|SocialismToday Socialist Party magazine|
What is happening to the US economy?
US capitalism is stagnating, weighed down by bubble-era debt and an unsustainable payments deficit. Faltering US growth is dragging down Europe and Asia. Apart from tax cuts for the super-rich, Bush has no economic policy. The dollar is beginning to slide downwards (for more click here): could this provide a way out for the US or will a collapse of the dollar provoke new convulsions in the world economy? LYNN WALSH writes.
THERE HAS BEEN no sustained ‘rebound’ of the US economy from the recession that started in 2001, nor any signs of a ‘bounce’ following the US victory in Iraq. "Stocks sag, profits fall, assets drop", read a recent business page headline. (International Herald Tribune 30 April) After growing 2.4% in 2002 (up from 0.3% in 2001), real gross domestic product (GDP) grew at an annualised rate of only 1.6% in the first quarter of this year. Workers are paying a heavy price for the capitalist downturn: over 2.4 million jobs have been lost since employment levels peaked in March 2001.
Unemployment rose half-a-million in the first quarter of this year, taking the official total to 8.8 million, a figure which substantially under-estimates the true numbers. Twelve successive cuts in the base interest rate by the Federal Reserve – to 1.25%, the lowest in 40 years – has failed to stimulate renewed business investment and growth. In fact, some capitalist economists now fear that the US is in danger of a Japanese-type deflationary spiral in which falling prices would aggravate the accumulated burden of debt (by raising real interest rates) and stifle recovery.
Faced with this, Bush appears to have only one economic policy, which is really no policy at all: tax cuts for the super-rich. Launching a blitzkrieg in Congress to push it through, Bush describes the measure as a ‘jobs creation’ package. The New York Times calls it a ‘disaster,’ and even many top Wall Street finance houses are opposed to a measure that, if implemented, is likely massively to push up the Federal deficit and national debt while giving only a feeble stimulus to investment and consumer spending (see: Bush Shuns Wall Street Critics of Tax Policy, International Herald Tribune, 14 April).
The US victory in Iraq after only thee weeks has not removed the ‘geopolitical’ uncertainties that preceded the war. Strategists of big business are concerned about possible US intervention against other states, such as Syria or North Korea; the rift between the US and ‘old Europe’; the SARS epidemic in Asia; the recent bomb attacks in Saudi Arabia – all of which could have unpredictable ramifications for the world economy. Moreover, although the currently estimated cost of the war – up to $100 billion – may appear quite ‘manageable’ for US imperialism, big business fears that the real cost, especially of the aftermath in Iraq, may be far higher.
A flight of capital from the US has been gathering pace over recent months. Initially, this was mainly a response by international capitalists to the downturn in the US, but has recently been accelerated by fears about the adverse consequences of US unilateralism, especially the prospect of further military adventures by the Bush regime. As its momentum gathers, the decline of the dollar (and the associated rise of the euro) is producing severe strains in the world money system, an early warning of a period of global financial turmoil.
The world outlook
A SECOND US recession, a ‘double dip’, or even a period of prolonged stagnation, will impose severe problems on the world economy. The US accounts for 30% of world GDP, and it is estimated that during the 1990s boom (1995-2000) the US economy was responsible for sixty percent of world GDP growth. In the globalised economy that reached its height in the late 1990s, US capitalism came to occupy a pivotal role in the structure of world capital and trade flows between North America, Europe and Asia. In this period, US stagnation means global stagnation, US slump means world slump (perhaps with some variations of tempo). No other economy has the capacity to act as locomotive of world economic growth. This year’s first-quarter slowdown in the US, after the feeble recovery last year, has been followed by a similar stalling of growth in Europe and Asia.
At the end of March the OECD predicted an ‘unspectacular’ recovery for the OECD area (consisting of 30 countries) after the Iraq war, revising its 2003 growth forecast down from 2.2% to 1.9%. They predicted a 1% growth for the Euro zone and 1% for Japan – although even this now appears optimistic. The European Union now reports first-quarter stagnation for the twelve-country Euro zone, with negative growth in Germany and Netherlands. "The Euro zone is stagnating, and Germany, as the sick man of Europe, is falling even further behind", commented Joerg Kraemer, chief economist at Invesco in Frankfurt. (Europe’s economy nearing recession, New York Times, 16 May) France and Italy are expected to grow little over 1% this year. "The world doesn’t have much of a growth cushion", says Stephen Roach, Morgan Stanley’s chief economist. "So when we have shocks like SARS in Asia, and Europe seemingly falling into recession, it could push the global economy into recession". (New York Times, 16 May) The currently predicted 2% to 2.5% growth in US GDP will not drag these countries out of recession. Japan, the world’s second largest economy, is still stagnant, with 2003 growth predicted to be under 1%. China, which grew at 9.9% in the first quarter, may only achieve around 2% growth in the second quarter, as a result of the SARS crisis.
