'The Conscience of a Liberal' by Paul Krugman

Reviewed by Peter Taaffe

As the pace of the intractable crisis of world capitalism speeds up and deepens, so the frantic rush to find solutions gathers pace. In place of the paeans of praise for globalised capitalism, the 'hidden hand of the market', free market 'superiority', etc, it can be predicted that an avalanche of books, rejecting these and the neo-liberal ideas that went with them, will now appear. Keynesian or neo-Keynesian ideas - state solutions to solve economic problems - are back on the agenda.

Paul Krugman is better placed than many to lead the way. He has systematically demolished the neo-liberal project of the 'Bushies' in the columns of the New York Times in order, as he sees it, to provide solutions which are 'liberal' and 'humane'. But he restricts himself to the limits of the capitalist system.

He rejects 'supply-side', monetarist economics - controlling the money supply or tax cuts for the rich, allegedly to boost investment in industry. He favours 'demand side', maintaining and boosting incomes in order to alleviate the looming crisis.

He is, in other words, from the Keynesian school of capitalist economists, broadly committed to 'priming the pump', boosting demand in straitened economic circumstances. He has been joined by a growing band of economists, clamouring for state intervention to bail out their system, at a considerable cost to the rest of us in tax increases.

Krugman draws heavily on the example of the 'New Deal' of the 1930s under US President Franklin D Roosevelt (FDR), which is pictured as laying the foundations for the mighty economic upswing in the US that developed at the end of the thirties right through until 1973-74. He prettifies what actually took place during this period and romanticises in particular the role of Roosevelt, a shrewd and, if necessary, brutal capitalist politician.

For Krugman, US history is compartmentalised into distinctive phases. There was the long 'gilded age' of the 1870s, similar to the present period, following the American Civil War, which lasted until the New Deal of the 1930s.

In 1900 there were 22 billionaires; by 1925, 32. Yet, allegedly because of Roosevelt's 'New Deal', in 1957 there were only 16 billionaires. There are 160 billionaires in the US today.

In the 'gilded age', capitalist parties exercised ruthless political control through measures which included the disenfranchisement of many American workers. Millions were unable to vote because they were 'non-naturalised immigrants'.

In the 'dollar democracy', expenditure of huge sums in elections and, of course, the use of the methods of divide and rule were deployed to keep different ethnic and religious groups at each others throats.

Rose-coloured glasses

Notwithstanding the Civil Rights and Voters Rights acts of the 1960s, playing the 'race card' has remained a vital ingredient of US 'democracy'. Today Barack Obama's Democrat opponent, Hillary Clinton, is not averse to resorting to these dirty methods when the power of the presidency is at stake.

To say that the author looks at Roosevelt and the New Deal in the 1930s through rose-coloured spectacles is an understatement. Inadvertently, Krugman admits the failure of Roosevelt. By his second term, "FDR spoke... of one third of the nation [still] ill-housed, ill-clad, ill-nourished." Krugman's beliefs that Roosevelt had a conscious plan for massive reform, summed up in his phrase 'New Deal', is a myth.

Art Preis, in his monumental Labor's Giant Step, quotes the words of Roosevelt's Secretary of Labor, Francis Perkins: "The New Deal was not a plan with form or content. It was a happy phrase he had coined during the campaign, and its value was psychological. It made people feel better."

Krugman insists that Roosevelt was a "friend of labor". But this impression is also completely false. Ferdinand Lundberg, in his classic study on those who ran America, America's 60 families, concluded that the 'New Deal' was neither "revolutionary nor radical".

Roosevelt was supposed to have begun to abolish unemployment, yet his works programmes never provided jobs for more than 25% of the jobless. Unemployment remained as a malignant growth in the US throughout the 1930s, totalling over ten million in 1940, compared to just over 12 million in 1933.

Status quo

Even Roosevelt's National Industrial Recovery Act (NIRA), enacted in June 1933, in effect only sought to guarantee the status quo of worker and employer, "one in possession of little, the other in control of much", in order to restore industrial stability.

True, the labour movement correctly used this legislation to prosecute their own interests. The leader of the mineworkers' union, John Lewis, in 1933 sent an army of union organisers into the coalfields shouting: "The President wants you to join the union." Roosevelt himself was the last to subscribe to such sentiments!

It was the independent, magnificent movement, prompted by the beginnings of a boom in 1933-34, which swept almost four million new workers into the unions and created the colossal Congress of Industrial Organisations (CIO).

It was no conscious policy of Roosevelt, but the beginnings of natural revival after the worst slump in capitalist history, reinforced by increased arms production, both before and during the Second World War, that laid the basis for the post-1945 economic upswing, particularly in the 1950s, 1960s and early 1970s.

