The World Economy: Results and Prospects
BY THE end of the first year of the new millennium the United States, the powerhouse of the world economy, was on the ropes. That this should be so was no surprise. What was unexpected was that it should happen so quickly and so dramatically.
On 19 December Alan Greenspan, chairman of the Federal Reserve, economic saviour and sage, was unconcerned about the slowdown in the US economy. He remained intoxicated by the new paradigm of an economy based on improved rates of productivity resulting from investment in new technology. Yet, within two days of the Stock Exchanges opening in the New Year, he was sufficiently panicked to make an emergency and unexpected interest rate cut.
Market makers and movers were shocked by events. Many claimed never to have seen such a rapid deterioration in an economy as had occurred in US over the last two months of 2000. This adjustment was brutal for a people exercising hegemonic power over this planet. Their fears in the 1980s that the Japanese would consume them having proved groundless, they had then become convinced that their economic dominance would never end. Now, however, the economic quicksand opened up. As the Wall Street Journal put it, the American people behaved as would a manic-depressive. First euphoria then abject depression.
One of the features of the presidential election campaign had been the sight of Bush and Gore trying to outdo each other in promising tax cuts based on the surplus being generated by the US economy. Alas, Bush will now find that this will run like mercury through his fingers as the surplus evaporates with the deepening of the recession. And, instead of finding its way into the pockets of the rich, it will have to be used to shore up first this part of the economy and then that.
In fact the US economy had been living on borrowed time. A year earlier, the governments of the imperialist world decided to pump liquidity into the world economy because they feared a potential computer meltdown caused by the millennium bug. This wave of credit headed for the nearest port, the stock exchanges. In particular it elevated prices of shares in the "new economy", causing prices on the Nasdaq Exchange to leap.
The old economy was ridiculed, the new economy glamorised. The Nasdaq Exchange was supposedly going to trump the Wall Street Exchange. Yet by March this wave of liquidity was ebbing. At the same time there was a surge in the number of new, "new economic" shares being issued. Blinded by greed, investors made no objective assessment of profitability. Most new companies showed only losses, but hey, they had the future in their hands. On average the price to earnings ratios exceeded 60.
Then the Nasdaq fell off its perch. Within nine months it had shed over 50% of its value, a fall reminiscent of 1929 but occurring in a shorter period of time. The loss was over $2,000 billion, or if you prefer two trillion dollars. Capitalism, in times of boom, often and arrogantly ignores its basis of existence, profits. However, no sooner does it do so than the gravity of profitability trips it up and it lands on its face.
Bruised by the collapse of the "new economy", investors sought refuge in that part of the economy they had ridiculed such a short time ago, the old economy. They did so despite the collapse in the outlook for profits. Three months earlier economists were looking for profit growth of 20% year on year for the fourth quarter. Within two months this was revised down to below 10% and the year ended with a projected growth of 4%, barely covering inflation.
This fall in the mass of profits rekindled the debate over productivity. On the one side were the proponents of the view that information technology had transformed productivity growth, and on the other those who claimed that its effect was marginal and that the growth in productivity was due to the booming economy. This author is of the opinion that information technology did boost productivity.
The confusion over productivity flows primarily from the fact that the capitalists refuse to make a distinction between productive and unproductive workers. As Marxists, we understand that productive workers are those who produce surplus value and therefore profits. Unproductive workers are those who do not – for example, those involved in buying, selling, administering, accounting and managing the concerns of the capitalist class. Information technology allowed corporations to delayer, to strip out tens of millions of these unproductive workers and managers. This continual renewing, or if you like re-engineering, of corporations, exemplified by General Electric, meant that they were able to reduce what had been an enormous drain on profits.
This brings us to the second point. The capitalists calculate productivity on the basis of value added per worker. Re-engineering allowed corporations to produce the same turnover with fewer workers. Hence the value added by each worker went up and so with it did productivity.
These figures were slightly inflated. Many of the low value-added, but value-creating, jobs like cleaning were subcontracted out. Hence they did not act as a burden on the higher value-producing activity of the corporation.