Prospects for the world economy are further clouded by growing tensions over trade. The ‘Doha Round’, which was supposed to overcome the disarray of the Seattle World Trade Organisation (WTO) meeting in 1999, is deadlocked. No progress has been made in resolving the most contentious problem, agricultural subsidies. At the same time, the US is locked in combat with the European Union (EU) on a series of trade disputes: Bush’s 30% steel tariffs, ruled illegal by the WTO, US tax breaks for US multi-nationals, and the export of genetically modified foods to Europe. The conflict over the Iraq war between the US, on the one side, and France and Germany, on the other, has aroused fears that the US’s aggressive unilateral approach may spill over into areas of trade. "In the normally closed, clubby world of the WTO", reported the New York Times, "envoys and officials said they feared that American moves within the organisation and towards war in Iraq would weaken respect for international rules and lead to serious practical consequences for the world economy and business". (WTO Fears Bush Go-It-Alone Role, International Herald Tribune, 15 March) In the previous months the US had violated a series of WTO rules and single-handedly blocked an agreement to provide low-cost generic medicines (through exemptions to WTO rules) to poor countries. "I can feel the sense of trepidation", warned the WTO director-general, Supachai Panitchpakdi.
Following the end of the war, oil prices have declined. The OPEC producers are trying to maintain a price of around $25 per barrel, but it is likely to fall lower, especially when Iraqi oil begins to reach world markets once again. This, however, will not give the world economy the magical boost dreamed of by the Bush administration. A low oil price may well be a positive factor for most of the advanced capitalist countries, but by itself it will not be enough to stimulate an upswing. Moreover, a low and possibly declining oil price will have an adverse effect on the oil producers, plunging some of them into crisis.
Workers’ spending faces squeeze
THE COLLAPSE OF the stock exchange bubble early in 2001, triggered by a slump in corporate profits, led to a collapse in investment and a downturn in US manufacturing (with a sharp rise in unemployment). Since then, US capitalism has been hit by a series of big business scandals – Enron, Global Crossing, etc – which has revealed the rotten criminal core of bubble capitalism.
Despite a 50-60% fall of the major US stock exchange indexes, shares remain grossly overvalued. The average price/earnings ratio (share price/company profits per share) is still around 1:30 compared with an historic average price/earnings ratio of 1:15. A ratio of 30 is comparable to the overvaluation of shares just before the 1929 crash or the 1987 crash. Another stock exchange shock, therefore, cannot be ruled out.
Despite the major stock exchange crash, the recession from 2001 was relatively mild. The economy was cushioned by the continuation of relatively strong consumer spending and stimulus from government spending after the 11 September attacks (turning the federal government surplus into a deficit).
In the late 1990s consumer spending was boosted by the ‘wealth effect’ of the stock exchange boom. When this effect disappeared, however, consumer spending continued to be fuelled by the growth of debt. This was encouraged by low interest rates and easy credit (facilitated by the Federal Reserve’s massive post-9/11 expansion of the money supply).
A large slice of consumer credit came from the housing bubble. House prices surged at the height of the boom during 1998-2000. On the basis of rising prices and falling interest rates, a huge number of households refinanced their mortgages, using the excess cash to subsidise their living standards. At the same time, the consumer ‘confidence’ inspired by the 1990s bubble continued for some time even after the economy was heading for a downturn. Consciousness lagged behind reality. Credit card and consumer debt also continued to surge after the bubble burst. In effect, workers and sections of the middle class were using credit to partially compensate for their decreased share of the wealth and increasing inequality.
During the late 1990s bubble economy private sector debt (company and personal) rose to historic peaks. At the height of the boom, the annual flow of credit to households exceeded 10% of personal disposable income, while the average outstanding debt rose above 100% of household income. Since 2001, companies – no longer increasing their investment levels – have sharply reduced their debt levels. It is not so easy, however, for households to reduce their reliance on credit. Personal debt levels are becoming increasingly unsustainable as unemployment rises and incomes shrink. The inflation-adjusted weekly pay of the median worker (half earn more, half earn less) fell 1.5% from early 2002 to early this year, the biggest drop since the mid-1990s. Recently, more and more households have been using (relatively cheap) mortgage refinancing to pay off (relatively expensive) credit card and consumer debt rather than for buying consumer goods, holidays, etc.
