by Jacob Bilsky
Economists and bankers are talking about a possible recession in the United States and the world economy. Falling stock prices are slowing the capitalists’ profits, and they will make the working-class pay the price with layoffs, inflation, and government bailouts for corporations.
Working people are already feeling the effects of the growing economic crisis. Last May, Socialism Today covered the cost-of-living crisis in the United States regarding food, housing, and gasoline. Since April of 2021, annual inflation of 8.5% has wiped out a 5.6% average increase in wages, meaning wages have effectively declined by 2.7% in the last year. Furthermore, February-April 2022 saw the rate of wage growth slow considerably from its 2021 peak as the job market “cools.”
What is a recession?
According to capitalist economists, a recession officially occurs after two business quarters of negative growth in an economy’s Gross Domestic Product (GDP)—a statistic representing the value of all goods and services produced in a country. While the economy started to rebound in 2021 from the economic crash in 2020, the first quarter of 2022 (January-March) showed negative GDP growth. Nearing the end of the second quarter (April-June), most signs indicate this trend will continue.
The United States Federal Reserve raised interest rates by a quarter-point in March in an attempt to lower inflation. They followed with another half-point increase on May 4th, making it the largest hike in interest rates in over 20 years.
The intention of raising interest rates is to make loans more costly and slow the economy’s growth to curb inflation and any investment bubbles. Under capitalism, increases in interest rates often trigger panic among sections of the capitalist class, who scramble to sell assets before stock prices drop too drastically. The day after the Fed’s May 4th interest rate hike, the Dow stock index fell by more than 1000 points–the worst day for the market since 2020.
While the market drop has slowed since then, the stock market has seen an overall decline in 2022. The S&P 500 stock index was down by 19% in mid-May compared to the beginning of 2022. The crisis hit “tech-heavy” indexes harder, with Nasdaq dropping 28%.
The market could rally in the coming months, but stock market changes often do not align with GDP or living conditions. As we saw in 2020 and 2021, the markets can soar even as workers suffer.
Economic Shocks and Supply Chain Disruptions
Global capitalism faced a series of economic shocks in the last year, contributing to the current economic crisis. For example, the Russian invasion of Ukraine disrupted wheat and natural gas production in Europe, and a resurgence of COVID-19 slowed manufacturing and shipping of consumer goods from China to the United States.
Policy changes since the 1970s have made the U.S. economy more sensitive to supply chain disruptions, both abroad and at home. For instance, corporations began outsourcing manufacturing to other countries to undermine unions and cut labor costs. To save warehouse and inventory costs, they also adopted a “just-in-time” production model by the 1980s, which stopped the practice of producing commodities beyond current demand in anticipation of unexpected increases in demand or production being disrupted.
In the 1990s, the H.W. Bush and Clinton administrations enabled companies’ efforts to hyper-exploit workers outside the United States with the North American Free Trade Agreement. This economic treaty made it easier for companies to sell commodities and outsource production to Mexico and Canada, and to avoid labor and environmental laws.
The late 1970s also saw the Carter administration and leading Democrats in Congress initiate deregulation of the banks alongside the trucking, railroad, and air transport industries. Companies took advantage of deregulation to lower wages, increase work hours, and understaff workplaces for transportation workers. Corporations also ignored necessary maintenance to the vehicles and infrastructure involved in moving commodities. Deregulation allowed corporations to increase profits massively but made U.S. commercial transportation less reliable, compounding problems in the supply chain.
When disruptions occur, the U.S. economy and government do not have backup plans to compensate for the loss of production because such long-term planning would cut into corporate profits. The disruptions lead to shortages and price hikes on commodities that hurt working-class people first and foremost, as happened recently after Abbott Laboratories closed its factory due to the baby formula being contaminated.
The logical solution to the infant formula shortages is producing for need, not profit. A workers’ government could nationalize and plan production, better monitor the labs and factories to ensure consumer safety, and, for example, make extra baby formula in case production is disrupted. But as Pete Buttigieg noted in an interview on Face the Nation, the United States “is a capitalist country” and will leave the production and distribution to private corporations, regardless of their ability to meet people’s needs.
The Crypto Bubble Bursts
In addition to the interest rate hikes intended to curb inflation and economic shocks, investment bubbles also contribute to economic recessions. The capitalist class will often speculate on new technologies and fad companies to turn a profit. They invest exorbitant sums of money based on what seems to be most profitable at a particular moment, whether or not that company or technology can deliver commodities that can sell.
Corporations, banks, and individual capitalists will often take out loans and spend money they otherwise don’t have to jump on investing trends. They do this as a sort of gamble, hoping that prices will go up after they buy stock and that they can turn around and sell for a profit before everyone else gets the same idea. When everyone invested tries to sell at once, prices plummet, and it becomes apparent that investors will take a loss and possibly default on their debts. Overnight, the vast sums of money disappear.
