By JOEL GEIER
BTHE STRONG economic growth of the last six months marks a turning point, indicating that a recession has ended and a new business cycle is underway. We can now look back on the whole preceding boom-bust cycle and examine its distinctive features, particularly those that are being carried over into this new cycle.
The U.S. expansion of the 1990s was impressive. Though not the biggest, it was the longest period of growth in the 20th century. Gross Domestic Product (GDP) grew by 39 percent, profits more than doubled, unemployment fell to 30-year lows and for the first time in decades, real wages increased. The U.S. advanced against its main rivals. GDP per capita grew by 26 percent, better than Japan’s 9 percent growth, Germany’s 5 percent or France’s 15 percent. The only advanced country to do almost as well was Britain. The cycle ended with scandals revealing widespread corporate accounting fraud which grossly overstated profits. This has led some to question whether the boom was real. But capitalist booms generally end in an orgy of speculation, swindles and fraud. These phenomena accompany booms but do not negate them.
If the boom was impressive, the bust was spectacular. The downturn started with the 1997 Asian crisis and gradually spread to the entire global economy. Depression-like conditions devastated Thailand, Korea, Indonesia, Russia, Brazil, Turkey, Argentina and Venezuela. Currencies collapsed, external debt ballooned, and banking systems went under. World trade declined for the first time since the Second World War.
In the U.S., manufacturing lost three million jobs, and layoffs have continued for a record 40 months. Industry limped along at 74 percent of capacity, manufacturing at 72.4 percent. Hours worked fell to 33.6 per week–a low for the post—Second World War period. The rate of profit in 1997 was 7.8 percent, the highest since the 1960s. By 2001, it had fallen by 40 percent, and was lower than any post-war year with the exception of 1991 and 1982. As a share of national income, 2001 profits were lower than any year in the last four decades.
In no other recession since the 1930s had there been so many, or such massive, corporate bankruptcies: Global Crossing, Enron, Conseco, WorldCom, Bethlehem Steel, United Airlines, Roadway, Budget Rent-A-Car, K Mart and Montgomery Ward, among others. Between 20 and 25 percent of the labor force experienced some period of layoff during the last three years. Government figures list only 8.8 million, or 6 percent unemployed. There are an additional 4.8 million on involuntary short-time, two-plus million who dropped out of the labor force altogether, millions of young people who have never been able to enter it, more than one million on disability because they can’t collect unemployment, and one million more people in prison than in the last recession. The actual number of unemployed is more than 15 million, with conservative estimates of the real unemployment rate of 10—12 percent. Twenty-four percent of the official unemployed have been unemployed for more than six months, the highest level since 1983. Despite this, Congress recently refused to extend unemployment benefits beyond six months, citing low unemployment rates.
Unlike any previous recession, jobs continued to be destroyed in the recovery. One-and-a-half million jobs were lost in the recession, but an additional 1.1 million jobs were destroyed in the weak "job-loss" recovery from November 2001 to June 2003. Millions lost their health benefits–43 million now have no health coverage. The 31.6 million people who were living below the inadequate poverty level in 2000 had climbed to 34.6 million by 2002. In Ohio, two million of the state’s 11 million people had to turn to food charities in the last year–victims of the destruction of welfare by the Clinton Democrats during the boom.
Stimulus program
The fear of falling into a second recession convinced the Bush administration to coordinate the largest government stimulus program since the Second World War. Massive deficit spending flipped a $250 billion budget surplus into a $400—500 billion deficit. Taxes were cut on capital gains to underwrite corporate profits on incomes for the rich to shore up the stock market, and much smaller tax cuts were made to the working class to uphold consumer spending.
The Federal Reserve set negative interest rates (below inflation) to allow record corporate debt to be renegotiated at cheaper rates. The Treasury’s weak dollar policy brought the dollar down 30 percent against the euro, and 15 percent against the yen. Through currency devaluation, American hourly labor costs are now lower than those of Europe and Japan, while in 2000 they were higher. War spending, plus war contracts, did their part.
Low interest rates fueled a housing boom. In the last year, low mortgage rates and rising housing prices allowed homeowners to cash out $600 billion from their homes through refinancing and home equity loans. Half of it went to pay off higher credit card debt, but $300 billion was the major support for consumer spending in a weak economy.
Capital spending finally kicked in. After three years, pent-up demand by business for high-tech equipment brought strong capital investment. This investment went toward the replacement of worn-out or obsolete equipment–what Karl Marx called "simple reproduction." Virtually no capital investment has yet gone for the creation of new plants, for the expansion of the means of production–what Marx called "expanded reproduction," or accumulation.
The result has been a stunning turnaround in the last eight months. The world economy entered a new growth cycle, centered in the U.S., China and Southeast Asia, and is now spreading internationally.
In the U.S. in the third quarter of this year, GDP grew by 8.2 percent, output by 10.3 percent, productivity by 9.4 percent, durable manufacturing productivity an astonishing 14.8 percent–figures last seen in the recovery from the sharp 1982 recession. Unit labor costs dropped by 5.8 percent. With rising productivity, virtually no new hiring and stagnant wages, everything flowed to profits. Profits soared to a record $1 trillion, 30 percent more than a year ago and 45 percent more than the bottom two years ago.
