Socialist Action /March 2001
US Economy - The Bubble has Burst
By ANDY KILMISTER
The last four months have seen U.S. profits fall dramatically in many
sectors. Is the economy heading for a crisis, and what would this mean for
the stability of global capitalism? In order to answer these questions,
we need to look more closely both at the nature of the U.S. economy in the
last decade and at Marxist accounts of economic crises.
The nine-year expansion in the United States since 1991 has really been
made up of two separate processes. There was a modest upturn between 1991
and 1996, which actually produced slower growth than that of the 1970s and
the 1980s. But from 1996 onwards the growth rate accelerated and became
inextricably linked with a dramatic stock market bubble and a consumption
boom.
The size of this boom cannot be underestimated. Between World War II
and 1996 there was just one year in which the private sector (firms and
households taken together) had a negative net savings rate in the United
States. This was 1955. But since 1996 this rate has been continually negative,
and borrowing has been increasing all the time.
By the beginning of 2000, private sector net borrowing had reached about
7 percent of U.S. GDP, with the stock of debt at a record level of 165 percent
of private disposable income. Corporate debt was at a record level of 74
percent of corporate GDP
The basis of this massive increase in borrowing was twofold. First, there
was a wave of optimism about the future profitability of the American economy,
sending share prices soaring and encouraging households and firms to spend
on the basis of future incomes.
Second, this borrowing was funded by an inflow of funds from abroad,
which financed a record U.S. trade deficit. This money came from Japan and
Europe and, after 1997, from elsewhere in Asia as investors withdrew from
South East Asia, Russia, and Latin America in the wake of currency and stock
market crises.
Marx's ideas about capitalist crisis can help us see both why the slow
growth of the first half of the decade in the United States developed into
the bubble economy of the second half, and whether this is sustainable.
For Marx, capitalism is an inherently unstable system, in which crises
are not just interruptions to growth but play an important function in temporarily
resolving economic difficulties and laying the basis for the next period
of expansion. However, given this instability, such resolutions can only
be temporary and themselves lay the basis for future crises.
The root of such crises lies in the constant tendency of capitalism to
undercut the basis on which profits are made, the exploitation of living
labor, by replacing such labor with machinery and capital.
Such investment raises the productivity of individual workers and thus
is rational from the point of view of each capitalist in isolation. But
looked at from the perspective of capitalism as a whole, it lowers the rate
of profit and lays the foundation for crises.
This process, however, is a long-run trend and is constantly modified
by a number of more concrete developments. The tendency of profit rates
to fall can be offset for a while by increased exploitation of those workers
that remain, by falls in the price of capital goods and raw materials, or
by the opening up of new markets.
Yet these factors themselves create tensions in the system, which give
rise to a constant movement between booms and slumps. Such a movement reasserts
itself even in those economies that have appeared to overcome the business
cycle, like Japan in the 1980s or the United States in the 1990s.
The basis for the upturn in the U.S. economy in the 1990s and the initial
growth was the dramatic restructuring of American capitalism in the late
1970s and early 1980s, and to a lesser extent in the early 1990s. A wave
of closures and "downsizing," followed by a takeover boom in the
second half of the 1980s, destroyed large amounts of unprofitable capital
and presented the opportunity for a rise in the profit rate.
The financial crisis of the late 1980s triggered a restructuring of the
banking system, allowing it to mobilize the funds to finance future investment.
This was backed up by three further developments which helped to offset
the long-term tendency for the profit rate to fall:
First, U.S. capital launched a massive assault on the working class,
both lengthening hours of work (according to some estimates by as much as
160 hours a year, or an extra month, on average), and by increasing the
intensity of labor, while keeping wages down through attacks on trade unions
and a shift to temporary, part-time and insecure employment, under the banner
of "flexibility."
Second, the fall in the dollar after 1985, especially against the yen,
allowed for some extra strength in export markets, while the costs of increased
import prices were again off-loaded onto labor rather than capital.
Third, capital goods, particularly in the area of information technology,
fell drastically in price over the 1990s. In addition, the U.S. state played
an important role in subsidizing U.S. capital throughout the 1980s and 1990s,
particularly through the defense-related sector.
However, such developments on their own did not allow for an upsurge
in the American economy that could match the "long boom" of the
1950s and 1960s. There were three main reasons for this. First, the squeeze
on wages limited the growth of consumption at home. This meant that growth
became very dependent on a constantly rising rate of business investment.
But such investment was itself limited by available profits, and by raising
the value of the capital stock put a downward pressure on the rate of profit.
Second, slow growth in Europe, Japan, and elsewhere placed limits on
the export potential of the U.S. economy, especially as these markets were
also being served by U.S. firms located abroad.
Third, the high rate of investment did not appear to transfer into increased
labor productivity, at least in the first half of the l990s. By the mid-1990s,
for these reasons, the upturn in the U.S. economy appeared to be running
out of steam, as the effect of the rationalization at the turn of the decade
worked itself out.
It was at this point that the rise in the stock market and the growth
in borrowing began to take effect. The underlying imbalances in the economy
were temporarily hidden by developments in the financial markets. Limits
on consumption growth were lessened by the rise in credit.
Export potential became less important if foreigners were prepared to
fund a record trade deficit. And investment could continue to rise on the
basis of stock market finance and the growth of corporate debt. The result
was an increase in growth-rates and the continuation of the upturn.
The Federal Reserve Bank was unable to check the growth of speculation
because of their own worries about the world economy in the wake of the
Asian crisis and the near-bankruptcy of the Long-Term Capital Management
hedge fund.
