Radhika Desai is Professor at the Department of Political Studies, University of Manitoba, Winnipeg, Canada. She is the author of numerous books and articles on political economy. Her most recent book Capitalism, Coronavirus and War: A Geopolitical Economy investigates the decay of neoliberal financialized capitalism as revealed by the coronavirus pandemic, an economic crisis that has been deepened by the conflict over Ukraine and its repercussions across the globe. Radhika is the convener of the International Manifesto Group, a world-wide group of concerned activists and scholars.
BTC: The standard definition of recession is two consecutive quarters of negative growth. Are we in a recession? Has that actually happened? Could you talk about what the Federal Reserve is and what it does? What does it mean to be in a recession? Why is this inherent within capitalism?
RD: So first of all, the body that in the United States is generally taken as the sort of the fount of wisdom on recessions is the National Bureau of Economic Research. Typically, it announces that there is a recession if there are two successive quarters of below zero growth, which, more accurately, is the shrinking of the economy.
So, this we have already experienced. However, there are said to be certain extenuating circumstances that it may take into account – in particular the labor market that is really very hot right now, because so many people have fallen out of the labor force – and may not declare the current two quarters of economic shrinkage a recession. And there may be a lot of politics behind it given that the Biden administration desperately needs to claim that it is doing a good job on the economy. Certainly the ‘hot’ labor market is not all it appears to be. Why have so many workers fallen out of the labor force? Because the terms of employment are so terrible that people think that maybe it’s better not to be employed anymore if they have a choice.
That’s why a lot of people who have even a little bit of wiggle room have decided to take advantage of that wiggle room and have left the labor force, which is not a good sign, by the way, for any economy.
Now, let’s discuss inflation. On the whole, all the debates around all the discussion of inflation have been about whether the Federal Reserve and central banks in general have lost the capacity to control inflation. But this question and this discussion itself relies on a false assumption that in the past we had low inflation because the Federal Reserve was so adept at vanquishing inflation. This is absolutely not the case.
The fact of the matter is, capitalism actually has a long record of mismanaging money. What do I mean by that? Capitalism needs money. Without money, capitalism cannot function, because money is the medium in which capital is accumulated. But at the same time, in order to make money function the way that capitalism and capitalist want it to function, they have to impose certain unnatural dynamics on money, in particular they must make it artificially scarce.
The second thing is, when there is inflation, if you’re to keep society capitalist, then capitalism has very few ways of addressing inflation other than to use the sledgehammer of high interest rates. If inflation is very high, then the idea is you raise interest rates sufficiently high, which will essentially induce a recession which will, by reducing demand even more than supply, counteract inflation.
Once the recession is induced economic activity will go down sufficiently as to bring down the prices of things simply by imposing the very destructive deflation. And capitalists have tended to do this and have not shied away from doing this because the bulk of the cost is paid by workers.
With the resurgence of inflation in the 1970s, the last time we had very high inflation., Paul Volcker [then chairman of the Federal Reserve -Ed] applied the classic and destructive mechanism. He basically said, “I’m going to restrict money supply, and I’m going to let interest rates go as high as they want, I’m going to not worry about that, I’m only going to restrict money supply. And that’s how we are going to get out of this inflation.” And he did it. And at one point inflation was above 10% and interest rates even hit 20%, which is practically unknown in any developed country.
Interest rates had never been so high. It induced a very deep and long recession in the United States and in much of the rest of the world. This was a very costly way of dealing with inflation. People are now talking as though we need a Paul Volcker-like action to deal with inflation now, and of course, a lot of progressives are speaking out against it. I’m not so much disagreeing with them as I’m saying this is not the real issue.
The Volcker Shock was one of the first signs that neoliberalism had arrived. Forty years later we are looking at a very different scenario. Throughout the 80s and 90s, the Volcker Shock had sent interest rates going really high before they came down, but they remained at historically high levels in the 80s and 90s. But after the Federal Reserve lowered interest rates at the end of the dot-com era, when the dot-com bubble burst, they kept them really low, like 1 percent for several years. Then starting in 2004 they started raising them incrementally, little by little. They had to only reach the 5 percent mark, when they pricked the housing and credit bubbles, causing the 2008 financial crisis, what I call the North Atlantic financial crisis. Now, with the Federal Reserve raising interest rates again, we’re not far away from that level of 5 percent or so.
