Chris Harman


When will the bubble burst?

(January 1989)

From Socialist Worker Review, No.105, January 1988, pp.13-16.
Transcribed & marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

For the last twelve months the Tories have been crowing over the “economic miracle” Britain has undergone. Meanwhile, the American economic boom seemingly continues apace. But are things as sound as they are made out to be? Chris Harman, editor of Socialist Worker discusses the situation with Lee Humber and Jim Smith of the Socialist Worker Review

SWR: The Tories are saying that Britain has had too much of a good thing and that the interest rate rises are justifiable. Is that true?

CH: Their boast is that Britain has the highest productivity growth rates in Europe. But there are two problems with that. The figures are calculated after the recession of 1982, when a third of manufacturing capacity had been destroyed. The growth rates are only the same as the levels of 1973. If you compare that with the other advanced countries the difference is devastating. West German output compared with 1970 is up 30 percent, French output is up 30 percent, American output is up 55 percent and Japanese output is up 80 percent. The UK output is still at roughly the same level.

And on average the increase in the rate of growth in productivity is only the same as that achieved in the 1950s and 1960s, then regarded as a sign of the terrible weakness of the British economy.

Faced with this, the Tories now have three central problems. Firstly, there are the balance of payments difficulties, always a problem in the 1950s and 1960s, which led to “stop-go” policies where any expansion in the economy led to sucking in imports.

They slammed oh the brakes to stop the imports but this then led to stopping investment in British industry, and to a cumulative decline in its position. British manufacturing industry lagged further and further behind its competitors. Every time they slowed down the economy, they aggravated the overall problems by stopping further investment.

The second problem facing them is inflation. This is caused by basically two dungs, shortages of manufacturing capacity and shortages of skilled labour. Both of these have been felt severely in the British construction industry. Companies have recently had to scour the world for cement and other bask construction necessities. It is dear that there is a limit to the expansion of manufacturing because of limits to capacity and this translates itself into inflation.

The shortage of skilled labour is also a major problem. Again, the situation in construction is very bad. The output in the industry has increased 50 percent in the last three or four years. In the depths of the last recession there were very few construction sites and so few apprentices, few electricians, few brickies. Many skilled construction workers also left.

So the expansion caught the employers without skilled labour, hence the stories of £800 a week plasterers, which is probably an exaggeration. However, what is clear is that skilled workers can walk off a building site one day, walk on to another the next and get a call from the first site offering them increases in wages. That scarcity translates itself into an increase in wages which can spill over into an increase in prices, with average wage increases of around 7-8 percent.

Linked with that, the bosses don’t know how this will effect shop floor organisation and union power. Increased inflation with increased prices and increased wage claims can also lead to increased confidence on the shop floor, and that can cut into profits.

The third problem for the ruling classes is the huge level of borrowing that has been required to sustain the boom currently taking place.

What Lawson, Thatcher and the CBI have been worried about is how to contain this process of escalating balance of payments deficit, escalating skilled labour shortage and escalating borrowing, without having to take measures which shove the whole economy into recession.

SWR: What do the economists mean when they talk of hard and soft landings?

CH: The soft landing is the idea that the rate of growth can be reduced from around 4 percent to about 2 percent. What worries them is that by doing so it won’t just go to 2 percent but to 0 percent or actually into negative growth, into very serious recession.

The only control they choose to use is interest rates. In the long term increasing rates attacks living standards, but in the short term it has very perverse effects.

Without any direct controls on credit, people respond to the increased interest rates by borrowing more. The more that’s borrowed the greater and greater the indebtedness. There is a danger that when the consumer boom eventually does stop, the whole thing will come crashing down like a house of cards.

This is particularly a problem in those sections of the population the government relies on for their votes. It also creates problems in industry because to invest means borrowing. So if interest rates stay high then industry responds by cutting back on investments. The gap between British capitalism and its rivals gets even wider.

It is very difficult to predict whether there will be a soft or hard landing. By its very nature capitalism is a system where individuals all over the world make decisions on the basis of guesses. If the guesses are wildly wrong they change their decision over night.

There are serious political implications whatever happens, since errors or indecision can lead to a loss of confidence in the government among a section of the ruling class and amongst sections of industry.

SWR: Is it the case that whether there is a recession or not is most effected by developments overseas, by events in America for example?

CH: Any problems British capitalism faces, American capitalism also faces but in an aggravated form.

The miracle of British growth in the economy has been a bit of a mirage. But in America there has been real growth over the last six years – 3-4 percent average growth a year. That has translated itself into new factories, increased spending power and so on. The number of people working in American manufacturing is the highest it’s ever been in American history.

The boom has been financed by methods which all the respectable bourgeois economists said didn’t work anymore – that is basically Keynesian supply-side economics. That means high government expenditure financed by massive government borrowing, a huge balance of payments deficit and budget deficit.

On top of that there is a great pyramid of private sector borrowing all of which has been sustained by Reagan’s refusal to retreat from pushing up growth rates. He carried through tax cuts and wouldn’t let anyone make expenditure cuts to try to balance the budget. He carried through the boom by increasing the deficit of the economy and therefore the long term instability of the economy.

