By accident, I sent the following missive before it was finished. Please respond to this version, not the other.
Fred Moseley writes: >Over, the weekend I read with interest Jim D's explanation of the "millennium crisis" (i.e. the current recession) on his website, which was discussed last week on PENL. I also read his RRPE 2000 paper on the rise and fall of stagflation. I mostly agree with the latter and strongly disagree with the former.< Thanks for your comments, which are not only helpful but definitely help raise the intellectual level on pen-l. The last time I discussed this issue, the discussion developed to a stage where one individual asserted that my "politics stink." Luckily, it got to that low level only off-list.[*] > Jim, as I understand it, you argue that the main cause of the current recession was an INCREASE in the rate of profit from 1982 to 19[97].< My emphasis was on the _trend_ rise, which occured from 1981 or so to 2000. It's true that the cyclical peak was in 1997, though other estimates besides the US government's disagree about the timing. As noted in the paper that I put on-line, I believe that there's no big correlation between the short-term fluctuations of the profit rate and macroeconomic behavior, so I don't care that much when the peak occurred. Instead, I emphasize the trend. (I said: "... in terms of the way in which the [rate of profit] affects both the supply of funds for fixed investment and the incentive to engage in such accumulation, it's most likely not the current profit rate but the trend profit rate that powers the economy. Instead, the trend profit rate indicates the presence or absence of a structural problem, blocking or encouraging accumulation. A low trend profit rate discourages accumulation and demand-side growth.") (I should acknowledge that if I recalculate the trend profit rate in a few years, the trend will probably be different, maybe even falling down in 1997 or so. That would change my view. But I'm trying to give the best interpretation I can given the information I have.) >It is not entirely clear to me how an increase in the rate of profit could cause a recession, but the argument seems to something like the following: The increase in the rate of profit was in large part caused by an increase in the share of profit, which in turn was caused workers' wages increasing slower than the value added of the output. However, the slower wage growth, which caused the share and the rate of profit to increase, also caused problems of insufficient demand for consumer goods (i.e. problems of underconsumption), which eventually caused the recession. > Jim, is this roughly correct? Please correct or elaborate.< Gladly, because there's no way I can do any real work when I'm totally fatigued (from flying back from the economics meetings) and this, unlike real work, is energizing. A. The rise in the income share of profits didn't cause the stagnation of wages relative to labor productivity as much as reflected it. But that's a very trivial point. Rather, my view is that this kind of stagnation _encourages_ stagnation of consumer demand, but that latter stagnation does NOT automatically happen immediately or automatically pull the economy down. The growth of consumer credit can delay the effects of stagnant wages on consumption. This delays recession, but eventually leads to increasingly unbearable debt, which makes the economy more prone to recession. B. Being prone to recession is not the same thing has having a recession, however: unlike the underconsumptionists (surveyed in Michael Bleaney's excellent book, UNDERCONSUMPTION THEORIES, International Publishers, 1976), I don't see working-class consumption as the be-all and end-all of aggregate demand. There are several obvious substitutes for consumer demand. (1) capitalist accumulation, which is in fact encouraged by profit rates trending upward. (2) capitalist luxury spending, which is encouraged by the same force. (3) government deficits. (4) positive net exports (if our unit of analysis is the nation-state rather than the world). Numbers (3) and (4) are ruled out in the current era (so far). In fact, the world-wide stagnation of wages relative to productivity would make it very hard for the US to run a trade surplus _even if_ the dollar exchange rate were more appropriate. So, along with worker debt accumulation, (1) and (2) explain why the US economy grew _despite_ stagnant wages. But these, like worker debt accumulation, are quite limited solutions which make the economy more and more fragile. (1) capitalist accumulation can accelerate out of step with consumption (as with Tugan-Baranowsky's idea of fixed investment being justified by the increased demand for machinery) but it ends up being a little like a Ponzi scheme: for the process to continue, accumulation has to