Can You Say, Fascism? The Political Consequences of Stagnation

My apologies to T. S. Eliot, but September, not April, is the
cruelest month. Before 9/11/2001, there was 9/11/1973, when Gen.
Pinochet toppled the Allende government in Chile and ushered in a
17-year reign of terror. More recently, on 9/15/2008, Lehman Brothers
went bust and torpedoed the global economy, turning what had been a Wall
Street crisis into a near-death experience for the global financial
system.

Two years later, the global economy remains very fragile. The signs
of recovery that desperate policymakers claimed to have detected late in
2009 and early this year have proven to be mirages. In Europe, four
million people are unemployed and the austerity programs imposed on
highly indebted countries such as Greece, Spain, Italy, and Ireland will
add hundreds of thousands more to the dole. Germany is an exception to
the dismal rule.

Although technically the United States isn't in recession, recovery
is a distant prospect in the world's biggest economy, which contracted
by 2.9 percent in 2009. This is the message of the anemic second-quarter
GDP growth rate of 1.6 percent and a real unemployment above the 9.6
percent official rate if one factors in those who have given up looking
for work. Firms continue to refrain from investing, banks continue not
to lend, and consumers continue to refuse to spend. And the absence of a
new stimulus program, as the impact of the $787 billion Washington
injected into the economy in 2009 peters out, virtually ensures that the
much-feared double-dip recession will become a reality.

That the American consumer does not spend has implications not only
for the U.S. economy, but for the global economy. The debt-fuelled
spending of Americans was the motor of the pre-crisis globalized
economy, and nobody else has stepped in to replace them since the crisis
began. Consumer spending in China, fuelled by a government stimulus of
$585 billion, has temporarily reversed contractionary trends in that
country and East Asia. It has also had some impact in Africa and Latin
America. But it has not been strong enough to pull the United States and
Europe from stagnation. Moreover, in the absence of a new stimulus
package in China, a relapse into low growth, stagnation, or recession is
very real in East Asia.

To Cut or to Stimulate

Meanwhile, the debate in western policy circles has divided into two
camps. One group sees the threat of government default as a bigger
problem than stagnation and refuses to countenance any more stimulus
spending. The other thinks stagnation is the greater threat and demands
more stimulus to counter it. At the G20 meeting in Toronto in June, the
two sides collided. Germany's Angela Merkel advocated tightening,
pointing to the threat of a default by Germany's debt-laden satellite
economies in southern Europe, particularly Greece. President Obama, on
the other hand, facing an intractably high unemployment rate, wanted to
continue expansionary policies, though he lacked the political clout to
sustain them.

To the pro-spending people, the anti-deficit people don't have much
of an argument. At a time when deflation is the big threat, fear of
government spending stoking inflation is misplaced. The idea of
burdening future generations with debt is odd since the best way to
benefit tomorrow's citizens is to ensure that they inherit healthy,
growing economies. Deficit spending now is the means to achieve this
growth. Moreover, government default is not a real threat for countries
that borrow in currencies they control, like the United States, since,
as a last option, they can repay their debts simply by having their
central bank print more money.

Perhaps the most vocal pro-stimulus advocate is Paul Krugman, the Nobel laureate, who has become the bete noire
of many on the right. For Krugman, the problem was that the original
stimulus was not big enough. Yet how big is the extra stimulus needed,
and what other anti-stagnation measures can the government take? On
these questions Krugman betrays some unease,
perhaps realizing that traditional Keynesianism has its limits: "Nobody
can be sure how well these measures would work, but it's better to try
something that might not work than to make excuses while workers
suffer." The stark alternative to more aggressive deficit spending is
"permanent stagnation and high unemployment," says Krugman.

Krugman may have reason on his side, but reason has taken a backseat
to ideology, interests, and politics. Despite high rates of
unemployment, the anti-big government, anti-deficit forces have the
initiative in three key Western countries: in Britain, where the
Conservatives won on a platform of reducing government; in Germany,
where the image of spendthrift Greeks and Spaniards financed with loans
from hardworking Germans became the powerful horse Merkel's party rode
to maintain power; and in the United States.

The Obama Debacle

The anti-deficit perspective has gained ascendancy in the United
States despite high unemployment for a number of reasons for this. First
of all, the anti-deficit stand appeals to the anti-big government
sentiments of the American middle class. Second, Wall Street has
opportunistically embraced anti-deficit policies to derail Washington's
efforts to regulate it. Big government is the problem, it screams, not
the big banks. Third and not to be underestimated is the reemergence of
the ideological influence of doctrinaire neoliberals, including those
who, as Martin Wolf puts it,
"believe a deep slump would purge past excesses, and so lead to
healthier economies and societies." Fourth, the anti-spending economics
has a mass base, the tea party movement. In contrast, the stimulus
position is advocated by progressive intellectuals without a base or
whose potential base has become disillusioned with Obama.