The US presidential campaign showed the impasse the American ruling class is in. Neither candidate was prepared to commit himself on plans for the economy. The boom on the stock market to celebrate Bush’s election lasted about six hours and was followed by a depression as business expressed its lack of confidence in Bush’s ability to sort the economy out.

The problem facing Bush is similar to the problem facing Thatcher. The boom has led to massive unbalances. The administration, in trying to deal with these unbalances, can give rise to a very risky deflation.

But it is still very difficult to predict exactly what will happen with the American economy. Four years ago people were saying the American boom must end soon. And they were right except Reagan ignored apparent economic sense and allowed the boom to continue to fuel itself. People are saying now that Bush must end the boom. But whether he moves to do so, or just continues in the blind hope that it will carry on for the next six months or a year, we just don’t know.

There are other unpredictable factors. In America in September 1987, measures were taken which should have started to cool the boom down. They increased interest rates. But this led directly to the stock exchange crash which forced them to reverse their policies. They lowered interest rates and pumped billions of dollars into the economy in order to sustain the financial sector which then allowed the boom to continue. Subsequently the problems for them today are greater than a year ago.

It is important for Marxists to recognise booms and slumps. But sometimes socialists only talk about the economy being out of control when it’s in a slump. In fact the economy is also out of control when it’s in a boom, when it’s travelling at break neck speed. An old man running at speed is likely to get a coronary.

And the American administration don’t know how to slow it down.

It should be relatively easy to cut the balance of payments deficit without any great difficulties, by cutting public expenditure. Except there are some very well entrenched middle class interest groups, for example the old people’s lobby groups in the US, who are against this. The authorities are very worried about cutting into what is a middle class welfare state in the US.

Bush is committed to no tax rises after his “read my lips” statement. Any tax increases will immediately expose him.

On top of that, as part of the Reagan boom the American thrifts (their equivalent to building societies) have held down their interest rates and are now faced with $80 million worth of debts. The government is responsible for these but really doesn’t know how to finance them.

Leveraged buy outs are also prevalent in the US currently. They are really legal rip offs, consisting of people with no financial backing of their own borrowing huge sums of money to buy up or take over a company, like the recent Nabisco buy out. They can then sell off the productive areas of a company and use the money they make to pay off their debts instead of investing. This raises the value of the stocks in the process but also weakens the productive basis of the company.

So Bush is faced with all these contradictions. If he throws the brakes on he weakens his own political position. He upsets lots of middle class interest groups and he’s in danger of putting a pin in the debt bubble which could lead to a great crash. The point is, if he sees it in terms of a great crash he may avoid doing anything for six months or a year, which means we can’t talk about a recession yet.

If he doesn’t do anything then the bubble can get bigger and more dangerous. If he does do something he may precipitate a slump. It’s not possible for us to predict what will happen. The most probable scenario is that we’ll have nine or ten months of continued boom followed by a slump at the end of the year. But that’s only a guess.

SWR: One option that has been mooted is cutting back on arms expenditure as a way of cutting back on government debt. Do you think that’s a possibility?

CH: There are a number of problems with that. A cut in arms spending will weaken the thrust of the boom and can begin to precipitate the recession. Governments find it very difficult to fine-tune the economy as the Keynesians used to say, through cuts in arms spending or cuts in welfare spending. Fine-tuning can push an economy which is already about to go down into a worse drop than intended.

Also, the American economy leads in arms expenditure because it is weak in terms of competitive capabilities with Japan and others. Over the last eight years part of the Reagan trick has been to stress the level of international tension in order to try and force the Europeans and Japanese to follow its strategic goals.

To reduce the level of international tension can weaken the influence that American capitalism can have over world events. Part of America’s leverage is that it is the world’s great military power.

There is a further problem when we consider the Gorbachev effect, if you have two economically weak empires who then begin to reduce their military expenditure, what happens if that leads to the various countries who are partially dependent on the major powers getting rebellious?

For example, the American ruling class are worried about the political instability in Mexico, about the Workers Party in Brazil doing well in the elections, and other developments in South America. Their hegemony over this sphere of influence is very important to them. Whether they can maintain that hegemony while reducing arms is an important question for them.

Gorbachev has an even bigger problem because he wants to reduce expenditure in order to strengthen the Russian economy. But what happens if in the process of restructuring his economy Hungary erupts into struggle, Poland really blows up or the nationalist disturbances in the Baltics and Armenia get worse?

If the situation in Yugoslavia develops into civil war, which is quite possible in the period ahead, it will be very difficult for the two great powers to cut military expenditure, the pressure will be on them to move towards further arms spending. The situation is very much beyond their control.

SWR: Can America maintain the boom by keeping the level of living standards down, with low wage rises and low levels of welfare spending?

CH: The American situation is different from the European one. In Europe the boom has been accompanied by real improvements in wages and – in Italy, Spain and now in France – by rising levels of militancy. In Britain, we’re beginning to see a recovery in confidence from the very serious set back of the miners strike.

But in the US we have the strange situation of the boom being accompanied by a continued fall in the level of wages. So average wages in America are still 14 percent lower than they were in 1973. The great number of new jobs created are largely low paid. Up to 40 percent of the new jobs are paying rates below the poverty line.

