University Community for Democracy (UCD)
The following is a rejoinder drafted by University Community for Democracy to the pamphlet circulated by Krantikari Yuva Sangathan titled “What is Ailing University Democrats”. We will first present what we see as certain basic misconceptions and flawed assumptions at work in way KYS has understood UCD, and then proceed to factually refute a number of statements made in their pamphlet.
UCD is a platform primarily consisting of students and some teachers of Delhi University. It was formed when many of us who were deeply offended by the way the University authorities had decided to evict students from their legitimate right to hostel accommodation decided to come together and protest against this eviction. In the course of our discussions, we concluded that the callous behaviour of the University administration in this instance had to be linked to a larger pattern of increasingly irresponsible and authoritarian governance in Delhi University. Hence, we decided to call ourselves University Community for Democracy. For us, democracy is a mode of governance and organisation which is transparent, open and inclusive. At the same time, while each organisation and individual harbours its own ideological worldview, the fact of coming together on this platform has not been to absolve those differences but to come together with a basic common understanding of the problem at hand. It is, therefore, a coming together of those from the Left and not elsewhere. While demanding our democratic space from University authorities we have also tried to realise what democracy can be for us in our own workings as a platform. All our meetings are held in the open (most of them have been held in the lawns of Delhi School of Economics), all decisions are taken in these open meetings, which are duly recorded in minutes put up on freely accessible internet forums. We do not claim to be saviour of anyone in the University, the downtrodden, the working classes or the poor. We have no claim to be any revolution’s vanguard, or harbingers of a future ideal society. However, each of us is actively engaging with how we want to visualise an ideal society. Ideologically some of us are committed Marxists, some are liberals, while most of us are still exploring our paths in the world of ideas and commitments. Some of us are members of other organisations. All we demand is that these not be reactionary, communal, sexist or casteist.
The KYS pamphlet demonstrates their failure to understand this basic character of the UCD. The central paradox in their formulation is that they see the UCD as an organisation. It isn’t. UCD was always conceived as a network of those who shared a basic understanding of a common problem afflicting both the University in particular and in the city in general. So when the weaknesses of UCD are pointed out, it seem to assume that UCD is an organisation with a defined manifesto in rivalry with (and thereby judged retrograde in comparison to) another organisation like KYS, whereas UCD was loosely assembled as a forum precisely for individuals and organisations like KYS and NSI to ally their valuable experience with mobilisation and work together. The very fact that KYS has criticised UCD for its politics vis-à-vis KYS demonstrates that they saw themselves separate from it, and thereby missed the spirit behind which the network was formed. Indeed, one could go on to argue that the very distinction drawn between UCD and KYS as distinct organisations confirms the strange sense of competitiveness one sensed throughout from KYS members when they consistently spoke (and Sujit reinforces this sense in his reply to Bala) of some issues, such as rent regulation, as rightfully their forte, given that they raised it months before UCD was born. The fact is that UCD was never in competition in KYS, for the efforts of KYS members was considered part of what UCD was meant to be. That is why one was rather bewildered when one found KYS drafting pamphlets on concerns that overlapped with those of the UCD without once informing or involving fellow members in the UCD. Indeed, upon being confronted on this issue, KYS members spoke of their struggle as a “separate” one that needed no prior permission from the UCD. This position seemed to miss the point entirely (no one was demanding that KYS ask for ‘permission’ anyway), for it assumed that the two groups were rivals competing for the same political claims rather than colleagues fighting in the same battle. This attitude, destructive to cooperative participation and petty, to say the least, also finds its way into Sujit’s so-called ‘critique’.
It is also for this reason that one wonders at the naïveté of those who claim that attacking the behaviour of KYS members is a ‘personal attack’, as if the ‘personal’ is somehow a pristine space cleansed of politics and ideology. Indeed, the questions being raised about KYS members’ personal maturity is an intensely political question, especially given that (and this will be understood by those who regularly attended the meetings and did the work) the same KYS members rarely leant themselves to the actual labour of UCD activity (drafting and printing posters and pamphlets, campaigning in colleges, etc). Surely one’s own physical contribution is as much a measure of one’s politics as ideological contestations about the working class. In that sense, it is not simply “fashionable activism” to ask the question of who did what, for some have consistently worked harder than others to make the UCD campaign successful, and those ‘some’ have a right to be ‘resentful’ when others who never fully contributed to that process later claim that the process was undemocratic and politically flawed. The question needs to be asked: as UCD members, what did the KYS members do to improve the process? Having had all the problems they had, at what point did they make the space their own to do something about it? Merely making suggestions at meetings for others to implement is not enough.
Speaking of making suggestions, the KYS pamphlet claims that the valuable ones made by KYS members were “swept under the carpet as mere issues of modus operandi or as divisive tactics”. Besides being factually untrue, as the minutes of the meetings show, it is rather reductive to claim that an imperative to focus on a meeting’s agenda is tantamount to undemocratic repression of criticism. Any member of any organisation knows that meetings have to be conducted with a certain discipline, and cannot simply become occasions for everyone to mouth their opinions on any matter generally concerning the organisation (we hope KYS meetings function with this discipline as well). Those larger questions are of course very important, and it was even felt that a separate meeting should be called specifically in order to discuss the ideological differences that had been raised in previous meetings. Alok, a KYS representative and member of the UCD, was categorically asked to take the initiative to decide a time for the meeting. But taking initiative is precisely what KYS members haven’t been doing in the UCD campaign, so it isn’t surprising that such a meeting was never held.
The KYS pamphlet confirms our argument when it states that “in the very beginning in UCD meetings there have been activists and organisations that have questioned the constituting logic of the forum” (emphasis added). So basically the KYS saw itself as an advisory committee whose only role would be to teach us how to conduct ourselves, to point out faults in our “constituting logic” before it had even been built! This brings us back to our earlier point: UCD wasn’t allowed to grow because KYS seemed determined to see themselves as critical outsiders rather than as participative insiders. They were quick to criticise at every step of the way, without contributing offering concrete suggestions or constructive proposals on what alternative to follow. Many members found this behaviour by KYS members disruptive, and their objections have been noted in the minutes of more than one meeting. In this regard, refer to the minutes of the following meeting:
Minutes of UCD meeting on 22nd July 2010 – pertaining to an incident on 21st July
http://www.facebook.com/home.php?#!/topic.php?uid=135067129852679&topic=211
“The meeting today began with a discussion on the issue of an incident at Hans Raj College where the KYS and CSW (who are members of the UCD) were distributing their organisational parchas and running a parallel campaign on similar issue at a time when they had committed to UCD work – they were to be at Daulat Ram college as part of the UCD college campaign. The discussion was hoping to arrive at a sense of how we will work together as a collective and proceed with our campaign in a democratic manner, without fragmenting into competing campaigns, since most people felt that the UCD is a collective for moving ahead with the issues offset by the Commonwealth Games in the city, and now, the more specific issue of hostel evictions in the university”.
