Devastating Crisis Unfolds

Robert Brenner
THE CURRENT CRISIS could well turn out to be the most devastating since theGreat Depression. It manifests profound, unresolved problems in the realeconomy that have been - literally - papered over by debt for decades, aswell as a shorter term financial crunch of a depth unseen since World WarII. The combination of the weakness of underlying capital accumulation andthe meltdown of the banking system is what's made the downward slide sointractable for policymakers and its potential for disaster so serious. Theplague of foreclosures and abandoned homes - often broken into and strippedclean of everything, including copper wiring - stalks Detroit in particular,and other Midwest cities. The human disaster this represents for hundreds of thousands of familiesand their communities may be only the first signal of what such a capitalistcrisis means. Historic bull runs of the financial markets in the 1980s,1990s and 2000s - with their epoch-making transfer of income and wealth tothe richest one per cent of the population - have distracted attention fromthe actual longterm weakening of the advanced capitalist economies. Economicperformance in the United States, western Europe and Japan, by virtuallyevery standard indicator - the growth of output, investment, employment andwages - has deteriorated, decade by decade, business cycle by businesscycle, since 1973.The years since the start of the current cycle, which originated in early2001, have been worst of all. GDP (Gross Domestic Product) growth in theUnited States has been the slowest for any comparable interval since the endof the 1940s, while the increase of new plant and equipment and the creationof jobs have been one third and two thirds, respectively, below postwaraverages. Real hourly wages for production and non supervisory workers,about 80% of the labor force, have stayed roughly flat, languishing at abouttheir level of 1979.Nor has the economic expansion been significantly stronger in either westernEurope or Japan. The declining economic dynamism of the advanced capitalistworld is rooted in a major drop in profitability, caused primarily by achronic tendency to overcapacity in the world manufacturing sector, goingback to the late 1960s and early 1970s. By 2000, in the United States, Japanand Germany, the rate of profit in the private economy had yet to make acomeback, rising no higher in the 1990s cycle than in that of the 1970s.With reduced profitability, firms had smaller profits to add to their plantand equipment, as well as smaller incentives to expand. The perpetuation ofreduced profitability since the 1970s led to a steady falloff in investment,as a proportion of GDP, across the advanced capitalist economies, as well asstep-by-step reductions in the growth of output, means of production, .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, haveresulted in a slowdown in the growth of investment, consumer and governmentdemand, and thus in the growth of demand as a whole. The weakness inaggregate demand, ultimately the consequence of the reduction inprofitability, has long constituted the main barrier to growth in advancedcapitalist economies.To counter the persistent weakness of aggregate demand, governments, led bythe United States, have seen little choice but to underwrite ever greatervolumes of debt, through ever more varied and baroque channels, to keep theeconomy turning over. Initially, during the 1970s and 1980s, states wereobliged to incur ever larger public deficits to sustain growth. But whilekeeping the economy relatively stable, these deficits also rendered itincreasingly stagnant: In the parlance of that era, governments were gettingprogressively less bang for their buck, less growth of GDP for any givenincrease in borrowing.>From Budget-Cutting to BubblenomicsIn the early 1990s, therefore, in both the United States and Europe, led byBill Clinton, Robert Rubin and Alan Greenspan, governments moving to theright and guided by neoliberal thinking (privatization and slashing ofsocial programs) sought to overcome stagnation by attempting to move tobalanced budgets. But although this fact does not loom large in mostaccounts of the period, this dramatic shift radically backfired. In some parts of Detroit it's cheaper to buy a house than a car Becauseprofitability had still failed to recover, the deficit reductions broughtabout by budget balancing resulted in a huge hit to aggregate demand, withthe result that during the first half of the 1990s, both Europe and Japanexperienced devastating recessions, the worst of the postwar period, and theU.S. economy experienced the so-called jobless recovery. Since the middle1990s, the United States has consequently been obliged to resort to morepowerful and risky forms of stimulus to counter the tendency to stagnation.In particular, it replaced the public deficits of traditional Keynesianismwith the private deficits and asset inflation of what might be called assetprice Keynesianism, or simply Bubblenomics.In the great stock market runup of the 1990s, corporations and wealthyhouseholds saw their wealth on paper massively expand. They were thereforeenabled to embark upon a record-breaking increase in borrowing and, on thisbasis, to sustain a powerful expansion of investment and consumption. Theso-called New Economy boom was the direct expression of the historic equityprice bubble of the years 1995-2000. But since equity prices rose indefiance of falling profit rates and since new investment exacerbatedindustrial overcapacity, there quickly ensued the stock market crash andrecession of 2000-2001, depressing profitability in the non-financial sectorto 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 in theinflation of asset prices, and this has essentially brought us to where weare today. By reducing real short-term interest rates to zero for threeyears, they facilitated an historically unprecedented explosion of householdborrowing, which contributed to and fed on rocketing house prices andhousehold wealth.According to The Economist,, the world housing bubble between 2000 and 2005was the biggest of all time, outrunning