American families have been able to maintain living standards but only by both husband and wife working, whereas before one wage would have sufficed. So the boom in the US hasn’t translated itself into increased levels of militancy. There have been major strikes in the last few years although most of them have gone down to defeat. The Hormel meatpackers’ strike was just like the P&O strike. The recently settled strike at the Chicago Tribune over union busting was just like the strike at Wapping.

Over the last few years the American working class has suffered a number of defeats which has meant their confidence has remained low. But there are interesting developments. Ford are now operating at full capacity in a booming car market. A strike against Ford at the moment would have great chances of victory since the company is desperate to maintain production in a cut throat market. Unfortunately, so far strikes haven’t occurred because of the general demoralisation and the tight grip of the American union bureaucracy.

There was a ten day strike at Chrysler which knocked $80 million off the company’s profits. That shows the vulnerability of sections of American capital. The steel industry shows similar vulnerability. During the 1980s the industry cut back enormously on capacity but today thanks to the boom it is working flat out. Potentially the workers in the industry have enormous power.

Far from sustaining the American economic boom, low levels of living standards in some ways could make the boom more vulnerable. What is financing the boom is borrowing, borrowing by workers and borrowing by the middle classes, all of which would be threatened if Bush puts the brakes on too sharply.

The situation is analogous to the 1920s. There was a boom in the US at a time of stagnating low wages with the imbalances in the economy that produced. It was sustained by various forms of loans, wage reductions and speculation which meant when the turning point came the crash was very great.

SWR: When the recent stock market crash occurred many on the left thought it would be like the 1930s when there was a huge economic crash. Does the experience of the October crash suggest that the US ruling class can just stumble through their severe problems?

CH: I find it difficult to believe that they can. But what became clear during the recent crash was the differences between the 1930s and today. The crisis then forced governments to intervene directly to control the economy much more than they had previously. There was the development of state capitalism with high levels of state expenditure providing governments with a certain ability to influence the economy.

The internationalisation of the world economy in the 1960s and 1970s substantially undercut the ability of governments to regulate the economy compared with the previous 30 years. However, governments still have much greater capacity to intervene today than they did in 1929.

But in intervening to calm some symptoms of the crisis they can aggravate others. This is essentially what happened last year. They intervened to stop a collapse of the US financial system but in the process they stopped the damping down of inflationary pressures. So the same problems exist today as they did on the eve of October 1987. Thatcher and Lawson refer to the stock market crash as a correction. It has corrected nothing.

They put up interest rates and that led to the crash, so they reduced interest rates. Now interest rates are going up again. If that starts to bring pressure to bear on the markets maybe they’ll reduce interest rates again. The result is increasing instability.

We can’t see how this instability will work out in practice any more than we can see where a glass will break if it is dropped onto a concrete floor. What we can see is that something will happen which will have a profound impact.

There have been six years of economic recovery which in most countries has led to real growth. In Britain it has led to the return to growth rates of 1973. That recovery is not going to continue without considerable instability.

In some ways the best thing for socialists and the labour movement would be another year of boom. In Britain we’re just beginning to see the recovery of working class confidence after the effects of the miners’ strike. Maybe in the US it will tip the balance so that workers will begin to fight.

SWR: How much of a threat do the countries in South East Asia, the so called Newly Industrialised Countries (NICs), pose to the US in terms of competition for markets?

CH: You have to put it in perspective. The big economies like the United States, West Germany, Japan, and even the second division countries like Italy and Britain, are much bigger than the NICs. All the NICs together including Taiwan, Korea and Brazil, still export only half the value of Britain’s exports for example.

The NICs are important in certain areas. They have been particularly important with regard to the US. They have not undercut American industry, as many of the American nationalists on the right and the left claim. But they have provided the link for American capitalists to undermine union organisation and to move production from the unionised areas of the north east of the country to the non-unionised areas of the south and the west.

But the NICs don’t really present a major challenge as far as competition for markets go. The main significance of these countries for us is that the industrialised working class has increased massively as a result of developments hi Korea, Taiwan and Brazil.

SWR: What effect does the debt crisis in the Third World have on the world economic climate?

CH: There are two debt problems. The debts of Brazil, Mexico and so on are a problem in that certain agreements are reached between the debtor countries and the banks which are dependent on cutting the living standards of the working classes of the countries involved. These attacks are translated into political instability as in South America which is a major headache for the US.

The other, much bigger debt crisis is that of corporate and private debt in the US. Debt is important when you reach the point that it can’t be paid off. If we get a period of stable, coordinated boom with rising profits then the debts represent little problem. If, however, we have a world economy where the level of profits have still not been raised to above the levels of 1972-73 which precipitated the present period of crisis, then we’re talking about a faltering period of growth which throws the whole issue of debt repayment sharply into focus.

The debt problem is another reflection of the general crisis of profitability. Financial crisis grows out of a more deep seated crisis of the system. But having grown out of it the financial crisis exacerbates and deepens the general crisis.

Therefore any faltering in growth rates will have very serious consequences on the levels of debt and on the general crisis.

Last updated on 7 May 2010