“Also, while everybody agreed that there was absolutely no issue with the fact of individuals and groups will be part of separate agendas and campaigns, we did think it necessary that we must not allow this to become disruptive to our campaign’s efforts. That was raised in the context of how the KYS and CSW apart from absenting from the slotted work at the slotted time for UCD activities were conducting their own campaign on rent regulation (an issue that had come up in the previous meeting to be brought out in the next UCD parcha) and demand for more hostels, and even while they distributed their pamphlets they did not distribute the UCD pamphlets. Some members of the UCD who went to Hanraj yesterday when they came to know about it, brought up the incident in the meeting as an issue of honesty and trust of the collective which consists of individuals, groups as well as organisations. KYS did apologise for the comments by a member of their team. The latter was quoted saying that their campaign and pamphlet were better than that of UCD”.
“While members of the KYS and CSW said that their being at Hans Raj was a result of confusion, there was disagreement about this since it was seen as a breach of trust, going against the spirit of this campaign and collective. While some members assumed KYS and CSW had stepped out of the campaign already, KYS and CSW denied such a claim”.
“Finally, to end the matter a resolution was passed in the house stating that there was a case of misconduct by KYS and CSW relating to the incidents of the previous day. (Out of 24 people, 14 voted in favour of the resolution, 4 voted against, 6 abstained from voting)”.
In this regard, one could even call the KYS duplicitous, because they wore down the UCD at a time when, unlike KYS, it was still a very new campaign at an early stage of its formation. Thus, while their 5,297 words of vitriolic diatribe might sound radical to those dissociated with the workings of the campaign, we maintain that to decry a process one never contributed to help or improve is possibly the most flawed form of politics. When theory cannot give direction to praxis it is rendered meaningless.
And now we have this long litany of accusations against us, trying to prove how we are not an organisation that can lead students of oppressed classes for a joint struggle with the working class to destroy class and emancipate the world. Both the KYS pamphlet and Sujit’s reply to Bala is littered with rather self-conscious references to “petty-Bourgeois” backgrounds as somehow endangering one’s commitment to politics. Perhaps KYS has to ask itself whether experiential politics can be stretched to such an idealtypical situation that anyone who is not dalit/poor/muslim/woman/gay/tribal cannot speak, as if access to capital necessarily yields a flawed political subjectivity. Of course it is important to remember one’s class position, but there is also something to be said for those still trying to become politicised despite their privileged subject positions. Mocking these attempts the way the KYS pamphlet does is precisely what discourages fellow “petty-Bourgeois” folk from making even that small effort, and makes politics into a club rather than a movement. That is the brand of politics KYS espouses, and it is not one we endorse. Thus, when KYS accuses us of not being this or that, the irony of the matter is that we have never claimed to be what KYS accuses us of not being! Unlike the KYS, we do not use Left rhetoric merely as a means to vilify, nor are we impressed by KYS’ attempts to claim the moral high-ground by claiming to work for the oppressed and exploited of this country (itself a suspect claim). For most of us in the UCD, our work has been a discovery of the politics of democracy and protest. We are not here to wear medals for being the most radical. If we were, then KYS has already declared itself the winner, and we happily concede them the title.
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The following section consists of a point-wise rejoinder to the slanderous allegations the KYS has levelled against the UCD. Sections of the KYS pamphlet have been reproduced in bold and our responses follow in standard lettering. We have not commented on all the factual inaccuracies, for there are far too many and unlike KYS, we have work to do for our campaign. What we have highlighted are only the sections that disturb us the most. We have also consciously chosen not to respond to the large passages in the KYS pamphlet that pontificate about the nature of the working class. There are countless critiques and counter-critiques of their position within Marxist theory, and doing so here will digress from our major points of contention. Nevertheless we thank them for their effort to educate all of us.
1. Regarding teachers and internal assessment
These teachers, acting as pied-pipers and humming the threatening tune of internal assessment, drew their hapless students to the venue by taking their classes there. Students (the majority of whom were oblivious to the issues raised), were obviously not taken into confidence when they were made to come to the “hunger strike” site.
This is a straight lie. No students were ever threatened with internal assessment. Moreover, we are offended by the cavalier recklessness with which KYS questions the credibility of teachers who have been crucial for stimulating progressive debate in the University for decades, and who have stood by the student community in countless cases of injustice against students.
2. Regarding rent regulation
Let us take the example of rent regulation raised during the “hunger strike”. Firstly, UCD began its campaign with absolutely no concrete demand of rent regulation. The forum was forced to pick up the issue of rent regulation in addition to the issue of hostel eviction because it was constantly accosted by the majority of students who had never even lived in college hostels, and had for a long time been faced with the problem of escalating rents. There was also urgency in making rent regulation an active demand of the UCD campaign because some other organisations had already launched a full-fledged campaign on rent regulation in the city. Hence, it was more in a competitive spirit than with any serious commitment and understanding on the issue that rent regulation became part of UCD’s charter of demands.
Please check our very first parcha, released on . It reads: “It (University) has thus become an accomplice in the larger processes of reckless corporatisation that the whole city is undergoing in the bid of become a ‘global city’. This has left students at the mercy of private accommodation, with its unregulated rents and precarious guarantees. Rents are rising in anticipation of the increased demand for PGs and flats, forcing many existing residents to move out and making accommodation unaffordable for incoming residents as well. The University had made no attempt to devise a mechanism to control or subsidise rents”.
