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Do governments cause recessions?

The short answer is “NO”. However, how governments handle stagnation and recession makes a difference, for better or worse, for either employers or the working class, and for their survival. Stagnation and recession now prevail globally (China is probably an exception) and domestically in dynamic interaction with climate change and its dramatic heating of nature and its consequences.


Overall, slumps and recessions are not good for the working class: lower wages, reduced living standards, associated unemployment, fewer working hours, frozen social services at best, and so on. And they threaten the necessary momentum for a democratic and just green transition.


How and why each recession occurs and persists is a big deal against the huge effort to persuade the majority they must learn to tolerate the situation, and that they cannot do much about it. The essence of left unionism and left environmentalism is to challenge and defeat that message, starting within the immediate struggles of the day, including the Annual Wage Review and the social wage in the Commonwealth Budget.


Australia’s gross domestic product is a useful starting point.




In Australia, the doldrums were established well before the COVID pandemic.


The Labor government and a stagnant economy

An economy drifting in the doldrums is rich material for Dutton and his LNP to attack Labor as “poor economic managers” and thus win a return to government at the next election. The mainstream media allies of Dutton’s LNP will help everyone to forget or not even know that the economy has stagnated during LNP and Labor governments before COVID struck. When it did strike the LNP at first opposed and then adopted Keynes-style spending to rescue itself from mass dissatisfaction. The post COVID withdrawal from those hits was never going to be pretty. Again, Labor inherited recession conditions not of their making, even more so now that corporate globalization transmits the doldrums infection faster.


The Labor Treasurer, Jim Chalmers, is dead right to publicly discuss the role of the government in this stagnant economy and be concerned that stagnation has been and will persist unless something quite different happens.


Persistent stagnation, maybe worse, is the biggest threat to the Albanese Labor government and how it handles it will define life for Australians over the next twenty years.


The left is also in the muck.

This applies to everyone to the left of the ALP – red or green or a mixture of both.

Socialists have the best conceptual framework to provide the most coherent and complete explanation of why stagnation persists. Laborism and Keynes, the “new” MMT, and, of course, the Liberals do not.


However, the left lacks a credible presence and a coherent strategy or leadership that creates popular momentum for general learning about why stagnation is normal for 21st-century capitalism, nor for a programme of proposals that have democratic socialist characteristics.


Why do stagnation and recession happen, and how does that connect to global heating and general environmental degradation?

Slumps and recessions have recurred every several years or so. The markers were a slowdown and fall in GDP, erratic share markets, profit problems, weaker productive activity, rising unemployment, downward pressure on wages, bankruptcies and closures, reduced capacity, rising debt (public, personal and corporate) and falling investment.


Then, as now, the “why” of economic downturn, or worse, was pursued by only a few, and certainly not the mainstream.


Climate change and associated global heating is the decisive new element that adds to the breakdown of productive capacity.


As Prime Minister in the early 90’s, Paul Keating talked about “the recession we had to have”. He was right. He wanted the people to understand that his government’s neolaboralism could handle that recession better than the Howard alternative. Keating was dedicated, as he remains, to the protection of exploitation and so his “recession management” would have been better relatively for some and marginally for many. Nothing he intended would have stopped the next downturn.


Why downturns, stagnations and worse recur and persist is the essential question to work out the common thread in the modern polycrisis and what most effectively can be done to deal with it.


The socialist starting point is simple: slumps and recessions are periodic and for now continuous, intrinsic to capitalist societies. Nature’s recession is getting worse. Future production is no longer possible in some locations and will extend to more. Profit-taking is the common thread.


Profits, wages and investment

Profits and wages are the biggest components of GDP. We start with profits because profit-seeking is the primary rationale of all economic activity. We have seen strong growth since the last big economic crisis in 2009.



However, workers are always paid wages that are less than the value they have produced and distributed. Thus, we get the rate of exploitation in dollar terms in the ratio of profits taken to the wages paid. This graph tells the story.



Despite the fall in 2013-15, the rate of exploitation has climbed steadily throughout this century.


The next question is “What have the employers been doing with their profits?” Given immediate circumstances, how much have they been reinvesting in productive capacity? We know the answer.


 

This is a big deal when we know that global heating requires massive new investments in renewable systems that replace fossil fuel dependency. We know the private sector in Australia is just NOT capable of delivering what society and nature need. In effect, we see capital on strike.


What should be done instead? The answer is more public sector investment with public ownership and control, democratically managed by the workers and relevant communities in the recipient “enterprises” and regions. Public investment in productive activity is drawn originally from the taxation of both workers (PAYE) and employers (profits and other taxes). Taxation income from employers comes from the value of the production from workers’ efforts. That also justifies the social ownership condition on the public investment required.

Subsidies and tax breaks with weak conditionality reward private sector failure.  


Why is it so, that private sector investment is a failure?

