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International Socialist Review Issue 22, March-April 2002

U.S. economy: Limits of recovery

IT'S HARD to imagine two symbols of U.S. capitalism more different than the hulking LTV Indiana Harbor Works in East Chicago, Indiana, first built in 1914, and Enron's brand new corporate headquarters in Houston, Texas, a sleek symbol of the “new economy.” But in early December, the scene was identical at both locales. Laid-off workers milled around as bankruptcy courts presided over the shutdown of most operations. Pensions were to be erased; medical insurance cut off. The supposed distinctions between the rust belt “old” and the Internet-driven “new” economies suddenly vanished. There is only one U.S. economy, and it is in crisis.

By the time the National Bureau of Economic Research finally made it official in mid-December, it was obvious: The U.S. was in recession and had been since March 2001, long before the September 11 attacks occasioned another wave of layoffs. Corporate profits at the end of 2001 were, by one measure, at their lowest levels in 60 years. Manufacturing had its longest decline since 1932. Overall, the economy contracted by 1.3 percent in the third quarter of 2001.

But almost as soon as the recession was acknowledged, Corporate America's professional optimists declared that it was over. Their evidence: a decline in unemployment from 5.8 percent in December 2001, to 5.6 percent in January 2002, and an estimated growth of at least 0.2 percent in gross domestic product (GDP) in the last quarter of 2001. Technically, the optimists may be proven correct. But enormous obstacles remain in the way of sustained growth in the U.S. economy: overcapacity in virtually every industry, which has hammered profits and stock prices; vast amounts of corporate and consumer debt that weigh down investment and spending; and recession in Europe and Japan. Simply put, this recession is a classic example of what Marxists have called a “crisis of overproduction”-too many goods to be sold at a profit and too many plants and factories producing them.

Even if a recovery did begin in early 2002, it is likely to be so weak that unemployment will continue to rise. Rather than a “V-shaped” recovery-a steep decline followed by an equally rapid climb-the economy is more likely to take a second downward dip. Heavily indebted consumers, hit with rising joblessness, will have to pull back on spending. Corporations, with debt levels at a record six times the amount of profits, will pull back from unprofitable investments that only add to the glut of excess industrial capacity. The economic growth charts may well come to resemble-unfortunately for the resident of the White House-a “W.”

Indeed, if not for the war in Afghanistan, the recession would have already savaged George W. Bush's standing in opinion polls and reminded everyone that he had not been legitimately elected. Instead, the war enabled Bush to divert attention from the economy-and from the fact that the top donors to his campaign were the bosses of Enron, some of whom may be headed to prison. But Bush can't avoid the consequences of the economic crisis forever. The disclosure of widespread Enron-style corporate cover-ups of hidden debt and political payoffs has already led to a crisis of confidence with major economic, political, and ideological implications. “In a single six-month period,” wrote Felix Rohatyn, the veteran investment banker and diplomat, “one of America's leading companies became the symbol of the defects in American capitalism claimed by its critics.”

This journal has previously examined the contradictions of the U.S. boom-its roots in an employers' offensive and class polarization, the myth of the “new economy,” the stock market bubble, the rescue of the U.S. from the East Asian financial crisis of 1997-98, and the onset of the recession. This article builds on those analyses.

Boom, bust, blame

Mainstream economists always portray crises and recessions as the result of mistakes, the result of bad policies that can be corrected or at least blamed on someone. Thus Federal Reserve Chair Alan Greenspan is no longer the god who granted the “miracle economy” and the longest-ever boom, but just another high-pressure salesperson who believed his own hype of a technology-driven revolution in worker productivity. “At meetings and cocktail parties, [Greenspan] would sometimes draw a graph on paper representing the spread of tech innovations, and then ask business executives to plot where their companies stood in exploiting these new technologies,” the Wall Street Journal reported in a highly critical front-page article. The Journal quoted former Fed officials and economists who blame Greenspan for fueling the technology stock bubble by lowering interest rates too much.

The Financial Times was more blunt:

Like the Bank of Japan in the late 1980s, the Fed failed to deflate an asset “bubble,” in the U.S. case built on implausible claims of an information technology revolution that had permanently lifted U.S. growth prospects. Indeed, on this view Mr. Greenspan was actually more culpable because he actively encouraged the asset price explosion-by talking up the “new economy” and letting growth accelerate to unsustainable levels in 1998-2000.
Greenspan stands guilty as charged. Yet his decision to pump up the U.S. economy with cheap credit and easy money wasn't motivated simply by his conversion to the cult of the new economy. After all, this was the same Greenspan who famously warned of “irrational exuberance” in the stock market in 1995-long before the peak of the boom.

