Chris Harman


The recession strikes back

(September 2002)

From Socialist Review, No.266, September 2002.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Website.
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

Chris Harman wonders whatever happened to the US economy’s ‘new paradigm’

Some people lose valued possessions. Some people lose their memories. But it is not often that people lose an economic crisis. Yet this is what happened to many mainstream economic commentators a few months ago. Now they have found it again, and some are absolutely terrified.

Few people doubted the reality of the crisis in the immediate aftermath of 11 September 2001. The sackings in the world’s air transport industry and by US leisure companies were all too visible. And, for much of the media, blame for the crisis lay with the shock of 11 September. In fact, the signs of crisis were there months before. That summer one US stockbroker told reporters that the condition of the country’s economy could be summed up as, ‘Help! I’ve fallen and can’t get up.’

The week before 11 September the Financial Times ran a series of articles on the huge crisis facing the world telecommunications industry, pointing out that it had wasted £1,000 billion on unprofitable investment. That weekend a prominent European business leader told his audience at a ‘mini Davos’ economic forum at the Italian lakes, ‘Everybody is in the dark. No one knows what’s going to happen in a shorter term. Businessmen are trying to talk up their shares and politicians the prospects of growth. In short, no one has a clue.’ Nevertheless 11 September was soon the media explanation for the crisis. Companies were able to slash jobs and attack wages and conditions, blaming it all on Al Qaida.

But within five months they decided they had got it all wrong. On 1 March 2002 a Financial Times headline proclaimed ‘US Recession May Have Ended Before It Began’.

‘The US economy grew much more impressively in the last three months of 2001 than initially reported, suggesting that last year’s recession was probably over before it had begun,’ the Financial Times wrote. The stockmarkets had risen and supporters of capitalism felt they could rejoice, even while US unemployment was continuing to grow.

The celebration lasted barely three months. By July stockmarkets were falling again. The collapse of Enron, brushed aside when it occurred at the end of last year as insignificant, was followed by the collapse of WorldCom and problems for a score of other giant US firms. By early August US statisticians had discovered that, far from the recession never having begun, it had lasted for nine months. What’s more, last year’s productivity figures were found to be much exaggerated. The much vaunted ‘recovery’, it turned out, was no more than the short lived product of a rise in consumer spending, based on Bush’s tax handouts and a further rise in private borrowing, already at a record level.

Now all the talk is of a ‘double dip’ or ‘W-shaped’ recession – a fall in output, followed by a brief recovery based on consumer borrowing, and then a further dip. Even so, there are still attempts to dismiss the gravity of what is happening, and to blame it all on accidental factors. Last autumn the ‘accidental’ factor was supposedly 11 September. This summer it has been simply a few heavily publicised cases of corporate fraud – hence George Bush’s belief he can ‘restore confidence’ by threatening errant corporate bosses with the criminal law.


In fact the roots of the crisis lie much deeper, as I have attempted to show in previous articles in this magazine and in International Socialism journal. Through the 1990s US capitalism did more than simply recover from the recession at the beginning of the decade. It was also able to reassert its global economic power. While at the beginning of the decade the world’s biggest banks and new technology companies had been Japanese, by the end of it they were American. Microsoft became synonymous with software for personal computers. IBM recovered from the dire straits to which it seemed to be heading. General Motors and Ford were able to re-establish their lead over Toyota and Nissan (which eventually passed into the hands of the French firm Renault). The merger of Boeing and McDonnell-Douglas cemented US domination of civilian and military aircraft production. Production in the US rose by about a third in an eight-year period, while in Japan it stagnated and in Germany advanced at a snail’s pace. US power was still a long way short of what it had been in the 1940s and 1950s. But it was relatively stronger than in the 1970s and 1980s, when it had feared Soviet military competition and Japanese economic competition.

The renewed strength was based on a massive restructuring and reinvestment in industry which, in turn, was based upon making US workers toil longer and harder for less. Real wages by 1998 were less than they had been 25 years before, despite an increase in the working year for men of 160 hours and for women of over 200 hours. This permitted profit rates to recover somewhat from the depressed level of the previous two decades. Investing capitalists came to feel that their wealth could go on expanding almost exponentially forever. This pushed up share prices, encouraging a wave of borrowing among better off consumers – and also encouraging banks and finance companies to lend even to those who were not so well off.

Attracted by the boom, those with wealth in the slow growing economies of Europe and the stagnating economies of the rest of the world, especially Japan, moved vast sums to the US. By the end of the 1990s more than 5 percent of private spending in the US was based on borrowing from abroad.

Fooled by the figures

This could not go on forever. Despite the increased exploitation of US workers, profit rates were no higher than they had been in 1973 – that is, at a level that resulted in a crisis then. On that basis, the usual ebbs and flows of the system should have resulted in recession by 1998 or 1999 at the latest. In fact, the Asian crisis of 1998 nearly brought the house of cards down. The collapse of the massive ‘derivatives’ firm Long Term Capital Management briefly threatened the whole US financial system. But emergency action to keep it afloat from the head of the US Federal Reserve, Alan Greenspan, accompanied by a cut in interest rates, seemed to magic the crisis away. Companies proceeded as they had before, but on an even grander scale. The derivatives market doubled in size in the four years after the crisis that exposed its dangers. The majority of mainstream economists joined in paeans of praise for a ‘new economic paradigm’ which, they claimed, had banished slumps forever.