Still, the triumph of the hawks was not foreordained. According to Anatole Kaletsky, the economic commentator of the Times of
London and someone not exactly sympathetic to the progressive point of
view, the ascendancy of the anti-deficit forces stems from a major
tactical mistake on the part of Obama coupled with the progressives'
failure to offer a convincing narrative for the crisis. The blunder was
Obama's taking responsibility for the crisis in a gesture of
bipartisanship, in contrast to Ronald Reagan and Margaret Thatcher, who
"refused to take any blame for the economic hardships." Reagan and
Thatcher devoted "the early years of their government to convincing
voters that economic disaster was entirely the responsibility of
previous left-wing governments, militant unions, and liberal progressive
elites."

But even more problematic, says Kaletsky, was the Obama narrative,
which was a contradictory one that put the blame on greedy bankers while
maintaining that the banks were too big to fail. "With banks recovering
from the crisis more profitably and quickly than voters had been led to
expect," he argues in his book Capitalism 4.0,
"politicians of all parties have been branded by public sentiment as
stooges of the very bankers they tried to blame." Indeed, the Democrats'
finance reform package that recently passed in Congress can only
reinforce this public perception of their being coopted or intimidated
by the very people they denounce. It lacks provisions with teeth : a
Glass-Steagall type of provision preventing commercial banks from
doubling as investment banks; the banning of trading in derivatives,
which Warren Buffett called "weapons of mass destruction;" a global
financial transactions tax or Tobin Tax; and a strong lid on executive
pay, bonuses, and stock options.

For Kaletsky, Obama should have portrayed the economic crisis as one
created "by the polarized and oversimplified philosophy of market
fundamentalism, not by bankers' and regulators' personality flaws. By
offering such a systemic account of the crisis, politicians could
capture the public imagination with a post-crisis narrative than the
lynching of greedy bankers - and ultimately more dramatic." But with
aides like Treasury Secretary Tim Geithner and National Economic Council
Director Larry Summers, neither of whom had broken completely with
neoliberalism, such a systemic account was simply not in the cards.

Toward a Progressive Strategy

The right wing has the momentum now and will probably win big in the
U.S. elections in November. They will tie Obama and the Democrats so
firmly to the crisis that people will forget it exploded during the
reign of market fundamentalist George Bush. But with their primeval
market economics, the fiscal hawks and tea partiers are unlikely to
provide an alternative to what they have caricatured as Obama's
"socialism." Allowing the economy to implode in order to be
ideologically correct will invite an even greater repudiation from an
economically insecure population.

But progressives should not take comfort from the dead end offered by
tea party economics. They should try to understand what has led to the
failure of Obama's pallid Keynesianism. Beyond the tactical mistake of
taking responsibility for the crisis and the failure to advance an
aggressive anti-neoliberal narrative to explain it, the central problem
that has plagued Obama and his team is their failure to offer an
inspiring alternative to neoliberalism.

The technical elements of a progressive solution to the crisis have
been thrashed out by Keynesian and other progressive economists: a much
bigger stimulus, tighter regulation of the banks, loose monetary
policies, higher taxes on the rich, rebuilding the national
infrastructure, an industrial policy promoting green industries,
controls on speculative capital flows, controls on outward bound foreign
investment, a global currency, and a new global central bank.

The Obama administration has tried to enact some of these measures.
But owing to its eagerness for bipartisanship, the ties of some of its
prominent people to the economic elites, and the failure of key
technocrats like Summers and Geithner to break with the neoliberal
paradigm, it failed to present them as elements of a broader program of
social reform aimed at democratizing control and management of the
economy.

For progressives, the lesson to be derived from the stalling of
Obamanomics is that technocratic management is not enough. Keynesian
moves must be part of a broader vision and program. This strategy must
have three key thrusts: democratic decision-making at all levels of the
economy, from the enterprise to macroeconomic planning; second, greater
equality in the distribution of wealth and income to make up for lower
growth rates dictated by economic and environmental constraints; and
third, a more cooperative, as opposed to competitive ethic, in
production, distribution, and consumption.

Moreover, such a program cannot simply be dished out from above by a
technocratic elite, as has been the fashion in this administration, one
of whose greatest mistakes was to allow the mass movement that brought
it to power to wither away. The people must be enlisted in the
construction of the new economy, and here progressives have a lot to
learn from the Tea Party movement that they must inevitably compete
against in a life-and-death struggle for grassroots America.

Nature Abhors a Vacuum

Krugman predicts that the likely electoral results in November "will
paralyze policy for years to come." But nature abhors a vacuum, and the
common failure of both market fundamentalists and technocratic
Keynesians so far to address the fears of the unemployed, the
about-to-be unemployed, and the vast numbers of economically insecure
people will most likely produce social forces that would tackle their
fears and problems head-on.

A failure of the left to innovatively fill this space will inevitably
spawn a reinvigorated right with fewer apprehensions about state
intervention, one that could combine technocratic Keynesian initiatives
with a populist but reactionary social and cultural program.There is a
term for such a regime: fascist. As Roger Bootle, author of The Trouble with Markets, reminds
us, millions of Germans were disillusioned with the free market and
capitalism during the Great Depression. But with the failure of the left
to provide a viable alternative, they became vulnerable to the rhetoric
of a party that, once it came to power, combined Keynesian pump-priming
measures that brought unemployment down to 3 percent with a devastating
counterrevolutionary social and cultural program.

Fascism in the United States? It's not as far-fetched as you might think.