As Joel Geier argued in an earlier issue of this journal, Greenspan moved to slash interest rates in late 1998 and early 1999 in response to the financial crisis that hit East Asia and Russia-and, via the collapse of the Long-Term Capital Management investment fund, the U.S. itself. The Fed's moves to pump cash into the system not only averted a credit crunch in the U.S., but further stimulated an economy that was still in boom. This, in turn, spurred a new round of investment in information technology and technology stocks. Dot-com stocks rose to insane peaks. At the same time, due to low interest rates, banks continued to lend even to heavily indebted consumers, who used loans and credit card spending to compensate for low and stagnant wages. Auto sales hit record levels, for example, helping to stimulate the overall economy. Profit rates, while below 1997 peaks, were propped up for a couple more years.

The question, therefore, isn't why Greenspan cut interest rates in the late 1990s, but why the same strategy couldn't avoid a recession in 2001. To put it roughly, the U.S. could postpone the economic problems of overproduction and overcapacity that caused the financial meltdown in East Asia, but it couldn't avoid them. A glut of goods and overcapacity is not only a problem for the East Asian economy but for the world economy. Investors began to flee East Asia in 1997 because they concluded that, eventually, the rapid expansion of industrial capacity would lead to downward pressure on profits and a rise in bad debts. The crisis led to a classic “beggar-thy-neighbor” strategy: Each country in the region devalued its currency to make its goods cheaper in a bid to undersell its neighbors in exports, most importantly to the U.S.

The rapid growth in the U.S. economy did absorb much of this excess, allowing for a V-shaped recovery in some East Asian countries, especially South Korea. However, the flood of cheap imports hammered sections of U.S. manufacturing. Factory capacity in the U.S. had expanded 6 percent per year between 1994 and 1998, when the East Asian crisis hit. Then, despite the pressure from imports, it kept growing at a rate of 4.6 percent in 1999 and 2000-still above the average annual rate of factory capacity growth for the 1980s. Meanwhile industries producing high-technology goods and devices expanded by 40 percent every year between 1994 and 2000. The problem of overcapacity was compounded on a world scale.

The technology boom played the pivotal role in this overinvestment. According to one estimate, information technology was responsible for 30 percent of U.S. economic growth during the boom. When profits kept declining-or, in the case of most dot-coms, never came-investors began to bail out. The Nasdaq exchange, home of most technology stocks, lost $3 trillion on paper in 2000-a sum equivalent to about one-third of GDP for that year. Overall industrial production began to drop in 2000, even as capacity continued to expand. In the third quarter of 2001, the glut of products forced U.S. manufacturers, wholesalers, and retailers to write off a record amount of their stocks-cutting U.S. GDP by a full percent on the year.

The globalization recession

A survey of the world economy is beyond the scope of this article. It should be noted, however, that in late 2001, the Organization for Economic Cooperation and Development (OECD), a club of the world's wealthiest nations, gave an assessment of the world economy “as gloomy as anyone can remember…. The OECD's number-crunchers reckon that the OECD economies as a whole are currently shrinking-the first time this has happened in 20 years.” If Europe was not officially in recession as 2002 began, it was on its way. Japan, just entering its third recession in a decade, is undermining its East Asian neighbors, who already are hurting from a drop in exports to the U.S.

The International Monetary Fund (IMF) felt compelled to revise downward its forecasts for world economic growth to just 2.4 percent in the aftermath of September 11. “But, on the other hand, we can also imagine a worse outcome than we have in our baseline forecast,” an IMF spokesperson said at a Washington press conference that coincided with the release of the report on December 18, 2001. “There are many other potential sources of weakness in the world economy. So there is this very significant uncertainty.” Later that day, food riots swept Buenos Aires, Argentina, in a growing rebellion against IMF-imposed austerity measures. Two days later, a mass uprising forced President Fernando de la Rúa to resign and evacuate the presidential palace by helicopter.

The crisis in Argentina is also a crisis of the “Washington consensus” of privatization, deregulation, and “flexible” labor policies. By pressuring competitors in Europe and Japan to take similar steps-and using the IMF, the World Bank, and the World Trade Organization (WTO) to force developing countries into line-the U.S. sought to shape the post-Cold War world economy in its interests. The collapse of the USSR and its Eastern European bloc was portrayed as the inevitable triumph of the market and democracy (always presented as the same thing, of course).

