Abstract
Graham Turner has had two books published by Pluto Press in consecutive years, 2008 and 2009, which deserve attention. Turner worked for Japanese banks in the 1990s and in 1999 founded a financial consultancy in London. One might expect a financial consultant to produce work that is rich in institutional detail but lacking in theoretical force. Turner does indeed deliver revealing graphs and tables described in accessible language. But what makes these texts noteworthy is their author’s use of Keynesian and Marxian insights to identify the structural tensions that make the current situation of capitalism so toxic, and that these texts are aimed at readers who are not professional economists, not to mention political economists.
Credit Crunch sets out Turner’s principal hypothesis: that is, the ultimate source of the housing bubble (and subsequent bust) of the 2000s is the global expansion of race-to-the-bottom free trade in several previous decades. He writes: “The housing bubbles were not an accident, spawned simply by careless regulatory oversight. They were a necessary component of the incessant drive to expand free trade at all costs. Dominant corporate power became the primary driving force for economic expansion” (1). He asserts that the efforts of large corporations in the United States, the United Kingdon, and Western Europe to increase their profits by shifting production to lower-cost countries invariably drove down wages. The loss of manufacturing jobs was not offset by the growth of “bubble jobs” in the City of London or on Wall Street; nor were there ancillary manufacturing job gains in Western countries: instead, most spillover gains in manufacturing were realized in developing countries, accelerating the emerging dynamic. Given the importance of consumer expenditures in these nations’ aggregate demand, the only way to maintain spending was to expand credit to fill the widening wage/expenditure gap. This credit-based solution to a potential shortfall in aggregate demand was facilitated by monetary and regulatory policies: interest rates were maintained at low levels in the 1990s and 2000s to maintain credit growth; and the deregulation of credit was regarded as good for consumers and financial firms alike. Consequently, asset bubbles in the West (or in the developing world) and huge surpluses are “indelibly linked. Those railing against protectionism never acknowledge this fundamental point” (82).
Writing in mid-2008, the author predicts the financial collapse that unfolded just months later; and he argues that it would lead to “a sudden reversal in profit margins,” which had been growing secularly for two decades. His predictions about both the financial crisis and profit margins were borne out: according to the U.S. Bureau of Economic Analysis, profits from current domestic production fell 17.6 percent in 2008. 1
The author pays virtually no attention to subprime lending per se. In his view, two factors prefigured the current crisis: large Western corporations’ moves to cut labor costs by shifting production to low-wage countries, and the continued dependence of global demand on Western countries’ expenditures, and in particular on Western consumers. Those consumer/workers, their path to prosperity from wage-earning blocked, instead pinned their hopes on wealth accretion via a doomed housing bubble. And this bubble spread in both countries without adequate attention from political and monetary authorities. In the United States, Alan Greenspan backed down from trying to slow down the overinvestment boom because he calculated there was not much risk from asset-price inflation; in the United Kingdom, monetary policy under the New Labor government focused solely on inflation, not the rise of a housing bubble.
The book’s argument focuses largely on the situations in the United States and the United Kingdom; the author often uses side-by-side paragraphs to describe these two countries’ parallel journeys into crisis. In chapter 6, “A Global Credit Bubble,” the author extends his argument about housing bubbles beyond the United States and United Kingdom, pointing out the numerous asset bubbles in the developing world. These have arisen due to the coincidence of managed exchange rates to spur export growth, combined with massive investment inflows (and earnings surges). In his view, the 1997 buildup to the Asian crisis is being relived, on a more massive scale. The reason for this vulnerability is the massive inflow of capital to many low-wage developing countries. Some countries have been taken in, as was much of East Asia in the 1990s, by “economic miracle” rhetoric, which suggests no need for sterilization; and in any case, not doing so makes it easier for local elites to take profits in booming asset markets. Many successful exporters are, in effect, running massive current-account deficits. And this in turn can lead to the build-up of private debt and the emergence of credit bubbles. The author produces as an appendix to chapter 6 an extensive list of countries in which credit growth since 2000 has exceeded the pace of that in the United Kingdom and United States.
In chapter 2, “Global Contagion,” the author links this argument about housing and asset bubbles to a depiction of the underlying crisis tendencies in global capitalism. He does this by first mentioning other bubble-market episodes in the neoliberal era: the 1987 crash, the U.S./U.K. housing slumps of the early 1990s, and the 1997 Asian financial crisis. He argues that the first two episodes of crisis involved overconsumption: too much demand chasing too little supply. He argues that from 1997 onward, financial panics were due to overproduction and overinvestment. The reason is that the balance of power—reflected in the real wages being paid in (global) production and the profits being earned—had swung to corporations. He cites Thailand’s experience in the 1997 crisis, in particular, as a case of an overinvestment squeeze (19), with the overproduction of exports preceding a loss in earnings.
Ironically, the Japanese boom and crash of the 1980s and 1990s is not included in this chronology of the pressures building toward crisis, perhaps because of the author’s emphasis on the significance of the twin regimes of President Reagan and Prime Minister Thatcher in facilitating deregulation and an attack on unions, actions that sanctioned the corporate global-factor/wage-cutting dynamic featured in these pages. Japan’s own crisis is included here; it is treated as a largely independent episode foreshadowing the current global fix.
