Devastating Crisis Unfolds?

Bob Brenner, for the ATC editors
THE CURRENT CRISIS could well turn out to be the most devastating sincethe Great Depression. It manifests profound, unresolved problems in thereal economy that have been ? literally ? papered over by debt fordecades, as well as a shorter term financial crunch of a depth unseensince World War II. The combination of the weakness of underlyingcapital accumulation and the meltdown of the banking system is what?smade the downward slide so intractable for policymakers and itspotential for disaster so serious. The plague of foreclosures andabandoned homes ? often broken into and stripped clean of everything,including copper wiring ? stalks Detroit in particular, and otherMidwest cities.The human disaster this represents for hundreds of thousands of familiesand their communities may be only the first signal of what such acapitalist crisis means. Historic bull runs of the financial markets inthe 1980s, 1990s and 2000s ? with their epoch-making transfer of incomeand wealth to the richest one per cent of the population ? havedistracted attention from the actual longterm weakening of the advancedcapitalist economies. Economic performance in the United States, westernEurope and Japan, by virtually every standard indicator ? the growth ofoutput, investment, employment and wages ? has deteriorated, decade bydecade, business cycle by business cycle, since 1973.The years since the start of the current cycle, which originated in
early 2001, have been worst of all. GDP (Gross Domestic Product) growthin the United States has been the slowest for any comparable intervalsince the end of the 1940s, while the increase of new plant andequipment and the creation of jobs have been one third and two thirds,respectively, below postwar averages. Real hourly wages for productionand non supervisory workers, about 80% of the labor force, have stayedroughly flat, languishing at about their level of 1979.Nor has the economic expansion been significantly stronger in eitherwestern Europe or Japan. The declining economic dynamism of the advancedcapitalist world is rooted in a major drop in profitability, causedprimarily by a chronic tendency to overcapacity in the worldmanufacturing sector, going back to the late 1960s and early 1970s. By2000, in the United States, Japan and Germany, the rate of profit in theprivate economy had yet to make a comeback, rising no higher in the1990s cycle than in that of the 1970s.With reduced profitability, firms had smaller profits to add to theirplant and equipment, as well as smaller incentives to expand. Theperpetuation of reduced profitability since the 1970s led to a steadyfalloff in investment, as a proportion of GDP, across the advancedcapitalist economies, as well as step-by-step reductions in the growthof output, means of production, and employment.The long slowdown in capital accumulation, as well as corporations?repression of wages to restore their rates of return, along withgovernments? cuts in social spending to buttress capitalist profits,have resulted in a slowdown in the growth of investment, consumer andgovernment demand, and thus in the growth of demand as a whole. Theweakness in aggregate demand, ultimately the consequence of thereduction in profitability, has long constituted the main barrier togrowth in advanced capitalist economies.
To counter the persistent weakness of aggregate demand, governments, ledby the United States, have seen little choice but to underwrite evergreater volumes of debt, through ever more varied and baroque channels,to keep the economy turning over. Initially, during the 1970s and 1980s,states were obliged to incur ever larger public deficits to sustaingrowth. But while keeping the economy relatively stable, these deficitsalso rendered it increasingly stagnant: In the parlance of that era,governments were getting progressively less bang for their buck, lessgrowth of GDP for any given increase in borrowing. From Budget-Cutting to BubblenomicsIn the early 1990s, therefore, in both the United States and Europe, ledby Bill Clinton, Robert Rubin and Alan Greenspan, governments moving tothe right and guided by neoliberal thinking (privatization and slashingof social programs) sought to overcome stagnation by attempting to moveto balanced budgets. But although this fact does not loom large in mostaccounts of the period, this dramatic shift radically backfired.Because profitability had still failed to recover, the deficitreductions brought about by budget balancing resulted in a huge hit toaggregate demand, with the result that during the first half of the1990s, both Europe and Japan experienced devastating recessions, theworst of the postwar period, and the U.S. economy experienced theso-called jobless recovery. Since the middle 1990s, the United Stateshas consequently been obliged to resort to more powerful and risky formsof stimulus to counter the tendency to stagnation. In particular, itreplaced the public deficits of traditional Keynesianism with theprivate deficits and asset inflation of what might be called asset priceKeynesianism, or simply Bubblenomics.In the great stock market runup of the 1990s, corporations and wealthyhouseholds saw their wealth on paper massively expand. They were
therefore enabled to embark upon a record-breaking increase in borrowingand, on this basis, to sustain a powerful expansion of investment andconsumption. The so-called New Economy boom was the direct expression ofthe historic equity price bubble of the years 1995-2000. But sinceequity prices rose in defiance of falling profit rates and since newinvestment exacerbated industrial overcapacity, there quickly ensued thestock market crash and recession of 2000-2001, depressing profitabilityin the non-financial sector to its lowest level since 1980.Undeterred, Greenspan and the Federal Reserve, aided by the other majorCentral Banks, countered the new cyclical downturn with another round inthe inflation of asset prices, and this has essentially brought us towhere we are today. By reducing real short-term interest rates to zerofor three years, they facilitated an historically unprecedentedexplosion of household borrowing, which contributed to and fed onrocketing house prices and household wealth.According to The Economist,, the world housing bubble between 2000 and2005 was the biggest of all time, outrunning even that of 1929. It madepossible a steady rise in consumer spending and residential investment,which together drove the expansion. Personal consumption plus housingconstruction accounted for 90-100% of the growth of U.S. GDP in thefirst five years of the current business cycle. During the sameinterval, the housing sector alone, according to Moody?s Economy.com,was responsible for raising the growth of GDP by almost 50% above whatit would otherwise been ? 2.3% rather than 1.6%.Thus, along with G. W. Bush?s Reaganesque budget deficits, recordhousehold deficits succeeded in obscuring just how weak the underlyingeconomic recovery actually was. The rise in debt-supported consumer