In reality, the development that took place was limited to particular countries and was highly uneven within them. While some developing countries experienced rapid rates of growth, including East Asia, China, and India, most countries actually lost ground. In Latin America, 200 million people, or nearly half the population, lived below the poverty line in the 1990s. Even largely industrialized countries such as Brazil and Argentina labored under massive foreign debts. Income in sub-Saharan Africa has actually fallen by 15 percent in the last two decades. Amartya Sen, the 1998 winner of the Nobel Prize for economics, put it well:

Global capitalism is much more concerned with expanding the domain of market relations than with, say, establishing democracy, expanding elementary education, or enhancing the social opportunity of today's underdogs.
The East Asian crisis provides a harsh example. The industrialization of the region ultimately aggravated the problems of overproduction that first emerged in the 1970s. When the crisis of overproduction hit that region in 1997, the U.S. used the IMF to block a Japanese-led regional solution. In exchange for emergency loans, the IMF insisted on conditions that would make it easier for U.S. capitalism to buy up cheap assets. If capitalist crisis means that some capitalists must go under, Washington made sure that they were East Asian, not American. “There are clear signs that the scramble for capital in Asia is leading to an acceleration of purchases by foreign investors, which is sometimes akin to repossession, since the terms can be extremely unfavorable to sellers,” wrote an author who studied the crisis. “One of the signs is the lifting of direct investment restrictions or ceiling on foreign ownership by several countries.”

Globalization is not, as its cheerleaders have claimed, a path out of poverty for developing countries. It is corporate globalization, a drive to shape the world in the interests of capital-U.S. capital in particular. Multinational corporations are backed by their respective governments-mainly the U.S., Japan, and Europe. These governments, in turn, use their imperial power to pursue their interests-for example, by dominating the WTO (where they try to cut each other's throats, too). When their version of globalization cannot be advanced through the IMF or the WTO, they pursue it with NATO or Special Forces commandos. The issue is not whether there should be a world economy. A world economy has existed for centuries. The question is how-and in whose interests-is that economy organized.

These are not abstract points, as any steelworker in Indiana, Ukraine, China, or Brazil can attest. In December 2001, representatives of the main steel-producing countries sat down to address the global glut in steel. Washington, which preaches that the free market is the solution to every economic problem, demanded an international agreement to cut steel production. This was backed by a threat to raise tariffs on steel imports. “President Bush is in effect telling the global industry to become a cartel or kiss the U.S. market goodbye,” the Wall Street Journal reported. Even if the U.S. gets its way with protectionist measures, it might boost steel profits but it won't save steel jobs. The proposed merger of USX-U.S. Steel, Bethlehem Steel, and others would entail thousands of layoffs of unionized workers and include steep cuts in pensions and benefits.

The steel crisis is more than a manifestation of the world recession. It highlights the absurdity-and the terrible human cost-of production for profit. World steel capacity is 1 billion tons per year, but only 800 million tons can be sold at a profit. Since governments have decided that the market can't solve this problem, the state has stepped in. Rather than tap the extra steel capacity to help rebuild crumbling U.S. schools-or, for that matter, to develop Africa or rebuild Afghanistan-governments will pursue policies in line with capital's priorities. The bigger companies will swallow the smaller ones, and stronger states will impose their will on weaker ones. Excess steel capacity will not be used to meet human needs but will be destroyed instead.

Karl Marx long ago explained the contradiction between capitalist crises of overproduction and the continued impoverishment of the mass of humanity:

So long as the most urgent needs of a large part of society are not satisfied, or only the most immediate needs are satisfied, there can of course be absolutely no talk of an overproduction of products-in the sense that the amount of products is excessive in relation to the need for them. On the contrary, it must be said that on the basis of capitalist production, there is constant underproduction in this sense. The limits to production are set by the profit of the capitalist and in no way by the needs of the producers [workers].
Rocky road to recovery

Economic recovery will come. Capitalism is a system of booms and slumps and will remain so as long as it exists. What is uncertain is the strength and duration of the recovery and the long-term perspectives for the world economy.

For the past quarter-century, U.S. capitalism has been on the offensive against workers at home and rivals abroad. The aim has been to recover its former strength of the long boom of the 1950s and 1960s. In that period, capital grudgingly made concessions to labor, and workers' living standards improved. But since the mid-1970s, employers have been busting unions, deregulating business, and pushing corporate globalization in an effort to restore the rates of profit to those of the “golden age.” This drive did improve the competitiveness of U.S. capitalism on a world scale. From 1992 to 2000, the U.S. economy expanded by 36 percent, by far the strongest performance among the industrialized countries. Worldwide, only Australia, China, South Korea, and India experienced greater GDP growth.