Real profitability is the simple answer. New useful, productive investment chases profitability, measured as total profits relative to the sum of fixed assets, raw materials, semi-finished components, and wages.


In the real world, that indicator is what every employer and their CEO cares about more than anything.


Thus, we pay attention to the value of the fixed assets, or capital stock used to produce new useable value, relative to the value of the wages being paid. Even when the rate of investment is falling the capital stock still rises, just at a slower rate and, can become a threat to profitability. This requires and explains the increase in the rate of exploitation.



We now have the best information for working out “the productivity problem” which is a big deal at the Annual Wage Review, but more on that separately.


The profitability arithmetic in Australia is tricky because of how the ABS presents the relevant data. The following graph, using ABS data, shows a fall in profitability before the pandemic.



My attempt to work it out shows slow growth, a slump, and now a recovery, including during COVID.



If this is correct, we can say that in Australia, relative profitability is underpinned by the exploitation (in some sectors hyper-exploitation) of workers, not productive investment by those commanding the wealth to do so.


That’s why anti-solidarity, anti-strike and anti-organizing laws with the mainstream promotion of “trickle-down economics” is so necessary. For the time being, the “productive investment strike” can continue.


Thus, profitability continues during stagnation.


Profitability and the Rescue of Nature

Whenever any bit of nature is taken and not restored, we have its exploitation. But that is not normally added to the profitability equation. If the value of restoration is added, profitability falls, even when profits rise. That’s why capitalists are desperate to avoid their responsibility to restore what they have taken for profit-taking purposes.


There is nothing in the logic or behaviour of enough capitalists to suggest they will voluntarily restore nature. However, we do see some “green” capitalists take some necessary steps, claiming the system in general can deliver what is required.


The return of an LNP Dutton government will disrupt the progressive socialist potential to drive the slowing and reversal of climate change, not just a setback for the ALP and the Greens. Socialists must have an answer to the big questions, including immediate proposals that are necessary to kickstart the momentum needed by humanity and nature. The Greens also must build their explanation about why the economy is stagnant and what their alternative might be.


Again, to our question: do governments cause recessions?

“NO”,  but they can shape its timing, character and intensity, including through the Reserve Bank and the Fair Work Commission.

Governments can decide to let a recession roll on unimpeded. Or they can soften the impact, leaving the dynamic that created it alive and well for another slump in the future. That is where Chalmers and Labor are at.


Only a revitalized and unifying left can build credible momentum for the opposite dynamic, using public ownership to produce socially useful and nature-restoring priorities, and create new momentum for genuine progress that tackles inequality and restores nature. This third option must include dealing with the counteraction of globally connected employers – the withdrawal of their capital to another place in the world.


In practice, Australian governments pursue the employers’ priorities. They are the dominant class, and it is their system. The employers’ answer is always increased productivity, their code for “profitability”, underpinned by anti-democratic labour and civil law. Their theory is that increased productivity will “trickle down”, after profits rise, one day flowing to the majority.


Can war-making or “natural” disasters help?

The short answer is “yes”, depending on who or what is being helped. It does not help the standard of living of most people, nor the restoration of nature. The machinery and equipment of war-making (think AUKUS and with built-in AI) do not add to the productive capacity of society. Its purpose is the opposite - to destroy it, including the basics, water and food supply, housing, new renewable energy technology and so on. In war-making that includes new renewable energy technologies. Destruction helps profiteering.


 This will be developed further in a future post, including the impact of natural and “climate change” disasters.


Immediate Implications

We now know that employers are asking the Fair Work Commission for a minimum wage outcome in the current annual wage review that increases the rate of exploitation.


The Commonwealth budget is a big deal for profitability opportunities on the one hand and, on the other, inequality and the urgent requirement to slow and reverse climate change.


How should the organizations of the people respond to persistent stagnation and recession?


  1. Understand honestly how and why they occur, both specifically and in general.

  2. Run political economy education programmes from the point of view of working people and their families, and of nature. Do this together as soon as possible.

  3. Synthesize a common programme of the people that reverses inequality and the destruction of nature based on public ownership and control.

  4. Organize so that there is an effective popular counter-power to that of the most powerful corporations.

  5. Create an opposite momentum to production for profitability – production for social needs and the restoration of nature.

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What a thoughtful and rich post this was Don, you put a lot of thought and data digging into it. Congratulations and thank you.

Regarding your data on investment and capital stock, you might be interested in this report that the Centre for Future Work published a couple of years back: https://futurework.org.au/wp-content/uploads/sites/2/2022/11/Robots-are-Not-Coming-Formatted.pdf. Shows a slowdown in capital accumulation and falling capital intensity.

You graphed the net capital stock in current dollar terms in your blog; I think the point would be clearer if you used real (price-adjusted) values, or perhaps real per worker terms (so the overall trend isn’t distorted by inflation or population growth, both of which have surged lately).

Your ‘internal rate of return’ chart is also interesting:…

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