Why Republicans love recessions

We Americans have recently witnessed the ability of the tea party Republicans to throw the American economy into a possible double dip recession. Considering that the first recession, now called the "Great Recession," was the consequence of the profligacy of the Bush Administration, directly attributable not only to irresponsible fiscal policy, such as conducting two wars using borrowed money, tax cuts that primarily benefited the wealthy (VP Cheney's justification: we deserve it because we won), and that great sinecure to big Pharma, Medicare Part D, but also its defunding of the SEC and its proclivity to prosecute criminal acts by Wall Street and the banking establishment using civil cases and modest fines. The Bush Administration also put pressure on Fannie Mae and Freddie Mac to provide loans to low income people for homes in what Bush referred to as "the ownership society." Deregulation of the banking industry and lack of oversight on criminal banking activities encouraged gigantic fraud on the part of lenders, especially directed at lower income people who were offered “Ninja” (no income, no job, no assets) loans with adjustable mortgage rates that ballooned after the first three years. We could go into the process by which these toxic loans were sliced and diced and sold to unsuspecting buyers, but hey, that's not the point of this blog.

Tea Party Protest

What is important is that Republicans love recessions. Every recession since 1950 including the last one, occurred during a Republican Administration. Given that there were nine recessions over the past 61 years and that there were Republican administrations in 38 and Democratic administrations in 23 of those years, this is hardly a random phenomenon. The figure below shows recessions by Administration in the postwar years up to about 1997. The first recession on the chart, a consequence of World War II demobilization, occurred during the Truman Administration. The Eisenhower Administration presided over three recessions, Nixon/Ford had two recessions, Reagan/Bush oversaw three recessions, and of course, Bush II initiated the Great Recession, from which we are still trying to recover, despite obstructionism by the Republican Party.

From Kerbo: Social Stratification and Inequality

One of the interesting phenomena depicted in the figure, is what happens to the Gini coefficient – the index of income inequality – during times of recession. With the exception of the recession in the early 1970s, which was brought about by the oil crisis, the Gini coefficient rose. Sometimes, as in the case of 1951-52, 1960, and 1982-1983, the Gini coefficient rose precipitously. That is, during seven of the last eight recessions, inequality increased. A recession is a time when the economic pie shrinks. For the most part, when it shrinks, it tends to shrink from the bottom up, with those people at the bottom of the income pyramid suffering more than those people at the top. Although the calculations are not in, it seems that one of the major consequences of the Great Recession is another precipitous rise in the Gini coefficient. Luxury car dealers are experiencing a boom; another boom is in the consumption of food stamps.

If we look at the progression of the Gini coefficient from the end of World War II to about recession of 1968-1969, we see that as the economy grew, inequality decreased. Beginning with Nixon-Ford, inequality starts increasing during good times and bad. However, inequality really jumped in the early years of the Reagan Administration and continued to rise throughout his and the Bush I Administration, leveling off and declining a bit during the Clinton Administration. The jump with dotted lines during the Clinton Administration is not a real increase, but a change in the calculation formula for the Gini coefficient.

The critical years were 1981-1982, at that time, the worst recession since the Great Depression. At this point, the Reagan Administration disposed of Keynesian theory for supply-side economics: a peacetime military buildup, destruction of the social safety net, and a deep recession designed to stop "stagflation," in which the economy was not growing and the value of the dollar was declining. Being that the Reagan Administration was populated by "free traders," that is, people who believed that capital should be able to flow across international boundaries without impediment, there was, in the inimitable words of H Ross Perot, "that giant sucking sound" of capital exiting the United States in search of cheaper labor forces in such worker paradises as China, Singapore, Mexico, and Saipan. The recession generated an internal migration of formerly employed unionized workers from the Midwest to nonunion employment in the South at about two thirds their former salaries. Of course, the capital that was sucked out of the US economy was from the bottom 90% of the income pyramid; it was repatriated in the form of increased profits to corporate shareholders of those companies that moved their productive facilities to cheaper labor markets.

Whether intended or not, the recession of 1981-1982 devastated unions, increased the rate of profit, and created a raft of new millionaires who were buying up formerly profitable companies, splitting them up, and selling the parts, much like a butcher would take a side of beef, cut it up, and market the separate pieces. Along with the Kemp-Roth tax cuts and the cutting back of the social safety net, inequality increased as the rich got richer and the rest of America became poorer. Because they no longer had unions, workers in the private sector became increasingly vulnerable to the vicissitudes of the business cycle.

The recession of 1981-1982, unlike other recessions, was generated in Washington. Paul Volcker, then head of the Fed, jumped interest rates by about 20% over fewer than 18 months. This action stopped the economy dead in its tracks and threw it into recession. Not only did the fiscal crisis increase inequality, but it conservatized the labor force. Workers were fearful; unions were on the defensive. From that point on, there became a disparity between what was occurring in the financial markets and the well-being of the mass of Americans. The economy improved throughout most of the rest of the Reagan Administration, but American incomes had stagnated, and in some cases declined.

Paul Volcker

The Republicans have learned a new lesson. Hard times do not necessarily generate effective resistance. A fiscal crisis of the state can be used to implement changes that are highly unpopular. Naomi Klein, in her book, Disaster Capitalism, noted that acolytes of the Milton Friedman neoliberalist school of economics found that economic changes could be implemented by the state against the will of the people if there was a political or economic disaster. The first experiment occurred in Chile in 1973 when the CIA helped Gen. Pinochet overthrow the Allende government. Within days of the establishment of the military dictatorship, University of Chicago economists were in Santiago advising him on an austerity program that would devastate the Chilean middle class.