demand, as well as super-cheap credit more generally, not only revivedthe American economy but, especially by driving a new surge in importsand the increase of the current account (balance of payments and trade)deficit to record levels, powered what has appeared to be an impressiveglobal economic expansion.Brutal Corporate OffensiveBut if consumers did their part, the same cannot be said for privatebusiness, despite the record economic stimulus. Greenspan and the Fedhad blown up the housing bubble to give the corporations time to workoff their excess capital and resume investing. But instead, focusing onrestoring their profit rates, corporations unleashed a brutal offensiveagainst workers. They raised productivity growth, not so much byincreasing investment in advanced plant and equipment as by radicallycutting back on jobs and compelling the employees who remained to takeup the slack. Holding down wages as they squeezed more output perperson, they appropriated to themselves in the form of profits anhistorically unprecedented share of the increase that took place innon-financial GDP.Non-financial corporations, during this expansion, have raised theirprofit rates significantly, but still not back to the already reducedlevels of the 1990s. Moreover, in view of the degree to which the ascentof the profit rate was achieved simply by way of raising the rate ofexploitation ? making workers work more and paying them less per hour ?there has been reason to doubt how long it could continue. But aboveall, in improving profitability by holding down job creation, investmentand wages, U.S. businesses have held down the growth of aggregate demandand thereby undermined their own incentive to expand.Simultaneously, instead of increasing investment, productiveness andemployment to increase profits, firms have sought to exploit thehyper-low cost of borrowing to improve their own and their shareholders?
position by way of financial manipulation ? paying off their debts,paying out dividends, and buying their own stocks to drive up theirvalue, particularly in the form of an enormous wave of mergers andacquisitions. In the United States, over the last four or five years,both dividends and stock repurchases as a share of retained earningshave exploded to their highest levels of the postwar epoch. The samesorts of things have been happening throughout the world economy ? inEurope, Japan and Korea.Bursting BubblesThe bottom line is that, in the United States and across the advancedcapitalist world since 2000, we have witnessed the slowest growth inthe real economy since World War II and the greatest expansion of thefinancial or paper economy in U.S. history. You don?t need a Marxist totell you that this can?t go on.Of course, just as the stock market bubble of the 1990s eventuallyburst, the housing bubble eventually crashed. As a consequence, the filmof housing-driven expansion that we viewed during the cyclical upturn isnow running in reverse. Today, house prices have already fallen by 5%from their 2005 peak, but this has only just begun. It is estimated byMoody?s that by the time the housing bubble has fully deflated in early2009, house prices will have fallen by 20% in nominal terms ? even morein real terms ? by far the greatest decline in postwar U.S. history.Just as the positive wealth effect of the housing bubble drove theeconomy forward, the negative effect of the housing crash is driving itbackward. With the value of their residences declining, households canno longer treat their houses like ATM machines, and household borrowingis collapsing, and thus households are having to consume less.The underlying danger is that, no longer able to putatively ?save?through their rising housing values, U.S. households will suddenly begin
to actually save, driving up the rate of personal savings, now at thelowest level in history, and pulling down consumption. Understanding howthe end of the housing bubble would affect consumers? purchasing power,firms cut back on their hiring, with the result that employment growthfell significantly from early in 2007.Thanks to the mounting housing crisis and the deceleration ofemployment, already in the second quarter of 2007, real total cashflowing into households, which had increased at an annual rate of about4.4% in 2005 and 2006, had fallen near zero. In other words, if you addup households? real disposable income, plus their home equitywithdrawals, plus their consumer credit borrowing, plus their capitalgains realization, you find that the money that households actually hadto spend had stopped growing. Well before the financial crisis hit lastsummer, the expansion was on its last legs.Vastly complicating the downturn and making it so very dangerous is, ofcourse, the sub-prime debacle which arose as direct extension of thehousing bubble. The mechanisms linking unscrupulous mortgage lending ona titanic scale, mass housing foreclosures, the collapse of the marketin securities backed up by sub-prime mortgages, and the crisis of thegreat banks who directly held such huge quantities of these securities,require a separate discussion.One can simply say by way of conclusion, because banks? losses are soreal, already enormous, and likely to grow much greater as the downturngets worse, that the economy faces the prospect, unprecedented in thepostwar period, of a freezing up of credit at the very moment of slidinginto recession ? and that governments face a problem of unparalleleddifficulty in preventing this outcome.[This statement was written by Robert Brenner, a member of the ATCeditorial board and author of The Economics of Global Turbulence.
References for all data cited here can be found in this book, especiallyin the Afterword.]
from ATC 132 (January/February 2008)