would create jobs.
Caterpillar said second-quarter earnings shot up 44 percent to $1 billion. General Electric's
second-quarter earnings were up 21 percent to $3.8 billion. And McDonald's quarterly
earnings increased 15 percent to $1.4 billion.
Still, the U.S. economy is missing the engines that usually drive it out of a recession.
Carl Van Horn, director of the Center for Workforce Development at Rutgers
University, says the housing market would normally revive in the early stages of
an economic recovery, driving demand for building materials, furnishings and
appliances -- creating jobs. But that isn't happening this time.
And policymakers in Washington have chosen to focus on cutting federal
spending to reduce huge federal deficits instead of spending money on
programs to create jobs: "If we want the recovery to strengthen, we can't be
doing that," says Chad Stone, chief economist at the Center on Budget and
Policy Priorities, a research group that focuses on how government programs
affect the poor and middle class.
For now, corporations aren't eager to hire or hand out decent raises until they
see consumers spending again. And consumers, still paying down the debts they
ran up before the recession, can't spend freely until they're comfortable with
their paychecks and secure in their jobs.
A Second Great Depression, or Worse?
SIMON JOHNSON, On Thursday August 18, 2011, 5:00 am EDT
Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of "13 Bankers."
With the United States and European economies having slowed markedly according to the latest data, and with global growth
continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?
The easy answer is "no" - the main features of the Great Depression have not yet manifested themselves and still seem unlikely.
But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind
seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous
direction.
The Great Depression had three main characteristics, seen in the United States and most other countries that were severely
affected. None of these have been part of our collective experience since 2007.
First, output dropped sharply after 1929, by over 25 percent in real terms in the United States (using the Bureau of Economic
Analysis data, from its Web site, for real gross domestic product, using chained 1937 dollars). In contrast, the United States had
a relatively small decline in G.D.P. after the latest boom peaked. According to the bureau's most recent online data, G.D.P.
peaked in the second quarter of 2008 at $14.4155 trillion and bottomed out in the second quarter of 2009 at $13.8541 trillion, a
decline of about 4 percent.
Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we
experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly
touched 10 percent (in the fourth quarter of 2009; see the Bureau of Labor Statistics Web site).
Even by the highest estimates - which include people discouraged from looking for a job, thus not registered as unemployed the jobless rate reached around 16 to 17 percent. It's a jobs disaster, to be sure, but not the same scale as the Great Depression.
Third, in the 1930s the credit system shrank sharply. In large part this is because banks failed in an uncontrolled
manner - largely in panics that led retail depositors to take out their funds. The creation of the Federal Deposit
Insurance Corporation put an end to that kind of run and, despite everything, the agency has continued to play a
calming role. (I'm on the F.D.I.C.'s newly created systemic resolution advisory committee, but I don't have anything
to do with how the agency handles small and medium-size banks.)
But the experience at the end of the 19th century was also quite different from the 1930s - not as horrendous, yet
very traumatic for many Americans. The heavily leveraged sector more than 100 years ago was not housing but
rather agriculture - a different play on real estate.
There were booming new technologies in that day, including the stories we know well about the rapid development
of transportation, telephones, electricity and steel. But falling agricultural prices kept getting in the way for many
Americans. With large debt burdens, farmers were vulnerable to deflation (a lower price level in general or just for
their products). And before the big migration into cities, farmers were a mainstay of consumption.
According to the National Bureau of Economic Research, falling from peak to trough in each cycle took 11 months
between 1945 and 2009 but twice that length of time between 1854 and 1919. The longest decline on record,
according to this methodology, was not during the 1930s but rather from October 1873 to March 1879, more than
five years of economic decline.
In this context, it is quite striking - and deeply alarming - to hear a prominent Republican presidential candidate
attack Ben Bernanke, the Federal Reserve chairman, for his efforts to prevent deflation. Specifically, Gov. Rick
Perry of Texas said earlier this week,,referring to Mr. Bernanke: "If this guy prints more money between now and
the election, I don't know what y'all would do to him in Iowa but we would treat him pretty ugly down in Texas.
Printing more money to play politics at this particular time in American history is almost treacherous - er,
treasonous, in my opinion.“
In the 19th century the agricultural sector, particularly in the West, favored higher prices and effectively looser
monetary policy. This was the background for William Jennings Bryan's famous "Cross of Gold" speech in
1896; the "gold" to which he referred was the gold standard, the bastion of hard money - and tendency toward
deflation - favored by the East Coast financial establishment.
Populism in the 19th century was, broadly speaking, from the left. But now the rising populists are from the
right of the political spectrum, and they seem intent on intimidating monetary policy makers into inaction. We
see this push both on the campaign trail and on Capitol Hill - for example, in interactions between the House
Financial Services Committee, where Representative Ron Paul of Texas is chairman of the monetary policy
subcommittee, and the Federal Reserve.
The relative decline of agriculture and the rise of industry and services over a century ago were long believed to
have made the economy more stable, as it moved away from cycles based on the weather and global swings in
supply and demand for commodities. But financial development creates its own vulnerability as more people
have access to credit for their personal and business decisions. Add to that the rise of a financial sector that has
proved brilliant at extracting subsidies that protect against downside risk, and hence encourage excessive risktaking. The result is an economy that is at least as prone to big boom-bust cycles as what existed at the end of
the 19th century.