Big Challenges Facing Janet Yellen

Yellen testifies

Janet Yellen gave her first report to the House Financial Services Committee since she became chairperson of the Federal Reserve Board in January. In the wake of the 2008 panic, her predecessor Ben Bernanke had indicated that “the Fed” would keep the federal funds rate—the interest rate commercial banks in the U.S. charge one another for overnight loans—at near zero until the unemployment rate, as calculated by the U.S. Labor Department, fell to 6.5 percent from over 10 percent near the bottom of the crisis in 2009.

However, the Labor Department’s unemployment rate has fallen much faster than most economists expected and is now at “only” 6.6 percent. With the U.S. Labor Department reporting almost monthly declines, it is quite possible that the official unemployment rate will fall to or below 6.5 percent as early as next month’s report.

But there is a catch that the Fed is well aware of. The unexpectedly rapid fall in the official unemployment rate reflects the fact that millions of workers have given up looking for jobs. In effect, what began as a cyclical crisis of short-term mass unemployment has grown into a much more serious crisis of long-term unemployment. As far as the U.S. Labor Department is concerned, when it comes to calculating the unemployment rate these millions might just as well have vanished from the face of the earth.

In reality, the economic recovery from the 2007-09 “Great Recession” has been far weaker than the vast majority of economists had expected. Indeed, a strong case can be made that both in the U.S. and on a world scale—including imperialist countries, developing countries and the ex-socialist countries of the former Soviet Union and Eastern Europe, as well as oppressed countries still bearing the marks of their pre-capitalist past—the current recovery is the weakest in the history of capitalist industrial cycles.

The continued stagnation of the U.S. economy six and a half years since the outbreak of the last crisis has just been underlined by a series of weak reports on employment growth and industrial production. For example, according to the U.S. Federal Reserve Board, U.S. industrial production as a whole declined 0.3 percent in January, while manufacturing, the heart of industrial production, declined by 0.8 percent.

Yellen, as the serious-minded policymaker she undoubtedly is, is well aware of these facts. She told the House committee:”The unemployment rate is still well above levels that Federal Open Market Committee participants estimate is consistent with maximum sustainable employment. Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high.”

Over the last several months, the growth of employment, which serious economists consider far more meaningful than the the U.S. Labor Department’s “unemployment rate,” has been far below expectations.

Bad weather

Most Wall Street economists are sticking to the line that the recent string of weak figures on employment growth and industrial production reflect bad weather. The eastern U.S. has experienced extreme cold and frequent storms this winter, though the U.S. West has enjoyed unseasonable warmth and a lack of the usual Pacific storms, resulting in a serious drought in California. So it is possible that bad weather has put a kink in employment growth and industrial production.

But there is also concern—clearly shared by the new U.S. Fed chairperson, notwithstanding rosy capitalist optimism maintained by the cheerleaders that pass for economic writers of the Associated Press and Reuters—that the current global upswing in the industrial cycle has failed to gain anything like the momentum to be expected six years after the outbreak of the preceding crisis.

Two ruling-class approaches

This growing “secular stagnation”–lingering mass unemployment between recessions—has produced a growing split among capitalist economists and writers for the financial press. One school of thought is alarmed by continued high unemployment and underemployment. This school thinks that the government and Federal Reserve System—which, remember, functions not only as the central bank of the U.S. but also of the world under the current dollar-centered international monetary system—should continue to search for ways to improve the situation. Another school of thought, however, believes that all that has to be done is to declare the arrival of “full employment” and prosperity.

The Fed Tapers as Yellen Prepares to Take Over, and the Unemployed Get Screwed Over

In what may be its last official action under Ben Bernanke’s leadership, the Federal Reserve announced in December that it would reduce its purchases of U.S. government bonds and mortgage-backed securities from $85 billion to $75 billion a month as of January 2014. This indicates that the Fed hopes to slow down the growth of the dollar monetary base during 2014 from the 39 percent that it grew in 2013.

Considering that before the 1970s the historical growth rates in the monetary base were 2 to 3 percent, and from the 1970s until the mid-2000s they were around 7 percent, a 39 percent rate of growth in the dollar monetary base is viewed by the Fed as unsustainable in the long run.

The bond market reacted to the announcement in the textbook way, with interest rates on the U.S. 10-year government bonds rising to around 3 percent. The last time interest rates on 10-year bonds were this high was just before the Fed put the U.S. housing market on “life support” in 2011.