Please also refer to the minutes of the following meetings:
Minutes of UCD meeting on 3rd July 2010
http://www.facebook.com/home.php?#!/topic.php?uid=135067129852679&topic=193
“There were concerns shared about whether we would like to gradually broaden this to wider struggles in the city. It was accepted that we would be broadening our ideas gradually and linking it to wider struggles. This is why we have tried to form a larger forum and this is a campaign within it at the moment” (the ‘this’ we are talking about is the campaign concerning hostel evictions).
Minutes of UCD meeting on 20th July 2010
http://www.facebook.com/home.php?#!/topic.php?uid=135067129852679&topic=207
“There was a brief discussion about what our approach should be gradually, if we should focus on hostel evictions or also give more prominence to the issue of unregulated rents and problems in the neighbourhood since many students live in private accommodation”.
The very fact that KYS makes this claim despite all this history is itself evidence of the competitiveness prevalent behind the KYS’ anxiety to declare their campaign on rent regulation as the only legitimate one, and to declare all others as motivated “more in a competitive spirit than with any serious commitment”.
3. Regarding the decision to approach University authorities
This is precisely why UCD’s “hunger strike” targeted the audience in Arts Faculty (a transit point for the student/ teaching community), and not any tangible authority (which in this case should really have been the Government of Delhi). And this is why the best that UCD can do on the issue of rent is to demand rent regulation from the Dean of Colleges! Quite rightly, their delegation was informed by the Dean of her incapability to regulate rents since this was way beyond the University authorities’ jurisdiction and responsibility. We return to the fundamental question: why does the University remain the centre of UCD’s resistance when authorities beyond the Vice Chancellor are to blame, and when there are many people apart from students/teachers who are adversely affected by unregulated rents?
We approached the University authorities – the Vice Chancellor – because he is responsible for ensuring a safe, affordable accommodation for the students of Delhi University. In the past (2006) there have been attempts to enlist all those PGs and private accommodation places with the University in order to centrally keep a check on rents. Similarly, on the issue of workers, being the principal employer the University is again directly responsible for seeing to it that workers are paid minimum wages and have proper housing and access to basic facilities.
4. Regarding visit to Bhalaswa
UCD now seeks to locate the working class and its struggle in a far off resettlement colony called Bhalaswa. Unfortunately, judging by recent email correspondences between UCD and students of the Women’s Development Cell (WDC) in Miranda House, the trips to Bhalaswa are being envisaged by the students more as extra-curricular activities. This indicates that UCD’s form of politics is really incapable of building a long-standing and formidable unity between the student community and working class.
It was decided in the very beginning of the campaign that UCD would establish connections with others in the city affected by the Games. It was felt that since students were not the only ones held hostage by the Games, it was necessary to forge ties of solidarity with other organisations working on overlapping concerns, while recognising that our constituency remained the University. In the case of Bhalaswa, we were extended an invitation by people working with Bhalaswa Lok Shakti Manch to come and visit their resettlement colony. The trip was not an official UCD objective, and the students who went did so in the capacity of individuals wishing to extend their support to the Bhalaswa movement.
Please refer to the minutes of the following meeting:
Minutes of UCD meeting on 5th August 2010
http://www.facebook.com/home.php?#!/topic.php?uid=135067129852679&topic=219
“Kaveri forwarded a message which came from the group from Bhulaswa who came for the protest meeting saying that people interested in visiting the Bhulaswa resettlement site could do so on Tuesday. Please leave your number so that this can be arranged”.
In any case, even if the trip had been an official UCD activity, it would still not justify the KYS’ mocking epithet “extra-curricular”. Most of us may never know what it is like to be a construction worker or a displaced adivasi, but visiting places like Bhalaswa is valuable in and of itself as the smallest of attempts to understand the plight of others, even if it can’t bring about the revolution of the working class that KYS is obviously so successful in doing.
5. Regarding workers’ protest
The same day that UCD began its “relay hunger strike”, workers down the road were protesting against their severe exploitation under various CWG construction projects. UCD failed to respond and join the struggle. The message, therefore, sent out was clear enough—we will participate only when we are in charge and not workers, and we will raise workers’ issues only as an addition to our never-ending list of “democratic” demands. Considering this, are not the issues of workers’ rights being raised in tokenism, i.e. only when it suits them?
Do not brush aside the practical aspects of the campaign. We are not a trade union. We are too small a force to claim to organise workers at the construction sites all over the University. If we were 250 people, we might have been able to attempt to organise workers, but when those actually willing to labour for the campaign number 20 or less at any given time, we cannot (it would have helped if KYS had added to our numbers of working campaigners). But as a university community we have stood against construction work in the University that violates legally sanctioned labour standards, and have integrated it into our demands. Also, the decision to sit on a relay hunger strike was taken well over a week before it began and posters had been put up. Meanwhile, the KYS/CSW workers protest was decided and its posters put up a day before. And then too, in at least three different venues we found that KYS/CSW had pasted their posters corner to corner over UCD ones. If this is not malicious what is?).
6. Regarding Gandhi Ashram
The first pamphlet printed by the UCD spoke of the need to build communes in places off campus. In fact, a team met with the management of a Gandhian trust (funded by Ministry of Social Justice) which ran a hostel near Kingsway Camp, called Gandhi Ashram. The place soon began to be promoted via e-mails etc. almost like any other private accommodation; the purpose being to provide a space for those still desperately looking for affordable accommodations and also to provide a space for regrouping when things got rough during the campaign. Ironically, the Gandhi Ashram hostel is meant for poor Dalit school students who were obviously going to be displaced if college students moved into the dormitories. No one seemed to reckon with this inevitability while the plan was still being hatched.
What we also found disturbing about the Gandhi Ashram plan was the desire of creating an isolated “democratic” space. The message being sent out was nothing but we can create our own isolated commune-like space in this big bad world. This approach stems from the sectarian University-centric politics of the UCD highlighted above, and also from a non-revolutionary conceptualisation of commune life. For many participants in UCD, the commune with its base in Gandhi Ashram was an apparent ‘pre-figuration’ of a new society, whereas it was far from that. Commune was being envisaged as a centre of ‘counter-culture’—an oasis in capitalist wilderness. Interestingly, this is a very familiar trope—it is based, both at once, on a vision of a transformed society without real hope for a process of transformation. This is because it is based on the vision that the lives of a minority can magically change without transforming the whole. This is, after all, how (phantom) revolution itself, is envisaged according to the pipe-dreams (joint-dreams?) of petty bourgeois students/intellectuals who enjoy the comforts/security of generous remittances from home—‘let us, at least, as a small privileged community enjoy revolution making’.