In such circumstances, a lessening in confidence ("irrational exuberance"
in Greenspan's words) in the American economy was the last thing needed.
Instead, they reduced interest rates, talked up the economy, and helped
to prolong the speculation for a further two years. However, the enthusiasm
of the financial markets cannot hide the limitations of the mechanisms that
have been used to maintain the rate of profit.
One important development has been a change in the labor market. Declines
in unemployment finally appear to have had an effect on the ability of employers
to attack labor.
The London Financial Times of Sept. 4, 2000, analyzed a report by the
U.S. think tank, the Economic Policy Institute. The report concluded that
"the turnaround from widespread wage decline between 1979 and 1995
to widespread wage growth since is a significant new development for working
Americans" and that "the long-term rise in job instability and
job insecurity which continued well into the current recovery, finally abated
at the end of the last decade."
A second key factor was the rise in the value of the dollar. After 25
years when the tendency was for the dollar to decline, especially against
the yen, since 1996 the U.S. government has tried to pursue a strong dollar
policy.
Among the reasons for this has been fear of the effects of continued
rises in yen values on the fragile Japanese economy. Letting the yen fall
is the price paid for avoiding Japanese investors "repatriating"
their U.S. assets in order to avoid financial collapse at home.
In addition, the high dollar has been important in keeping U.S. inflation
under control despite the speculative boom. But it has limited the ability
of U.S. companies to compete internationally and contributed to the record
trade deficit.
Also central has been the issue of the so-called "new" economy.
Partly, this has been framed as a debate about whether information technology
is really raising the productivity of labor. There appear to have been
some increases since 1996, but it is very uncertain whether these are long-term
or simply a result of the cyclical boom and whether they justify the massive
investment required to achieve them.
But more fundamentally, investors have begun to question whether even
if productivity does increase this will be translated into a rise in profitability.
For Marxists this should be no surprise, for the reasons set out above.
A rise in labor productivity on its own does not necessarily increase profitability
if it simply leads to a shift from employing living labor to the use of
machinery. Technological change will only offset the decline in the rate
of profit if it also makes capital goods cheaper and so reduces the amount
of investment needed to employ more workers.
For some time developments in the U.S. information technology sector
seemed to do this. But this is becoming less and less clearly the case.
The Economist of Dec. 9, 2000 reported that the rate of deflation for computer
prices had slowed from 25 percent to 11 percent, with software prices rising
by 7 percent during 2000: "After falling for a couple of decades, prices
for IT equipment and software were flat in the year to the third quarter.
That matters because IT investment has been spurred by falling prices."
The result of all this has been a sharp decline in the headline profits
of some key U.S. companies followed by dramatic falls in share prices. Examples
are Dell, Intel, Apple, IBM, Chase Manhattan, and Xerox, which saw its shares
fall by 75 percent in value last October and came close to bankruptcy.
Banks like Bank of America have seen significant rises in problem loans.
These developments have fed through to the stock market in general, which
has been wildly optimistic about future profits in any case.
American capitalism thus faces two central problems. The most immediate
is the possibility of a financial crisis spilling over into a recession.
A collapse in domestic confidence in the stock market could cut investment,
by starving companies of funds, and slash consumption as households see
their savings fall in value.
If foreign investors also lose confidence in the U.S. economy then they
could withdraw their funds, sending the currency plunging and making it
difficult to continue funding the trade deficit.
But in many ways more important is the second, long-term problem. The
recent buoyancy of U.S. capitalism has been based on an artificial set of
circumstances, which have masked the underlying limitations of the economy.
If those circumstances have now evaporated, then these limitations come
sharply into focus.
While U.S. companies were notably successful in a number of areas in
the 1990s, they face continuing challenges in the future. In the motor industry,
for example, Ford and Genera1 Motors have been increasingly threatened by
competition from European companies.
In telecommunications, European and Japanese companies continue to dominate
in mobile phones, while U.S. giants like AT&T lurch from crisis to crisis.
The strength derived by American capital from the restructuring undergone
in the decade after 1979 cannot be expected to last forever.
The United States faces not just a recession but also deeper questions
about the nature and limitations of growth over the last 20 years.
The implications of a U.S. slump for capitalism elsewhere could also
be dramatic. The United States has accounted, directly or indirectly, for
about half the increase in world demand over the last few years. A collapse
in the value of the dollar could easily choke off any recovery in Japan
or Western Europe as the yen and euro rise in value.
Japanese and European companies that have invested in the United States
could also see their profits fall if there is an American recession.Stagnation
in the U.S. will have a much more direct effect on global capital than the
slow growth in Japan over the last decade, given the relatively low level
of exports to Japan and of foreign investment there before the slump.
It is not clear how sharp the downturn in the U.S. economy will be, or
to what extent the Federal Reserve can hold it off by reducing interest
rates and trying to stimulate demand. But what is clear is that the bubble
of the last five years has burst and that from now on U.S. capital will
have to grapple with its real problems without the aid of the financial
hysteria we have seen recently.
The ideological effects of this for socialists worldwide cannot be overstated.
The supposed success of the "new economy" based in the United
States has been crucial in providing a basis for neoliberal thought and
for the strategies of the WTO and IMF.
The explosion of this myth will provide important opportunities for arguing
against such ideas and for putting forward the view that the problems demonstrated
in the United States cannot be solved by capitalism but require a renewed
struggle for an alternative economic system.
Socialist Action /March 2001 |