It seems likely that the latest move was made to smooth the transition from the Bernanke Fed to the Yellen Fed. Janet Yellen, the newly appointed, and confirmed, chair of the Federal Reserve Board of Governors, is considered a “dove.” That is, she is inclined to follow more expansionary monetary policies than Bernanke in order to push the economy in the direction of “full employment.” As defined by bourgeois economists, this is the optimal level of unemployment from the viewpoint of the capitalists – not unemployed workers. With this move, the money capitalists are “assured” that the Fed will be slowing the rate of growth of the U.S. monetary base despite the new Fed chief’s “dovish” views, while relieving Yellen of having to make a “tightening move” as soon as she takes office.

The gold market, as would be expected, dropped back towards the lows of June 2013, falling below $1,200 an ounce at times, while the yield on the 10-year bond rose to cross the 3 percent level on some days. This reflects increased expectations on the part of money capitalists that the rate of growth in the U.S. dollar monetary base will be slowing from now until the end of the current industrial cycle.

Though the prospect of a slowing growth rate in the monetary base and rising long-term interest rates is bearish for the stock market, all things remaining equal, stocks reacted bullishly to the Fed announcement. The stock market was relieved that a stronger tightening move was not announced. The Fed combined its announcement of a reduction in its purchasing of bond and mortgage-backed securities with assurances that it would keep short-term interest rates near zero for several more years, raising hopes on Wall Street that the current extremely weak recovery will finally be able to gain momentum. As a result, the stock market is still looking forward to the expected cyclical boom.

Long-term unemployed get screwed over

On December 26, Congress approved a measure, incorporated into the U.S. budget, that ended unemployment extensions beyond the six months that unemployment benefits usually last in the U.S., which added to Wall Street’s holiday cheer. During recessions, Congress and the U.S. government generally agree to extended unemployment benefits but end the extension when economic recovery takes hold. It has been six years since the recession began – 60 percent of a normal industrial cycle – and the Republicans and the bosses agreed that it was high time to end the unemployment extensions.

Some Democrats dependent on workers’ votes have said that they are for a further extension of emergency unemployment benefits. President Obama claims to oppose the end of the extended benefits but signed the budget agreement all the same. The budget agreement as it stands basically says to the unemployed, it is now time to take any job at any wage you can find. If you still can’t find a job, tough luck.

Michael Heinrich’s ‘New Reading’ of Marx—A Critique, Pt 1

The April 2013 edition of Monthly Review published an article entitled “Crisis Theory, the Law of the Tendency of the Profit Rate to Fall, and Marx’s Studies in the 1870s” by German Marxist Michael Heinrich. This is the same issue that published John Bellamy Foster’s “Marx, Kalecki, and Socialist Strategy,” which I examined the month before last.

Michael Heinrich teaches economics in Berlin and is the managing editor of “PROKLA A Journal for Critical Science.” His “new reading” of Marx apparently dominates the study of Marx in German universities.

The publication of Heinrich’s article brought about a wave of criticisms on the Internet from Marxists such as Michael Roberts who base their crisis theory precisely on Marx’s law of the “tendency of the rate of profit to fall,” or TRPF for short.

Today on the Internet, partisans of two main theories of capitalist crisis—or capitalist stagnation—are struggling with one another. One theory attributes crisis/stagnation to Marx’s law of the TRPF that Marx developed in “Capital” Volume III. The rival theory is associated with the Monthly Review school, which is strongly influenced by John Maynard Keynes and even more by Michael Kalecki. Unlike the supporters of a falling rate of profit theory of crisis, the Monthly Review school, like Kalecki, puts the question of monopoly and monetarily effective demand at the center of its explanation of capitalist crisis/stagnation.

In addition to publishing Heinrich’s attempt to prove that there is in fact no tendency for the rate of profit to fall, Monthly Review Press published an English translation of Heinrich’s “An Introduction to the Three Volumes of Karl Marx’s Capital,” originally published in German under the title (in English) “Critique of Political Economy—an Introduction.”

Is Michael Heinrich a new recruit to the Monthly Review school? In fact, we will see later that the Monthly Review school and Heinrich have radically different views on the questions of capitalist monopoly and imperialism. So at this point, it is more a question of an “alliance” between the Monthly Review school and Heinrich’s “new reading of Marx” trend against the TRPF school, whose leading academic representative today is Andrew Kliman, a professor of economics at Pace University.