Of course, as pointed out by us in the meetings, it was nothing but ridiculous that UCD spoke of building a commune in a place which was actually going to be charging the students Rs. 1500 per bed and where 6 to 8 women students would have to live per room. How can a commune work within a market structure, and how can a place which gives you no control on the rules and regulations to be implemented, become a progressive, commune-like accommodation?! Despite these criticisms, UCD went ahead and would have signed a MoU with the Gandhi Ashram management, if it wasn’t for the sheer lack of students interested in the place. In fact, just so as to get students to join the bandwagon, emails were sent out exaggerating the facilities available at Gandhi Ashram. In the interest of pulling a crowd, the green lawns of the Ashram were highlighted. Meanwhile, it was downplayed that no fooding would be available at the place and that this was going to be a
dormitory system.
The lies continue. Firstly, Gandhi Ashram was visualised as a means to tackle the practical problem of students who couldn’t find safe and affordable accommodation (particularly girls, who also face the problem of safety). We never claimed it to be an isolated island of counter-culture, but yes, a space where those resorting to that accommodation could critically engage with the problem at hand, and therefore with ideas like a community kitchen. No Dalit students were going to be displaced, because the rooms being given to us were at that time unused. A member of KYS was even present as part of the team that went to Gandhi Ashram to figure out the modalities of making this arrangement. No facilities were ever “advertised”, and all that was publicly declared was the availability of Gandhi Ashram as an option (though of course, if KYS sees any form of publicisation, whether press releases to the media or circulation through emails, as part of a larger Bourgeois capitalist conspiracy, we advise them to kindly sharpen their political understanding; sophomoric regurgitations of Das Kapital isn’t going to cut it). Not once was it thought of as a final solution, but only as a temporary arrangement for students who had not found or could not afford accommodation elsewhere.. Regarding food arrangements, we were in discussion with the Ashram authorities about the possibility of expanding kitchen facilities. And as for the charge of Rs.1500 per month, that price is about one-fourth the cost of accommodation in the outlying regions of North Campus. At any rate, not once did KYS members suggest an alternative to Gandhi Ashram as a possible venue to rehabilitate students who could not afford anything else, which is ironic given their constant chest-thumping about being champions of the poor. Instead of appreciating the attempt made to lend some respite to students while carrying on the work of politicisation through the campaign, all the KYS members seem capable of doing is ill-intentioned criticism and hysterical slander.
***
We hope this rejoinder will put to rest the false allegations made by KYS against UCD. We do not have any faith in KYS’ capacity to introspect about the falsity of their claims. We only hope that the wider audience privy to this debate will learn to take KYS statements with a pinch of salt. Our experience with the KYS has been one big negative lesson, and we are glad that our work now proceeds far more productively and democratically. Anybody wishing to know more about the UCD, to really see how it functions for themselves, is always welcome to visit us on our face-book page, to join our googlegroups mailing list, or to attend our meetings. We are always open.
Radical Notes 
Is ‘It’ Over? A Look at the Current Economic Crisis
Rohit
Hyman Minsky, an American Economist, had written a book titled ‘Can It Happen Again’ with ‘it’ standing for the Great Depression of the 1930s, the biggest and the longest economic crisis in the history of capitalism. The answer to this question today seems to be in the affirmative if one takes a deeper look at the events that have unfolded in the financial markets in the United States and the other advanced countries over more than two years. The extent of this crisis, in particular in the US, has led the economic pundits to describe the present financial crisis as something similar to what happened during the 1930s. Despite all the signs of recovery, we believe it is too early and erroneous to assume that the crisis is over and that the government should withdraw the stimulus package.
Theoretical Overview
To place the issues in perspective, it is important to reflect upon the economic ideas that developed regarding growth and crisis under capitalism since the 1930s. In the aftermath of the Great Depression, John Maynard Keynes, a British economist and Michal Kalecki, a Polish economist, had written extensively on its causes as well as its remedies. Though their political orientation was very different (Kalecki was a Marxist while Keynes was not), both argued that it was the absence of direct intervention of the government in the working of the economy and financial markets that led to the Great Depression. The remedy that Keynes suggested was a categorical rebuttal of the principles of Laissez faire since he asked not only for a regulation of the financial markets but for a direct government intervention to boost the demand in the economy through positive fiscal stimulus. The fiscal management (1) on the lines of the Keynes-Kalecki produced the Golden Age of capitalism in the 1950s and the 1960s in the advanced capitalist countries which saw the longest period of booms in these countries and distribution of income moving partially in favour of the working class.
In the early 1970s, this model broke down and there was a resurrection of the old ideology of free market and finance. It is interesting to note the complete reversal in economic ideas as well as policies despite having learnt the lesson the hard way in the 1930s. It seems almost as if the Keynes-Kalecki were erased from history. But the real answer to this reversal comes out quite clearly in Kalecki’s writings. Kalecki, unlike Keynes, looked at capitalism as fundamentally an antagonistic system. Kalecki (1943) argued that even though it is theoreticallypossible to attain high levels of employment and growth through government spending, it cannot go on in the long run. He argued that a prolonged period of low unemployment increases the bargaining power of the workers due to the declining reserve army of labour. Why this would lead to problems in maintaining such a growth process is for the following reason,
So, the reserve army of labour is a necessity under capitalism to maintain the correlation of class forces in favour of the capitalists and rentiers. Accordingly, one could argue that the so-called golden age of capitalism was more of an aberration than a rule under capitalism. Seen in light of this argument, the present crisis, its severity notwithstanding, is actually not an exception but a rule under capitalism. We would like to argue, therefore, that this crisis should not be seen only in the light of the failure of the financial system for it could actually be just a signal of deeper malaise in the real economy. This distinction between real and financial crisis is very important because a sizeable majority in the academia and policy circles are arguing that if only the financial markets could be controlled, such crises would not take place. In other words, capitalism otherwise is a stable system provided the financial markets are regulated. Our argument is that crises of this nature can and do take place under capitalism independent of whether the latter were regulated or not. Unregulated financial markets add to the severity of the crisis.
