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Lead article
News & Letters, April 2001
Layoffs pile up, reality of global capitalism sets in
by A. Anielewicz
The United States and Japan, the world's two largest economies, now both
stand on the brink of recession--if indeed they have not succumbed already.
Simultaneous recessions in these two nations could well bring down the
whole world economy, since together they account for about two-fifths of
world output and the whole of the global capitalist system is linked to
them in myriad ways. This threat comes scarcely two years after the last
global economic crisis which ripped throughout East Asia and beyond
threatened the world's financial structure with collapse.
The case of Japan's economy is an instructive one, since it may show the
U.S. the image of its own future. Analysts are increasingly pointing to
several striking parallels between the Japanese economy of the 1980s and
the U.S. economy of the 1990s, including an explosion of stock and real
estate prices, a deterioration of savings, and rapid growth of business
investment and GDP (Gross Domestic Product).
OMEN IN DOOMED JAPANESE ECONOMY
In the case of Japan, these trends proved to be unsustainable. The bubble
burst, sending the economy into a deep recession, followed by a full decade
of relative stagnation and now the prospect of another serious downturn.
The question facing the U.S. is whether the fallout from the recent
bursting of the Nasdaq stockmarket bubble will be confined to the dot com
and high-tech sectors, or whether history will repeat itself.
Far from "priming the pump" to an economic recovery, the Japanese
government's 13 rescue packages during the last decade have instead
contributed to a soaring public debt. This debt, which now exceeds 130% of
the country's GDP, has recently been downgraded by Standard and Poor's to
"junk-bond" status.
Although growing GDP at the end of 2000 reversed a decline earlier in the
year, more recent statistics tell a different story. Japan's unemployment
rate has risen to a record 4.9%, industrial production is plummeting,
unsold goods are piling up, household spending is falling, and the country
is suddenly importing more than it is exporting.
The threat posed by deflation--falling prices--is even more alarming.
Japanese real estate and stock prices have fallen throughout the last
decade, joined by declining consumer prices during the last two years. By
depressing incomes, this deflationary trend has made the payback of debts
more onerous, helping to push bankruptcies to a record high. As a result,
Japan's banking sector stands in danger of widespread collapse, especially
now that declining stock prices have made it harder for the banks to use
their stockholdings to paper over losses from bad loans.
Perhaps the best measure of how dire is Japan's economic situation is the
fact that even the government itself now speaks about it in the frankest
terms. In recent weeks, its finance minister has conceded that Japan's
"public finances are very near collapse." The central bank has warned that
the economy faces the "threat of deterioration." And a leading member of
the ruling party and potential prime minister has characterized the
economic situation as "a life-or-death crisis for the country."
U.S. CAPITALISM SLIDES TO THE EDGE
Like Japan, the U.S. economy as a whole narrowly avoided falling into
recession at the end of last year. The manufacturing sector, however, has
certainly experienced a steep decline. Between last July and February,
426,000 manufacturing jobs--2.3% of the sector's total employment--have been
eliminated, and overtime hours have been cut back to the lowest level since
1992. Output has fallen by about 2.5 % since September in the sector as a
whole, and by a whopping 22% in the auto industry.
Through February, employment in the economy as a whole kept growing at
near-normal levels. Yet it seems likely that this trend will reverse
itself. Falling profits are causing companies to announce tens of thousands
of layoffs--18,000 at Motorola, 13% of its total workforce; up to 8,000 at
Cisco Systems; 5,000 each at Compaq and Intel... and the list goes on.
Several other phenomena also suggest that recession is likely. Among them
are the decline in profitability, massive indebtedness and negative saving
in the private sector, and a large and growing international trade and
investment deficit.
It is mostly because corporate profits have fallen, and are predicted to
fall further, that U.S. stock prices have plummeted in recent weeks. Late
last year, analysts were forecasting that profits would increase at a 5%
annual rate throughout the first half of 2001.
Less than three months later, these forecasts have been drastically revised
in light of an ever-growing series of announcements of losses and falling
profits, and equally dismal projections of profitability for the second
quarter of the year. The announcements have come from firms in all sectors
of the economy. Corporate profits are now expected to drop by 6.3% in the
first quarter and another 4.1% in the second.
It is true that the 64% drop in the Nasdaq stockmarket index over the past
year is largely a high-tech phenomenon, not a result of falling profits.
Fetishization of the supposed "New Economy" had earlier sent technology
stock prices to wildly excessive and unsustainable levels. Especially in
recent months, however, the plummeting of stock prices has extended far
beyond the technology sector. By March 21, the broad-based S&P 500 index
had fallen by 27% from its peak a year earlier. Declining stock prices in
the U.S. and Japan have also helped cause the world's other stockmarkets to
fall by comparable amounts.
The drop in stock prices is important for two reasons. One is that
stockmarket fluctuations are a good predictor of economic activity in the
near future. The market is in essence signaling to workers that they can
expect more layoffs and declining incomes, as a result of future declines
in profits and the cutbacks in productive investment spending and
production that such declines typically trigger.
