Under the Hood of Recovery— Rethinking the State of Contemporary Capitalism

Without addressing the increasingly unequal experiences of growth—or lack thereof—future economic crises risk creating ever more devastating consequences for democracy and people’s wellbeing.

Capitalism is fraying at its edges. It has been 10 years since one of its most devastating economic crises since the Great Depression. While aggregate numbers suggest that capitalist economies have bounced back within a few years after the Great Recession, many people have not experienced the reported recovery. Social discontent with the unequal rewards of the capitalist system is brewing, finding an outlet in populist right-wing movements promising to bring back “the good old days”. But can modern capitalism be repaired to restore prosperity to the wider population? Or are new policy solutions needed to avoid the gathering storm?

In this article, I scrutinize the state of capitalist economies at present and look under the hood of aggregate prosperity, arguing that it hides a grim picture of unsustainable inequality and a fragile economy. Without addressing the increasingly unequal experiences of growth—or lack thereof—future economic crises risk creating ever more devastating consequences for democracy and people’s wellbeing.

Within a few years, however, major capitalist economies restored their GDP growth back to their pre-crisis levels.

A perfect storm of changing economic relations

Let’s remind ourselves what led to the Great Recession 10 years ago. No single event had been responsible for bringing about the crisis. Rather, it was a perfect storm of changing economic relations and shifting approaches to policy, reaching as far back as the late 1960s. High-interest rates and inflation in the late 1960s and in the 1970s prompted non-financial companies (NFCs) to look for investment funding in financial markets instead of banks (Krippner 2005). Through issuing shares, the objectives of NFCs shifted from long-term investment towards short-term performance, boosting immediate financial profits to appease shareholders.

As NFCs turned away from banks, the latter found themselves in need of looking for new sources of revenue in the household sector. Facilitated by deregulation policies since the 1980s, loans to households—especially those financially vulnerable—became the basis of new financial products, which seemingly reduced systemic risk only to enable one of the most devastating collapses of that system in 2007. The unsustainable rise in household debt could not have happened, however, without a policy steering private markets to deliver prosperity, which increased pressures on wages and employment conditions, reinforced prior discrimination in credit markets and beyond, and raised the costs of living following labor market liberalization and privatization of public services.

Many households have not experienced recovery

While these processes were developing primarily in the USA, increasing globalization of production and financial operations generated an interrelated web among capitalist economies. This resulted in a well-documented domino effect as economic contagion spread to Europe and other advanced economies (OECD 2013). Within a few years, however, major capitalist economies restored their GDP growth back to their pre-crisis levels.

The USA, Germany, and France recovered by 2011 (Manibog and Foley 2017), the UK by 2013 (ONS 2018), and the euro area by 2015 (European Commission 2017). Alongside GDP growth, these countries witnessed a remarkable recovery of employment. After a spike in unemployment immediately after the Great Recession, by 2019 unemployment rates have fallen to their lowest levels in decades. The pick-up of GDP growth and the near-full or rising employment levels have been cherished by many governments as a statement of support for policy choices after the 2007 crisis: private bank bail-outs on an unprecedented scale, fiscal austerity and unconventional monetary policy measures.

What these aggregate figures conceal, however, is that many households have not experienced recovery from the Great Recession. While aggregate employment rates have risen, new forms of unstable, part-time, and precarious employment have become increasingly common (ILO 2016). GDP growth in the UK has been led by recovery in the services sector, as manufacturing value added and investment remain below their pre-crisis levels (ONS 2018a). Globally, the sluggish performance of the manufacturing sector, poor productivity, and faltering investment were associated with a downward revision of GDP growth projections in the coming years (OECD 2018).

The pick-up of GDP growth and the near-full or rising employment levels have been cherished by many governments as a statement of support for policy choices after the 2007 crisis.

In the euro area, the crisis is not over in periphery countries as GDP growth and employment levels are yet to bounce back in Greece, Portugal, Italy and Spain (Manibog and Foley 2017). Regulation of the financial sector did not go far enough and has not prevented the re-emergence of risky practices: subprime lending, which was instrumental in bringing down the global economy 10 years ago, is making a comeback in the auto-loans industry (Haughwout et al. 2016).

The Great Recession perpetuated the existing problems

These trends reveal a deeply unequal and fragile global capitalist economy. Contrasting the recovery of aggregate employment levels, real wages have stagnated or fallen since the Great Recession (Desilver 2018, ONS 2018b, AMECO). This signals a decline in income and wealth gains accrued by low-income households prior to the crisis, and increasing pressure on finances of the middle classes, which fuel rising social discontent with eco- nomic policy. This has been paralleled by higher inequalities of wages (ILO 2017), income (World Inequality Report 2018), and wealth (Szymborska 2019), which have surpassed their pre-crisis levels thanks, in part, to fiscal austerity and quantitative easing (Claeys et al. 2015, UNCTAD 2017).

Despite improvements in recent years, unemployment rates for people of color in the USA and in the UK remain double that of white households. At the same time, racial and gender pay gaps persist and their true scale is only slowly coming to light.

Moreover, despite improvements in recent years, unemployment rates for people of color in the USA and in the UK remain double that of white households (McGuinness 2018, Lockhart 2018). At the same time, racial and gender pay gaps persist and their true scale is only slowly coming to light (National Women’s Law Center 2017, McGuinness and Pyper 2018). Against the backdrop of these processes is the deeply worrying projection that the young generation is facing worse economic prospects than their parents and grandparents (Resolution Foundation 2018, Bialik and Fry 2019).