Nevertheless, the expansion of the 1990s fell far short of the 48.2 percent growth in GDP experienced by the U.S. from 1961 to 1969. It barely tops the 35.5 percent increase between 1982 and 1990. Nor did this expansion achieve a return to the golden age of profits of the 1950s and 1960s. The overall rate of profit, calculated as a return on capital stock, peaked in 1997 at 12.5 percent, a level that was reached several years running during the 1960s boom. In fact, the 1990s recovery was called “jobless,” then “joyless,” before Wall Street proclaimed the “miracle economy.” Now that the party is over, the picture is clear. Average annual growth in GDP in the 1990s was 3.1 percent, lower than in the boom of the 1950s and 1960s, and even lower than it was in the 1970s. Those who measure the boom by looking at the second half of the 1990s are like golfers who improve their average score on 18 holes by excluding the nine where they did poorly.

In short, the 1990s boom failed to overcome the long-term decline in the rate of profit that emerged in the 1970s. Indeed, the growth of investment in what Marx called “means of production”-factories, machinery, and so on-contributed to this problem.

The destruction of capital-whether it takes place in cartel agreements, bankruptcy courts, corporate mergers, or wars-is the precondition for capitalist recovery from a slump. As Marx put it, crisis throws capitalists into

a competitive struggle in which the loss is divided very unevenly and in very different forms according to the particular advantages or positions that have already been won, in such a way that one capital lies idle, another is destroyed, a third experiences only a relative loss or simply a temporary devaluation, and so on.
Executives at Boeing understand this dynamic very well. They used the falloff in air travel following September 11 as an excuse to accelerate existing plans to lay off one-third of the workers who build commercial airliners. “September 11 provides domestic political cover, which will help them in the long run,” explained a cynical Wall Street analyst.

What capitalists euphemistically call “restructuring” will involve not just the liquidation of unsold inventories, but the closure of plants and factories around the world. In the U.S., where capital spending surged in the late 1990s, an acute need for restructuring exists to restore profitability. Boeing was among the first and most aggressive to make its move, but it will not be the last.

There are obstacles to this program. As the example of steel shows, the size and complexity of the modern corporate enterprise constrains the capitalist class from simply letting the market destroy all of the weak players. It is one thing for the U.S. government to pursue policies that helped to drive South Korea's Daewoo Motor Company into bankruptcy (and a takeover by General Motors). It is quite another thing to let debt-laden Ford Motor Company go under. That is why the notion that corporate globalization has made governments irrelevant has always been nonsense. Governments, corporations, and the major banks will always try to find ways to avoid catastrophic collapses of their own capital-or at least to inflict them on their rivals. Internationally, therefore, the drive to reduce capacity will take the form of increased trade wars alongside the shooting wars pursued by Bush. Tellingly, world trade increased by just 1 percent in 2001, the lowest level since 1982-a sign not only of slump, but of increasing protectionism around the world.

Debt and the “Enron effect”

Even if U.S. capitalists can squeeze their rivals some more, corporate debt will remain a major obstacle to recovery. Businesses issued more than $700 billion in debt in 2001, three times the amount of five years ago. “And that's just the debt investors know about,” remarked New York Times business columnist Gretchen Morgenson, referring to Enron Corp.'s practice of hiding much of its debt. The increase in corporate debt far outpaced economic growth during the 1990s boom. While GDP rose 42 percent, debt rose 85 percent. By the third quarter of 2001, nonfinancial corporate debt was equivalent to nearly half of GDP-about $4.9 trillion.

Among the first to face the crunch was the telecommunications industry. Expectations of high profits led telecom companies to borrow heavily-a stunning $1.3 trillion since 1996-to keep building networks. The result was massive overcapacity and a collapse in profits. “Telecom had $60 billion in negative free cash flow in 2000, by far the largest amount of any industry in modern times,” a Wall Street analyst said. AT&T, the best-known name in the industry, broke into four parts, sold out to a smaller rival, and announced another 5,000 layoffs. By the end of 2001, equipment maker Motorola had cut its workforce by one-third worldwide. Lucent, the former manufacturing division of AT&T, planned to eliminate more than half of its 150,000 jobs.