Let us concentrate on the sources of malaise in the real economy. Unfettered development of capitalism leads to greater monopolisation by big business. Greater monopolisation of the market ensures a downward rigidity in prices and, therefore, a guaranteed profit margin. On the other hand, there are continuous efforts to improve labour productivity so as to keep the wage costs low. Downward rigidity in prices and continuous increase in labour productivity results in a tendency towards increasing profit share in the total output. While this strategy sounds good for an individual capitalist, it has seeds of its own destruction inbuilt into it.
A higher profit share for the economy as a whole leads to a decline in the domestic market. This is so because workers consume a higher proportion of their income than the capitalists and any shift of total income away from workers would ipso facto lead to a decline in overall consumption demand in the economy (2). Since private investment is the main source of growth under capitalism, such a signal of declining consumption in the market exerts a downward pressure on the rate of growth. This is the typical realisation crisis in Marxian terminology. This is an imminent tendency under capitalism because there is no spontaneous mechanism of coordination of investment decisions of the capitalists to avert such a crisis. The reasons for why the system is not underperpetual crisis but faces it only intermittently have to be found elsewhere but this tendency exists all the time. The factors which counter this tendency could be state intervention, export-led growth, capitalists’ consumption led growth. Each of these factors has different consequences on the trajectory of the growth process, some of which we would focus on later in this article.
Just as the pre-Golden Age, the current period is also not fundamentally different. Inequalities in income and wealth have been rising dramatically since the late 1970s across the world, except for the possible exception of France and Japan, creating conditions for realisation crisis. The genesis of the present crisis lies precisely in the factors which had kept the growth going even when such a tendency existed. Therefore, to understand the present crisis, we need to analyse the economic booms that the US has witnessed in the present decade and the previous one.
Growing Inequality
There has been a dramatic increase in inequality in the US since the early 1980s. What the US is witnessing today in terms of inequality has only one parallel in its history i.e., the period during the Great Depression (see fig 1). The inequality is such that the top 10 % of the population earns close to 40% of the total income. The inequality has increased in the US since the early 1980s primarily because of two reasons. On the one hand, the income of the poor has got squeezed due to a decline in the legal minimum wages, unionisation rates and increased globalisation, all of which have decreased their bargaining strength. On the other hand, the payrolls of the top executives, especially CEOs, has increased manifold in the absence of either the wage controls of the World War II or the social norms of the Golden Age period which restricted the growth of high-end wages.
The increase in equality is not restricted to income alone but there is a growth in wealth inequality too as shown in Table 1. While the top 1% of the population owned 33.8% of the total wealth of the economy, the bottom 40% of the population owned less than 1% of the total wealth in 1983. The wealth inequality increased by 1995 to such an extent that the top 1% owned close to 40% of the wealth while the bottom 40% owned a mere 0.2%.
A major part of the increase in the wealth of the rich during this period has been through the increase in the stock market prices of the financial assets that they own. Since the ownership of stock market assets itself is extremely skewed in favour of the rich, an increase in the prices of the shares has an asymmetric effect in favour of the wealth of the rich.
The Boom of the 1990s
From the point of view of classical political economy, such a growth in inequality should have led to stagnation in the economy instead of a boom as witnessed both in the late 90s and the present decade (prior to the current crisis). If that is the case, then why did the growth of inequality lead to an increase in the growth rate in the US in the late 90s and 2000s?
As mentioned above, at least theoretically, there could be three ways which can help avert this tendency towards stagnation into becoming a reality. First, the government could prop up the domestic demand through fiscal management. But this route was practically unavailable given the right-wing dominance in the policy circles which wanted to restrict the role of the government in the real economy (3).
Second, the stress of growth could divert in favour of export-oriented strategy. Again to do that, one needs to be internationally competitive both in terms of technology as well as wage costs, neither of which was in favour of the US. The US had been left far behind in terms of technology by its European counterparts, especially Germany and Japan in Asia.
Third, consumption of the rich could more than compensate for the declining share of workers’ consumption through injection of consumption demand independent of the current stream of income, say through the wealth effect coming from the asset price markets. Furthermore, new methods of enticing even the workers to consume through credit financing could also act as a counter to this tendency. It is the third route which the US has adopted in the last two booms which we focus upon in the rest of the paper.
The way this third route worked is the following. Stock or housing market booms led to a growth in the ‘notional’ wealth of the rich which had a positive effect on the consumption of the rich, a phenomenon called the ‘wealth effect’. Increase in consumption due to wealth effect was an external injection of demand into the economy independent of the redistribution of income between the rich and the poor. Though the exact effect of an increase in wealth on consumption in the US has been estimated to be not more than 3 cents per dollar, i.e., out of every dollar increase in wealth only 3 cents are spent on consumption, the sheer magnitude of the wealth increase due to the stock market boom of the late 1990s was such that it had a huge impact on the overall consumption. The argument can be better understood if we look at the exact increase in the wealth of households which increased by 50 percent within a span of five years between 1995 and 2000. The increase in consumption as a proportion of GDP was close to 1.5 percent during these years. Therefore, this increase in wealth alone explains the increase in consumption of the household during this period.
A more interesting question, however, is not why the consumption increased but how was this consumptionfinanced? To understand that, we need to explain how the increase in the wealth was ‘notional’? It was purely ‘notional’ to the extent that its value had increased due to higher valuation in the stock market so that the increased wealth could not be realised from the stock market by all the stock holders at the same time. Any attempt to ‘realise’ the increased value of the wealth in the stock market by selling the stocks at their higher prices by all the investors at the same time would have meant a collapse in the stock market itself. Thus, the increase in wealth was merely notional. That being the case, any increase in expenditure on consumption based on this increase in wealth had to be financed by taking more debt based on the increased collateral in the form of enhanced value of wealth. It is here that the debt spiral began in the US. Therefore, the debt spiral became a necessity for the economy to compensate for the imbalances in the real economy.
During the 1990s, the household debt stood at 95.6 percent of the total disposable income of that sector (see table 2). In other words, the household debt was almost equivalent to the total income of the sector as a whole in the 1990s. Such high levels of debt-income ratio were ominous signs for the US but the Federal Reserve did not pay heed to the dangerous growth in the debt-income ratios, instead they were busy propagating the argument that the US economy had entered a new phase of ‘new economy’ where business cycles were a thing of past.