continue to accelerate. (This is made worse if fixed capital becomes more "productive," i.e., fixed capital/output ratios fall, as they did in the trend after 1982.) The greater role of accumulation in aggregate demand also implies that aggregate demand as a whole becomes increasingly unstable (because, as is well known, fixed investment is more volatile than most consumer spending). Further, there is a greater likelihood of microeconomic over-investment processes, as in fiber-optic cable, malls, and movie screens. The process of accelerating accumulation _can_ continue, but becomes increasingly subject to inevitable "shocks," e.g., the popping of the stock market bubble and 911. (2) A lot of the surge in capitalist consumption spending was based on credit and the assumption that stock values would remain high. This led to a clash between the growth of debt and the fall or leveling-out of asset values (stocks, housing, etc.) Further, important consumer markets -- like PCs -- became saturated. Again, this makes the process increasingly fragile. C. Note the nature of the "inevitability" I'm talking about here: it's as if a wooden house is being munched at by termites. It's inevitable that it will fall apart (or even fall down) but we can't say when. Further, the possibility of fumigation -- some sort of major structural change -- could forestall the "inevitable." To use a less poetic analogy, my argument is formally akin to that of Godley & Izureta: they see government surplus as inevitably dragging down the economy, but they see private-sector debt accumulation as allowing the kind of prosperity we saw in the late 1990s. They then point out that the latter debt accumulation is unsustainable, especially since the private sector can go bankrupt in a way the US government can't. As with my view, there's no way to predict the end of an unsustainable process. D. I want to note another difference from the underconsumptionist view (also based on Bleaney's critique). I don't see underconsumption as a transhistorical force under capitalism. There are eras -- such as the 1960s in the US -- when the social system is set up in a way that implies that rising accumulation pulls up wages (relative to labor productivity) so that workers' consumption can grow to allow stable realization of the profit rate. In that case, in what I've called a "labor scarce regime" but should be called a "strong-labor regime," underconsumption forces are irrelevant. (Instead of the problem being one of inadequate profit realization, it is inadequate profit production.) It's possible (on a very abstract level) that the late 1990s boom could have pulled up wages and workers' consumption, conquering the underconsumption undertow. In fact, toward the end there, wages did surge upward and workers' debt situation began to improve. Someone might argue that there was even a wage squeeze on profits to explain the cyclical fall in the profit rate after 1997 or so. But my _structural_ analysis rules this out except as a very transitory phenomenon: the current era is characterized by a weak-labor regime akin to that of the 1920s (a.k.a. labor abundance) not just in the US but in the rest of the world. There's a world-wide process of a "race to the bottom" or what I've called "competitive austerity and export promotion" encouraged by the transnational movement of capital and by the efforts of the IMF and the WB (and of course the US government). In sum, the neoliberal movement is encouraging world-wide underconsumption. >If this is correct, then this theory would seem to suggest that, in the quarters leading up to the beginning of the recession in 2001, consumer spending should have been very weak. However, THE OPPOSITE IS THE CASE. As is well-known, US consumers have been on an extended "spending spree" in recent years, which has resulted in rapid rates of increase of consumer spending (consumer spending has increased faster than value added). Indeed, consumer spending is STILL INCREASING in the fourth quarter of the recession, spurred in large part by the "zero interest" incentives on automobiles, plus continuing strong credit growth in general. It is possible (though I think unlikely) that this will be the first recession in US history in which consumer spending does not decline! Nothing is said these days about weak consumer spending. Thanks is always given for strong consumer spending.