So disaster capitalism was successfully implemented by the Reagan Administration in 1991. Klein describes disaster capitalism as a strategy to institute political and economic changes against the will of the majority. The Great Recession and the fiscal crisis of the state that accompanies it is a consequence of the political and economic policies of the Bush II Administration that have been enumerated elsewhere. The Republicans, depending on the very short memories of the American electorate are now using recession as a justification for impoverishing more Americans and increasing social and economic inequality.

Naomi Klein

Actually, what we have here is the assertion of the political over the economic. That is, the Republicans, although they say otherwise, are creating an economic disaster to enhance their own political power. The vast majority of them have signed onto Grover Norquist's pledge to never raise taxes under any conditions. The alternative is to drastically reduce federal expenditures; their targets are Medicare, Social Security, and Medicaid. Find me a Republican other than Ron Paul who wants to reduce military expenditures.

As I have insisted on from the beginning of this blog, the ultimate battle is over the appropriation and redistribution of the material surplus, or what in more common parlance is called "wealth." The Republican hard right has decided that the federal government appropriates and redistributes too much of the surplus, especially that sector of the surplus that goes to services for poor and middle-class people. Therefore, they have bought into Grover Norquist's ideal of shrinking the federal government to the size that it can fit into a bathtub and then drown it. The hard right loves "democracy," but somehow hates democratic government. They want all governmental functions privatized, which means served by organizations that has as their first priority rewarding stockholders. Given the fact that most government functions are inherently monopolistic, such provision promises guaranteed profits.

The New Right had decided that the federal government is a giant evil monster that steals their money and wastes it. They want that money returned to them so that they can spend it in more "productive" ways. Thus we have recently heard the Republicans refer to the rich and the superrich as "job producers." Of course, the only jobs they produce with their private income is perhaps construction workers building their third (or fourth or fifth or sixth) home, sales people at providers of luxury goods (you can now buy a designer purse from the Row for $39,000, approximately the average income of an American family of four), and service personnel. One of the things that drove Karl Marx crazy when he was in the bowels of the British Museum studying labor reports in the 1870s was the fact that private service personnel actually outnumbered members of the British working class. Hmm. Maybe we can all be hired to serve the needs of the accumulating class.

Handbags costing a year's salary

The characterization of the federal government as a huge behemoth that wastes money has a kernel of truth in it, but not in the way the hard right characterizes it. Because of the popularity of entitlement programs, they dare not mention that what they consider "waste” are those very programs: Social Security and Medicare, two prime factors in the alleviation of poverty among the elderly, and Medicaid, which not only helps the poor, but helps hospitals that would have to take care for uninsured people showing up in the emergency room needing care. They also consider investments in science, education, and the arts waste as well, leaving that to either local governments or to the private sector. What they do not consider waste is corporate welfare, which is primarily actualized in the Defense Department budget, or worse yet, unbudgeted costs of war that are awarded on a cost plus basis to highly connected corporations, such as Halliburton, KBR, Xi (formerly Blackwater), Triple Canopy, Dynacorp, Bechtel Corporation, and so forth.

This next election essentially pits the interests of the accumulating class, which is certainly less than 10% of the total population against the rest of us. It will be a test of the power of hidden and unaccountable wealth to generate enough votes for corporate friendly candidates. Currently, two of the three leading candidates in the Republican Party, Mitt Romney and Rick Perry are actively promoting a pro-corporation agenda. It is likely that one of these men will receive the Republican nomination, probably Rick Perry, because not only does he have the corporations lined up behind him, he also is a member of the religious right. Obama will also get plenty of corporate money, but he will also run a campaign that will be (mildly) pro union, pro-workers, pro-choice, and pro-jobs (whatever that means). Popular dissatisfaction with the president cuts two ways: those on the right who are racist, antigovernment, anti-women's health issues, anti-welfare state, and are acolytes for neoliberal economics, and those on the left who have felt betrayed by Obama over such issues as a public option for health care, ending the wars, failure to defend unions against the Republican onslaught, lack of environmental legislation, obsequious responses to hard-line Republican resistance, and so forth.

The 21st century has not been kind to America: each subsequent election seems to loom larger in terms of its importance for the future. The elections of Bush in 2000 and 2004 were an unmitigated disaster for this country. Foreign-policy was a catastrophe: we were caught asleep at 9/11. While Osama bin Laden was plotting his attacks, the Bush administration was ignoring warnings, instead trying to reward its friends with the resurrection of Star Wars. Economic policy was similarly wrongheaded, with the administration generating a huge deficit and deregulating oversight of the financial sector so that the economy would eventually collapse. The highest officials of the land were engaged in unconstitutional behaviors that remain unpunished to this day: leading us into war under false circumstances, condoning violations of the Geneva Convention on kidnapping and torture, wiretapping American citizens whithout warrants, and unconstitutionally appropriating power to the executive branch. The election of Obama in 2008 was supposed to be a return to an America that was no longer a rogue state, end its involvement in foreign wars, solve its healthcare problems, rescue us from a depression, and invest in its future. It rescued us from a depression. In the next election, America faces more of the same, or worse. If the Republicans win the White House, they will seek a pro-corporate agenda by reducing corporate taxes, destroying the modest gains we have made in healthcare, deregulating the financial sector so that the economy could collapse yet again, cutting social welfare, slashing environmental regulations, and further exempting the rich from paying their fair share. If the Democrats win, these processes will probably continue at a slower rate or be stalemated. Don't look for much progressive legislation. If the Republicans have their way, we will have another recession.