Paul Krugman is wrong about capitalism

Why his solution to inequality in America doesn't go nearly far enough

Published May 7, 2015 5:45PM (EDT)

Paul Krugman                              (Reuters/Brendan Mcdermid)
Paul Krugman (Reuters/Brendan Mcdermid)

To many liberals, the post-WWII period in America was a time of near economic perfection. The government taxed the wealthy over 90 percent and unions became powerful organizations demanding a fair share for workers. It was a period that progressive economist Paul Krugman has always been quick to praise, writing in his 2009 book, "The Conscience of a Liberal":

"The political and economic environment of my youth stands revealed as a paradise lost, an exceptional moment in our nation’s history."

This period, which can be called the Keynesian era, was indeed a time of great economic growth and increased economic equality. Looking back today, it does seem like an exceptional time to be in the working class. (As long as you were white, of course.) It was an age of compromise, between the capitalist class and the working class, and perhaps the most democratic period in our liberal capitalist society. During that epoch, it certainly looked as though a form of socialism was on the horizon, with the middle class growing and forming a previously unimaginable kind of egalitarian society within capitalism.

But of course, it was not to be. By the '70s, the economy had seemingly become diseased, with both inflation and stagnation, or what was coined stagflation. At the time, most economists were dumbfounded. In neoclassical theory, inflation and recession were opposites, they did not happen simultaneously. Hence the monetary policy of low interest rates during a recession, and high interest rates during a period of high inflation.

Today, we can pinpoint certain causes for what happened during the '70s. The most obvious is, of course, the energy crisis, which happened in 1973, after the Organization of Petroleum Exporting Countries declared an oil embargo on America and other developed nations because of their support of Israel in the Yom Kippur War. This sparked a 400 percent increase in the price of oil, affecting the entire economy.

Another important consideration for its failure is the very nature of a Keynesian economy, which promotes low unemployment and higher wages. During the Keynesian period (1945-1970s), unions had created a strong workforce, which forced capitalists to give in to higher wages, and likely contributing to the high inflation plague. And, of course, Nixon’s dismantling of the Bretton Woods System, which had fixed the international exchange rate to the dollar, and the dollar to gold, created floating currencies, which did not help currency stability.

The stagflation crisis, along with increasing globalization, created an opening for the capitalist class, who embraced the thinking of Milton Friedman. The crisis of Keynesianism created a wave of propaganda, which ultimately resulted in the election of Ronald Reagan. At the same time, the high interest rate policies of Fed chairman Paul Volcker attacked inflation head on, and drove the American economy into a deep recession, while undermining the working class. To top this off, the major tax cuts for the wealthy and the war on unions during the Reagan presidency dismantled what was left of the Keynesian-era middle class.

The Inevitable Fall

But while all of these policies certainly sped up the destruction of America's working class, what may have truly sealed its fate was globalization and technological progress. To see how much these phenomena hurt the working class, one only has to look at America's employment history in manufacturing compared to finance. During the post-WWII period, manufacturing accounted for 50 percent of domestic corporate profits and 30 percent of American employment, while the financial industry accounted for 10 percent of profits, and less than 5 percent of employment. Since then, profits for these industries have reversed; manufacturing accounted for about 10 percent of profits in the early 2000s, but have since recovered to nearly 20 percent, while the financial industry reached a high of 40 percent before the financial crisis, and is closer to 30 percent today. What is even more telling is the number of jobs each industry produces: Today, manufacturing accounts for less than 10 percent, while finance still hovers around 5 percent. So while the financial industries profits have jumped, its share of employment has hardly grown at all.

America’s economy has gone through a deindustrialization period, largely replacing its domestic manufacturing with a financialization. And this has created the enormous inequality we have today. While our economy has grown steadily since the '80s, most of the gains have gone to the top 1 percent, and China has taken over as the largest manufacturer in the world.

