Workers Power Global, London, 30 September 2003
This year the United States economy has been growing steadily. Between April and July GDP was rising at 3.1 per cent on an annual basis, twice the rate experienced at the beginning of the year.
Consumer spending continues to drive this recovery but private business investment rose in the second quarter of the year at the fastest rate since the stock market collapse in the spring of 2000. Industrial output rose by0.5 per cent in July for the third successive month.
Productivity growth has been sustained through the recession and not merely as a function of jobs being cuts faster than output. Non-farm out per hour rose 4 per cent in 2002 and this has been sustained into 2003. On the back of this (and given stagnant wage levels) profits have rebounded strongly. From their low point in mid-2001 profits have risen by 65 per cent to summer of this year.
The recession of 2000-2001 and stagnation of 2002 then is over. The issue is, however, can it continue and gain momentum or will the underlying structural weaknesses of US capitalism fatally undermine it?
The answer to this question in turn is critical for the fate of the world economy. Growth in the US between 1995-200 accounted for 65 per cent of the increase in world output. The Eurozone (and crucially Germany) has been barely growing for the last two years while Japan has averaged GDP growth of little more than 1 per cent a year for the last decade.
As the Economist put it in its survey of the world economy last month, the world economy has been and continues to fly on a single engine. If this falters and stalls then the global economy would crash.
The US recession of 2000-2001 began differently from the previous two when a sharp rise in inflation was countered by a sharp rise in interest rates which increased the debts of companies and households to such an extent that investment and spending collapsed.
Rather the recession of 2000-2001 started when falling profits in 1999 led companies to cut back sharply on spending on new capital equipment. At that point (March 2000) the stock market bubble of 1997-2000 burst as share prices collapsed 40 per cent in weeks.
This crash reinforced the recession in the real economy as a considerable part of household wealth was based on high share prices and as many companies&Mac226; debt burden became unserviceable as the new, lower market valuation of their shares hit them.
Faced with this calamity for capitalism in its largest heartland the government pulled all its monetary and tax levers at its disposable to pull the aircraft out of its nosedive.
The Federal Reserve (the USA’s equivalent of the Bank of England) cut interest rates rapidly and repeatedly. In the two years following spring 2001 the Fed cuts rates 12 times to bring them down to their current 1 per cent level. That makes the cost of borrowing money the lowest for more than 40 years and in real terms rates are negative, since inflation is higher than 1 per cent.
The most immediate and durable effect of this monetary policy was to keep to US consumers spending and hence keep the economy afloat during 2001-2002 even though businesses were retrenching.
Despite the fact that US households were hit hard by the stock market crash, the lower interest rates more than compensated them. Many cash strapped consumers borrowed time and again against the value of their homes (house prices have risen steadily as a result of lower interest rates making them more affordable and in greater demand).
In 2002 homeowners borrowed $130bn against the value of their homes, twice that of 2001. This year the binge continues. Homeowners are using the cash to buy goods (mostly sucking in imports) and to pay-off their credit card debts; interest rates on home loans are half that of credit cards and are tax deductible.
Naturally, low interest rates made it possible for many US businesses to survive their huge debt burdens &Mac246; the result of a massive borrowing binge to finance new investments in the late 1990s. However, when profits started to recover last year they were invariably used to pay off debts rather than finance new investment. Massive overcapacity remains in most branches of industry. Hence, until very recently, companies played little role in keeping the US economy afloat or stimulating recovery.
In addition to an aggressive monetary policy the Bush administration has followed classic Keynesian counter-crisis measures in regards to the tax and spending policies of federal government.
Last year Bush announced a $1.7 trillion tax cuts package, the bulk of which was a give-back to shareholders and big businesses in the form of a much lower taxes on share dividends and company tax. But it also included income tax cuts and bigger child tax credits that were released this summer, injecting a further $30bn into the economy.
Last but not least, as part of the “bread and guns” economic package, the Bush team have boosted arms spending to the tune of $85bn to finance the invasion and occupation of Iraq this year. This has accounted for 1.75 per cent of the GDP growth in 2003 &Mac246; or fully half the total.
So in many ways the surprise is not that a reasonably robust economic recovery has finally taken hold this year but that it remains as weak and best with problems as it is.
A prolonged recovery in US capitalism requires the economy to get away from its short term dependency on tax cuts, lower interest rates and more arms spending, to depend on a rising tide of increased output and employment as a result of sustained improvement in profits and investment over several years.
There are several reasons to doubt this can happen. The first set of problems centre on existing levels of debt and overcapacity. Companies are gradually writing down their debts with profits. The profits have not be used generally to re-invest. But generally speaking, the new cycle of capital spending remains muted mainly due to the fact that there is so much spare capacity around in industry and the service sector- probably between 15-25 per cent.
This means that output can be raised from present levels for some time without investing in new plant and equipment- or workers. It even may well be that the recent rebound in production is simply a function of the fact that the stocks of goods sitting in warehouses is now at a six-year low and that there is some rebuilding of inventories going on.
At this stage at least the recovery remains crucially dependent on sustaining household spending. While low interest rates have helped enormously, households &Mac246; even according to the Congressional Budget Office in Washington &Mac246; have a “dangerously low” ratio of savings to income. If they decide to save more rather than spend then a significant part of the recovery will falter. This could happen for several reasons.
First there is the fear of unemployment. One of the most stark features of the recovery is how jobless is it. Unemployment stands at 6.4 per cent, 2 per cent higher than in 2001 and represents 2.5mn job losses in those two years. It has been called “the greatest contraction in private sector employment since the Great Depression” by the head of the US Employment Policy Institute. This level of unemployment itself is a function of the drive to sustain productivity improvements and so help profits rebound. Politically, this persistent (and to date growing) unemployment could fatally damage George Bush’s re-election prospects if it continues into next year.
In the meantime fear of unemployment may well cause a retrenchment in household spending.
Secondly, consumer spending may be hit by an increase in interests rates and a softening in house prices. Already in many areas in the USA house price rises have levelled off abruptly due to a glut of new house building. This itself was caused by the surge in demand for houses when mortgage costs were lowered so dramatically in 2001-2002.
But a rise in interest rates present the greatest threat to the recovery. They cannot be lowered any further but they could rise because of debt levels in the economy as a whole.
The Bush administration’s economic packages have turned a federal budget surplus under Clinton into a huge and growing deficit. It will be $300bn this year and $600bn next year; it would top $1500bn in ten years, but most sympathetic commentators believe it would not be sustainable as early as 2005-6.
In addition the current account deficit (difference between what USA PLC earns and what it owes the rest of the world) is 5 per cent of GDP &Mac246; a historic high &Mac246; and growing. Servicing this debt is increasingly onerous and would become more so if interest rates rise as they are bound to do as the need to attract more and more money from the world grows.
Bush’s opinion poll ratings are at an all time low on the back of the quagmire his troops are stuck in inside Iraq; he is hoping that the economic recovery will come to his rescue in time for November 2004. He may well be disappointed.
[October 2001]
Global economy: recession hits USA and Japan
[July 2001]
Stock market frenzy turns to fear [May 2000]
US capitalism: markets in denial (pdf) [Trotskyist International 25, 1999]
Modern capitalism and crisis theory [Trotskyist International 25, 1999]