sot of dramate uS economic sta- he last few weeks have seen one
tistics follow another. • The trade deficit, already at record levels, has risen over the last year from $420 billion to $5l4 billion. • Retail sales fell in April and industrial production has virtually stagnated over the last year. • Consumer prices, as measured by the Department of Labor, are growing at the slowest rate since 1966, while wholesale prices fell in April at the sharpest rate for 50
Government bond yields are at their lowest for 45 years.
Employment has fallen for the longest continuous period for half a century, with 2• million US jobs lost since George W Bush came to power.
The dollar has fallen by 10 per cent against the euro over the last two months and would have fallen against the yen, but for heavy Japanese government intervention in the markets.
What does this mean for American capitalism and for the world economy? Is the USA entering an economic crisis? In order to answer, we need to examine the boom of the late 1990s and how it led to the current slowdown.
The fundamental economic problem in the USA is the legacy of over-production and over-capacity resulting from the speculative boom, which ended in the first half of 200l. This boom was financed by record borrowing both from households and firms, encouraged by the rise in the stock market and a wave of hype about the 'new economy". This borrowing was unsustainable in the long run and when the stock market slumped and the extent of over-investment became clear a slowing of growth was nevitable
The clearest indicator of this has been the collapse in corporate investment. After growing in real terms at an average rate of 10 percent per year between 1996 and 2000, it fell by 5.5 percent per year in both 200l and 2002. T Reave the US centel ban, fie his is not surprising since Federal
Tures released in mid-May showed. that a quarter of American industrial capacity remained unused, the highest rate since June 1983. In some industries the situation was far worse. In his survey of the US economy published in the London Review of Books (6 February 2003) American Marxist analyst Robert Brenner quotes a utilisation rate for telecoms networks in the USA of 2.5-3 per cent, with a corresponding figure for undersea cable laid by US firms of just 13 per cent.
The 39 million miles of fibre-optic cable laid in the USA during the boom was enough to circle the globe 1566 times!
The collapse of investment has presented American capitalism with real problems. An Now the Iraq war is over, Bush has less room to hide on the economy alternative source of demand for goods has to be found to prevent the economy spiralling into crisis.
Three such possibilities have all been tried over the last two years; consumer demand, government spending and exports. But each of these poses severe problems as a route away from a slump. Relying on them is likely to make the system even more unstable. M ost analysts agree that the main
reason for the relatively shortlived and shallow nature of the recession of early 2001 in the USA was the continued strength of consumer spending. However, there are two main difficulties in relying on this way of stimulating the economy.
Firstly, it means a dangerous build-up of debt, given the previous record levels of household borrowing in the late 1990s. Secondly, much of this consumer spending was based, as in Britain, on rising house prices which are unlikely to continue at such high levels. US house prices have risen by 28 per cent in real terms (in other words as compared with prices in general) since 1996.
As The Economist observed:
"The main reason why households have been able to postpone their adjustment is their ability to borrow - and so spend -against the rising value of their homes. But that extra cash could soon run out: even if property prices stay high and mortgage rates stay low, the scope for home-equity withdrawal will decline. Households will then have to tighten their belts. This, in turn, implies that America's growth rate could remain below potential for some time." (March 15 2003)
As a result the US government has been trying to avoid recession through increases in government spending, coupled with tax cuts. The IMF now expects the American budget deficit to be 4.6 per cent of GDP this year, up from 3.6 percent in 2002. This can be compared with the budget surpluses of the Clinton years, and the 3 percent limit for deficits under the European 'stability and growth' pact.
But many observers argue that even these deficits are not enough to avoid a slump. On the assumption of 3-4 per cent growth in the USA, coupled with the rest of the world economy remaining at the current weak levels of growth and US households and firms running balanced budgets, Cambridge economist Wynne Godley has claimed that the budget deficit will have to double to 9 per cent of GDP, a figure comparable to that in the struggling Japanese
The difficulties of relying on government deficits or consumer spending to kick-start the economy have led to increasing reliance on a third approach; encouraging exports by bringing down the value of the dollar. As Brenner has argued, this has been a favoured tactic of US capitalism over the last thirty years, in response to economic challenges from Europe and Asia.
