Global Economic Crisis: No End in Sight

By Max J. Castro
majcastro@gmail.com

Are we out of the woods yet? Or is the worst yet to come?

The current European situation reveals more than ever the serious and global nature of the economic crisis that is afflicting the world capitalist system. One source of hope, the modest recovery in the United States over the last few months, may stall as a result of the European crisis and other problems in the American economy itself, such as the looming bursting of the commercial real estate bubble and the second phase of the foreclosure crisis. (The first phase resulted from bad loans; the second phase is due to high unemployment)

Even if the recent modest level of U.S. economic growth is maintained, it will be several years before full employment is restored. As the European crisis deepens, what is clear is that the policy consensus to reduce government expenditures in country after country means that the cost of the crisis provoked by the rapacious form of capitalism that has been in place over the last several decades will be paid for by the most vulnerable.

Unemployment, salary and benefits cuts, reductions in pensions and similar measures are the consequence of the implosion of Wall Street and other centers of financial power. While the culprits of the crisis have been for the most part bailed out by their respective governments to the tune of trillions of dollars, relief for those losing their jobs or their homes has been miserly, as exemplified in the endless debate in the U.S. Congress regarding the extension of unemployment benefits.

What is remarkable is that the policies that are now being adopted are exactly the opposite of what is required to combat a global recession. An example is the budget-slashing policies agreed upon by the leaders of the European Union and Latin America at the recent EU-Latin American summit.

The economic crisis is a result of private underconsumption. The way to remedy such a crisis, as John Maynard Keynes demonstrated in the 1930s, is for government expenditure to make up for the deficit in private consumption. Cuts in government spending only worsen the situation, creating a negative multiplier effect as private consumption is further reduced leading to increased unemployment, requiring more government outlays, reducing taxes collected, requiring more belt tightening and on and on in a vicious circle.

The Obama stimulus package was an acknowledgement of this reality and an attempt to break out of the vicious circle, but it was far too small and inadequately targeted to promote the kind of massive job growth that is required to put millions of Americans back to work. But there is little chance that Congress will approve an adequate stimulus package at a time when politicians are listening more to deficit hawks and financial institutions than unemployed workers.

This situation is ripe for demagoguery of the kind exhibited by the Tea Party. Economic crises seldom result in progressive advances and are more likely to lead to reactionary, xenophobic, and racist movements. Exhibit A: Arizona. All of this portends problems for the Democrats and Barack Obama and, for that matter, for the majority of the people of the world.

But everything is not lost yet. Rather than reactionary currents like the Tea Party, what is needed is massive resistance to measures that undercut the advances made by working people through decades of struggle and a demand for a more democratic economy free of the iron grip of the financiers. The troubles in Greece may yet portend the beginning of a movement of popular resistance that might spread to other countries in Europe, Latin America, and even (dare we hope?) the United States.