From a weak recovery to a new recession?
The recent swings in world financial markets and the growing international effects of an economic slowdown in China have raised fears in the U.S. that the economic recovery could be on its last legs--even before working people felt like they had escaped the last crisis. And what will come next? In the first two installments of a three-part series, looked at back at the causes of the last recession and at how China, Europe and other parts of the world economy have fared. In the final part, he answers questions about how the recession has impacted working people in the U.S., the prospects for the U.S. economy and the need for a political alternative in the face of a slump that will inevitably come sooner or later.
THE SLUMPING Chinese economy is causing huge problems for countries from Canada to Australia to nations across Africa and beyond. What impact will this have on the U.S.?
THERE IS a lot of happy talk about how the U.S. is immune to China's difficulties, and the prospects for continued growth in the U.S. economy are still good.
Certainly the U.S. stock market has radiated an image of prosperity. Equity markets have risen dramatically since the financial crash of 2008. As of June, U.S. equity markets were up by a combined total value of $17 trillion since then the worst of the crisis. Even after the big stock market drops in August, the S&P 500 index of stock prices was, as of late September, up about 163 percent from its recent low point.
We're told by the media that the stock market gains are a reflection of the overall health of the U.S. economy. There is an element of truth to that explanation: The Great Recession in the U.S. ended more than six years ago. After a period of stimulus spending, the Obama administration has sought to shape a U.S. economic recovery based on low wages, cheap energy and low taxes on business. In some ways, they've succeeded.
Higher world oil prices opened the way for the U.S. fracking binge that made this country one of the top oil and gas producers in the world. Since 2005, U.S. oil output is up 30 percent, and gas production increased by 34 percent.
Wages have been cut, too. This has been done directly, as in manufacturing, as Corporate America followed the auto industry in cutting pay and benefits through concessionary union contracts, or simply imposing them on many of the 90 percent of workers in the private sector who have no labor representation.
Today, U.S. manufacturing workers, who once earned higher-than-average wages, are now paid 7.7 percent less than the median wage. One in four factory workers earn less than $11.91 per hour. As usual, institutional racism and the oppression of women play a central role in driving wages down. Some 42 percent of all U.S. workers earn less than $15 per hour. More than half of African-Americans are in that category, as are 60 percent of Latinos. Among women of all races, 55 percent are paid hourly wages below the $15 mark.
Wages have been cut indirectly, too. Small raises have often failed to keep up with even the low rate of inflation since the early 2000s. As David Wessel of the Brookings Institution recently pointed out, typical male workers' wages were lower in 2014 than they were in 1973, once inflation is taken into account, even though output per worker has increased 2.5 times since then.
Moreover, the benefits of recent U.S. economic growth have been entirely grabbed by capital at labor's expense. From around 1950 to 2001, labor's share of national income stayed near a historical average of 62 percent. But by 2014, it had dropped to 56 percent. That may not seem like a big swing, but in a nearly $18 trillion U.S. economy, it's an enormous shift.
You can see that trend reflected in another stunning figure: between 2009 and 2012, the richest 1 percent saw their real income soar by 34.7 percent while the bottom 99 percent only saw a 0.8 percent gain. In other words, more than 90 percent of all real income gains went to the 1 Percent. The Occupy movement, which popularized the slogan "We are the 99 percent," was right on the money--literally.
On top of all this comes the tremendous hit to working class wealth, which is almost exclusively tied to the value of homes. Since September 2008, some 5 million homes have gone into foreclosure. Even today, some 15 percent of homeowners whose houses are valued under $200,000 are "underwater," meaning they owe more on loans than their homes are worth.
African Americans saw more than half their wealth simply vaporize in the housing bust, dropping from an already incredibly low $12,124 to just $5,677.
Then there's the costs pushed onto workers by cuts in social spending on education and social programs, forcing people to dig into their own pockets for essential needs.
Driving this austerity--given new force by the political deal between Obama and the Republican Congress on the "sequester" that strictly limited federal spending--is Corporate America. Big business in the U.S. pays an effective tax rate of just 12.6 percent, compared to the official rate of 35 percent. That's icing on the cake for U.S. and foreign businesses that invest here, as they benefit from a highly productive and low-wage workforce at a tax rate lower than they would face in other advanced countries.
Obama's economic strategists expected this pro-business policy mix to revive U.S. manufacturing on a basis that could compete with not only traditional economic rivals like Japan and Germany, but also China. But the formula hasn't worked nearly as well as Obama had hoped. Despite statistics showing a recent spurt of growth--gross domestic rose at a 3.9 percent annual rate in the second quarter of 2015--the U.S. recovery is the weakest on record since the Second World War, averaging about 2 percent a year, compared to a 3 percent and more average in the postwar era.
Growth is so lousy that former Treasury Secretary and Obama economic adviser Larry Summers has declared that "secular stagnation"--a long period of sluggish economic growth--is the new normal for the U.S. economy, unless and until bolder economic measures are taken, including major stimulus spending. This from the guy who, as an official in the Clinton administration, famously fought off regulation of Wall Street's casino-style derivatives market by declaring: "I have 13 bankers in my office, and they say if you go forward with this, you will cause the worst financial crisis since World War II."