On the other hand, with specific reference to the US, the value added by workers has been understated. Once again, this has to do with another methodological flaw in the calculations of the capitalist class. They do not draw a distinction between value produced and value realised. If, on average, goods are sold at prices below their actual costs of production, some of the value is not realised.
The strong dollar has opened the gap between value produced and realised in the US. It has sucked in cheap imports from parts of the world where demand has been weaker. These cheap imports have depressed prices and seen a redistribution of profits from the US to the rest of the world. Without this, productivity would be seen to be higher.
This depression of profits means that the mass of profits has not risen in proportion to the increase in productivity and exploitation. Compared with the mass of investment, profits have risen by only 13%. If we wipe away the froth, it is likely that profits rose by less than 10% in 2000, as much of this increase was due to creative accounting, or to profits resulting from speculation in shares and property. In the third quarter of 2000, for example, INTEL and Microsoft used the sale of shares in other companies to pump up their profits which had hardly risen from earlier levels.
This means that the rate of profit has hardly improved despite the reduction in the amount of capital needed for investment. In particular, the use of information technology has reduced the level of stocks needed for production. For example, "just in time" manufacturing has allowed stocks of raw materials and components to fall from what would have been $450bn to $300bn in 1999. Secondly, the reduction in workers has allowed the corporations to reduce the liquid assets needed to meet wages.
If share prices have soared, this is not only due to speculation but also to the cynical management of the number of shares in circulation. Notably, the 1990s has been a period of accelerated buying back of shares by their companies. Hence, compared with the number of issued shares, profits have risen, but compared with assets they have hardly increased at all.
In buying back their shares, corporations have mortgaged their future. They have not used profits to finance these buy backs, simply because the profit flow has not been sufficient for that in addition to the high levels of investment they have undertaken. Instead, they have had to employ that age old device of borrowing money in order to pay for these redemptions of shares. They have swapped debt for equity. The result is they now carry an awesome debt load.
By the second half of 2000 the bubble had burst. This coincided with the fact that what remained of the information technology revolution had proved disappointing. It did not provide the services and the savings it promised, hence the collapse of the legion of new start up dot-coms. The realisation is now dawning that the information technology revolution is largely behind us. Whatever lies in the future, with the exception of B2B, will only be incremental. Yes, the large corporations will be able to squeeze their suppliers by sourcing components and materials internationally on the web, but away from that what can be milked has been milked.
With only incremental increases in technology, the outlook for profits is depressed. This has been aggravated by the slowdown in the US economy which has made it more difficult for the capitalists to substitute absolute for relative rates of exploitation – that is, to substitute longer hours of work for technological improvements.
At the time of writing, the capitalists are convinced that the profit outlook is depressed only for the first half of this year and that thereafter it will resume its upward path. They are also convinced that a sharp reduction in interest rates will ease the debt burden. After all, a halving of interest rates means a company or an individual can sustain double the debt burden at the same level of income.
This view is too sanguine by half. Firstly, it underestimates the level of debt. US corporate debt is 20% higher than on the eve of the last recession and much of it went on over-investment. In addition, household debt is 25% higher. Much of this debt is secured against or has been borrowed on the basis of an anticipated rise in share prices that would enable it to be paid off.
Yet, for the first time in ten years, 2000 saw a fall in share prices during the course of the year. The outlook for 2001 is even poorer. Despite the 9% fall in share prices last year, the price to earnings level remains well above historical trends and asset values. In fact the US Stock Market valuation is still at 160% of GNP, having fallen from a peak of 180% in March last year. That is over double the levels of 1973, 1980 or 1990, on the eve of the previous recessions.
Given the deterioration in the outlook for profits, interest rate manipulation will increasingly be seen to be ineffective. The early January cut did stabilise the debt market but, as the economy slows, further rate cuts will have a decreasing effect on underpinning the debt mountain. It is at that point that the real panic will break out.
This applies not only to US banking capital, but to international finance. Many of their investments are in the US with much of it in the most risky segments. With a financial shock imminent, the country most effected will be Japan.
Japan is the weak link in the chain of imperialism. For ten long years it has unsuccessfully tried to restructure its economy. Industrial production in 2000 is still below the level of 1990. It has bobbed along the trough of a depression year after year. It has only been the buoyant US economy and the fiscal policies of the Japanese government that has kept it afloat.