It was the bankruptcy of the telecom company Global Crossing in February that added to the Enron shock waves throughout Corporate America. Revelations of Enron-style faked revenue and hidden debts forced regulators, ratings agencies, and banks to examine the books of other big telecom and tech companies, including Qwest, WorldCom, XO Communications, Sprint, IBM, and Computer Associates. Scrutiny soon spread to the conglomerate Tyco, to insurer AIG-and even to that supposed super-company, General Electric. Commercial paper, the short-term loans that corporations use to manage cash flow, was suddenly denied to Qwest and Tyco. They were forced instead to use lines of credit from banks at much higher interest rates, making further borrowing much more expensive. Others may be forced to follow suit.

In addition, companies face huge debt repayments on convertible bonds, so named because they allow bondholders to convert debt into stocks at a cheap price. In the 1990s, this was a great deal-instead of paying back loans, companies handed out stocks. But nowadays, bondholders want cash. “The prospect of [corporations] having to unexpectedly raise billions of dollars to repay bondholders is likely to cause a drag on the economy, too,” Business Week noted.

The debt threat prompted Greenspan, who raised interest rates to avoid inflation in 1999 and early 2000, to suddenly reverse course. By flooding the U.S. economy with cheap credit, he tried to allow U.S. corporations to refinance their huge debts and ride out the storm. But as any Japanese banker or manufacturing CEO could have told Greenspan, interest rates can go to zero and still fail to stimulate investment if businesses can't make a profit. According J.P. Morgan, profits had fallen to 7.5 percent last year, with steeper declines likely to come. So with debt high, profits low, and a glut of goods and factories operating below capacity, much of industry is still cutting back. “Manufacturers, for example, which are operating 72 percent of capacity, have neither strong reason nor the capital to spend on new machines,” Business Week observed. By contrast, manufacturing capacity at the height of the boom was about 83 percent.

Greenspan's “Plan B” is to keep interest rates low so that consumer spending will come to the rescue. This is highly unlikely to succeed. The “consumer” after all is a statistical amalgamation of all social classes. It includes about 90 million nonsupervisory workers, most of whose wages stagnated or grew only late in the 1990s boom. This category also includes the middle class that can no longer boost its spending as the result of the “wealth effect” from the stock market bubble. By one estimate, the collapse of the stock market could cut consumption by $400 billion.

Greenspan's rate cuts in 2001 did allow another massive expansion of consumer debt to a record $7.5 trillion at the end of the third quarter. This is not the spur for a new boom, but a last-ditch effort to maintain living standards during a bust. Aggregate personal income dropped 2.4 percent in October, and will drop further as unemployment rises. Personal bankruptcies for 2001 are expected to surge beyond the record 1.4 million in 1998. Credit card debt, used to compensate for lousy wages, has now become a millstone around the necks of tens of millions of people. “Everybody's telling [people] to spend, spend, spend, but it's going to be difficult for them if they're being hounded by collection agencies,” admitted economist Mark Zandi. The lower rates did make it easier for consumers to refinance mortgages and to keep housing construction going into 2002. But this is in fact the last bubble of the 1990s boom, set to burst as incomes decline and interest rates rise.

The much-hyped “zero percent financing” of auto sales highlights the interrelation of some of the key problems facing the U.S. economy-corporate debt, personal debt, and industrial overcapacity. By launching the campaign to “keep America rolling” after September 11, General Motors (GM) forced its rivals to match the zero percent offer. GM, with more cash on hand than its competitors, had three aims: to clear its bloated inventory, to compete with cheaper imports, and to spend its domestic rivals into the ground.

The costs are enormous, however-about $2,300 per car in lost interest. And they only postpone the day of reckoning: An estimated 500,000 people who were planning to purchase a car in 2002 simply bought one sooner. They also eat into profits. Ford Motor Credit reported pretax earnings of $2.97 billion in 2000, but Ford Motor had to spend $3.4 billion to compensate for cheap loans before these latest deals. Nor did extra sales prevent Ford from announcing the closure of five North American plants. It has the capacity to build1.9 million more cars in North America than it can sell. Finally, by financing the loans themselves, automakers are exposed to the rise in bad debt that occurs in any recession.

Here, too, overcapacity on a world scale is behind the problem: The world auto industry was operating at only two-thirds capacity in 1998 at the height of the boom, and many more plants have been added since then. The crisis does not, however, fit the stereotype of cheap imports “stealing” U.S. auto industry jobs. Nissan, Honda, and Toyota are expanding their production in the U.S. during the recession to take markets away from GM, Ford, and DaimlerChrysler. Meanwhile, overcapacity in the U.S. auto industry has been a major factor in the layoffs of 200,000 Mexican workers in the border maquiladora plants since the recession began.