Far more now than ever before, declining stock prices are also important
because of their direct impact on workers' incomes and spending. The 401k
retirement plan has allowed businesses massively to shift onto workers the
risks of providing for their retirement. Increasingly, workers invest
directly for their retirement, and suffer the consequences when their
stockmarket wealth disappears.
To date, about $5 trillion of it has disappeared in the U.S., an amount
equal to about half of GDP. Now that they find themselves so much poorer,
Americans will be cutting back on their spending. The size of this spending
cut is hard to predict, but it alone--even leaving aside the cuts in
workers' spending due to unemployment and in business spending due to
falling profits--will almost certainly be more than enough to send the U.S.
economy into recession. Much more than in the past, the lost wealth
consists of workers' retirement incomes, which they will have to try to
restore by cutting their spending, not excess funds that the wealthy can
afford to have gambled away.
The flip side of this story is that the decade-long expansion in the U.S.
has been built largely on an excessive pile-up of debt that has been used
to fuel unsustainable levels of spending. In 1992, consumers spent 91.3% of
their after-tax incomes, saving the other 8.7%. Since then the spending
share has risen continually, largely because of the stockmarket bubble--huge
stockmarket gains became viewed as a substitute for saving. By the middle
of last year, consumer spending began to exceed income. In January, it
surpassed income by a record 1%. Clearly, this "overconsumption" is another
bubble waiting to be burst.
A MOUNTAIN OF DEBT
Over the last three years, moreover, business debt grew more than twice as
fast as GDP. On paper, everything seemed fine as long as firms' stockmarket
wealth kept ballooning enough to counterbalance their ballooning debt. When
the market fell, however, it became clear that the debt build-up had been
excessive. Firms then slowed their investment spending in a belated attempt
to improve their balance sheets. Yet this slowdown has helped send profits
tumbling downward.
The recession on the horizon is fundamentally a result of these and other
structural imbalances in the U.S. economy. It is not something the Federal
Reserve has artificially engineered (either intentionally or by mistake).
Although the Fed did raise short-term interest rates from mid-1998 to
mid-2000, they rose only by about one percentage point. When adjusted for
inflation, moreover, the interest rates actually DECLINED during that
period.
This also suggests that there are definite limits to what the Fed's current
interest rate reductions can be expected to accomplish. There are deeper
structural imbalances that must be corrected. In particular, both theory
and the Japanese experience suggest that excess debt will probably need to
be paid down, through lower consumption and productive investment spending,
and/or wiped out, through personal and business bankruptcies and similar
means.
If the U.S. economy turns downward, working people can expect to be greeted
with half of President-select Bush's "compassionate conservative"
agenda--the conservative half. His, and Congress's latest policies make
clear that theirs is a government tailor-made for capitalism in a time of
crisis, dead-set on restoring profitability at any cost.
Last month, Congress passed a bankruptcy "reform" law that will make it
impossible for millions of workers to escape from debt. With lightning
speed, the Republicans also pushed through a repeal of recent regulations
designed to reduce carpal tunnel syndrome and other repetitive motion
injuries that 1.8 million U.S. workers suffer on the job each year.
Appealing to economic necessity, Bush reneged on a campaign promise to
regulate power plant emissions of carbon dioxide, the chief contributor to
global warming.
The President-select has also gone on the offensive against unions, which
have recently begun to reverse a long decline in membership. Last month he
issued a ban against "project labor agreements" on federally funded
building projects. He also used his executive powers to stall a threatened
strike at Northwest Airlines for 60 days, and weighed in heavily on the
bosses' side of contract negotiations at the other three major U.S.
airlines, by declaring ominously that he would take "the necessary steps"
to prevent their workers from striking.
TAX CUTS SMOTHER SOCIAL SPENDING
Bush's massive proposed tax cuts will do next to nothing to help the U.S.
economy pull out of recession or to stabilize workers' incomes during a
recession. They were not designed to do so. They were designed to make the
rich richer and to prevent budget surpluses from being used to restore any
of the spending on social services that was slashed during the past 20
years. Moreover, almost all of the tax cuts will come into effect too late
to have an anti-recessionary effect.
Nor will Bush's plan help the economy by "paying down the debt." The much
ballyhooed paydown of federal debt is at best a matter of "creative
accounting"; the Congressional Budget Office's own wildly optimistic
figures project that total Treasury debt will actually rise from $5.6
trillion in 2000 to $6.7 trillion in 2011. By causing tax revenues to fall
and social insurance spending to rise, a recession is likely to turn the
current budget surpluses into deficits once again.
Working people certainly have a serious fight on their hands, especially if
the economy does fall into recession. For more than malice or greed
underlies the Bush administration's reactionary agenda. Without sufficient
profit and sufficient "unpaid labor" of workers that produces this profit,
the capitalist system simply cannot survive. So the economic necessities
that Bush invokes in justifying his reactionary agenda are real ones under
the capitalist system. What is not necessary is the system itself.
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