The first thing I must say about Heinrich is that it is clear that he knows his Marx at least as well as any writer whose works have been published in English. He is also a remarkably clear writer. This reflects the fact that he has thoroughly mastered his material. This does not mean that Heinrich agrees with Marx on all questions. Indeed, Heinrich is more than willing to express his disagreements with Marx. And as we will see, Heinrich disagrees with Marx on some very important issues.

Can the Capitalist State Ensure ‘Full Employment’ by Providing a Replacement Market?

The followers of Keynes believe that when there is a considerable amount of unemployment of workers and machines, the government and the “monetary authority” can create whatever additional purchasing power is necessary to achieve “full employment” by providing a replacement market for otherwise overproduced commodities.

If this is true, the general overproduction of commodities can only arise because of either policy mistakes by governments and central banks or because the governments and central banks deliberately wish to create unemployment. Therefore, according to this view, it is perfectly possible to avoid the periodic mass unemployment created by crises of generalized overproduction without abolishing capitalist production.

If, on the other hand, crises of generalized overproduction occur because the industrial capitalists periodically produce more commodities than can be purchased by the combined purchasing power of the working class, the capitalist class, the middle class, and the state and its dependents, long-term “full employment” is impossible under capitalism.

In order to examine the question of to what extent if at all the capitalist state can create a replacement market for commodities that otherwise cannot find buyers requires an examination of government finance in light of Marx’s fundamental discoveries involving the nature of value, price and money.

It is pretty obvious how the production of commodities can exceed the purchasing power of provincial governments—including the national governments of the euro zone countries—state governments, and local governments—none of which has the power to issue its own currency. During downturns in the industrial cycle, tax revenues of the governments decline. If they spend more than they take in, they must borrow. If the recession is persistent, their debts will grow so that sooner or later they will be forced into bankruptcy, just as happens with private individuals and individual corporations.

But what about the case of governments that can issue their own currency—most famously the U.S. government, whose currency, the U.S. dollar, is widely accepted as a means of payment, not only in the United States, where it is “legal tender for all debts private and public,” but throughout the world? Why can’t the government make up for any gap between the ability or willingness of the “private sector” to purchase commodities and the ability of the industrial capitalists to produce them?

A Major Attack on Labor Rights in the U.S. as the Federal Reserve Makes Another Inflationary Move

December 11 brought news of a major new attack on basic labor rights in the United States. The following day, the Federal Reserve announced new inflationary measures designed to end the economic stagnation the U.S. economy has been mired in since the “Great Recession” bottomed out in July 2009.

The new attack on labor rights occurred when Michigan Governor Rick Snyder signed a so-called “right to work” bill in the state that is the home of the U.S. auto industry. Unlike the attacks in Wisconsin and some other U.S. states that targeted the labor rights of state employees, the Michigan legislation—though it affects state employees, with the police being a significant exception—is clearly aimed at Michigan’s highly unionized automobile industry.

So-called “right to work” laws in the U.S. have absolutely nothing to do with the right of workers to a job. The leaders of U.S. capitalism recognize no such right. Rather, under the Taft-Hartley Act of 1947, U.S. state governments can pass “right to work” laws that outlaw the union shop. Under a union shop, all workers are required to pay union dues after their probation period as new hires ends.

Traditionally, such laws have existed in the southern states, with their long history of slavery and post-slavery apartheid-type Jim Crow segregation laws. Ultimately, the “right to work” laws of these states, where unions have always been weak, can be seen as part of the heritage of slavery itself. However, the passage of such legislation in Michigan, a northern state that was never a slave state and was at the very center of the rise of the Congress of Industrial Organizations—CIO—is another matter altogether.

Michigan is the home of the United Automobile Workers, the most powerful industrial union created by the great strike movement of the 1930s. For the first time since the auto bosses were forced to recognize the UAW, the passage of this legislation opens up the real possibility that they are preparing to bust the UAW altogether.

The ‘Implications’ of Paul Baran

In its July-August 2012 issue, Monthly Review has published a new document entitled “Some Theoretical Implications,” written by Paul Baran, which was originally intended to be a chapter of “Monopoly Capital.” The summer issue also includes the correspondence between Paul Sweezy and Baran during what turned out to be the final weeks of Baran’s life. Written between February and March 1964, we see two of the greatest economists of the 20th century discuss among themselves the “Implications.”

Monthly Review editor John Bellamy Foster put together the “Implications” piece as it appears in the summer 2012 issue from two texts by Baran that were recently found in Sweezy’s papers. These documents were long believed to have been lost, so their discovery and publication is an event of the highest significance for the history of 20th-century economic thought.