Neither of these two supports now remains in place. From the early 1990s, virtually free credit allowed Japanese banks and companies to invest in the US economy and make substantial gains. This has enabled them to gradually whittle away the debt mountain inherited from the free spending 1980s. With the collapse of investment opportunities in the US, these returns have yielded losses where once there were gains. Secondly, the Japanese government is now bankrupt. Ten years of spending above its tax base in order to stimulate the economy has resulted in the highest level of government debt in the imperialist world.
It is therefore highly likely that Japan will experience a 1929-style slump. By this we mean more than a recession; we mean a contraction in production exceeding 10%, real unemployment approaching or exceeding 20% and deflation exceeding 2% per annum. It will rock Japanese society to its core, change attitudes for ever and test for the first time in thirty years the class peace that has characterised this docile society.
Developments in the US will mimic those in Japan during the first half of the 1990s. The US will have to work its way through a huge debt bubble. Like the Japanese in the 1980s, in the 1990s the US has over-spent, over-consumed and over-invested. Though the fall of the Nasdaq is more or less complete, Wall Street has to fall much further. Land prices need to tumble and corporations will have to work off their debts.
Over the last two decades, and particularly during the second half of the 1990s, the US spent more than it produced, a state of affairs that could only be sustained because the US is the dominant world economic power. In 2000, for example, the US spent 108 cents for every 100 cents it produced. This has led to an unprecedented international debt burden, one which poses a threat to its economic hegemony as well as to the mighty dollar.
Yet the US is unlikely to have a full blown slump. Three factors mitigate against that. First, the US government is in surplus, and thus in a position to pump money into the economy, in a manner not dissimilar to the Japanese government in the early 1990s. Secondly, as we saw on 3 January, interest rates can be reduced significantly (though the effectiveness will diminish with each reduction). Above all, unlike the Japanese, US corporations are not shy about shedding labour and closing factories, thereby making workers pay for the failure of the system.
Already commentators in the US have raised the perspective of the US economy entering a Japanese-style economic valley. This author has raised this perspective a number of times. What is clear is that it will take the US many years to work through the excesses of the 1990s and part of the 1980s.
Of all the major economic blocs, the EU will fare best. Its growing integration has unlocked many investment opportunities and its opening up of Eastern Europe has raised the prospect of turning the reserve army of the unemployed there into a new Mexico. Contrary to the arrogant belief of economists in the US, it is likely that productivity in the major EU countries, especially Germany, is equal to the best in the US.
The growing integration of the EU will create an economic bloc that will be able to challenge the hegemony of the US for the first time since the Second World War. As a result, it is here that the locus of renewed inter-imperialist rivalry will be found. Tensions over the new giant Airbus and the creation of an EU army are a foretaste of things to come. However, these developments should not be overstated. Compared with the past, capital is now much more international. It will be much harder to achieve unity within each national ruling class, which in turn will open splits and tensions which workers can and must exploit as imperialist rivalries are stepped up.
Finally, the Third World will pay a hefty price. It is not by accident than the Korean and Taiwanese Stock Exchanges experienced the heaviest falls last year. They just happen to be the two countries most integrated into world trade and most dependent on the electronics industry and the US market. The Pacific Rim has not fully recovered from the collapse of 1998. It now faces an even greater calamity. There is no one to replace the US market. Japan is on its knees; Europe’s growth will be too anaemic to compensate for the loss of the furious consumption of the US. With international trade stagnating, the oxygen line to the Third World will be blocked, and they will asphyxiate. The economic genocide of large swathes of Africa will expand to other continents.
Reagan and Thatcher inflicted a generational defeat on the international working class. For nearly two decades we have had to live with capitalist triumphalism, with the view that the market is the highest form of human economic activity. The beauty of capitalism, however, is its propensity to stumble and then fall when one least expects it.
Nevertheless we should still be patient. The organisations of the working class are in tatters. The ideological hurdles are still formidable. It makes the future dangerous, but the situation is not impossible. With an economic mode of production exhausting its potential once again, this creates the objective conditions for the re-emergence of the working class on the world stage. The capitalist class may find that, after all, the 21st century does not belong to them.