Such sleight of hand by the mainstream economics, however, had to face the reality when the economy witnessed the Dotcom bubble go burst in 2001. The business cycle was back as indeed it is a part of the working of any normal capitalist economy, contrary to the claims of the new economy enthusiasts. A decline in the stock market meant a decline in the wealth of the households too and the increased wealth effect was bound to reverse but the debt taken against the increased wealth earlier remained nonetheless.
The Mortgage Boom of the 2000s and the seeds of destruction
In the event of the stock market meltdown in 2000, the financial speculators moved away from the stock market to some other avenues where they could make a quick buck and the best opportunity they found was in the housing market. Such a huge diversion of funds from the Dotcom bubble to the housing market had a positive effect on the housing prices just as it had on the stock prices of the IT sector during the late 90s.
An increase in the housing prices made housing into a profitable venture for the household sector because in common perception it was thought to be a safer asset that the stocks, little was it known that it was merely a shifting of one bubble to another. As happens in the stock market, the increase in buyers of houses led to a further increase in prices of housing much beyond its cost of manufacture.
The policy of the government in the post-2001 phase was multi–pronged to provide a boost to the household demand (either in consumer durables or expenditure on housing) which had been responsible for the growth in the 1990s. First, there was a major tax cut by George W. Bush announced on June 7, 2001. Bush, in his remarks in Tax Cut Bill Signing Ceremony, argued that the magnitude of the tax cut that his administration was announcing can only be comparable to the Reagan Tax cut of the 80s or the Kennedy Tax cut of the 60s. This tax cut had a definite impact on increasing the consumption of the rich because they were the biggest beneficiary of the Bush Tax Cut. That is why despite the meltdown in the stock market which had driven the consumption during the 90s, consumption of the household did not decline as would be expected based on the wealth effect (after increasing for over two decades, the consumption share after 2001 remained stagnant instead of declining despite the meltdown in the stock market). The declining wealth effect was compensated to an extent by the easing tax effect during this period.
Second, after the stock market crash of 2000, which had its repercussions well into 2002, the Fed was looking for other ways of stimulating consumption demand because that had been the bedrock of growth in the late 90s. In the absence of another equity price bubble, the housing market provided an opportunity of such an alternative. The prices in the real estate market had been increasing since the mid–90s but it was still a sideshow to the stock market boom of the 90s. It was only in the early years of the present decade that they started picking up. The reason for this housing market run was quite obvious. The stock market crash led the investors to look for alternative measures of keeping their money and real estate seemed a good opportunity because its demand was going high so there was always a potential of making capital gains (p.92, Pollin (2005)). A Special Report (2005) of The Economist had the following to say about the magnitude of the housing market boom in the US or perhaps the entire developed world,
The extent of speculation in the housing market can be measured by the ratio of the housing prices to the rental applicable to the houses. This is similar to the Price-equity (P/E) ratio of stocks because the income that can be imputed from owning a house comes from the rental that it would fetch in future. Let us see what happened to this ratio. Weller (2006) presents the data comparing the Housing Price Index to Rental and the CPI (see fig. 2).
While the ratio of HPI to rentals remained stable for more than two decades since 1975 (as shown by the dashed line in fig. 2), there was a sharp increase in it since 2000. This is further corroborated by the fact that in 2004, 23 percent of the homes bought were purely for investment purposes while 13 percent were bought as second homes. ‘Investors [were] prepared to buy houses they [would] rent out at a loss, just because they [thought] prices will keep rising–the very definition of a financial bubble.’ (Report (2005)). In Miami, nearly half of the original buyers resold their apartments in an attempt to make capital gains.
In such a situation of high speculation, the Fed pushed aggressively for an easy monetary policy which meant a drastic decline in the federal funds rate (short term interest rate set by the Fed) even below the rate of inflation resulting in negative real funds rate. The real federal funds rate remained negative from the mid-2002 to early 2006 which meant a real heavy dose of easy money for more than three years. This kind of monetary policy has not been seen in the recent past in the US. The household sector responded very positively to this easy credit policy because the mortgage rates also declined. They increased their expenditure on housing which further increased its prices and the spiral started building up. This was the other bubble building up as Pollin (2005) writes (p.92),
The “limits” to which the buyers were “pushed” can be estimated by the growth in the Financial Obligation Ratio (FOR) and the Debt Service Ratio (DSR) of the household sector during this period. Debt Service Ratio (DSR) is the ratio of debt payments on outstanding mortgages and consumer debt to the disposable income of the household sector. We also present data of a more inclusive concept of the debt obligation that the household sector holds. This measure is called the Financial Obligation Ratio (FOR) which, apart from the repayment of interest charges on outstanding mortgage and consumer debt, includes the automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance, and property tax payments.
Some important conclusions can be drawn about the financial condition of the household sector based on these two ratios. In panel (a) of fig. 3, it clearly shows that both DSR and FOR have been rising since the early to mid–1990s. If we differentiate between the debt payments on account of home mortgages and consumer durables, we get panel (b), which tells us another interesting story behind this debt growth. As expected, for the 1990s, which is characterized by stock market boom, it is the consumer durables debt payments that play a central role in driving the FOR up whereas the home mortgage debt payments were declining for that decade. After 2000, however, when the real estate boom replaced the stock market boom, it is the home mortgage payments which determine the FOR for the households.
The Federal Reserve during this period had its priorities chalked out pretty well which was to give a boost to the housing prices, just as in the 90s, it was most interested in maintaining the stock market boom. This can be seen from the minutes of the Federal Open market Committee (FOMC) meeting of this period. Minutes of the FOMC (2004) meeting held in June say,
Third, given that the growth of the economy now was driven by the growth in residential investment financed primarily by debt, there was an increasing tendency by the lenders to indulge in predatory lending practices. The norms of lending were broken at will to keep the real estate boom alive and the Fed, despite being aware of the precariousness of the situation, allowed it to happen under its nose just as it did not intervene during the speculative run in the stock market boom of the 90s.