This is presented by the author as a golden age, "as a paradise lost". In a process he describes as the 'great compression', the incomes of the capitalists allegedly shrank, and "America in the 1950s was a middle-class society". These are exaggerations. While real living standards of the mass of the population grew, class divisions remained, albeit ameliorated by the boom.

Moreover, while the relative share of the capitalists may have been somewhat 'compressed' - and this is disputed by many economists and commentators of the period - the absolute rise in profits of US big business was indisputable. Reinvesting this was a key factor in American big business's pre-eminence within world capitalism.

US society was torn apart in the late 1960s, and Krugman correctly points out that this was even against the background of a boom. This was a "magic economy" that seemingly provided jobs for everyone. Wages were "rising every year" and there was a minimum wage at "$1.25 an hour [which] was the equivalent of more than $8 in today's dollars, far higher than today's minimum wage of $5.50."

Even the Republican Nixon presidency in 1972 was much more to the 'left' than the Democrat presidency of Clinton or even Carter. Famously, Nixon declared in 1970 that "I am a Keynesian now".

That period has well and truly gone, as Krugman demonstrates. Corporate profits "are now at the highest level, as a percentage of GDP, since 1929." A massive attack on the conditions of the US working class, detailed by the author, is reflected in the catastrophe in the health sector. Almost alone amongst the advanced industrial countries, there has been no predominantly state financed health cover in the US.

Instead, the unions have used their bargaining power during the boom to extract health cover from the big corporations. But in changed circumstances: the closure of plants, joblessness and the weakness of the unions; this largely private health insurance system "leaves 45 million workers without health coverage".

On the rise of the neo-conservatives and their brutal ideology Krugman is very good and quotes an article by one of their gurus, Irving Kristol, in the Wall Street Journal called 'Income Inequality without Class Conflict'. This creature wrote: "Income inequality tends to be swamped by even greater social equality." Meanwhile three million US citizens could be forced out of their houses through the subprime crisis and the credit collapse.

Therefore, Krugman concludes we must go back to a bygone age - largely illusory - of "income equality" associated with the 'New Deal'. He outlines a number of measures that could reinvent the age of the 'great compression'. This involves the fight for an increased minimum wage and higher taxes on the rich - which we would support - which form an important part of the 'progressive agenda'.

However, his solution is cautious, if not meagre. He does not put forward an overarching Keynesian programme, a big boost to public expenditure, as one might expect from a manifesto of a 'liberal'. This is because many of the planks of Keynesianism have been tried in the US, albeit unconsciously, and the state and the 'consumer' are massively burdened by debt.

The boom itself was fuelled by 'asset Keynesianism', the rise in property prices, largely benefiting the rich. This in turn funded a credit bubble, which gave a massive boost to capitalism, particularly the financial plutocrats, which is now unwinding.

There is little scope for classical Keynesianism in the straitened economic circumstances of US imperialism today. This is not to say that the capitalists will not still increasingly advocate such measures in the dire economic situation which looms. This could involve the 'nationalisation' of banks - à la Northern Rock.

Faced with a mass movement for change, concessions can be made - for instance, through an increase in the minimum wage. But what is given with one hand can be taken away with the other through price increases. Deflation - cuts in the working class's share of the wealth they create - and inflation are ultimately head and tails of the same capitalist coin.

Krugman yearns for a return to the methods of the 1950s, when Democrats and Republicans amicably collaborated in 'bi-partisanship'. He attacks Ralph Nader because he "mocked politicians from the two major parties as 'Republicrats'", because most "Americans view the parties as being very different indeed". This is false from top to bottom. Yes, the politics of the 'lesser evil' exist in the US as elsewhere because of the revulsion felt at the Bush presidency.

More than any other president since 1945, Bush has openly stood for the rich and the greater imperial appetite of US imperialism, as witnessed in Iraq.

That the Republicans' defeat is not guaranteed in the forthcoming election is a searing criticism of the Democrats. They offer no fundamental challenge to capitalism, either on the domestic or the international front. Despite this, and particularly because of the failure of Bush and the chronic condition of US capitalism, they are still most likely to win the presidential election, either with Obama or Clinton.

Therefore, as useful as Krugman's book is in providing much detail to fill out an historical and contemporary analysis of the US, it provides no lasting answer for American workers at this decisive turning point in history.

The creation of a mass independent party of the working class with radical policies is the only real way of both reflecting the class polarisation which is taking place and opening up a new era of advance for the US workers.

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In The Socialist 23 April 2008:

The rich get richer... and we foot the bill!