[Marxism] New boom or new bubble?

Louis Proyect lnp3 at panix.com
Tue Dec 7 14:18:39 MST 2004


New Left Review 25, January-February 2004

The shape of the US economy as it emerges from recession, in election year. 
With the giant manufacturing sector still crippled by over-capacity, can 
the take-off be sustained by bubble-driven finance, retail and construction 
booms?

ROBERT BRENNER

NEW BOOM OR NEW BUBBLE?

The Trajectory of the US Economy

In early 2002 Alan Greenspan declared that the American recession which had 
begun a year earlier was at an end. By the fall the Fed was obliged to 
backtrack, admitting that the economy was still in difficulties and 
deflation a threat. In June 2003 Greenspan was still conceding that ‘the 
economy has yet to exhibit sustainable growth’. Since then Wall Street 
economists have been proclaiming, with ever fewer qualifications, that 
after various interruptions attributable to ‘external shocks’—9/11, 
corporate scandals and the attack on Iraq—the economy is finally 
accelerating. Pointing to the reality of faster growth of gdp in the second 
half of 2003, and a significant increase in profits, they assure us that a 
new boom has arrived. The question that therefore imposes itself, with a 
Presidential election less than a year away, is the real condition of the 
us economy. [1] What triggered the slowdown that took place? What is 
driving the current economic acceleration, and is it sustainable? Has the 
economy finally broken beyond the long downturn, which has brought ever 
worse global performance decade by decade since 1973? What is the outlook 
going forward?

In mid-summer 2000, the us stock market began a sharp descent and the 
underlying economy rapidly lost steam, falling into recession by early 
2001. [2] Every previous cyclical downturn of the post-war period had been 
detonated by a tightening of credit on the part of the Federal Reserve, to 
contain inflation and economic overheating by reducing consumer demand and, 
in turn, expenditure on investment. But in this case, uniquely, the Fed 
dramatically eased credit, yet two closely interrelated forces drove the 
economy downward. The first of these was worsening over-capacity, mainly in 
manufacturing, which depressed prices and capacity utilization, leading to 
falling profitability—which in turn reduced employment, cut investment and 
repressed wage increases. The second was a collapse of equity prices, 
especially in high technology lines, which sent the ‘wealth effect’ into 
reverse, making it harder for corporations to raise money by issuing shares 
or incurring bank debt, and for households to borrow against stock.

I. THE END OF THE BOOM

The recession brought an end to the decade-long expansion that began in 
1991 and, in particular, the five-year economic acceleration that began in 
1995. That boom was, and continues to be, much hyped, especially as the 
scene of an ostensible productivity growth miracle. [3] In fact, it brought 
no break from the long downturn that has plagued the world economy since 
1973. Above all, in the us, as well as Japan and Germany, the rates of 
profit in the private economy as a whole failed to revive. The rates for 
the 1990s business cycle failed to surpass those of the 1970s and 1980s, 
which were of course well below those of the long post-war boom between the 
end of the 1940s and end of the 1960s. As a consequence, the economic 
performance during the 1990s of the advanced capitalist economies taken 
together (g7), in terms of the standard macroeconomic indicators, was no 
better than that of the 1980s, which was in turn less good than that of the 
1970s, which itself could not compare to the booming 1950s and 1960s. [4]

What continued to repress private-sector profitability and prevent any 
durable economic boom was the perpetuation of a long-term 
international—that is, systemic—problem of over-capacity in the 
manufacturing sector. This found expression in the deep dip of—already much 
reduced—manufacturing profitability in both Germany and Japan during the 
1990s, and in the inability of us manufacturers to sustain the impressive 
recovery in their rates of profit between 1985 and 1995 much past 
mid-decade. It was manifested too in the series of increasingly deep and 
pervasive crises that struck the world economy in the last decade of the 
century—Europe’s erm collapse in 1993, the Mexican shocks of 1994–95, the 
East Asian emergency of 1997–98, and the crash and recession of 2000–01.

The roots of the slowdown, and more generally the configuration of the us 
economy today, go back to the mid-1990s, when the main forces shaping the 
economy of both the boom of 1995–2000 and the slowdown of 2000–03 were 
unleashed. During the previous decade, helped out by huge revaluations of 
the yen and the mark imposed by the us government on its Japanese and 
German rivals at the time of the 1985 Plaza Accord, us manufacturing 
profitability had made a significant recovery, after a long period in the 
doldrums, increasing by a full 70 per cent between 1985 and 1995. With the 
rate of profit outside of manufacturing actually falling slightly in this 
period, this rise in the manufacturing profit rate brought about, on its 
own, a quite major increase in profitability for the us private economy as 
a whole, lifting the non-financial corporate profit rate by 20 per cent 
over the course of the decade, and regaining its level of 1973. On the 
basis of this revival, the us economy began to accelerate from about 1993, 
exhibiting—at least on the surface—greater dynamism than it had in many years.

Nevertheless, the prospects for the American economy were ultimately 
limited by the condition of the world economy as a whole. The recovery of 
us profitability was based not only on dollar devaluation, but a decade of 
close to zero real wage growth, serious industrial shake-out, declining 
real interest rates, and a turn to balanced budgets. It therefore came very 
much at the expense of its major rivals, who were hard hit both by the 
slowed growth of the us market and the improved price competitiveness of us 
firms in the global economy. It led, during the first half of the 1990s, to 
the deepest recessions of the post-war epoch in both Japan and Germany, 
rooted in manufacturing crises in both countries. In 1995, as the Japanese 
manufacturing sector threatened to freeze up when the exchange rate of the 
yen rose to 79 to the dollar, the us was obliged to return the favour 
bestowed upon it a decade earlier by Japan and Germany, agreeing to 
trigger, in coordination with its partners, a new rise of the dollar. It 
cannot be overstressed that, with the precipitous ascent of the dollar 
which ensued between 1995 and 2001, the us economy was deprived of the main 
motor that had been responsible for its impressive turnaround during the 
previous decade—viz. the sharp improvement in its manufacturing 
profitability, international competitiveness and export performance. This 
in turn set the stage for the dual trends that would shape the American 
economy throughout the rest of the decade and right up to this day. The 
first of these was the deepening crisis of the us manufacturing sector, of 
exports, and (after 2000) of investment; the second was the uninterrupted 
growth of private-sector debt, household consumption, imports and asset 
prices, which would make for the sustained expansion of a significant 
portion of the non-manufacturing sector—above all finance, but also such 
debt-, import- and consumption-dependent industries as construction, retail 
trade and health services.

full: http://www.newleftreview.net/Issue25.asp?Article=03

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