The last months have seen a sharp movement away from the 'strong dollar' policy adopted since 1995. The Financial Times quotes Charles Dumas of Lombard Street Research as arguing that:
"The falling dollar is the Greenspan gamble. The quickest way to boost domestic prices and profit margins is a combination of falling oil prices and the dollar. Falling oil prices are genuinely beneficial to costs and the lower dollar concentrates this in US firms". (FT, May 17/18 2003)
However, there are two main problems with using dollar devaluation in this way. Firstly, the financing of the record US trade deficit depends on the willingness of foreign governments and investors to hold dollars.
Currently about 73 per cent of total world foreign currency reserves are held in dollars. But this may change if the dollar appears less good as an investment, with US interest rates low and the value of the currency on a downward trend
Secondly, a fall in the dollar is likely to cause even slower growth in Europe, as the euro rises. This will mean a further increase in the American trade deficit, as European demand for US exports declines, with consequent destabilisation of the world economy. - the USA appears likely to comth ie or all these reasons slow growth in
for the foreseeable future. But US policy makers are increasingly concerned about something even worse. The worry is that the USA is following the same path this decade as Japan did last decade, after the bursting of the stock market bubble there following the boom of the late 1980s. In particular the Federal Reserve is taking the threat of Japanese style deflation in the US economy more and more seriously.
The theoretical basis for concern about deflation (falling levels of prices) dates back to Irving Fisher's analysis of the 1930s depression. He saw this as a process of 'debt-deflation' in which, as prices fell, the real burden of debt increased, bringing spending levels down. This in turn pushed prices even lower, further worsening the position of borrowers even more, and slowing the economy further. It has been argued that this kind of process has been at the root of the slow growth in Japan over the last ten years.
One way of dealing with debt-deflation processes, adopted by the Japanese, is to reduce interest rates. But if prices begin falling significantly this becomes ineffective because interest rates cannot be reduced below zero. Even with interest rates at zero the Japanese government has been unable to encourage either consumer spending or business investment.
For Marxists the theory of debt-deflation has both good and bad points. Unlike the simplistic models of conventional free-market economics, which see the main cause of recessions as being rigidities in the labour market, it highlights the way in which changes in growth rates redistribute income between sectors in the economy, and in doing so affect the possibilities for future growth.
But the way in which such shifts in income have been analysed by Fisher and his followers differs fundamentally from a Marxist approach. Where we would focus on the relationship between workers and capitalists, the debt-deflation theorists focus on the relationship between borrowers and lenders. As a result they tend to concentrate on the financial sector at the expense of relating this to developments in the sphere of production.
The current US debate about deflation reflects important facts about American capitalism, in particular the impact of the debt burden resulting from the speculation of the 1990s. B ut to get a full picture of the
prospects for the economy this debate needs to be linked with an analysis of profitability in the USA. Here, however, the outlook for capital is also not good. Brenner has pointed out that the late 1990s boom actually coincided with a decline in profitability compared to the early 1990s, due in part to downward pressure on prices; 'between 1997 and 2000, as the boom peaked, the rate of profit in the non-financial corporate sector as a whole fell by a fifth.
Since then the picture has worsened Profits across the whole economy fell for three quarters in a row in 2002.
The combination of over-capacity and lack of demand on the one hand and debtdeflation and poor profitability on the other is likely to create severe problems for US capitalism in the coming period. It is always possible that some combination of devaluation of the dollar, increased borrowing at home and a rising government budget deficit may temporarily stabilise the econo my.
But this could only happen at the expense of worsening the underlying instability of the system. For over a decade the supposed dynamism of American business has been one of the main arguments used against socialism.
The next few years should provide plenty of opportunities for arguing back!
page 19 of the scan
Murray Smith
I rance is teetering on the brink of a
saw the biggest one-day general strike since 1995, mainly of public sector workers but with significant participation by workers in the private sector. Two milTE EDUCATIN soclalst resistance June 2003 19
International resistance