The enormous growth in profits indicates that this is not just a temporary, short rebound, based solely on tax cuts and refinancing. The size of the international recovery as well indicates that it is indeed the start of a new boom, which could go on for a period of years.
Unresolved problems
But carried over into this boom are significant unresolved problems of the last cycle that indicate that this will not be the start of a long expansion like that of the 1980s or 1990s. Each business cycle is distinctive, in problems, length, scope, etc. From 1938—1973 the booms were strong and the busts short and shallow. But when the U.S. lost its competetive edge on the world market to Japan and Europe, it led to three sharp recessions in the U.S between 1973 and 1982 and a dramatic cut in working-class living standards as U.S. capital restructured. The restructuring restored the ability of the U.S. to compete on the world market. From 1982—2000, the U.S. economy grew with only the mild recession of 1991.
This new cycle may have more in common with the pain of the 1970s than the boom of the 1990s. The last cycle was a classic neoliberal subordination of consumption to high capital accumulation, resulting in the overproduction of the means of production on a world scale. The problem is not just of too many TVs or shoes to sell at a profit, but of too many factories, of too much capacity, too much capital goods. The restructuring required is not just an American problem, as in the 1970s; it is an international one. The last recession, deep as it was, did little to solve this problem; the restructuring on a world scale is still before us.
Despite the massive growth of the third quarter, capacity utilization in the U.S. barely nudged up, from 72.4 percent to 72.6 percent. Capitalists therefore have little reason to build new factories and expand the system for years, keeping job growth substandard for a long time. Throughout this cycle, there will be the continuing shift of high-wage jobs in manufacturing to China, and in services to India and elsewhere. High unemployment and pressure on wages may characterize this entire business cycle, through the boom as well as the bust.
Jobs that are being created are at lower wages. In industries where employment has grown, wages average $14.65 an hour, while those sectors where jobs are being cut average $16.95 an hour. Real wages have been stagnant for three years, including during the boom of the third quarter. The gains in disposable income in the last year all depended on tax cuts and refinancing. Now that this is coming to an end, consumer spending may be substandard throughout the cycle.
The twin deficits of the 1980s are back. The government deficit is $500 billion and so is the current account deficit that the U.S. runs with the rest of the world. The U.S. is heavily dependent on foreign capital flows of $40 billion a month. But with the Federal Reserve Bank keeping interest rates at negative levels despite high growth, a crisis in confidence in the Fed and the dollar has started to develop internationally. Foreign direct investment in the U.S. has collapsed with the dollar decline.
Others countries are reacting to the competitive devaluations that the U.S. is using to export its problems. Reacting to the 20 percent decline in the dollar, the Saudis and the Organization of Petroleum Exporting Countries have announced they may cut back oil production to keep oil prices, which are priced in dollars, at a level of over $30 barrel. The weak dollar combined with the boom has also led to a jump in commodity prices of 30 percent in the last year, because of the boom and the weak dollar. The threat of a dollar crisis, which has existed for years because of the imbalances in world trade, has become a more present danger due to the government deficit and the Fed’s policy of continuing to stimulate an ongoing boom.
This new business cycle gives rise to three bubbles, as well as a deficit that war spending will only make worse. The additional $87 billion for the war in Iraq is only the first request of many to come. The last cycle ended with a stock market bubble. Now the stock market bubble, never fully deflated, is back. The Standard and Poor trades at 27 times earnings and the NASDAQ at 74 times earnings. It is now joined to a bond market bubble, inflated by artificially low short-term interest rates. The third bubble is the housing market, which could sink with the rise in interest rates. Housing prices are inflated out of line with earnings and rents.
Meanwhile, the employers will continue to put the working class under pressure–facing job cuts and more intensive work levels, lower wages and a constant assault on its health and pension benefits. The vicious attack on the welfare state is going to get worse. Both the government and the corporations are going after health and pension spending for workers in order to solve their debt problems. The grocery strike in California is one of many struggles to defend working-class health benefits.
We have entered a business cycle in which there will be sharp, sudden unforeseen swings in the economy, increasing class inequality and a relentless assault of the living conditions of the working class–in the boom as well as the bust. The last cycle began with the international Left in ideological confusion, disarray and collapse–with the disintegration of Stalinism and the triumph of neoliberalism. This cycle begins with a new radicalization underway internationally, widespread rebellion against neoliberal policies, class inequality and the more aggressive stance of American imperialism. The class struggle remains at a low level, but the dynamics of this business cycle open the prospects for greater struggle and radicalization. The prospects for the revolutionary Left are better than they have been in decades. This cycle begins with the newly emerging Left grouped under the slogan, another world is possible. It is the job of revolutionary Marxists to give this slogan content, that a world without booms and bust, without exploitation and oppression, a world of workers’ power is possible.
Joel Geier is an associate editor of the ISR.
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