Threat of financial crisis

The threat of financial crisis also hangs over the United States. Internationally, fallout from the Argentine collapse could yet cause problems. Even if this can be avoided, the U.S. itself is vulnerable. Its current account deficit-the total amount owed for imports of goods and capital-remains near historic highs. Crudely put, foreign investors essentially allowed the U.S. economy to consume more than it produced.

The strong dollar kept foreign capital pouring in during the late 1990s, especially after investors fled East Asia. However, the recession will make the U.S. more vulnerable to a sudden withdrawal by foreign investors if the dollar becomes too weak relative to the other main currencies, the euro and the yen. If the dollar declines too far and foreign investors pull out, the Fed could raise interest rates to pull them back in. These higher interest rates would make it more difficult for U.S. businesses to pay off their debts, and could choke off investment. On the other hand, failing to raise interest rates could lead to a big spike in inflation.

This may not come to pass, given the continued weakness of the yen and the euro relative to the dollar. Nevertheless, the post-Enron exposure of bad debts, crooked corporate books, and overextended banks could finally undermine foreign investors' confidence in the United States. If they suddenly dump U.S. stocks, it could lead to a sudden crash in the stock market. For, despite the massive decline in the stock market, stocks are still massively overpriced compared to earnings, or rather the lack of them.

All of these problems have led honest business journalists and economists to conclude that the recovery is likely to begin weakly. A New York Times economics writer argued that unless the recession is deep enough, the excess capacity won't be purged from the system, thereby undermining growth. “Only severe downturns, like the second one in the early 1980s, have produced rebounds as robust as those of earlier decades,” he wrote. “Indeed, the slow recovery of the early 1990s, rather than seeming to be an aberration, has become the reference point for the argument now confronting the economists.” Although that recession officially ended in March 1991, it took until 1997 for unemployment to fall below the lows of the previous boom in 1989.

These are the choices facing U.S. capitalists. On the one hand, they can undertake a vicious restructuring to clear out excess capacity. The risk of letting the market rip is that the bankruptcy of a giant corporation can drag down healthy ones, too. Such a course would also intensify class conflict and deepen the social and political crisis in the country. The alternative is a piecemeal operation that props up the banks to keep credit flowing to unprofitable companies. This was the approach that Japan took in the 1990s-with the result of stagnation and crisis. In practice, U.S. capitalists may vacillate between these two courses. Whatever their course, however, their aim will be to push the burden onto the backs of workers.

The “economic stimulus” fraud

Bush's “stimulus” package that died in Congress had nothing to do with stimulating the economy. It was just another smash-and-grab attack on the working class, only this time wrapped in the flag and presented as a war measure.

The centerpiece of the package was the elimination of the alternative minimum tax and $25 billion in rebates for corporations. Yet, simply handing $25 billion to corporations is no guarantee that they will invest, especially when they are laden with debt and have little prospect of profitable investment. “No economic doctrine I'm aware of, right or left, says that an $800 million lump-sum transfer to General Motors will lead to more investment when the company is already sitting on $8 billion in cash,” wrote economist and New York Times columnist Paul Krugman.

A tax cut that aimed to put more money in the pockets of workers could help to boost consumer demand-if it wasn't used to pay down debt. That's what appears to have happened with many of the rebates, used to give a populist gloss to Bush's 10-year, $1.35 trillion tax cut in June 2001. That measure was originally promoted as a benefit from the boom but was finally sold as a recession-fighting tool. It was neither. Thirty-four million taxpayers, or 26 percent, received no rebate check, while another 17 million got only about half of the promised amount of $600 for couples, $500 for single parents, and $300 for others. The wealthiest 20 percent will receive more than 70 percent of the benefits. And since the tax rebate was in fact an advance on the following year's taxes, the long-term effect will be wiped out.

Some have argued that Bush's massive increase in military spending along with the tax cuts has already provided an economic stimulus. Yet this amount could easily be dwarfed by a series of corporate bankruptcies. And there can be no return to military spending on the scale of the permanent arms economy without U.S. capitalism suffering relative to its competitors.
When Democrats finally began to criticize Bush, they failed to break from their Clinton-era stance as guardians of the federal budget surplus and “fiscal responsibility.” In a highly publicized speech by Senate Majority Leader Tom Daschle (D-S.Dak.) called on Bush to “restore fiscal discipline.” This was a throwback to Herbert Hoover, the Republican president who worsened the Depression of the 1930s by cutting government spending as the economy collapsed. It was left to Bush to call for deficit spending by the federal government-to increase military spending while proceeding with tax cuts.