Lending norms were twisted in myriad ways, especially in the Sub-prime mortgage market (4). First, the norm of mortgage was changed for rich borrowers who could use up to 50 percent of their income for their mortgage payment whereas earlier the norm was only 28–32 percent (p.92, Pollin (2005)). Second, new forms of loans were introduced which had no requirement for down payments. As high as 42 percent of the first time borrowers and 25 percent of all borrowers were exempted from making any down payment (Report (2005)). Third, a new form of financing was introduced which was the Adjustable Rate of Mortgage (ARMs), according to which the overall interest payment could be spread over years so that the initial interest payments might seem very low but the debt burden would increase as you go further into future. This was used to sell loans with ‘hidden costs’. Fourth, the borrowers could get up to 105 percent of the buying cost as loan and no documentation of borrower’s income or employment was required (Report (2005)). Fifth, the borrowers were allowed to pay only a part of the interest amount due while their unpaid interest amount and the principal get added as debt, a form of loan which has been termed as ‘negative amortization loans’. One third of the total loans in the US in 2002 were either interest–only loans or negative amortization loans (Report (2005)).
The housing market boom had a logic of its own which was in some ways similar to a stock market boom. Since the housing prices were increasing, it provided a good opportunity to make money at the margin by buying low and selling high, just as in the case of equities. Moreover, increasing prices of houses also increase the net worth of the owners of the houses which further increases their capacity to borrow and hence to speculate even more, which was reflected in people buying more than one house. But since all the buy is financed through debt, it puts the household sector on a knife–edge position. On the one hand, if the prices of the houses declined then the value of their collateral declines and further borrowing becomes less likely. In the worst situation, if the prices fell drastically, even the possibility of repaying the debt by selling the house might itself disappear leading to foreclosures. On the other hand, if the interest rates increase eventually, they would increase the debt burden in future, especially if the loans have been taken under the ARM scheme. In effect, it is the real mortgage rate that matters which is the difference between the nominal mortgage rate and the capital gain through a housing price rise (Weller (2006)).
Even though it was obvious that the housing prices were primarily speculative in nature, Alan Greenspan, the then Chairman of the Federal Reserve, while addressing the Joint Economic Committee on June 9, 2005, had rubbished all claims about the housing boom being a speculative bubble by arguing that,
It would be really surprising to note that the same Greenspan had an altogether different take on the Depression of the 1930s. Greenspan (1966) wrote,
If we say that ‘the excess credit which the Fed pumped into the economy spilled over into the housing market–triggering a fantastic speculative boom’, then how different would that be from what his argument is? If not, then it sounds puzzling as to why he did not apply his own argument about the Great Depression to the policy of the Fed under his chairmanship. Whitney (2005) writes the following about the policy of the Fed and its former chairman,
Given the delicate balance that the household sector was maintaining vis-à-vis the housing market, it was obvious that any meltdown in these markets would be disastrous not only for the US economy but for the world economy as well. This possibility was further precipitated by the fact that dual pressure fell on the borrowers. On the one hand, the Fed decided to increase the federal fund rate, which increased the interest burdens especially for consumers who had opted for ARMs or negatively amortized loans. On the other hand, decline in housing prices decreased the value of their collateral and thus increased the possibility of bankruptcy which indeed were quite high in this period. This would especially have serious consequences for the US economy, as can be seen today, because 90 percent of the growth witnessed during 2001-05 was due to increased consumption and residential investment of the households.
Till now we have presented a macroeconomic picture of the housing market but it is obvious that such a market has the potential of having an asymmetric effect on households depending on their income category. For the poorer households, the effect of an increase in the real mortgage rate would be more severe than a richer household.
Some broad pattern can be drawn about the different categories of households (see table 3). First, the bottom quintile was not a part of the recent run in the housing market since 2001. The value of home as a proportion of income increases the most for the middle quintile. Second, contrary to the general perception, the main customers of ARMs appear to be the richest households and not the poorer ones. This could be because of the fact that the rich were buying the house only for the purposes of selling it later and were financing it through ARMs. A housing market meltdown would, thus, have an asymmetric effect on these categories depending on their relative exposure to the credit market.
The fact that the growth process in the last two decades was dependent on asset price markets can be substantiated if we plot the movements in economic activity with respect to these markets. We attempt to plot the business cycle of the 1990s and 2000s against the cycle in the stock market and the housing marker respectively in figure 4.
It can be seen that in both the cycles the movement of GDP is closely linked to the movement in these markets. In fact, the GDP cycle follows the asset price cycles. This gives us some empirical evidence on the theoretical proposition made above. In Keynes’ words, the growth processes had become ‘bubble in the whirlpool of speculation’.
Is ‘it’ over?
A lot is being written about the end of the crisis or at least ‘the worst is over’. But we believe, given the magnitude of the crisis, it is premature to think so. When we say the crisis, we do not mean the subprime crisisper se. By end of the crisis, we mean the delinking of the growth process’ dependence on the speculative booms in the asset price markets. It is very possible that in the short term we have another asset price bubble which will provide some respite to the economy but only to aggravate the systemic problem in the long run.
Let us first examine the economic variables which can tell us about the present recovery process. To examine the extent of recovery, we have to first examine the components of the recovery. Since the US economy is facing a crisis of inadequate aggregate demand in the economy, the path of recovery has to somehow solve this problem. Its failure to do so would not only prolong the crisis but any premature withdrawal of the government stimulus would further aggravate the very problem it is seeking to address. Aggregate demand in any economy comprises of the consumption of the household sector, investment made by the household sector (residential investment), investment made by the corporations (non-residential investment), government expenditure and net exports (trade surplus).
Not only has the residential market plummeted seriously, there has been a decline in the share of consumption too in the present crisis for reasons well known. Together they form a deadly combination of declining investment and the income multiplier. Therefore, the path to recovery has to be dependent on the last three components of aggregate demand, i.e., non-residential investment, government expenditure and trade surplus. Let us look at what is happening to these three factors at present (see figure 5).
Non-residential investment or the corporate investment in ‘real’ capital continues to decline as a proportion of GDP, which itself is serious because it means a lower rate of growth in investment than the GDP. But this is a general trend during the periods of crisis. In any crisis, the first factor that is affected is the corporate investment precisely because of the crisis of confidence of the capitalists. So, this by itself is not novel to this crisis, especially if we see it in the light of the magnitude of the present crisis.