What I said in that article is, they’re not going to go much beyond that. They dare not even touch 5 percent. Why? Because you already saw that 5 percent was enough to prick the housing and credit bubbles at that time. Today, in the United States, the levels of financialization are even bigger. At that time, we had housing and credit bubbles. Now we have a so-called everything-bubble. Asset markets everywhere are inflated, and the wealth of the wealthy in the United States largely rests on these asset markets. These asset markets have been going on a high, because they have been drip fed the drug of low interest rates. If you have low interest rates, you can borrow money short-term to speculate with it in asset markets, make a lot of gains, come out of the market, repay the money. This is how a lot of the money is made.
If interest rates go high, all these asset markets are going to come crashing down. In fact, many of them are already crashing. The question is how far the Federal Reserve will continue when, if it does, it will destroy the wealth of the currently wealthy because it all rests on low interest rates. So the question is whether they will do it and my bet is they will not do it. So essentially, while I’m not saying that we should have high interest rates, my point is that not having low interest rates is not the issue, because low interest rates are driving up costs of housing for ordinary working people, and increasing inequality by making a small number of people really rich, while doing nothing to invest in the productive economy, which is what the United States really needs.
Instead of simply demanding low interest rates, what you have to demand is the dismantling of this idea that the Federal Reserve can manage the economy. You have to demand, instead, the restructuring of the economy, including through state ownership if necessary, in order to become productively strong. In fact, we have to do precisely what, as I’ve long been saying, the Western Left has failed to do: in consequence of not understanding imperialism, it does not understand where the wealth of its societies comes from and does not understand that you have to rebuild your economy, your productive economy, if it is not to rely on imperialism. This is exactly what the Left needs to focus on.
But as long as you keep your focus on, “Okay, don’t raise interest rates,” when the Federal Reserve is not going to raise interest rates anyway, if you keep demanding that, they’ll say, “Well, we’re just doing what you asked us to do.” But the real problem that needs to be solved if U.S. workers are going to have a better future is restructuring of the American economy out of the productive debility that it has been subjected to thanks to 40 years of neoliberalism, and into essentially some version of socialism. It will have to have a very big state role. Most fundamentally, it will have to dismantle the structures of financialization that have been built over the neoliberal decades. If you don’t, you leave in place the structures that promote inequality and do not promote production, employment and broad based prosperity. While the U.S. workers aren’t going to build socialism tomorrow, if they were on the path to that they’d be far better off than they are today.
BTC: While Western capitalism is facing repeated crises, socialist China achieved spectacular success, bringing a very poor society to the threshold of moderate prosperity. In an op-ed in the Global Times you list out a number of reasons why China’s struggle to develop along with the challenges that other socialist countries have faced are instructive for the rest of the developing world, and you mention that China’s foreign policy recognizes the centrality of anti-imperialism and national economic sovereignty. Could you comment on this?
RD: Let me comment on the productive economy first and then we’ll come back to the idea of economic sovereignty.
Neoliberalism was supposed to solve the productive problems of capitalism, to restore capital, capitalism’s productive dynamism. But it failed to do that. Neoliberalism is the ideology that you give capital more and more freedoms, you unshackle it from the burdens of social obligation and state regulation that has been imposed upon it in the post-Second World War period. And the idea was that if you did that, then the ordinary competitive forces of capitalism would take over and restore capitalism to health.
There was, however, one rather big problem with this proposition. By the early 20th century, capitalism had already ceased being competitive capitalism and had entered the monopoly phase. Giving monopoly capitalism these freedoms was not going to restore productive dynamism –– it was only going to leave it free to indulge in all the vices of senility, rather than the youthful vigor of competition.
We’ve seen that over the decades during which neoliberal policies have been applied. They have nothing to show for it. All neoliberal policies did is they left big corporate capital to do what it wanted. And what it wanted was to stop producing and instead engage in rentier activities: financialization, speculation, predation. All of which are the opposite of production.
Production involves producing what you and I need from year to year. Whereas financialization is simply a way of skimming off what other people are earning by producing things, whether they are other smaller businesses or third world countries and by speculation that drives up the prices of already produced assets. So there’s this opposition between creating a supply of new things people need and creating excessive demand for the old things that are already there such that you drive up their prices. The first is fertile and productive, the second is sterile and merely acquisitive.
So, in this context, the Western countries have become productively weaker. They have only essentially been able to continue consuming on such a grand scale because other people are producing. The deindustrialization of the West has not been because Western corporations have invested elsewhere. On the contrary, they have only outsourced to companies that are investing and producing in third world countries, whether it’s in China or elsewhere.
Why does economic sovereignty matter? Quite frankly, economic sovereignty matters because even capitalist economies have never operated without considerable support from the state. And if you’re going to create the kind of broad-based prosperity that we saw in the post-Second World War period during the so-called Golden Age of capitalism of Keynesian welfare states – it was not adequate but still better, much better, than before – you need pretty massive state intervention. In order to make monopoly capitalism yield that sort of prosperity, you always needed to have a fair degree of state regulation. So in that sense, states have long been involved in economies in pretty big ways.