These days, however, Summers is sounding the alarm. He points out that the U.S. economy today is 10 percent below what economists predicted it would be back in 2007: "In other words, through this recovery, we have made no progress in restoring GDP to its potential." Summers also points out that even steady job increases and a decent-looking unemployment rate--5.1 percent in August--isn't nearly as good as it seems. That's because the employment-to-population ratio, which dropped sharply in the Great Recession, has barely recovered since then.
In fact, the broadest measure of joblessness, a statistic that includes workers who have dropped out of the labor market in frustration or are working part-time because they can't find full-time work, was at 10.3 percent in August.
The weak growth has prompted the U.S. Federal Reserve to keep interest rates at near 0 percent since the financial crash of 2008. Initially taken as part of the massive bank bailout of that period, the low interest rates have been kept in place to try to stimulate investment and broader economic growth.
But the success has been quite limited. Instead, the low rate of return on interest-bearing financial instruments, such as bonds, has stimulated investors to pour money into the stock market in hopes of a better return. The result has been the return of the kind of stock market bubble last seen just before the recession began at the end of 2007.
That's in large part because the hoped-for surge in investment in the U.S. economy hasn't come. After the crash of 2008, it took nearly five years for the broadest measure of private investment to return to pre-recession levels. Austerity has also strangled investment: In 2013, U.S. government public investment in relation to GDP hit its lowest level since the end of the Second World War.
That's not to say that the U.S. economy won't continue to grow, even if the world economic recovery as a whole is past its peak. That's why the Federal Reserve faces a dilemma. Inflation hawks warn that if the Fed leaves interest rates at rock bottom, the U.S. economy will overheat, and inflation will go up. Others respond that the inflation-fighters are absurd: After six years of record low interest rates in the U.S., there's no sign of a significant inflation threat in the U.S.
The real threat, argues Larry Summers and others economists like New York Times columnist Paul Krugman, is the pressure from price deflation.
That may sound appealing from an individual standpoint--who doesn't want to pay less for groceries or a car? But from the standpoint of the capitalist system, deflation is a symptom of a serious crisis. When prices fall, it means that the real value of debt actually increases over time, putting pressure on both businesses and consumers, and choking off economic growth.
This debt-deflation trap was characteristic of the Great Depression of the 1930s, and Japan has been grappling with a milder version of it since early 1990s. That's why Summers, the onetime neoliberal policy hack, is calling for huge investments in U.S. infrastructure. Likewise, Krugman argues that governments must break with cautious budget-balancing in order to fight deflation globally. "Respectability is killing the world economy," he wrote recently.
IF THE U.S. economic recovery is so weak, how can capitalists in this country be doing so well?
DESPITE SUBPAR U.S. economic growth, government statistics show that non-financial corporate profits reached 10.1 percent on a pre-tax basis--well below the 1965 peak of 13.7 percent, but higher than the peak of the 1990s boom.
A major factor in this profitability is the big shift in the share of national income from wages to profits. It's also the case that many top U.S. corporations sit atop global supply chains and have substantial amounts of their businesses broad, allowing them to increase profits despite the slow recovery in the U.S.
Consider Apple, the world's preeminent consumer electronics company. Its product packaging is stamped, "Designed in California." The microchips inside are from South Korea, and the products are assembled in China. Apple's profits are then stashed in Ireland to avoid U.S. taxes. A report in March found that U.S. companies have hoarded $2.1 trillion overseas as part of a legal tax evasion strategy.
The big profits of U.S, companies, along with skyrocketing income for the 1 Percent and their hangers-on, is one major reason why so many big business interests have been rather complacent, despite a sluggish recovery by historical standards. They've got theirs, so what's the problem?
This reality has a reflection in the contradictions of the Obama administration's economic policy. On the one hand, the huge amounts of money it pumped into the banks shored up the financial system, and its stimulus package, while underpowered, nevertheless put a floor under the economy in early 2009.
But at the same time, the long-term squeeze on government spending has created an austerity ripple effect that is still being felt across the U.S., most directly with the attacks on public spending. That's why Detroit was driven into bankruptcy, Illinois public-sector pensions are being attacked, and Puerto Rico is being forced through Greece-style budget cuts.
As Summers, Krugman and their co-thinkers argue, austerity undermines the economic recovery by holding down wages and constraining public spending that could help boost demand. And the problem of debt for the working class and the middle class, which led to the disastrous housing crash, hasn't gone away, even if debt is at lower percentage of income today.
The new debt bomb in the U.S. is student loans, which have gone from around $500 billion in 2005 to more than $1.2 trillion today as the crummy employment outlook sent people to school to try to get training for a better job. Given low and stagnant wages, some significant defaults are inevitable. And because outstanding student loans total more than credit card and mortgage debt combined, this could have a big impact on the overall economy.