House prices have begun to level off and the housing bubble will deflate at a certain point, but perhaps not as suddenly as the stock exchange bubble. The fall of house values will curtail one source of credit and increasingly throw an added debt burden on those with big mortgages. Under the impact of private debt repayment, unemployment, reduced incomes, and general uncertainty about economic prospects, the growth of consumer spending – the dynamo of the 1990s boom – is running out of energy. In a classic manner, consumer demand (the need for goods and services backed by money) has been undermined by the intensification of capitalist exploitation.
WHAT SOURCES OF growth could now provide a route to recovery for US capitalism? Low interest rates are not the answer, as the example of Japan has demonstrated. A federal base rate of 1.25% (effectively a real interest rate of zero, allowing for inflation) has not triggered any revival of capital accumulation. There is massive overcapacity (around 30% in core industries like steel, vehicles, etc) and weak demand. Why should big business invest in new plant and equipment when there are poor prospects for profits?
Corporations are reluctant to invest even if they have access to very cheap credit. In fact, however, many businesses, having suffered big losses in recent years, are now considered to be ‘high-risk’ and can borrow only at premium rates – a further disincentive to new investment.
Bush claims his tax cut package will stimulate investment and growth and lead to the creation of jobs. The super-rich, however, who will pocket most of the tax concessions, only spend a small fraction of their incomes on consumer goods. According to Bush’s neo-conservative economics, if the super-rich have even more wealth, they will invest more in the economy. But why would they invest in productive activity or even in the speculative financial sector, unless there is a good prospect of their making more profit? Increasingly, the wealthy, as well as many corporations, are putting their money into secure cash assets (government bonds, etc) and real estate, and avoiding the stock market.
Bush’s tax cuts, likely to be about $500 billion, will increase the federal government deficit, raise annual interest payments, and massively push up the national debt. This policy will undoubtedly mean cuts in federal, state and local government budgets, especially in social spending. Bush’s stimulus package is the strangest kind of pseudo-Keynesianism. It is based on cutting tax revenue (to the benefit of the wealthy) rather than on deficit-financed spending programmes (historically financed by increased taxation, or printing money). For instance, Japan’s 10-year long stagnation during the 1990s was cushioned by a series of massive construction programmes, mainly aimed at subsidising the big construction companies and supporters of the ruling Liberal Democratic Party. Bush, on the other hand, believes that the super-rich, with more wealth in their pockets, will stimulate growth.
Increased government spending after 9/11, aimed at countering the negative economic effects of the attacks, undoubtedly prevented a worse recession or even a deep slump. Over half of total government spending, however, came from state governments. In the last year or so, in contrast, many states have cut their spending in order to balance their books. Most state governments are legally prevented from running deficits. Their tax revenue has fallen as a result of the recession. But their income has been seriously reduced by cuts in federal government grants to states, forcing them to cut Medicaid, welfare support, and other forms of social spending and public investment. This is having a devastating effect on the poorest sections of the working class.
Under Bush’s budget plans, the arms and security industries are the only sectors that will benefit substantially from increases in federal spending – and this probably will not even counteract the economic effects of the huge decline in civil air transport and aircraft production. The continued excess of imports over exports (overwhelmingly manufactured goods) also has a depressing effect on the US home economy. So far, the decline of the dollar has not had any real effect on this. In fact, the trade deficit continued to rise in the first quarter of 2003. In March, the trade deficit widened to $43.5 billion, the second biggest level on record.
Wynne Godley, formerly of Cambridge University and now based at the Levy Economics Institute in the US, long ago predicted the impasse into which the bubble economy was driving US capitalism. In a recent analysis, Godley predicts that, in the next five years or so, "the US economy will not recover properly but rather will enter a long, depressing era of ‘growth recession’ with increasing unemployment and the ever-present risk – with corporate and personal debt so high – of financial implosion". (Wynne Godley, The US economy: a changing strategic predicament, 15 February 2003, www.levy.org)
THE US DOLLAR appears to be on the verge of a sharp decline. Officially, the Bush administration continues to support the strong-dollar policy associated with the 1990s bubble economy. "I favour a strong dollar", announced the new US Treasury secretary, John Snow: "It’s in the national interest". (International Herald Tribune, 29 January)