Indeed, two strong chapters on Japan’s 1989-90 asset-market collapse and its aftermath conclude the volume. Chapter 8, “Japan’s Bear Market,” is a useful summary of why the Japanese miracle went wrong, and left Japan stuck in an extended macroeconomic stagnation and banking crisis. The author’s key point is the failure of the authorities to respond until too late to the bubble conditions in the housing market, and then the impossibility of off-loading or unwinding debt in an environment of asset-price collapse and caution. The notion that what Japan really needed was a sufficiently strong dose of market liberalization is countered effectively. Liberalization actually contributed to the problem. The author then relates Japan’s experience to the current conjuncture: the Fed and the Bank of Japan made the same mistake when confronting a collapsing property-market bubble: to base monetary policy reactions on the pace of inflation, not the threat posed by these collapsing bubbles.
The author’s notion that the global economy was beset first by a crisis of overconsumption and then by one of overproduction and stagnation is built on an appreciation of the relevance of Marx and Keynes to understanding contemporary dynamics. Indeed, in this, in his use of sweeping, functionalist analyses, and in his appreciation of telling institutional developments in markets and macroeconomies, Turner’s book resembles in some ways the essays that Magdoff and Sweezy published in Monthly Review in the 1970s.
The appreciation for Turner’s achievements in this volume has to be balanced against what he has missed. For one thing, there is almost no attention to the micro-economic aspects of the “credit crunch”; in particular, the author largely ignores the roles played by predatory lending, financial firms’ strategies, and financial-market developments—such as the explosion of derivatives instruments and collateralized debt obligations—in the subprime crisis. Essentially, Turner focuses his analysis on the big picture; and that big picture centers not on surplus-country/deficit-country imbalances, but on the imbalance of power between capital and labor in the world of globalized, deregulated production.
This leads to another omission: the lack of any references to the various ongoing debates about contemporary capitalism’s cyclical or secular dynamics. The author does incorporate some Keynesian perspectives into his argument; there are some references to Keynes’s writings and to the Keynesian/monetarist policy debate of past decades. But he makes no references to contemporary Keynesians’ ideas about financial crisis (for example, Minsky 1986). The author is implicitly intervening into robust recent debates about capitalist crisis; to name several threads, Brenner’s thesis about over-competition and the falling rate of profit (Brenner 2006) and its critics (for example, Aglietta 2008); Pollin’s critique of the Clinton administration’s Third-Way, pro-Wall Street policies (Pollin 2003); and the financialization hypothesis (Epstein 2006). But tellingly, while wanting to differentiate between over-consumption and over-production in capitalism, and to trace financial bubbles to a deeper crisis dynamic, the author does not engage these authors’ work. Nor does he try to explain the dynamic to which the “[d]ominant corporate power” he flags as the “the primary driving force for economic expansion” has given rise. It is surely more than an effort to “increase free trade at all costs” (1). This leaves a lacuna at the book’s analytical core; it is as if the author is describing the facts that support an argument that he has chosen not to spell out in so many words.
In any event, this volume’s central argument also requires more elaboration and empirical support than the author provides. That is, Turner asserts that falling wages implies a rising housing price-wage ratio. A decomposition of time-series data on median housing prices, wages, and prices throws this into question. Undoubtedly, the ratio of median housing prices to median wages has risen dramatically, especially since 1996. But real wages have stagnated, but not fallen precipitously, in this time period. When the housing-price/wage ratio is calculated with a constant real wage, it still grows dramatically from 1996 onward. This is not to say that Turner is wrong to link these two variables; only that any such causal links will be at work through a variety of mechanisms, whose relative importance will require further investigation.
These reservations are offset by the volume’s valuable dissection of empirical trends and its clear review of the policy responses to emerging contradictions. The author weaves together an account of unfolding events with a critical review of the policy dilemmas confronting government authorities. The blame for the housing bubble cannot be pinned on regulators, monetary policy, or even the banks. They all played their part—lax policy was the preferred option, interest rates were low to facilitate borrowing—and financial fragility was never taken seriously. Governments needed housing bubbles because they were wedded to a free-trade policy that drove down wages. The only way to compensate for the unsustainable drive to cut labor costs was to permit credit to grow precipitously.
Turner’s 2008 book concludes with the warning that, “Central banking has become a high-wire act” (188): cut rates too soon, and the markets continue to soar; too late, and the markets’ collapse cannot be checked. He sees the United States as heading for a Keynesian liquidity trap. And he argues that while the immediate policy task is to prevent debt deflation from taking root, a longer-run solution depends on establishing a more equitable global balance of power between labor and capital.
No Way to Run an Economy picks up the story in a book that went to press in July 2009 (and was released in November 2009). This book is more forward-looking, and anticipates policy interventions to prevent economic collapse bolder than those that have been undertaken, especially by the Obama administration. He presents the case for the possibility of a relapse into global recession, after the fiscal policy stimuli of 2009 have faded. He concludes that if a second downturn occurs, few conventional policy options will bring the patient back to life. This volume is most valuable for readers seeking updated discussions of U.S. and U.K. policy-makers’ efforts to manage the structural contradictions of global capitalism that their policy choices may ameliorate but cannot erase.