In addition, when you are not one of the imperialist economies, but one of the ones that is potentially a victim of imperialism, you need a strong state in order to stand up to imperialist powers. You need a strong state in order to organize your economy to create the level of production productivity that will afford the broad-based prosperity that you need to have. This is not going to be a gift of imperialism. In fact, you’re going to have to build it against imperialism’s most strenuous efforts to prevent you from acquiring that sort of productive capacity.
So economic sovereignty is important because you will need to be able to make the choices for this. Because if you don’t have sovereignty, what you will end up doing is \applying the policies that the imperialist West wants you to apply, which are some of the other forms of neoliberal policy, which leaves your economy open to the corporations and the commodities of Western companies.
Your economy will have to absorb whatever cheap goods they want to sell you to deindustrialize you. And then also, of course, you will supply resources and cheap labor, as and when the West wants them. So if you don’t want to be in that position, you cannot do without economic sovereignty. The idea that globalization was going to develop developing countries is not true, it was never true.
And, in fact, it was going to create a new era of economic subordination of recolonization.
… Despite this, specialization based on comparative advantage is considered the acme of economic wisdom and it is dispensed by professors in nearly all economics departments. These very same people who teach about competitive advantage, they don’t tell their young children, “Well, you are only capable of doing dishes right now, so you should specialize in doing dishes.” No. They protect that child, they invest everything they have in their child to educate it and make them capable of higher things. So, then the child becomes highly trained and enters the labor market, if it ever does, at the age of 20 or 25, or 30, capable of making a lot of money.
Economies are similar, you have to protect them in order to develop the productive capacities first. So in all of these ways, that’s why economic sovereignty is a critically important thing.
BTC: The economic situation is worsening especially for working-class women. Despite making up a majority of college graduates, women still earn 84 cents to the male dollar in the U.S. Women’s careers and education are often impacted by choosing or being forced into motherhood especially now with the overturn of Roe. And women still carry a larger share of household care than men. Could you comment on this and on breaking through the exclusion of women from society?
RD: Let me grab onto the word you used, “the exclusion of women.” I think we have to stop thinking of the exclusion of women – women are not excluded from economic life. They are included but in a subordinated fashion. Indeed, the fact that women are the bearers of children makes them economically central. There is no economy without people. There is no economy without workers.
So one of the primary functions of any economy is to figure out how we are going to bear and rear children, and how we are going to educate them. What we need to do is to demand an economy that is built around this primary responsibility.
The fact that our economies aren’t built around this has actually led in most advanced capitalist societies to a declining birth rate. …
And eventually, we’re going to have to build an economy. I’m not suggesting we build an economy around having lots of children. But the point is, you build an economy around taking responsibility for the children that you wish to have. That should be at the core of everything.
I remember, very early on in my consciousness as a feminist, reading a very interesting article, which I had never seen cited practically anywhere. It’s by a British economist called Nicky Hart and I think it’s entitled Procreation, the substance or the secret or the essence of women and subordination. She shows statistically that if you take the lifetime earnings of men, whether or not they have children, and then lifetime earnings of women without children, and the lifetime earnings of women with children, you clearly see that the difference in the lifetime earnings of men and women without children is relatively small.
The big difference comes when women have children, because they take time off the workforce, and because they have children, they are regarded as unreliable workers. So for all these reasons, women’s unique ability to bear children, which should be their great strength and asset, is used to punish them. And this is the fundamental injustice in society that we have to struggle against.
This is again where economic sovereignty comes in. You can only create an economy that is centered around these fundamental reproductive necessities, as I’ve suggested if you have the economic sovereignty to devise your own form of the welfare state and to devise a productive economy capable of supporting it.
I couldn’t agree more that women have suffered so much from the present recession, the pandemic-related recession, that some people have even called it a “she-cession.” And I would also add that earlier, I was talking about the subordinated way in which women have had the historical misfortune of entering the workforce in large numbers precisely during the neoliberal era where the only form of inclusion they could have was a subordinated inclusion.
And that’s what we are paying for. Women are disproportionately employed precisely in the “frills” area of the economies, which were the first to shut down during the recession of the pandemic. So they have suffered disproportionately, but at the same time, they are also at the forefront of professions like nursing and teaching which were “essential.” But they were also most fully exposed to the pandemic, so they also suffered disproportionately from that. So in all of these ways, women have paid a disproportionate price in the present pandemic.