The ABCs of the Economic Crisis by Fred Magdoff and Michael D. Yates, despite its small size, is packed with direct, concise and simple facts as the cause of the United States’ recession in 2007. Written with the academic audience in mind, Magdoff and Yates have produced a read that is essential to all those confused by the rhetoric of economists, the media and politicians.
Opening the book with “The Calm Before the Storm” the authors paint an eerie picture of life prior to the crash of the housing market, layoffs and bankruptcy. The blind “trust in the financial markets” (14) proved to be fatal for the US economy and, that in the wake of the economic crash – post the 2007 DOW Jones stock market high – the politicians and financial leaders that spearheaded the bailouts were the same that were responsible for it.
The authors then continue with a breakdown of capitalism – the economic systems strengths and weaknesses – and where the United States succumbed to capitalism’s flaws. Magdoff and Yates quickly assert that the profits made off of a capitalist system are merely the exploitation of workers. Magdoff and Yates write in the voice of a worker, not academics, and explain that the constant competition on behalf of the employer is not only the result of capitalism, but comes at the expense of fair wages and profit share for workers. They view the exploitation of mineral resources and geographical wealth as theft from peasants and the wealth of capitalism as the direct results of interconnected business and politics.
Magdoff and Yates then spell out for the readers something infrequently uttered: “capitalist economies are prone to crisis” (27.) Few academics are willing to admit this, especially in the shadow of great profit, however, for the authors; this notion is the foundation of their book. The lack of planning on behalf of the capitalist system and the inherent unemployment are two reasons for the authors as to why the public understanding of capitalism is a myth. Because of capitalism’s vulnerability, they are almost feeble in their defense to reckless borrowing and investments. Additionally, the authors note that a mature capitalist system (like that of the United States) is characterized by few investment opportunities, slow growth, and minimum inventories. As the capitalist system continues to age, these opportunities will continue to decay, which brings the authors to this question: can this slow growth be overcome?
To Magdoff and Yates, the answer is no – unless of course the government and workers invest within the markets to protect them from capitalisms vulnerabilities. That being said, the oligarchies of capitalism, rather than conceding to Magdoff and Yates’ inevitable, insist on redirecting their profits back to reckless investments, exploitation and in turn, the unsustainable bubble that caused the housing market crash of 2007.
The authors use the post-WWII stagnation of the US economy as the key example of capitalisms inclination to slow. The excess in the United States in both the car industry and from the remnants of government investment in housing, industry and military spending led to the slowing of the US economy in the early 1980s. This slowing is attributed to lack of innovation to, in the authors’ words “propel the economy” (44) in the same way as the railroads and manufacturing did in the late 19th and early 20th century.
The authors then cite the efforts of the capitalists to undo the “liberal” policies of the New Deal, unions, and business regulations and take-back political power with free-market ideology labeled as “neoliberalism.” Characterized by the free movement of money, privatization of public institutions, decreasing the size of welfare recipients, reducing taxes, and keeping inflation at bay – this values to Magdoff and Yates lead to three big problems .First, the exploitation of workers, then globalization, and lastly, the suppression of wages and worker benefits. Coupled with the deceit of average citizens by financial institutions (leading them to take on risky investments and loans), this rapid profit growth resulted in the complete saturation of the market – causing capitalists to look towards unstable markets for investment.
As concretely backed opportunities diminished for investment, the financial market took on “bad” debt and leveraged bets. In the book, Magdoff and Yates painted the financial institutions as the greedy “Mr. Pac-men” of capitalism and hold nothing back in their exposure of the institutions’ irresponsibility. It is almost silly then, that Magdoff and Yates dedicate a chapter to how the crisis happened after their thorough explanation of fiscal irresponsibility; however, the authors break it down into these points: First, firms used “gimmicks” as a way to make money (see the bets on financial markets above) combined with the fact that these gimmicks were not backed by tangible assets. Next, the firms took on debt and encouraged government deregulation. Lastly, financial firms participated in fraud. Magdoff and Yates state that these factors lead directly to the “explosion of debt” in the United States economy (75.)
The authors then pose the big question to the readers: should government intervene? Although Magdoff and Yates highlight the unprecedented actions taken by the Federal Reserve in response to the economic crisis (for example, the interest rates near 0%), they assert that more spending was needed on behalf of the federal government for the United States to overcome its capitalist recession. The authors conclude by suggesting direct unemployment aid, mortgage relief, and infrastructure spending as ways to bring the economy back to its full capacity. Nationalizing a lot of the banks, national health care, quality education, increasing public transportation’s accessibility, and labor friendly trade were offered as the direct solution to the United States’ crisis.
Ultimately, after an entire book of economic dialogue, Magdoff and Yates conclude with a one word solution: socialism. This final brevity of the authors reflects both their writing style and their conviction – leaving the reader not looking for a solution, but for a strategy to implement their suggestions.