A glut of homes in a sea of homelessness

Feb 1, 2008

The capitalist economy breeds a reserve army of the unemployed.

The absurdity of capitalist overproduction

Every year in the United States, 3.5 million people experience a period of homelessness, nearly half of them children, according to a 2007 report by the National Law Center on Homelessness and Poverty.1

During the same period, 17.4 million houses stand vacant.2 Another 2 million homeowners with subprime mortgages—over half of them African Americans—lost their homes to repossession in 2008. The trend has continued.

The situation is absurd: Homes sitting vacant while children sleep in shelters or in the streets.

It does not end there. The housing crisis, the foreclosure epidemic, and the collapse of subprime mortgages have already begun to wreak havoc throughout the broader economy. There have been tens of thousands of layoffs in housing-related industries—construction, finance and real estate. Banks worldwide have tightened up their credit flows, especially to working class families. As workers feel the pinch, consumer spending will surely decline and the downturn will ripple through other areas of the economy.

Economists who were optimistically referring to this as a needed “correction” are now openly discussing the dreaded R-word, “recession.” “According to our analysis, this [recession] isn’t even forecast anymore but is a present day reality,” chief North American economist at Merrill Lynch David Rosenberg told London’s Daily Telegraph.

Likewise, Nouriel Roubini, economist at the Stern School of Business at New York University, told the New York Times, that the U.S. economy was at “risk of a systemic financial crisis.”

Capitalist overproduction

How does the richest country in the world, employing an army of economists in think tanks, universities and government departments, find itself at the brink of an inescapable economic downturn that will throw millions out of their jobs and onto the street? Why did these financial geniuses with PhDs and MBAs not see where the economy was headed, and steer it in another direction?

Capitalism is an economic system that operates with one purpose: profits for individuals and corporations. This overarching logic determines how the capitalist owners and their administrators act and think. It also creates inescapable contradictions in the structure of the economy.

In the search for ever-higher profit margins and in competition with each other for greater market share, the capitalists produce far more of a given commodity than can be sold at the same rate of profit. The companies start to lower prices, hoping to sell the commodities they have produced—but there are no more buyers to be found. Investors pull out their capital, and the companies lay off workers and cut down operations in order to save their rate of profit.

This wasteful phenomenon of overproduction occurs on a small scale all the time, leading to layoffs and factory shutdowns. But periodically—when enough capital is wrapped up in the plummeting industry or industries—it leads to generalized economic recession or depression. This is called a crisis of overproduction.

That is what is driving the current housing crisis.

It is a phenomenon unique to capitalism. In previous social systems, economic crises were produced by national calamities—floods, droughts, hurricanes, earthquakes—leading to extended periods of food scarcity and starvation. Under capitalism, such economic crises emerge not because society has produced too little but because it has produced “too much.” That does not mean too much in terms of meeting human needs, but too much to be sold at a profit.

Can’t stop, won’t stop

Under capitalism, workers are paid less than the value of the goods or services that they produce. The capitalist who employs the worker takes the remaining value—what socialist economists call surplus value, the basis for profit.

At the same time, each capitalist competes with other capitalists in order to return the highest rate of profit. To increase their rate of profit, capitalists try to find ways to cut the costs of production, through technological advances that can replace workers, cuts in wages and benefits, and outsourcing to lower-wage areas or countries.

In the short term, this leads to an immense return for the leading capitalists and individual investors. But over time the competing capitalists—if they are to survive—find ways to replicate those technological advances, and the overall rate of profit again stabilizes or sinks even lower.

As the capitalist accumulates profit, the quest immediately begins to find new investments that can return the same high rate of profit previously enjoyed. Capitalists normally do not just let their money sit, no matter how much they have. Their investors require them to keep making profits.

In the late 1990s, as economic crisis swept across East Asia and later South America, investors worldwide started to invest heavily in U.S. corporations and banks, which appeared more stable. The banks and corporations could not just let this money sit idle.

The ‘subprime’ crisis

How could the banks turn all that newly acquired capital into greater gains? They began to lower interest rates on mortgages, allowing more working-class families to purchase new homes on credit. This policy was in effect a huge cash advance to the construction and banking industries—with the working class shouldering the risk.

Immediately, the construction industry began producing new homes and condominiums. Working class families were lured into purchasing homes at prices beyond what they could hope to pay on their constant or falling wages. At the same time, capitalists began purchasing homes and then immediately “flipping them”—reselling them at a higher price. Since the banks seemed to be a constant source of cheap credit, the new houses became more lavish and more expensive.

But the real-estate speculators built and purchased new houses without concern for the real needs and means of the buyers. In mid 2006, housing prices began to fall. Reports started surfacing about a spreading epidemic of foreclosures, as families defaulted on their loans. Many had been duped into accepting mortgages with enticing “teaser” rates that after a few years “reset” to higher rates that were completely unaffordable.