even that of 1929. It made possiblea steady rise in consumer spending and residential investment, whichtogether drove the expansion. Personal consumption plus housing constructionaccounted for 90-100% of the growth of U.S. GDP in the first five years ofthe current business cycle. During the same interval, the housing sectoralone, according to Moody's Economy.com, was responsible for raising thegrowth of GDP by almost 50% above what it would otherwise been - 2.3% ratherthan 1.6%.Thus, along with G. W. Bush's Reaganesque budget deficits, record householddeficits succeeded in obscuring just how weak the underlying economicrecovery actually was. The rise in debt-supported consumer demand, as wellas super-cheap credit more generally, not only revived the American economybut, especially by driving a new surge in imports and the increase of thecurrent account (balance of payments and trade) deficit to record levels,powered what has appeared to be an impressive global 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 Fed hadblown up the housing bubble to give the corporations time to work off theirexcess capital and resume investing. But instead, focusing on restoringtheir profit rates, corporations unleashed a brutal offensive againstworkers. They raised productivity growth, not so much by increasinginvestment in advanced plant and equipment as by radically cutting back onjobs and compelling the employees who remained to take up the slack. Holdingdown wages as they squeezed more output per person, they appropriated tothemselves in the form of profits an historically unprecedented share of theincrease that took place in non-financial GDP.Non-financial corporations, during this expansion, have raised their profitrates significantly, but still not back to the already reduced levels of the1990s. Moreover, in view of the degree to which the ascent of the profitrate was achieved simply by way of raising the rate of exploitation - makingworkers work more and paying them less per hour - there has been reason todoubt how long it could continue. But above all, in improving profitabilityby holding down job creation, investment and wages, U.S. businesses haveheld down the growth of aggregate demand and thereby undermined their ownincentive to expand.Simultaneously, instead of increasing investment, productiveness andemployment to increase profits, firms have sought to exploit the hyper-lowcost of borrowing to improve their own and their shareholders' position byway of financial manipulation - paying off their debts, paying outdividends, and buying their own stocks to drive up their value, particularlyin the form of an enormous wave of mergers and acquisitions. In the UnitedStates, over the last four or five years, both dividends and stockrepurchases as a share of retained earnings have exploded to their highestlevels of the postwar epoch. The same sorts of things have been happeningthroughout the world economy - in Europe, 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 in thereal economy since World War II and the greatest expansion of the financialor paper economy in U.S. history. You don't need a Marxist to tell you thatthis can't go on.Of course, just as the stock market bubble of the 1990s eventually burst,the housing bubble eventually crashed. As a consequence, the film ofhousing-driven expansion that we viewed during the cyclical upturn is nowrunning in reverse. Today, house prices have already fallen by 5% from their2005 peak, but this has only just begun. It is estimated by Moody's that bythe time the housing bubble has fully deflated in early 2009, house priceswill have fallen by 20% in nominal terms - even more in real terms - by farthe greatest decline in postwar U.S. history.Just as the positive wealth effect of the housing bubble drove the economyforward, the negative effect of the housing crash is driving it backward.With the value of their residences declining, households can no longer treattheir houses like ATM machines, and household borrowing is collapsing, andthus households are having to consume less.The underlying danger is that, no longer able to putatively "save" throughtheir rising housing values, U.S. households will suddenly begin to actuallysave, driving up the rate of personal savings, now at the lowest level inhistory, and pulling down consumption. Understanding how the end of thehousing bubble would affect consumers' purchasing power, firms cut back ontheir hiring, with the result that employment growth fell significantly fromearly in 2007.Thanks to the mounting housing crisis and the deceleration of employment,already in the second quarter of 2007, real total cash flowing intohouseholds, which had increased at an annual rate of about 4.4% in 2005 and2006, had fallen near zero. In other words, if you add up households' realdisposable income, plus their home equity withdrawals, plus their consumercredit borrowing, plus their capital gains realization, you find that themoney that households actually had to spend had stopped growing. Well beforethe financial crisis hit last summer, 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 the housingbubble. The mechanisms linking unscrupulous mortgage lending on a titanicscale, mass housing foreclosures, the collapse of the market in securitiesbacked up by sub-prime mortgages, and the crisis of the great banks whodirectly held such huge quantities of these securities, require a separatediscussion.One can simply say by way of conclusion, because banks' losses are so real,already enormous, and likely to grow much greater as the downturn getsworse, that the economy faces the prospect, unprecedented in the postwarperiod, of a freezing up of credit at the very moment of sliding intorecession - and that governments face a problem of unparalleled difficultyin preventing this outcome.[This statement was written by Robert Brenner, a member of the ATC editorialboard and author of The Economics of Global Turbulence. References for alldata cited here can be found in this book, especially in the Afterword.]
from ATC 132 (January/February 2008)Robert Brenner is an editor of Against the Current.