For many capitalists, cryptocurrencies seemed like “ground-breaking assets” promising “instant gains and a hedge against inflation.” But as CWI member Robin Clapp notes, cryptocurrencies have nothing to do with actual productive forces and are little more than paper assets to be gambled on. The sudden interest in them is ushering in a new era of “casino capitalism.” (Clapp’s analysis can be read in full on socialistworld.net, the website of the Committee for a Workers’ International.)
Trying to stay ahead of the curve, many capitalists and even some salaried workers bought into everything related to blockchain, ranging from supposedly stable cryptocurrencies to outright scams in the form of allegedly collectible Non-Fungible Tokens (NFTs) selling for hundreds of thousands of USD each.
Gambling on cryptocurrency proved to be a loss for the majority of investors. Following the stock market collapse, cryptocurrency crashed in the second week of May, wiping out an estimated $300 billion in value. Compared to their significant crash in 2018, cryptocurrencies are now more integrated into the U.S. economy, giving this crash a broader impact.
Recessions and the Logic of Capitalism
Capitalism does not concern itself with the well-being of working people. Instead, it has its own logic that prioritizes immediate profit. Just look at the baby formula shortage, where Abbott Laboratories knew that health and safety standards were declining in their factories. Yet, instead of fixing the problems with production to prevent bacteria from contaminating baby food, Abbott decided to use their profits to enrich shareholders.
From 2020 to 2021, the capitalist class raked in record profits. In the same period, many workers fought back through informal resignations and several high-profile strikes and unionization attempts, demanding better pay and conditions.
While the capitalist class made some concessions to workers, they greedily raised prices during a pandemic to rake in greater profits. Now, as inflation increases and the price of basic necessities outpaces wage growth, workers are buying less, creating a crisis of overproduction in many industries even as others experience shortages.
The crisis of overproduction is at the heart of the most recent stock market crash and the looming recession. Working people began buying less from retail and tech companies to try and save money and survive inflation. As a result, the profits of companies like Walmart and Target fell, causing panic among investors and contributing to the market’s volatility.
Capitalism regularly throws itself into crisis, but some capitalists pounce on the market crashes to buy dirt-cheap stock and real estate, and to engage in corporate takeovers as the working class suffers. This produces an ongoing cycle of boom and bust, growth and recession, concentrating the world’s wealth into the hands of an ever-smaller number of capitalists.
Workers Won’t Pay for the Crisis!
While a handful of capitalists come out on top after each crisis, the working class stands to lose. Without a strong, united labor movement, any growth in our wages is quickly outpaced by inflation. Furthermore, money we save towards retirement, our children’s futures, or buying a home is lowered or wiped out in recessions.
Workers can fight back to protect our savings and livelihoods today. For example, a militant labor movement in the 1930s, organizing workers on a national scale in new industries, managed to win significant social benefits from the U.S. government after the Great Depression. These benefits included steps toward full employment and job security, better wages, price controls, and protections for our savings.
Today, labor bureaucrats control many of our unions and don’t put enough resources into organizing more workers into unions. They use union resources mostly on high salaries and funneling money to the Democratic Party, a capitalist political party, while making concessions to corporations.
In contrast, the rank-and-file union members and unorganized workers who led the charge against the capitalist class in the wake of the Great Depression were guided by socialist ideas. Using a socialist framework they challenged the union bureaucracy as well as the capitalist class. Like the militant workers of the 1930s, we will need to struggle from the bottom up to democratize our unions.
Socialists recognize that capitalism will never be a stable system. Any gains we win will be wiped out if the capitalist class stays in power. The solution to capitalist chaos is a democratically planned socialist economy, which streamlines production and distribution to meet everyone’s needs, protect the environment, and prepare for emergencies like natural disasters.
To achieve socialism, working people must first get more organized, uniting unions and building a mass workers’ movement to win immediate relief from the crisis. Aligning the labor movement with the social movements against racism, sexism, and homophobia and channeling our political efforts to run independent left-wing and labor candidates—instead of supporting the Democratic or Republican Parties—can increase the pressure needed to force the government and corporations to concede reforms.
In the long term, we must organize unions, social movements, and left-wing organizations to help build an independent party for working people. Such a party would refuse corporate influence and cash, run workers’ candidates on a workers’ wage, and make them subject to nomination and recall by the party’s membership. Even taking the first steps toward building a workers’ party could strike fear in the capitalist class, winning concessions from them in the process.
The global capitalist system is founded upon exploitation, market, instability, and war, but a socialist world is possible. The time to start organizing for wages above inflation, universal healthcare, and other long overdue social benefits is not after another recession hits us, but right now. Working people did not create this economic crisis, and we should refuse to pay for it!