Marxists who talked about the crisis-prone nature of the system were treated with derision, while the small minority of mainstream economists who questioned what was happening were ignored. We know how hollow all claims for the new paradigm were. The continuation of the boom depended on the ability of firms to claim they were making massive profits, knowing that rises in the share values would stop anyone seriously examining what was happening. This was not a question of one or two greedy capitalists lying about their books. It was of a whole class exaggerating its profits and then coming to believe its own exaggerations.

Bob Barbera of the investment bank Hoenig last year compared the operating profits claimed by the 500 companies in the S&P index with the share of profits as measured in the US national accounts. He found that while the company figures showed profits trebling in the 1990s, the national accounts showed that in reality they merely doubled. A graph from the Economist shows how the two sets of figures for profit rates diverged, and to what degree. Two things stand out. The claimed profit rates were up to an incredible 50 percent higher than real profit rates by last year. And the gap between the two sets of figures opened up at the time of the Asian crisis. In other words, the ability of the US economy to avoid the immediate impact of the Asian crisis was not a result of any sort of magic by Greenspan, but rather of the ability of companies to fool themselves, and nearly everyone else, into thinking they were doing much better than they really were. Out of this delusion arose the talk of ‘the new paradigm’, euphoria about supposed productivity gains, the massive surge in share prices and massive levels of investment, mainly, but not only, in new technology areas like telecommunications.

The US boom was able to continue for another three years after the Asian crisis because the fantasy world of financial markets and money profits had lost sight of what was going on in the real world of production and exploitation. It was like a hang-glider, carried aloft by currents of warm air, coming to believe it could defy gravity forever. That is why the revelations about Enron, WorldCom and the others have not been simply a question of fraud. They are a product of the whole of corporate America falling back to the ground in a very destructive way. The most immediate result has been to destroy what lingering confidence firms have that they can make profits out of new investments.

This is creating enormous additional problems. There are only four ways any of the firms in any capitalist economy can sell all the goods they produce – to other capitalists for investment, to private individuals for consumption, to the state for public investment, and to buyers abroad as exports. The collapse of investment has radically weakened these outlets for goods. And exports cannot be raised at will at a time when much of the rest of the world is either stagnating or in recession.

This puts an enormous onus on what happens to private consumption and state expenditure. Hence the central role played by consumer expenditure and indebtedness in the supposed ‘recovery’ in the first three months of this year. But a rise in unemployment and the collapse of share prices to a level a third lower than two years ago is bound to lead to reduced consumer expenditure (half of US households have foolishly entrusted at least some of their savings to the stockmarket).

Government expenditure rose in the aftermath of 11 September, with Bush’s massively enlarged military budget. Such increased arms expenditures are, of course, welcome to certain important industries as providing them with easy markets. But wider sections of US capitalism are worried about budget deficits getting out of control, particularly after Bush’s tax cuts for the very rich. The pressures against further rises in government spending of any sort are very strong. The result is a widening gap between the level of productive capacity in the economy on the one hand, and what consumers and the state between them can buy on the other. In other words, an old fashioned crisis of overproduction has been developing as a result of expanding investment without regard to real profitability over the last five years. This is exactly what happened in Japan ten years ago – and the Japanese economy is still paying the price. No wonder there are fears among the keenest supporters of US capitalism as to what the future holds.

It is still hard to spell out exactly how the crisis will develop in purely economic terms in the US – and even more so in Britain, where a high level of consumer borrowing and an influx of funds from abroad are keeping up the service sector of the economy even while manufacturing industries lose thousands of jobs a month. But what is already very clear is the political impact. The crisis has thrown the Bush administration onto the defensive over its domestic polices in the run-up to November’s Congressional elections. It is also deepening its economic disagreements with its most powerful foreign allies even as it revs up for war against Iraq. Its hamfisted imposition of controls on imports of foreign steel is upsetting even those capitalists who are very friendly to it in Europe and Japan. This is increasing the general mistrust of ‘unilateralism’ – that is, of the Bush gang trampling on the interests of the rest of the world’s ruling classes.

Last, but not least, any crisis in the US deepens the instability in areas of the world important to it strategically. This clearly applies in Latin America, where many countries have still not recovered from the recession that came in the wake of the Asian crisis. The unprecedented slump in Argentina now shows signs of spreading, like ink on blotting paper, to the rest of South America. As a result, of the governments between the Caribbean and Cape Horn, probably only that in Chile could be said to be stable in any serious sense. Bush and Treasury Secretary O’Neil have famously dismissed Argentina as ‘not strategically important’. They dare not apply the same logic to the continent’s biggest economy, Brazil, in the run-up to elections which the parties of the reformist left are likely to win.

Potentially just as worrying for Bush is what is happening on the borders of Iraq, in Turkey. Two years ago it was bracketed together with Argentina in the financial press as the major source of concern among ‘emerging markets’. A politically motivated influx of IMF funds stopped Turkey going straight down the Argentinian road. But now the crisis shows signs of exploding politically, with the soft Islamists of the Justice and Development Party likely to oust both the conservatives and the left of centre social democrats just as Bush is depending on Turkish air bases for his war.

The Bush team are determined to show that the US rules the world by going to war. But an explosive combination of economic and political factors could make life very difficult for them.

Last updated on 27 December 2009