Robert Brenner: Devastating Crisis Unfolds

This is a fairly extensive analysis of some of the factors behind the current crisis. I would think that many foreign corporations must be sharing in the growth and profiting from increased production in areas such as China and India.
With military spedning already providing an artificial stimulus to the US economy I just wonder what effect further stimulus through tax cats will have. The US dollar is already being abandoned to some degree. Further decline will create inflated prices for all goods imported and that is quite a few goods! Even those goods made in the USA may have a number of imported components.
Devastating Crisis Unfolds
— Bob Brenner, for the ATC editors

THE CURRENT CRISIS could well turn out to be the most devastating since

the Great Depression. It manifests profound, unresolved problems in the

real economy that have been — literally — papered over by debt for
decades, as well as a shorter term financial crunch of a depth unseen
since World War II. The combination of the weakness of underlying
capital accumulation and the meltdown of the banking system is what’s

made the downward slide so intractable for policymakers and its
potential for disaster so serious. The plague of foreclosures and
abandoned homes — often broken into and stripped clean of everything,

including copper wiring — stalks Detroit in particular, and other
Midwest cities.

The human disaster this represents for hundreds of thousands of
and their communities may be only the first signal of what such a
capitalist crisis means. Historic bull runs of the financial markets in

the 1980s, 1990s and 2000s — with their epoch-making transfer of
and wealth to the richest one per cent of the population — have
distracted attention from the actual longterm weakening of the advanced

capitalist economies. Economic performance in the United States,
Europe and Japan, by virtually every standard indicator — the growth
output, investment, employment and wages — has deteriorated, decade
decade, business cycle by business cycle, since 1973.

The years since the start of the current cycle, which originated in
early 2001, have been worst of all. GDP (Gross Domestic Product) growth

in the United States has been the slowest for any comparable interval
since the end of the 1940s, while the increase of new plant and
equipment and the creation of jobs have been one third and two thirds,
respectively, below postwar averages. Real hourly wages for production
and non supervisory workers, about 80% of the labor force, have stayed
roughly flat, languishing at about their level of 1979.

Nor has the economic expansion been significantly stronger in either
western Europe or Japan. The declining economic dynamism of the
capitalist world is rooted in a major drop in profitability, caused
primarily by a chronic tendency to overcapacity in the world
manufacturing sector, going back to the late 1960s and early 1970s. By
2000, in the United States, Japan and Germany, the rate of profit in
private economy had yet to make a comeback, rising no higher in the
1990s cycle than in that of the 1970s.

With reduced profitability, firms had smaller profits to add to their
plant and equipment, as well as smaller incentives to expand. The
perpetuation of reduced profitability since the 1970s led to a steady
falloff in investment, as a proportion of GDP, across the advanced
capitalist economies, as well as step-by-step reductions in the growth
of output, means of production, and employment.

The long slowdown in capital accumulation, as well as corporations’
repression of wages to restore their rates of return, along with
governments’ cuts in social spending to buttress capitalist profits,
have resulted in a slowdown in the growth of investment, consumer and
government demand, and thus in the growth of demand as a whole. The
weakness in aggregate demand, ultimately the consequence of the
reduction in profitability, has long constituted the main barrier to
growth in advanced capitalist economies.

To counter the persistent weakness of aggregate demand, governments,
by the United States, have seen little choice but to underwrite ever
greater volumes of debt, through ever more varied and baroque channels,

to keep the economy turning over. Initially, during the 1970s and
states were obliged to incur ever larger public deficits to sustain
growth. But while keeping the economy relatively stable, these deficits

also rendered it increasingly stagnant: In the parlance of that era,
governments were getting progressively less bang for their buck, less
growth of GDP for any given increase in borrowing.
From Budget-Cutting to Bubblenomics

In the early 1990s, therefore, in both the United States and Europe,
by Bill Clinton, Robert Rubin and Alan Greenspan, governments moving to

the right and guided by neoliberal thinking (privatization and slashing

of social programs) sought to overcome stagnation by attempting to move

to balanced budgets. But although this fact does not loom large in most

accounts of the period, this dramatic shift radically backfired.

Because profitability had still failed to recover, the deficit
reductions brought about by budget balancing resulted in a huge hit to
aggregate demand, with the result that during the first half of the
1990s, both Europe and Japan experienced devastating recessions, the
worst of the postwar period, and the U.S. economy experienced the
so-called jobless recovery. Since the middle 1990s, the United States
has consequently been obliged to resort to more powerful and risky
of stimulus to counter the tendency to stagnation. In particular, it
replaced the public deficits of traditional Keynesianism with the
private deficits and asset inflation of what might be called asset
Keynesianism, or simply Bubblenomics.

In the great stock market runup of the 1990s, corporations and wealthy
households saw their wealth on paper massively expand. They were
therefore enabled to embark upon a record-breaking increase in
and, on this basis, to sustain a powerful expansion of investment and
consumption. The so-called New Economy boom was the direct expression
the historic equity price bubble of the years 1995-2000. But since
equity prices rose in defiance of falling profit rates and since new
investment exacerbated industrial overcapacity, there quickly ensued
stock market crash and recession of 2000-2001, depressing profitability

in the non-financial sector to its lowest level since 1980.

Undeterred, Greenspan and the Federal Reserve, aided by the other major

Central Banks, countered the new cyclical downturn with another round
the inflation of asset prices, and this has essentially brought us to
where we are today. By reducing real short-term interest rates to zero
for three years, they facilitated an historically unprecedented
explosion of household borrowing, which contributed to and fed on
rocketing house prices and household wealth.