The Keynesian period was a time of compromise, but within a capitalist system, a compromise can only last for so long. The American middle class has since been hollowed out, while the epoch of neoliberalism created irreversible environmental damage.

So, is a return to a Keynesian compromise the answer, as economists like Krugman believe? After the financial crisis, there was a resurgence of fiscal policies that Keynes promoted to combat the recession -- and there can be no doubt that the stimulus policy that America implemented helped the economy recover faster than the European economy, where rigid austerity has plagued several members of eurozone. It has also been reported that the stimulus policy erased most of the middle-class income loss in the recession. But these stimulus policies did not encourage any sort of compromise between capitalists and workers, and the globalized free market will make it quite impossible to return to the sort of compromise of the post-WWII period.

A Return to Radicalism

The problems seem to be systemic within capitalism. First of all, unions have been completely gutted by the capitalist class over the past 40 years, thanks to globalization and the aforementioned war on unions. Fifty years ago, one in three workers were union members, and today the number is just one in 10. This was natural reaction from the capitalist class, and there is little hope that unions will ever regain the strength they once possessed. But even more important, if we look at the era of great Keynesian compromise that many progressives want to emulate, evidence points to it being more of an anomaly than a natural outcome of capitalism.

Indeed, the strong middle class was most certainly a rarity of capitalism, and today our social structure is simply returning to form. While the middle class was assisted by government policies (i.e. regulation, progressive taxation, union support), a major contributing factor in Americas flourishing middle class was the second World War. As Thomas Piketty’s book “Capital in the Twenty-first Century” pointed out, the mass destruction of capital around the world created a much more even playing field than before, while also placing the United States at the forefront of the world economy. It was an era that some call the Golden Age of Capitalism; a time of global rebuilding and worldwide economic growth, supported by the American working class.

But today is a very different world. Capitalism has defeated communism and spread worldwide. The globalized economy gives all of the cards to the capitalist class, and there is no reason for them to form another Keynesian type of compromise.

The threat of communism was another reason for the capitalist system to become fairer -- to weaken support for radical socialists, and provide the working class a reason to accept capitalism over the alternative. FDR was quite aware of this, as he once wrote in a letter: “No question in my mind that it is time for the country to become fairly radical for at least one generation. History shows us that where this occurs, occasionally, nations are saved from revolutions.”

The threat of a socialist overthrow of capitalism was very real during that period, when inequality and desperation were great -- and a Keynesian compromise was necessary to prevent the rise of socialism within America. WWII happened to also provide great opportunity for the rise of a middle class. But that period is now long gone, as is the major ideological challenge of communism.

And if we continue to move in the same direction we have been for 40 years, which neither Barack Obama nor Hillary Clinton seem legitimately opposed to (think of the TPP), and Republicans wholeheartedly support, then our future will indeed become a new global Gilded Age.

That is, of course, unless the left becomes fairly (or fully) radical, as FDR once suggested. And the rise of Elizabeth Warren perhaps shows that there is enough discontent for a new radical movement to form. The capitalist class does not want a compromise, so why not fight it head on? It has done the same to the middle class over the past four decades, after all. Match the neoliberal movement with a neo-radical movement -- a call for true democracy, rather than the plutocratic democracy that we currently have.

Rather than fighting for a return to a Keynesian compromise, the left should be considering how to create a new 21st century workers movement. Unfortunately, globalization has strengthened the capitalist class, and workers movements can no longer be purely domestic issues; they must be international. Breaking up too-big-to-fail banks and fighting for more worker control should not be off-limit goals. If the previous century has shown us anything, it is that radicalism inevitably moves the debate leftward, and society with it.

By Conor Lynch

Conor Lynch is a writer and journalist living in New York City. His work has appeared on Salon, AlterNet, Counterpunch and openDemocracy. Follow him on Twitter: @dilgentbureauct.

MORE FROM Conor Lynch

Related Topics ------------------------------------------

Capitalism Economics Income Inequality Paul Krugman Radicalism Socialism Wealth Inequality