< I wasn't arguing that stagnant consumption was the proximate or efficient cause of the recession. Instead, we might see stagnant _wages_ (relative to productivity) as the structural cause (or what Aristotle called material and formal causes). Stagnant wages might be seen as being like the termites eating the house. Other factors, such as gravity, bring the house down. I see the zero interest rates as simply delaying the auto industry's problems. Similarly, a lot of the (relative) success of retail sales is due to low prices, which hardly is a victory for profits. Finally, with the rise in unemployment, it's hard to believe that consumer demand would continue to increase. Consumer confidence may be up _now_, but as lay-offs and downsizings continue to kick in... > What has collapsed, by striking contrast, has been investment spending, which has declined about 10% since mid-2000, and is still declining. Computer hardware makers, not consumer goods makers, were the hardest hit by the recession. In the words of the Cisco CEO, "investment demand fell off a cliff."...< My point is that the underconsumption undertow (or termites) made the U.S. economy excessively dependent on business fixed investment (and rich folks' consumption). In a different conjuncture, a fall of investment of the sort you describe would have had a smaller effect. BTW, I doubt that we've seen anywhere near the full effects of this investment fall yet. Unlike in classic underconsumption theory, investment plays a very important role in my analysis: the theory which I applied in the notes that I posted on my web-site is called "over-investment relative to consumption" (developed in my 1983 REVIEW OF RADICAL POLITICAL ECONOMICS article and more completely -- and mathematically! -- in my 1994 RESEARCH IN POLITICAL ECONOMY article). I don't see that type of over-investment as fitting a 1960s-type "strong labor" regime. (In the latter, over-investment is relative to supply. I had an article about that in the EASTERN ECONOMIC JOURNAL in 1987. It is unreadable, due to the editor's efforts.) > I would argue further that the sharp decline in investment spending since later 1999 was caused by an even bigger decline in the rate of profit from 1997 to 2000, which in turn was caused mainly by a similar decline in the share of profit over this period. The decline in the profit share since 1997 has been so strong that it has completely wiped out the previous increase in the mid-1990s (I will focus on the profit share since the estimates are easier). The profit share today is no higher that it was in the trough of the early 1980s. Jim's estimates are taken from Larkin and Morris (2001) and ultimately from the SCB (BEA). These estimates go through the year 2000, which shows a small increase over 1982. However, if these estimates are updated through the third quarter of 2001, we find that there has been a further significant decline, so that the profit share in 2001 will probably turn out to be even lower that it was in the trough of 1982 (0.15), and will probably set an all-time record low for the postwar period of 0.14. (These estimates are for the NFCB sector.)< In my article's calculations, the share of profit's rise isn't as important as the fall in the fixed capital-output ratio in explaining the trend rise in the rate of profit from 1982 to 2000. (It's roughly 38% explanation by the profit share vs. 62% by the capital-output ratio.) I also argue that the reported figures on profit shares under-estimate the upward redistribution that's going on because (1) the process is world-wide and the numbers only reflect the US; (2) the bloated salaries of top executives -- who really should be counted as part of the capitalist class -- are counted as part of wage & salary costs, not profits; and (3) the tax rate on profits has likely fallen, while the numbers I used were pre-tax. (BTW, I have my doubts about the importance of the third matter, at least for the US federal level.) I interpret the fall in the profit share since 1997 as a cyclical matter. Obviously, the deviation between the rise of the trend profit share and the fall in the actual profit share since 1997 is an important phenomenon that can't be ignored. (This kind of deviations have occured before, from 1984 to 1986 and from 1988 to 1992.) I see the upward trend as a real phenomenon, though: it represents one result of the triumph of neoliberalism, something that all the powers that be were assuming was going to continue back in early 2001 when the recession "officially" began. In fact, the prevailing view is that the neoliberal triumph will continue (who really gives a rat about Argentina among the rich and powerful?), in that we're going to enjoy a short V-shaped recession/recovery. So I think that looking at the upward trend of profit shares -- which started back in 1982 or so -- rather than simply looking at the actual numbers is a reasonable thing to do. Given this, my point is that the neoliberal triumph involves triumphalism, i.e., hubris. It's based on a structurally unsound premise, ignoring the nemesis or blow-back from the resultant underconsumption undertow (structural problem). Some of the air has leaked out of this triumphalism (as the air leaked out of the stock-market bubble) but