From Economic to Social Crisis: Deficits, Debt, and a Little Class History

Throughout its history, capitalism never succeeded in preventing recurring economic cycles or crises.  However, they were usually contained within the system.  Economic crises usually did not become social crises; the system itself was usually not called into question.  Transition to a different system was then an idea kept away from public discussion, a project kept from public action.  During cyclical downturns production was reduced, unemployment and bankruptcies rose, deflation often hit and hurt, and mass working-class suffering spread.  Downturns typically drove down wages and the prices of productive inputs.  Eventually, those declines provided sufficient profit opportunities for employers to resume production.  Then downturns became upturns, the unemployed (or at least some of them) were rehired, and prosperity replaced depression until the next cyclical downturn (usually within a few years).  Before the 1930s, government interventions to offset or manage downturns were mostly marginal, minor and sporadic.  Mass resignation to endure “hard times” was the norm, although voices for fighting back were also evident.

In contrast, during and since the 1930s, crises in capitalism provoked significant government economic interventions.  This happened chiefly for two reasons.  First, the Great Depression of the 1930s cut so deep, lasted so long, and damaged so many that resulting mass dissatisfaction extended, for growing numbers, to the capitalist system itself.  Second, when labor unions and anti-capitalist political movements (socialists and communists) were strong, they functioned as antidotes to resignation.  Periods of mass suffering were no longer accepted quietly or fatalistically.  Labor and left organizations blamed capitalists and capitalism, and they mobilized popular responses that often challenged the system and not just its latest crisis.  In the 1930s, the combination of a severe crisis with fast-growing industrial unions and anti-capitalist political parties forced Roosevelt’s administration to undertake massive economic interventions.  They aimed to prevent cyclical crises contained within capitalism from becoming social crises of capitalism bringing the system itself into question.

In the 1930s and since, governments’ economic crisis interventions usually had two purposes: (1) to save capitalists from the huge losses and possible collapse that the system routinely reproduced, (2) to save the system by shortening and softening mass suffering (thereby blunting the labor unions’ and anti-capitalists’ appeals).  Roosevelt’s New Deal achieved bailouts for banks and corporations, regulations trying to prevent the worst capitalist abuses, and such social welfare institutions as Social Security, unemployment compensation, and direct federal hiring of the unemployed (11 million after 1933).

Governments’ services to capitalism were also evident in how they financed such costly interventions.  In the US, Roosevelt got capitalists to accept the new social welfare institutions by carefully NOT taxing their wealth (either corporate or personal) and limiting tax increases on their incomes.  Roosevelt got workers to accept the bailouts of capitalists by NOT taxing workers to pay for those bailouts.  Of course, to finance very costly government interventions without taxing corporations, the rich, or the workers enough to pay for them meant that the government had to borrow what it did not raise in taxes.  The federal budget had to run big deficits that rapidly increased the national debt.

Roosevelt got corporations and the rich to lend Washington the money that they anyway could not profitably invest during a depression without taking huge risks.  Instead, they would earn interest on very low-risk loans to the Treasury.  Moreover, Washington would use that borrowed money to speed recovery from depression and offset threats to capitalism.  Corporations and the rich could cash in their loans to the government whenever they wanted to use their money for other purposes.  Finally, capitalist enterprises and the rich understood that if they did not lend to the government, either the IRS might tax the money from them instead or else the end of capitalism itself might loom.  With mass union, socialist, and communist demonstrations in the streets, Roosevelt’s program won the support of the majority of capitalists and the rich.  With the streets silent, Obama does not even conceive of such a program.

Since the 1930s, politicians in capitalist countries have used government deficit financing more and more, not just in cyclical downswings.  Corporations and the rich — like the mass of people — always want more from government and less taxes to pay, so politicians accommodate both sides by borrowing (state deficit financing).  They remind corporations and the rich that deficit finance is far preferable to their being taxed more.  The last 75 years have thus yielded repeated government budget deficits and rising national debt levels.  So when the 2007 crisis cut back government tax revenues and required costly government interventions, huge additional budgetary deficits were enacted in all capitalist countries, but this time they came after a long period of rising national debts.

The most indebted capitalist economies discovered that corporations and the rich had become wary of a new risk: lending more to countries with already high debt levels meant huge interest and principal repayments that citizens there might refuse.  Politicians there might be unable to devote ever more of their citizens’ tax payments to pay off creditors rather than providing public services.  Countries like Greece — with strong labor and left traditions — became flashpoints for a Europe-wide and indeed global struggle over sacrificing mass living standards (austerity) to satisfy creditors’ demands.

Capitalism’s new contradiction: it can no longer easily use deficits and rising debt to prevent economic crises from becoming social crises.  Yet, politicians fear to tax corporations and the rich whose money now makes or breaks political careers.  Hence governments everywhere impose austerity on their people.  Relatively weakened labor and left organizations (compared to the 1930s) cannot stop and at best slow the process.  For the mass of people, austerity adds to the burdens that capitalism’s crisis already imposes.

Capitalism is not “delivering the goods.”  It is piling on the bads.  These conditions do not prevent an economic crisis from becoming a social crisis.  Quite the contrary.  Resignation never was the only response of working people to capitalism’s dysfunctions.  After the initial shock — at an American Dream fast disappearing and lasting economic decline looming — rebuilding old and/or creating new labor and left organizations will resume.  The old mole of real class struggles will return to the surface of contemporary politics.

Richard D. Wolff is Professor Emeritus at the University of Massachusetts in Amherst and also a Visiting Professor at the Graduate Program in International Affairs of the New School University in New York.   He is the author of New Departures in Marxian Theory (Routledge, 2006) among many other publications.  Check out Richard D. Wolff’s documentary film on the current economic crisis, Capitalism Hits the Fan, at  Visit Wolff’s Web site at, and order a copy of his new book Capitalism Hits the Fan: The Global Economic Meltdown and What to Do about It.

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