Workers pay the price

The boom of the 1990s massively increased class inequality in the United States. The number of millionaires in the U.S. increased from 1.8 million to 8 million in the 1990s. The richest 1 percent of Americans increased their share of household wealth from 19 percent in 1976 to a staggering 40 percent by 1997. “Generally what's happening in the U.S. economy is that capital is what's being rewarded, and not labor,” said economist Edward Wolff. “Average wages have been stagnant now for almost 25 years, and the share of income going to owners of capital has been rising dramatically in the last 10 years particularly.” Wolff's research found that “47 percent of the total real income gain between 1983 and 1998 accrued to the top 1 percent of income recipients, 42 percent went to the next 19 percent, and 12 percent accrued to the bottom 80 percent.” At the end of the boom, the average CEO earned 531 times the amount of the average factory worker.

Poverty did decline in late 1990s, as a labor shortage pulled-and the abolition of welfare pushed-millions of the poor into the workforce and boosted the wages of low-income workers, particularly African Americans and Latinos. But by December 2001, Black unemployment rates had soared to 10.2 percent.

Even those who are still on the job have seen wages and hours cut. At the beginning of the boom, employers, uncertain of the economy, held down hiring as long as possible, adding hours instead. Manufacturing overtime peaked at an average of 4.9 hours per week in 1997. Overall, the average American worked 1,978 hours per year-nearly a week longer than in 1990. By comparison, CNN reported,

the average Australian, Canadian, Japanese or Mexican worker was on the job roughly 100 hours less than the average American in a year-that's almost two-and-a-half weeks less. Brazilians and British employees worked some 250 hours, or more than five weeks, less than Americans. Germans worked roughly 500 hours, or 12-and-a-half weeks, less than careerists in the States.
Of countries classified as “developing” or “in transition,” only South Korea and the Czech Republic tracked workers putting in more hours than American laborers. The Koreans logged almost 500 hours more annually than Americans, the Czechs doing some 100 hours more work than U.S. workers on average.
What the report fails to mention is that Czech and South Korean workers only emerged a little more than a decade ago from police states that banned independent unions!

So before the pink slip comes the reduction in hours and/or pay. In manufacturing, overtime began to disappear in mid-2000. The average workweek of nonsupervisory workers in the last three months of 2001 was just 34.06 hours, the shortest in a recession since the government began keeping records in 1964. In manufacturing, a full hour was lost. Overall, the cut in hours for nonsupervisory workers cut wages by $1 billion per month. From March through December 2001, 1 million workers were forced to accept part-time work for lack of an alternative.

The official unemployment rate also understates the problem of joblessness. Once you've stopped looking for work, you don't show up in the unemployment statistics. And the job market was so bad by the end of 2001 that the “labor force participation rate”-the number of people working or looking for work-saw its largest annual decline in nearly 40 years. The impact was especially severe among young people. Unemployment for males aged 20-24 hit 10.6 percent in January 2002, up from 7.7 percent a year earlier.

All of this has left the working class extremely vulnerable to even a short and “mild” recession. For example, only about 38 percent of the workforce is even eligible to collect unemployment benefits, which normally run only 26 weeks unless Congress extends them. Since the amount of payments varies enormously between states, a layoff can mean a quick plunge into poverty even if Congress does extend benefits. In 28 states, the average benefit amount is too low to keep a single parent with a child above the poverty line. What's more, federal lifetime limits on welfare benefits, now coming due, threaten destitution for those who are cut off.

Retirees and those who were planning to retire in the near future have also seen their incomes slashed by the collapse in stocks and restrictive rules governing the use of 401(k) accounts. Workers at companies such as Enron, which forced employees to keep most or virtually all of their investment in company stock, have found their life savings wiped out. Where traditional pension plans force employers to invest 90 percent of employees' money in other stocks, companies with 401(k) plans typically keep 19 percent in their own stock. Where the company is in control of the plan, they keep more than half in their own stock. Meanwhile, CEOs used special 401(k) plans to add millions to their pay.

The increase in joblessness will aggravate a social crisis that persisted in the boom-the lack of health insurance for 14 percent of the population, or some 39 million people. Three-quarters of the adults who were uninsured in 2000 worked that year. Laid-off workers can keep their company health insurance through the COBRA law-but only if they can afford to pay their former employers' share of the cost. This forces many unemployed workers to choose between food, rent, and proper health care. As a result, more than 900,000 people who were laid off between March and December 2001 lost their health care. Low-income people covered by Medicaid are facing cuts as well, as states try to tighten eligibility requirements to make up for budget deficits. By the end of 2001, some 36 states announced a combined $35 billion shortfall in their Medicaid programs. The picture is similar in education, which along with Medicaid accounts for 42 percent of spending at the state level. Florida, for example, cut $300 million from public schools in December. And since most states are required by law to maintain a balanced budget, the ax has come down as tax receipts have declined as a result of the recession.