it's continuing (just as price/earnings ratios are still unsustainably high on Wall Street). As for the cyclical fall in the profit rate after 1997, I interpret this as a two-stage process: (1) until some point in 2000, in terms of a combination of supply-side factors (rising wages, over-investment's effects) as befits an economy where the unemployment rate fell to 4%. However, given the broader structural analysis, I see this as a transitory phenomenon rather than a return to the good old days of the 1960s. (2) since mid-2000, the problem became one of inadequate realization. Falling investment meant falling rates of capacity utilization -- and thus falling profits. Both falling utilization rates and profit rates encourage further falls in investment... Who knows, but this process might conceivable blast the rest of the air out of the neoliberal balloon, encouraging a true intellectual/policy crisis (as in the 1930s) and the rise of statism and/or the world working-class movement. > Therefore, I argue that the current recession has been caused, in classical Marxian fashion, by a sharp decline in the rate of profit, which caused investment spending to fall.< the issue is what caused the fall. I think it's possible that a rising "organic composition of capital" -- as reflected in a rising fixed capital-output ratio -- might have contributed to stage (1) of the post-1997 fall in the rate of profit. But I interpret that as merely a cyclical phenomenon. It's only _in combination with_ the structural problem (the trend upward in the profit rate, reflecting the triumph of neoliberalism, the weak-labor regime) that the cyclical decline in the profit rate leads to what I see as a truly serious crisis in 2002. (However, it's possible that the problem could be pushed back more, though that doesn't seem to be happening.) > The causal relation between the decline of the rate of profit and the decline of investment spending in the current recession seems to be widely understood, including even by the Federal Reserve Board, which in its terse explanations of its interest rate cuts this year, has repeatedly emphasized "rapidly deteriorating profitability" and its negative effect on investment spending.< I agree that the rate of profit's cyclical fall hurts private fixed investment and severely weakens the effectiveness of monetary policy in stimulating business fixed investment (so that it works by other means, e.g., by propping up the stock and housing markets and preventing the "wealth effect" from dragging the U.S. economy down further). But, again, I don't see short-term profitability numbers as that important in determining fixed investment, because of the large role of _expectations_ of future profitability. Instead, I interpret the seeming impotence of monetary policy on falling rates of capacity utilization, i.e., a realization crisis. Though falling rates of capacity utilization clearly lead to lower profitability, I see them as affecting investment more directly, via the accelerator effect: what's the point of investing more in fiber-optic cable (or whatever) if the current stock is severely underutilized? In other words, I see the trend rate of profit as dominating what Keynes called the state of long-term expectations, which is the main determinant of long-term investment plans, while the rate of capacity utilization has a big immediate effect on investment (encouraging delays in the implementation of existing long-term investment plans). Clearly, short-term factors feed back to affect long-term factors, but I don't think we've seen that happen yet. If that happens, it would correspond to the end of the triumphalism I referred to. >Jim, what is surprising is that in your RRPE (2000) paper, you argue, along classical Marxian lines, that the cause of stagflation on the 1970s and 80s was a decline in the rate of profit, and that the cause of the end of stagflation in the 1990s was an increase in the rate of profit since 1980 (this latter conclusion needs to be reconsidered in light of more recent data). I agree completely that the cause of the stagflation of recent decades was the significant decline in the rate of profit in the early postwar period (a decline of roughly 50%). As you know, I have been making a similar argument for years. However, you now argue that the current recession was not caused by the decline in the rate of profit since 1997, but was instead caused by the increase in the rate of profit prior to 1997, which caused problems of underconsumption (which however do not seem to exist). I don't get it. ...< [*] Actually, it's quite possible that my politics do stink, since such issues can only be answered in practice. But I'd like to see how well my correspondent's political practice has done in getting rid of capitalism, patriarchy, and ethnic domination.
