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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.
Economic impasse
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)
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