According to The Economist,, the world housing bubble between 2000 and
2005 was the biggest of all time, outrunning even that of 1929. It made

possible a steady rise in consumer spending and residential investment,

which together drove the expansion. Personal consumption plus housing
construction accounted for 90-100% of the growth of U.S. GDP in the
first five years of the current business cycle. During the same
interval, the housing sector alone, according to Moody’s,

was responsible for raising the growth of GDP by almost 50% above what
it would otherwise been — 2.3% rather than 1.6%.

Thus, along with G. W. Bush’s Reaganesque budget deficits, record
household deficits succeeded in obscuring just how weak the underlying
economic recovery actually was. The rise in debt-supported consumer
demand, as well as super-cheap credit more generally, not only revived
the American economy but, especially by driving a new surge in imports
and the increase of the current account (balance of payments and trade)

deficit to record levels, powered what has appeared to be an impressive

global economic expansion.
Brutal Corporate Offensive

But if consumers did their part, the same cannot be said for private
business, despite the record economic stimulus. Greenspan and the Fed
had blown up the housing bubble to give the corporations time to work
off their excess capital and resume investing. But instead, focusing on

restoring their profit rates, corporations unleashed a brutal offensive

against workers. They raised productivity growth, not so much by
increasing investment in advanced plant and equipment as by radically
cutting back on jobs and compelling the employees who remained to take
up the slack. Holding down wages as they squeezed more output per
person, they appropriated to themselves in the form of profits an
historically unprecedented share of the increase that took place in
non-financial GDP.

Non-financial corporations, during this expansion, have raised their
profit rates significantly, but still not back to the already reduced
levels of the 1990s. Moreover, in view of the degree to which the
of the profit rate was achieved simply by way of raising the rate of
exploitation — making workers work more and paying them less per hour

there has been reason to doubt how long it could continue. But above
all, in improving profitability by holding down job creation,
and wages, U.S. businesses have held down the growth of aggregate
and thereby undermined their own incentive to expand.

Simultaneously, instead of increasing investment, productiveness and
employment to increase profits, firms have sought to exploit the
hyper-low cost of borrowing to improve their own and their
position by way of financial manipulation — paying off their debts,
paying out dividends, and buying their own stocks to drive up their
value, particularly in the form of an enormous wave of mergers and
acquisitions. In the United States, over the last four or five years,
both dividends and stock repurchases as a share of retained earnings
have exploded to their highest levels of the postwar epoch. The same
sorts of things have been happening throughout the world economy — in

Europe, Japan and Korea.
Bursting Bubbles

The bottom line is that, in the United States and across the advanced
capitalist world since 2000, we have witnessed the slowest growth in
the real economy since World War II and the greatest expansion of the
financial or paper economy in U.S. history. You don’t need a Marxist
tell you that this can’t go on.

Of course, just as the stock market bubble of the 1990s eventually
burst, the housing bubble eventually crashed. As a consequence, the
of housing-driven expansion that we viewed during the cyclical upturn
now running in reverse. Today, house prices have already fallen by 5%
from their 2005 peak, but this has only just begun. It is estimated by
Moody’s that by the time the housing bubble has fully deflated in
2009, house prices will have fallen by 20% in nominal terms — even
in real terms — by far the greatest decline in postwar U.S. history.

Just as the positive wealth effect of the housing bubble drove the
economy forward, the negative effect of the housing crash is driving it

backward. With the value of their residences declining, households can
no longer treat their houses like ATM machines, and household borrowing

is collapsing, and thus households are having to consume less.

The underlying danger is that, no longer able to putatively “save”
through their rising housing values, U.S. households will suddenly
to actually save, driving up the rate of personal savings, now at the
lowest level in history, and pulling down consumption. Understanding
the end of the housing bubble would affect consumers’ purchasing
firms cut back on their hiring, with the result that employment growth
fell significantly from early in 2007.

Thanks to the mounting housing crisis and the deceleration of
employment, already in the second quarter of 2007, real total cash
flowing into households, which had increased at an annual rate of about

4.4% in 2005 and 2006, had fallen near zero. In other words, if you add

up households’ real disposable income, plus their home equity
withdrawals, plus their consumer credit borrowing, plus their capital
gains realization, you find that the money that households actually had

to spend had stopped growing. Well before the financial crisis hit last

summer, the expansion was on its last legs.

Vastly complicating the downturn and making it so very dangerous is, of

course, the sub-prime debacle which arose as direct extension of the
housing bubble. The mechanisms linking unscrupulous mortgage lending on

a titanic scale, mass housing foreclosures, the collapse of the market
in securities backed up by sub-prime mortgages, and the crisis of the
great banks who directly held such huge quantities of these securities,

require a separate discussion.

One can simply say by way of conclusion, because banks’ losses are so

real, already enormous, and likely to grow much greater as the downturn

gets worse, that the economy faces the prospect, unprecedented in the
postwar period, of a freezing up of credit at the very moment of
into recession — and that governments face a problem of unparalleled
difficulty in preventing this outcome.

[This statement was written by Robert Brenner, a member of the ATC
editorial board and author of The Economics of Global Turbulence.
References for all data cited here can be found in this book,
in the Afterword.]

from ATC 132 (January/February 2008)


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