Monthly Review plans to publish next year an additional document by Baran that was to be a second chapter on the quality of life under U.S. monopoly capitalism. As it was published in 1966, “Monopoly Capital” has only one such chapter.

While all indications are that Foster has done an extraordinary job editing the Baran documents, they are so important for the history of economic thought it might be a good idea to scan the original texts and make them available online so that future economists and historians can examine them just as Baran and Sweezy left them.

Though all the materials in this fascinating issue of Monthly Review will be posted online before the end of August, I would urge my readers if they possibly can to purchase the issue in hard copy. It is well worth the 12 U.S. and Canadian dollars, 9 euros or 8 British pounds, unless you are really broke.

The importance of the “Implications” document is that it is here that Baran explores the relationship between “the surplus” and Marx’s surplus value. What Marx called surplus value is the most important category of all economics. Ever since “Monopoly Capital” was published in 1966, the question has been asked: Is “the surplus” simply another name for Marx’s surplus value? Or is it something else?

Now a half a century after “Monopoly Capital” was published, we have material that for the first time allows us to answer this question.

Reply to Comments by Andrew Kliman and Doug Henwood

Andrew’s comments to my extended review of the “The Failure of Capitalist Production” has clarified both the points of agreement and the differences that exist between us in the field of Marxist economics.

First, the agreements. We both agree that the Keynesian-Marxism of the Monthly Review school as it stands is inadequate both as an analysis of monopoly capitalism and as a response to the current historic crisis of the capitalist system that began with the onset of the “Great Recession” in 2007.

We also agree as against Sweezy and Monthly Review that Marx’s law of the tendency of the rate of profit to fall is necessary both to understand the laws of motion of the capitalist system and the problem of capitalist crisis. We agree that Marx and not Keynes provides the answers.

We also agree that the “neo-Ricardian” claim that there are basic inconsistencies in Marx’s theory is value is incorrect. We both uphold Marx’s law of labor value.

We have important differences, however, on our interpretation of Marx’s law of value. I believe that Marx’s law of labor value requires the existence of commodity money, notwithstanding the end of the gold standard at the end of the 1960s and early 1970s. Andrew disagrees. This difference of opinion affects both our interpretation of capitalist crises and our approach to the transformation problem.

In addition, I think there are some misunderstandings on Andrew’s part on what defines a capitalist that should be clarified. In addition, I need to say a little more on the evolution of the rate of surplus value since the end of the post-World II prosperity 40 years ago.

Despite my differences with Andrew, I want to stress what I said at the beginning of this extended review. I liked “The Failure of Capitalist Production” and recommend it to all serious students of the Marxist critique of political economy and students of the present extended economic crisis of capitalism, which is increasingly becoming a grave political crisis—as the recent elections in France and especially Greece reveal.

I also found Doug Henwood’s remarks to be useful as well, since it sheds light on my critique of the attempts to mix Marx and Keynes.

I must stress that the aim of this blog is not to destroy or crush other Marxists with whom I disagree on one and other point, but to advance Marxist economic science in order to get nearer to the truth.

‘The Failure of Capitalist Production’ by Andrew Kliman — Part 3

The evolution of the rate of surplus value

Kliman’s discussion of the evolution of the rate of surplus value over the last 40 years is, in my opinion, the weakest part of his book. Most Marxists—and non-Marxists, including the great bulk of U.S. workers—would agree that the portion of income going to the rich—the capitalist class—has risen considerably in the U.S. since the early 1970s. This widespread popular belief is clearly reflected in the rise of the Occupy movement.

Kliman strongly disagrees with this. Using U.S. government statistics, he attempts to demonstrate that the share of the U.S. national income going to the workers has risen at the expense of the share going to the capitalists. Or in Marxist terms, the rate of surplus value has actually fallen. A falling rate of surplus value, even if the organic composition of capital remains unchanged, implies a fall in the rate of profit. If a fall in the rate of surplus value is accompanied by a rise in the organic composition of capital, the result will be a marked fall in the general rate of profit.

Which is right: the general popular perception and the view of the Occupy movement that American capitalism and world capitalism is growing more exploitative, or Kliman’s contrary view?