The stimulus package that Obama administration has injected into the economy has led to increase in the second factor mentioned above, i.e., government expenditure. This automatically has the effect of propping up demand and thus, the GDP. But its magnitude is crucial, especially in crises like these. First, it has to compensate for the decline both in residential and non-residential investment. Second, even if that is taken care of, the net effect of that increase would be dampened if the income multiplier is decreasing as a result of declining share of consumption (as explained above). Therefore, the increase in government expenditure has to take care of both these factors which demands far more than what President Obama has announced so far.
Finally, the third factor, i.e., the trade balance, can also play a role in the recovery. In fact, as we will see below, the most crucial factor contributing to whatever little recovery that the US is witnessing today is directly linked to what is happening in their current account. Though it might seem contrary to common perception that current account balance in the US, which has been running record deficits for the last two decades, could actually be a catalyst to recovery. But if one looks carefully, if the rate of increase of trade deficit is low compared to the rate of decline in growth of GDP, it could actually play a positive role in recovery. In other words, if the ‘leakage’ of income from the economy in the form of net imports declines during the crisis, it will put less downward pressure on the rate of growth. This is what seems to be happening in the US. The share of trade deficit in the GDP has declined during the period of the crisis giving a positive impetus to an otherwise declining rate of growth.
A decline in the trade deficits could happen if there is an increase in the share of exports in the GDP or a decline in the share of imports or both. Or, at least the decrease in the share of exports in the GDP is lower than that of imports if both are decreasing. Declining trade deficit has taken place during this period in the US due to a sharper rate of decline in imports than exports. Further categorization of imports reveals that two factors, namely, industrial supplies and materials (except petroleum and products) and automotive vehicles, engines, and parts together have accounted for more than half the decline in imports in these quarters. This nature of decline in the share of imports in the GDP seems more to be of a short term character than a policy response by the US to increasing trade deficits, which makes this component of recovery even for a medium term suspect.
After analysing various components of demand and their behaviour during the ‘recovery period’, we can say that the increased government expenditure in the US through the fiscal package has still not been able to stimulate the economy to the extent of alleviating the problem at hand. On the one hand, consumption has stagnated, thereby, terminating the route to recovery through an increase in the multiplier. On the other hand, neither the residential investment nor the non-residential investment is showing any sign of recovery, especially, since the level of confidence of the corporations to invest is still quite bleak. Therefore, to withdraw the stimulus package now would be far from prudent. The lessons of the Great Depression remind us that the decision to withdraw the stimulus, on the basis of initial signs of recovery, ended up prolonging the crisis to almost a decade.
Conclusion
We have argued in this paper that growth in the US economy in the recent past has entirely been driven by either consumption spending or residential investment. Both of these were driven by asset price inflation of one kind or the other. While consumption was driven by the stock market boom of the 90s, residential investment was driven by the housing price boom. Such a growth path, however, has serious problems as already being witnessed in the US. First, it would require asset price inflation of one or the other kind to sustain the wealth driven growth. Second, it would be a highly volatile growth path because it would be dependent on the vagaries of these asset price markets. Third, it would invariably force the government to act in the interests of the finance capital because they hold the key to growth in the economy as happened in the bailout package endorsed by the US Congress earlier. The monetary as well as fiscal policy would have to be tethered to the developments in the asset price markets.
The current economic crisis that capitalism is faced with is of far greater magnitude than was envisaged even a few months back precisely because of the extent to which the machinations of the globalized finance capital has spread across the world. This is the time to categorically reject ‘there is no alternative’ (TINA) paradigm of the neo-liberalism and reassert alternative policy prescriptions which would be beneficial to common people.
Notes:
(1) It is another matter that the nature of state intervention was militarist in nature. Therefore, it would be simplistic to argue that the state intervention was primarily pro-people. In fact, the initial reversal in the economic activity after the prolonged period of Great Depression came after the World War II started. This led to increased fiscal expenditure on part of the government, which pushed the growth up. It is important to note that this growth was purely militaristic in nature. But post-1950s, there was an attempt to pop up the growth and employment by what was later came to be known as ‘welfare capitalism’. It is of course a contentious issue as to how much of the growth even in this period was welfare oriented.
(2) The argument underlying the negative linkage between growth and inequality can be found even in Marx when he talks about the underconsumption crisis. Josef Steindl, Baran and Sweezy and Kalecki revived this view in the field of Economics.
(3)This policy response was best exemplified by Ronald Reagan in the US and Margaret Thatcher in the UK where they proposed small governments to allow free markets to functions uninhibitedly. It should be kept in mind, however, that despite the opposition to government intervention in social sectors, they did not have any problems with burgeoning military expenditure. So, the argument effectively was to keep the ‘unnecessary’ government expenditure under check.
(4) With every passing day results of the investigations into the financial sector are getting murkier. A recent example of this is the recent case against the Golman Sachs (NY Times Editorial, 17 April 2010). Goldman Sachs Group Inc has been charged with fraud by the U.S. Securities and Exchange Commission over its marketing of a subprime mortgage product. It argued that Goldman Sachs was involved in malicious practice of creating and selling mortgage-backed investments and then placing financial bets that those investments would fail.
References
FOMC (2004): “Meeting of the Federal Open Market Committee,” Discussion paper, Board of the Governors of the Federal Reserve System.
Greenspan, A. (1966): “Gold and Economic Freedom,” The Objectivist.
Kalecki, M. (1943): “Political Aspects of Full Employment” in Selected Essays on the Dynamics of The Capitalist Economy, Cambridge University Press, 1971
New York Times Editorial: “Watch This Case”, April 16, 2010 available at http://www.nytimes.com/2010/04/17/opinion/17sat2.html?hp, accessed on April 17, 2010
Piketty, T., and E. Saez (2003): “Income Inequality in the United States, 1913-1998,” Quarterly Journal of Economics, 118, 1–39.
Pollin, Robert (2005): Contours of Descent: US Economic Fractures and the Landscape of Global Austerity. Verso.
Report (2005): “In Come the Waves: The Global Housing Boom,” The Economist.
Weller, C. E. (2006): “The End of the Great American Housing Boom: What it Means for You, Me and the U.S. Economy,” Discussion paper, Center for American Progress.
Whitney, M. (2005): “Pop Goes the Weasel: Greenspan and the Housing Bubble,” Monthly Review.