http://www.guardian.co.uk/commentisfree/story/0,,2177178,00.html
That hissing? It's the sound of bubblenomics deflating
Merely cutting the cost of borrowing will do little to remedy the
long-term weaknesses of the advanced economies
Robert Brenner
Wednesday September 26, 2007
The Guardian
The mortgage lending and banking turmoil in Britain and America seems to
be contained, but its future course remains very much in doubt. If, as
senior officials have long contended, economic fundamentals are strong,
fears about the impact of the crisis should be allayed. But are they?
The bull runs of the 1980s and 1990s, and the first half of this decade,
with their epoch-making transfer of wealth to the richest 1% of the
population, have distracted attention from the actual long-term
weakening of advanced capitalist economies. Economic performance in the
US, western Europe and Japan has, by virtually every standard indicator
- output, investment, employment and wages - deteriorated, decade by
decade, business cycle by business cycle, since the early 70s.
The years since the current cycle began in early 2001 have been the
worst of all - in the US, growth of GDP and jobs has been the slowest
since the end of the 1940s, and real hourly wages for about 80% of the
workforce have languished at about their 1979 level. The decrease in the
dynamism of the advanced capitalist economies is rooted in a major drop
in profitability, caused by a chronic tendency towards overcapacity in
global manufacturing, going back to the late 1960s. Reduced
profitability has, since the 1970s, led to a steady decline in the rate
of investment as a portion of GDP, as well as step-by-step reductions in
the growth of the capital stock and of employment. This slowdown of
capital accumulation, along with a push by corporations to restore their
rates of return by holding down wages, has reduced aggregate demand - a
weakness that has long constituted the main barrier to growth in the
advanced economies.
Governments, led by the US, have underwritten ever greater volumes of
debt, through ever more baroque channels, to subsidise purchasing power.
In the 70s and 80s they incurred continuously larger deficits to sustain
growth. But since the mid-90s they have had to resort to more powerful
and risky forms of stimulus to counter the tendency to stagnation,
replacing the public deficits of traditional Keynesianism with the
private deficits and asset inflation of what might be called asset-price
Keynesianism - or, with equal accuracy, bubblenomics.
Despite his recent protestations to the contrary, none other than Alan
Greenspan launched the experiment in the new macroeconomics, nurturing
the great stock market run of the late 90s, after the attempts by the
Clinton administration and the EU to wean the economy from its
dependence on credit, via neoliberal budget balancing, were met by deep
recessions in Europe and Japan, the jobless recovery in the US, and the
Mexican peso crisis. As corporations and wealthy households enjoyed
their growing paper wealth, they embarked on a record-breaking increase
in borrowing, sustaining a powerful expansion of investment and
consumption, the ill-fated "new economy" boom. However, the ascent of
equity prices in defiance of falling profit rates and the escalation of
overcapacity that resulted from accelerating investment prompted the
crash and recession of 2000-01.
Undeterred, central banks turned again to the inflation of asset prices.
By reducing real short-term interest rates to zero for three years, they
facilitated an explosion of household borrowing that contributed to, and
fed on, rocketing house prices. Inflated household wealth enabled
increased consumer spending that, in turn, drove the expansion. Personal
consumption plus residential investment accounted for 90-100% of the
growth of GDP in the first five years of the current cycle. However, the
housing sector alone was responsible for raising the growth of GDP by
more than 40%, obscuring just how weak the recovery was.
The rise in demand revived the economy. But while consumers did their
part, the same cannot be said for business, despite the incitement of
unprecedented household borrowing. Focused on restoring profit rates,
corporations unleashed a brutal offensive against workers. They
increased productivity growth, not so much by investing in equipment as
by cutting back on jobs and compelling employees to take up the slack.
They held down wages as they squeezed more output per person, allowing
them to appropriate an entirely unprecedented share of the increase that
took place in net non-financial GDP.
Non-financial corporations have, then, raised their profit rates
significantly, though still not back to the already reduced levels of
the 90s. But by holding down job creation, investment and wages, they
have held down the growth of aggregate demand, undermining their own
incentive to expand. Instead, exploiting the cheapness of credit, they
have devoted a record share of their resources to buying back their own
shares, financing mergers and acquisitions, and paying dividends to
stockholders - rather than expanding investment and creating new jobs.
Against this background of fundamental weakness in the real productive
economy, the crisis set off by the collapse of the sub-prime mortgage
market is indeed extremely threatening. Ben Bernanke - who replaced
Greenspan as chairman of the US Federal Reserve - thus had little choice
but to cut the cost of borrowing. The deflation of the housing bubble
from its 2005 peak was already exerting pressure on consumer spending
and residential construction, a problem that can be expected to worsen
as house sales and prices plummet. Moreover, in view of their feeble
response to one of the largest stimulus packages in history,
corporations could hardly have been expected to take up the slack, and
in fact had begun to reduce job growth even before the financial crisis hit.
Yet there is reason to doubt the efficacy of the Fed's reduced rates.
How can consumers again rise to the occasion, when declining house
prices increase saving, not spending? The consumption-led boom seems set
to peter out. Will not the fall in the dollar that is bound to accompany
the Fed's move force up longer-term rates, threatening to drive down
asset prices and curtail real growth? How can lower borrowing costs
reduce the massive mortgage security losses that cannot but result from
the tide of defaults that has only just begun? There is little doubt
that rough times are ahead: the expansion may end with both a whimper
and a bang.
ยท Robert Brenner is the author of The Economics of Global Turbulence
[EMAIL PROTECTED]