As for the proposals from economists like Krugman and Summers for more government spending to pick up the slack in the economy, there are fundamental flaws with their strategy.
First, boosting government spending to stimulate the economy can eventually add to the problem of overproduction. Then there are the debts racked up as government stimulus spurred the economy out of the Great Recession. While U.S. government debt has come down significantly since then, total debt is piling up across the world economy, rising from $142 trillion in 2007 to $199 trillion today. In Japan, for example, total debt is five times the size of economic output.
There are political barriers, too. The German capitalist class isn't interested reflating the wider European economy with big government spending at Berlin's expense. On the contrary, they are pushing austerity policies in Greece that will ravage that society.
Likewise, Corporate America isn't interested in New Deal-type spending. U.S. employers and their political operatives in both main parties are trying to shred what remains of an already minimal welfare state, which was only ever tolerated in the best of times.
In fact, U.S. capitalists are likely to be more aggressive as the world economic slowdown makes its way to the U.S. Profits are shrinking due to a stronger U.S. dollar and weaker markets abroad. Meanwhile, corporate debt is soaring to record levels as big companies carry out record mergers to strengthen their market positions. Those debts raise the risk of big bankruptcies in the next recession. The first quarter of 2015 saw as spike in corporate bankruptcies, many of the companies hit by the downturn in energy prices.
The financial sector is supposedly better placed to absorb these shocks than it was in 2007. But in this year's recent stress test, the Federal Reserve made several big banks, including Goldman Sachs, cut back on planned payouts to shareholders in order to meet their reserve requirements. Two European banks--Spain's Santander and Germany's Deutsche Bank--failed outright. Since Deutsche Bank holds $62 trillion in complex financial instruments known as derivatives, there is the possibility of a 2008-style financial crash in the event of downturn.
Another world financial crisis would immediately become a political crisis. In the U.S., the five biggest banks--created by the government-forced mergers during the financial meltdown--control nearly half of the $15 trillion in assets. The financial institutions that were considered "too big to fail" then are far bigger now. That means if they get in trouble, they'll be in a stronger position to extort Congress into financing even bigger bailouts--at the expense of working-class taxpayers.
WHAT WILL the political consequences of the world economic slowdown be?
WE'RE NOW seeing the convergence of several political developments driven by the Great Recession.
The economic crisis of 2007-09 detonated the revolutionary upheavals of the Arab Spring. That mass rebellion has since been beset by a multiheaded counterrevolutionary response, from the U.S.-backed Egyptian military's coup, to the Islamist forces funded by Saudi Arabia and the Gulf monarchies, to the Syrian rulers backed by Iran and Russia. This is the context in which another counterrevolutionary force, the Islamic State in Iraq and Syria, has been able to seize territory and jockey for position in the region.
While these forces clash among themselves, they share an interest in crushing any popular and democratic forces.
The war in Syria has been central to the influx of refugees into Europe. There, they have encountered viciously anti-immigrant forces--not only from the far right, but from mainstream conservatives as well. Anti-immigrant parties like the UK Independence Party are trying to tap into popular discontent over the miserable economy in most of Europe.
At the same time, sections of the capitalist classes in big European countries are waking up to the fact that Germany is the boss of the EU, and that Berlin's economic interests aren't the same as their own. That's one reason why Marine Le Pen, head of the far-right National Front, was willing to expel her own father, a Holocaust denier, as her party makes a bid for traditional conservative voters and business support.
There has also been a response on the left in the West, despite the weakness of the trade union movement and a low level of class struggle in most countries. This includes the Occupy movement in the U.S.; the Indignados' occupation of public plazas and the rise of the anti-austerity party Podemos in Spain; and, most importantly, the election of SYRIZA in Greece.
The surrender of SYRIZA Prime Minister Alexis Tsipras to a new round of austerity will make efforts to organize the left more difficult. But SYRIZA's electoral success showed the potential for the left to appeal to a broad working-class audience. In Britain, a veteran left-winger and avowed socialist, Jeremy Corbyn, was elected to head the Labour Party. In Spain, Podemos, in alliance with other left-wing forces, won election to head local government in some key cities earlier this year.
In the U.S., where the left is historically weaker, the situation is much more complicated, since the liberal wing of the Democratic Party has managed to contain opposition to the status quo.
For example, Bernie Sanders, despite being a socialist himself, has decided to campaign for the Democratic presidential nomination, pledging in advance to support the eventual Democratic nominee. Still, it's significant that Sanders' refusal to disavow socialism--which really amounts to Northern European-style social democracy--hasn't cost him support. On the contrary, his denunciations of the "billionaire class" have attracted big, working-class crowds at campaign events around the U.S.
The popularity of Sanders' campaign is a signal that, despite the economic recovery, the Great Recession has sown deep doubts about the fairness of the capitalist system. With the world economy edging towards another crisis, the time is right for a critique of capitalism--and to make the case for a socialist society based on human needs rather than profit.