The increase in class inequality during the “miracle economy” of the 1990s meant that the most extreme forms of poverty never disappeared. Then, Bill Clinton was able to get away with the argument that moving people from “welfare to work” could solve such problems. In the recession, millions of people who may have accepted this idea in the past may suddenly find themselves in need of such assistance-if they can get it. The U.S. Conference of Mayors reported that requests for emergency shelter in 27 cities increased an average of 13 percent in 2001. In big cities such as Chicago and Denver it was much higher. Those same cities reported a 23 percent increase in demand for food aid. Only a third were able to provide an adequate amount of food, and 85 percent had to cut the size or number of meals they offered. With the social safety net in tatters, millions could face the kind of misery not seen since the 1930s, even without a more severe economic downturn.

Politics and the recession

Recessions do not automatically lead to revolt. Often people try to find individual solutions to the crisis-some way to hold onto a job or a way to find a new one through a friend of a friend. Many are simply overwhelmed with the effort of keeping their families' heads above water. Nevertheless, the growing class-consciousness seen in recent years-measured in pro-union sentiment in opinion polls, for example-has shown that people are seeking collective solutions as well. In any case, while a few can solve their problems on their own, the vast majority of workers must find their way to self-organization and collective struggle in order to defend their interests if they are to succeed.

In the recession of the early 1980s, Ronald Reagan was able to divert workers' anger into a burst of patriotism. He bashed “unfair” competition from Japan and intensified the Cold War, while cutting spending by “big government” and demanding sacrifice from “big labor.” A decade later, George Bush Sr. was able to use the Gulf War to achieve 90 percent approval ratings-until the agonizingly slow recovery turned voters massively against him in the 1992 election.

Today, Bush Jr. is trying imitate Reagan and reprise his father's role as war leader while avoiding responsibility for the recession. He may succeed in doing so for some time, but there are limits. That is why the Democrats began, tentatively, to use the economy as an issue against Bush. Yet the party moved so far to the right under Clinton's New Democrats that it doesn't even pretend to want to revive the liberal programs of decades past for fear of offending corporate donors. Most Democratic politicians are so far out of touch that they have little idea about the bitterness and anger running through the working class. The recession will add to an ideological crisis and for employers and politicians who have nothing to offer but more of the same-more free-trade deals, more layoffs, more deregulation.

After sacrificing in the 1980s and receiving only scraps in the 1990s, workers will not simply roll over for new demands for givebacks to corporations and the wealthy. Amid the crisis, some Democrats may take a step to the left to try to tap this sentiment for their own ends. However, those who do will be followers, not leaders. If there is to be a shift in politics, it will come through initiative, organization, and activism from below. A fightback will need to be based on the radicalization that has developed in recent years-from the protest against the WTO in Seattle in 1999 to the mobilizations against racist police brutality in several cities. It will draw on the best lessons of the labor movement in the late 1990s-that it's possible to strike big corporations such as United Parcel Service and Verizon and win. Moreover, Ralph Nader's presidential campaign showed that millions of people were looking for-and many were prepared to vote for-an alternative to the two-party system.

To be sure, the U.S. “war on terrorism” disoriented and divided many of those who would otherwise be organizing resistance, including much of the union leadership. Indeed, Bush has used the war to silence dissent over his domestic agenda as well. Nevertheless, the source of the radicalization is the class polarization in the U.S. society-an enormous divide that the recession has only deepened. The never-ending war proposed by Bush will bring that division to the surface: Will government spending be used to provide jobs or to buy new jet fighters? Will federal budget dollars go to Medicaid prescription drug benefits or to missile defense?

These attacks present major challenges. The first successes in the fightback are likely to be modest-stopping the budget cuts in a local school district, for example, or resisting demands for concessions in a union contract. But U.S. history has shown that from initially isolated struggles powerful movements can be built.

Finally, the ideological and political fallout of free-market disasters from Enron to Argentina provides the greatest opportunity in decades to build a socialist alternative. The free-market policies that enriched only a tiny minority in the boom have now brought misery and suffering in the bust. Putting forward a socialist analysis of the crisis helps to prepare for the struggles ahead-and to organize for an economy based on workers' control and production for human need instead of profits.

Footnotes can be found in the print edition of this article.


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