In the summer of 2007, it became clear that virtually the entire banking system had massively invested in the housing boom. Afraid they would not be getting back the money they had lent out, banks tightened up their credit and the entire economy teetered on the brink of disaster.

Now, millions of homes sit vacant in the United States—the most on record. “There are more ownerless houses in the United States today as a percentage of total inventory than at any time since records have been kept,” wrote MSN Money’s Jon Markman on Oct. 4, 2007.3

“For sale” signs swing haplessly in the wind and real-estate agents organize open houses that nobody attends. The homes are too expensive for working class families, especially because credit is now harder to come by and it is ever harder to sell existing homes. The upper strata of society, the ruling class, is numerically too small to buy up and use all the condominiums and vacation homes that were built.

Residential construction has almost ground to a halt and industries related to construction materials are now in grave danger. Many real-estate companies have filed for bankruptcy and thousands of workers are out of their jobs.

Despite the absurdity of the situation, it is hard to imagine a different outcome. The high rate of profit necessitated it. If one of the real-estate companies had instead invested in affordable, low-income housing, it would have lost all its investors to the competitors who promised higher rates of return. If one of the banks had shifted its money out of the housing market altogether, another bank would have taken its place.

Nor could the capitalists have coordinated with one another to prevent the overproduction of housing. To coordinate in such a way would destroy the individual capitalist’s competitive edge. It runs counter to the speculative instincts of a system based on competition.

The economic crisis was not caused by the bad decision-making of families, who were prodded at every turn to buy into the “American dream.” Nor is it simply the product of predatory lenders. Both of these explanations put the onus on wrong-doing individuals. The scale of the foreclosure phenomenon shows that it comes from neither ignorance nor malice but from the very structure of the economy.

Can recessions be eliminated under capitalism?

Generalized crises of overproduction have occurred roughly once per decade in the United States for the last 150 years. The current economic crisis, a product of overproduction and the over-accumulation of capital, is an inevitable outcome of the logic of the economic system.

Some capitalist economists have tried to come to grips with the fact that the “free market” cannot solve its own contradictions. Followers of economist John Maynard Keynes, in particular, claim that the government can avert or minimize capitalist crisis by taking a more active role in controlling the money supply through the Federal Reserve, giving out money to promote consumer spending and reassure investors.

“Free market” rhetoric aside, federal intervention in the economy is now routine. While there has not been a downturn on the scale of the Great Depression of the 1930s, this routine intervention has not been able to stop periodic recessions. It cannot solve the fundamental contradictions of the economy.

Today’s recession is out of the Federal Reserve’s control. “Whatever [the Federal Reserve is] going to do,” Stern School economist Roubini admitted, “it’s going to be cosmetic.” (New York Times, Jan. 13, 2008)

The crisis is not the product of bad luck or poor planning. We are not faced with recession because a big-shot economist forgot one decimal point in his formulas, because some investment banker’s computer froze, or because the chairman of the Federal Reserve uttered the wrong phrase in his report.

We are faced with crisis because the capitalist economy has a fundamental contradiction. Although the production and reproduction of the economy draws in millions of workers, who consciously or not work together, the fruits of the economy are owned by a tiny minority who compete with one another based on profit. Enormous technological advances are wasted because the economy as a whole is unplanned, anarchic and thus prone to disaster.

Another way

It does not have to be this way.

Socialism is a different economic system operating according to a different logic. It functions according to a conscious plan, measuring the productive capacity of all of society with social needs.

Instead of being absorbed by individual capitalists and invested according to the needed rate of profit, surplus value—the social product created by the workers—is reinvested into the country’s infrastructure, into technology, and into cultural and recreational developments. There is no such thing as an inherent tendency toward overaccumulation or overproduction under socialism.

The current housing crisis could not possibly have taken place if the United States were a socialist country.

This is not wishful or utopian thinking. There are now decades of experience, positive and negative, in socialist planning and construction.

In its 74 years of existence, the Soviet Union never experienced a general crisis of overproduction. Although it developed into the second most powerful industrial economy on the planet, it never experienced the boom-bust cycle of the industrialized capitalist countries.

Even when its rate of growth slowed in the 1970s, it never went through negative growth that characterizes recessions under capitalism.

The same is true for China, despite the massive inroads that capitalist production have made since the late 1970s.

The goal of socialists is to get rid of the contradiction between socially created wealth and private accumulation and ownership. The wealth of society is produced collectively, so it should be owned and managed collectively.

The economic crises serve as periodic reminders that capitalism is condemned to die sooner or later. But it will not self-destruct. A revolutionary movement must bring about its demise.


1. National Coalition for the Homeless, Fact Sheet 2, August 2007, www.nationalhomeless.org/publications/facts/How_Many.pdf.

2. Jon Markman, comment on “For home builders, the worst is yet to come,” www.msn.com, comment posted on October 4, 2007, http://articles.moneycentral.msn.com/Investing/SuperModels/ForHomeBuildersTheWorstIsToCome.aspx?page=all.

3. Ibid.

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