This state of modern capitalist economies suggests that many of the contradictions and injustices of the private market-based model of economic development adopted globally since the 1980s have persisted. To the disappointment of many experts, the Great Recession has not brought relief to this turbulent capitalist system, but has instead perpetuated the existing economic problems. This has led many economists to declare that the next economic downturn is in sight.

Globalization as the cause to the upcoming crisis?

The question has become not “if” but “when” and “where” that crisis occurs. Some, including the former British PM Gordon Brown, identify the source of the next crisis with the likely lack of coordinated response to potential economic downturns, owing to a global mood that is increasingly unfavorable to global cooperation. Election of right-wing populist governments in the USA and some European and emerging economies, and the triumph of Leave voters in the Brexit referendum are not the problem, but rather a catalyst of any potential economic hiccups.

But others, including Ann Pettifor and Steve Keen, see the deepening globalization of economic production and exchange as the cause, rather than the remedy, to the upcoming crisis. Despite the anti-globalization rhetoric, global governance has seen little change after the Great Recession. Currency problems in Turkey or Argentina due to interest rate hikes in advanced economies, coupled with rising private sector debt in China and the accumulation of non-performing loans in China and periphery euro area countries may consequently ignite a crisis which will quickly spread to other economies, affecting not only advanced but also developing countries. Together with the fact that many households are still feeling the pinch of the Great Recession and that the rules of the game in the capitalist system which contributed to the 2007 crisis have not been reformed, the next crisis is shaping up to be even more damaging than the previous one.

Effective policy needs to start now; responsible policymakers cannot afford to wait until the next crisis strikes to mitigate its consequences.

Responses need to go beyond limited interventions

Policy responses to the upcoming crisis need to go beyond limited interventions which rely on profit-oriented private markets to bring about competition and growth. Market incentives under modern capitalism do not align the profit objectives of individual investors with the social goals of sustainable and inclusive economic development. This is because there are institutional factors at play which enable certain economic agents to benefit at the expense of others.

Deregulation in the financial sector in one example of such an institutional structure, together with liberalization of labor markets, lax taxation infrastructure, and belief in the necessity of curtailing public spending to balance the books. These institutions need to be challenged and reimagined in the context where an estimated $200bn in tax revenue is lost around the world due to tax evasion and avoidance; where work is no longer a guarantee of economic wellbeing; where rising house prices make homeownership unaffordable to a growing number of people; and where increasingly stingy social welfare systems create second-class citizens who struggle to pay for healthcare, rent, heating, food or education.

Reform of taxation, predistribution policies and coordinated macroeconomic policy

Effective policy needs to start now; responsible policymakers cannot afford to wait until the next crisis strikes to mitigate its consequences. Three areas of policy action have the potential to achieve that task—national and global reform of taxation infrastructure; predistribution policies; and coordinated macroeconomic policy. The way in which taxes are collected are a reflection of the social priorities of the economy. Currently, taxation systems in countries like the USA and the UK are inherently regressive because they place a greater tax burden on low-to-middle income households by increasing consumption taxes and allowing a large part the income and wealth of the rich to go untaxed (Szymborska forthcoming).

Secondly, fair taxation is vital to supporting low-income households through redistribution in a more generous and well-targeted welfare system. But given tax avoidance and evasion, policymakers should not rely on redistribution alone. Predistribution measures are important to that end as they go beyond ex-post policy action towards a more active effort to affect the distribution of market income, thereby making reductions in inequality more sustainable (Ostry et al. 2019). To achieve this goal, it is necessary to support workers and investment in quality public services such as healthcare, education and infrastructure. Supporting workers should also be a long-run objective, as privatization of pension schemes has threatened the stability of workers’ future income streams.

Last but not least, coordinated fiscal and monetary policy should act in unison to promote wage growth through encouraging productive invest- ment, and stabilize the financial sector to reduce the costs of risky financial investment practices. The Great Recession has shown that an unfettered financial sector poses a threat to economic stability and fairness due to its incentives to exploit economic structures in the name of short-term prof- itability.

The consequences of the next crisis can be alleviated

Given the mobility of capital, especially financial investment, it is essential for countries to cooperate on financial sector regulation and taxation in order to avoid regulatory arbitrage by financial institutions and prevent a race to the bottom in terms of tax rates and wages. In this sense, better regulation of the financial sector is instrumental to reigning in inequality and promoting democracy by breaking the principle of “one dollar, one vote” enabled by lobbying from wealthy interest groups in finance and big business.

The next crisis cannot be avoided. Its consequences for people’s economic wellbeing can, however, be alleviated. National governments and international bodies must take responsibility for facilitating the rise in inequality and uneven experiences of recovery. The successful policy should focus on not merely managing the aftermath of the looming downturn, but on transforming or replacing the inherently unequal processes which lie at the core of modern capitalist economies. Nevertheless, policymakers are operating within the environmental constraints and must respect the limits to carbon emissions committed to at the 2018 Katowice summit. For this reason, it is high time policymakers radically rethink what constitutes economic success, and go beyond aggregate measures of growth to nurture sustainable and inclusive societies.