Kliman quotes John Bellamy Foster and Fred Magdoff—leaders of the Monthly Review school: “…wages of private non-agricultural workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage rate in 1967), despite the enormous growth in productivity and profits over the past few decades.” (p. 155)

These figures would seem to clinch the case for a considerable rise in the rate of surplus value in the decades preceding the “Great Recession.” It would seem that on the eve of the Great Recession in 2006, a typical U.S. worker got less in use value terms for each hour of labor power she sold to the capitalists than her mother earned for similar work 34 years earlier. Furthermore, the productivity of human labor has hardly stood still over the last 34 years. This means that the commodities that a worker consumed in 2006 embodied a considerably smaller amount of human labor value than was the case in 1972.

This is true for two reasons. First, the worker in 2006 received less use value for every hour of labor power she sold to the capitalists. Second, each unit of use value she did receive in exchange for her sold labor power represented less embodied abstract human labor—value—than it did in 1972.

This would mean that there has been a marked growth in what Marx called relative surplus value when if the total work day remains unchanged workers will be working a smaller amount of time for themselves and a greater amount of time for the capitalists. This can be the case even if the standard of living of the workers actually increases, if the increased number or quantity of commodities the workers get to consume in exchange for their sold labor power represents a smaller quantity of value.

Kliman disagrees. He thinks that if anything the rate of surplus value, at least in the U.S., has fallen over the last 40 years. In attempting to prove this, he quotes economist Martin Feldstein as an authority. Feldstein wrote that it is a “measurement mistake” to “focus on wages rather than total compensation.” Feldstein complains that this has “led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity.” (p. 153)

Kliman doesn’t inform his readers that Martin Feldstein is an extremely reactionary economist who has dedicated his life to defending and prettifying U.S. capitalism, though he does mention that he was the head of the National Bureau for Economic Research.

Marxists, beginning with Marx, have often quoted bourgeois economists when these economists’ research exposes some of the truths about capitalism and its exploitation of the workers. When the hired apologists for capitalism are obliged to admit a portion of the truth about the exploitative nature of capitalism, it is especially telling. The more reactionary the particular apologetic economist is the better.

But for a Marxist to quote reactionary economists when they use statistical data in a way that actually strengthens their apologetic views of capitalism is rather unusual, to say the least. While we can’t prove that American capitalism has grown more exploitative simply because Feldstein claims it hasn’t, Kliman’s conclusion is strongly in line with Feldstein’s natural ideological bias.

The Federal Reserve System, Its History and Function, Part 1

This is a special post in two parts on the U.S. Federal Reserve System. It is in response to the rise of the Occupy Wall Street movement. Part 2 will be published on November 6, and the next regularly scheduled reply on the crisis of the dollar system will be published on November 20.

The last weeks in the United States have seen a sudden surge of anti-Wall Street demonstrations that have targeted the policy of the U.S. government of “bailing out banks and not people.” The occupation movement has since spread first across the United States and now the world.

The followers of Ron Paul, a right-wing Republican congressman and presidential primary candidate from Texas, have appeared at some of the occupations and raised the slogan “End the Fed.” Paul believes that not only “the Fed” but democracy in any form should be abolished. Paul’s followers blame the Federal Reserve System for virtually all the problems faced by the lower 99 percent—high unemployment, the high cost of living, mass indebtedness, “underwater” homes, and foreclosures.

But what actually is the Fed, or to use its formal name, the Federal Reserve System? Is it some kind of privately owned bank, or is it a government agency? What is the difference between the Federal Reserve Board and a Federal Reserve bank? Is the Fed really to blame for the problems of the lower 99 percent of the population? And if the answer is yes, why would such an evil institution have been established in the first place?

The Oil Reserve Sales and Stagflation

Reader Jon B asks, what in my opinion are the reasons behind the decision of the U.S. to sell some 30 million barrels of oil from the U.S. strategic petroleum reserve? Could it reflect the cutoff of Libyan oi production and plans for increased warfare by the U.S. government in the Middle East and Africa over the coming months?

The unexpected failure of the Libyan government to quickly collapse before the combined U.S.-NATO-rebel assault means that disruption of Libya’s oil production and exports is likely to last longer than the U.S. government planners expected back in March when the U.S.-NATO war against Libya began. U.S. military activity against Yemen also appears to be increasing. There is also a growing danger of a U.S.-NATO war against Syria. This danger will increase if Libya’s resistance finally crumbles before the overwhelming firepower of the U.S-NATO assault.

It seems likely now, however, that the motive for the sale of oil reserves is largely economic. By driving down the price of crude oil and gasoline, the U.S. and other capitalist governments are attempting to boost purchasing power and thus pump some life into the faltering economic recovery from the “Great Recession.”