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NEWS & LETTERS, April 2002
Lead article
World capitalism faces global economic slump
by Andrew Kliman Despite the recent talk about the "end" of the
recession in the U.S., the global economy is in an unusually
"synchronized" slump-a fact that is bound to have a long-term impact
on developments here at home. According to the most recent figures, the Gross Domestic
Product (GDP) has fallen for three straight quarters in Japan and two straight
quarters in Germany-the world's second and third largest economies. GDP is also
falling in France, Italy, and Austria, and its growth is a miniscule 0.1% or
less in Britain, Belgium, the Netherlands, and Switzerland. The "emerging
economies" in which GDP is falling include Hong Kong, Singapore, Taiwan,
Malaysia, Argentina, Brazil, Mexico, Israel, and Turkey. Official Russian government estimates indicate that its
economy, too, either failed to grow or contracted in the final quarter of 2001.
The Asian economic crisis of a few years ago spread to Russia in 1998, causing
it to default on its loans and devalue the ruble. Yet the Russian economy
rebounded sharply, mostly because the price of its oil exports tripled and the
collapse of the ruble cheapened its exports, making them more competitive in the
world market. Now that oil prices have fallen and the ruble's value has
stabilized, the Russian economy may again be heading downward. Absent from the list of declining-GDP countries is the
U.S. The U.S. may or may not have pulled out of its recession, which began last
March. Most, though not all, measures of economic activity have recently turned
upward. Preliminary figures indicate that GDP rose at a 1.4% annual rate in the
fourth quarter of last year after falling by 1.3% in the third, though it is
possible that revised figures will show that the decline continued. The official
definition of a recession, however, is not based on GDP but on trends in
employment, industrial production, and other measures of economic activity. In any case, the real questions are whether the recovery
in the U.S. will be strong or weak, and indeed whether the beginning of an
economic upturn during the last month or two is sustainable. UPTURN OR DOWNTURN? Federal Reserve Chairman Alan Greenspan told a
congressional committee at the end of February that "An array of influences
unique to this business cycle ...seems likely to moderate the speed of the
anticipated recovery." The economy, in other words, will not recover
rapidly from the recession. He predicted that the unemployment rate, which stood
at 5.5% in February, would continue to rise and eventually reach 6 or 6.5%. Many
private-sector economic analysts, such as Ian Shepherdson of High Frequency
Economics, agree that "this will be a jobless recovery," at least in
its early stages. Others are projecting that the recovery will be a
"profitless" one as well. A failure of profits to rebound would be
particularly significant because profits fell even before the recession began,
from 10.2% of GDP in 1997 to 9% in the third quarter of 2000. Then profits took
their fastest nose dive since the Great Depression, to 6.8% of GDP by the third
quarter of 2001. Any rise in unemployment will add to the 1.4 million
jobs that have already been eliminated since March 2001. An even greater number
of manufacturing jobs, 1.7 million, 9% of that sector's total employment, have
vanished since July 2000. As of January, 380,000 U.S. workers had been
unemployed for so long that their jobless benefits had run out. This is
particularly troubling because the welfare system no longer performs the
safety-net function it performed in the past. Some 60% of poor children receive
no welfare benefits. In addition to those who are "officially"
unemployed, another 4.2 million workers wanted full-time jobs but were working
only part-time in February. An additional 1.4 million people were not counted as
unemployed, even though they were available to work, merely because they
couldn't find a job and gave up looking for one. If one counts these groups as
unemployed, February's unemployment rate stands at 10.1% (up from 7.9% the year
before), almost double the "official" rate. Some analysts' forecasts are even more negative than
those of Greenspan and Shepherdson. Felix Zulauf, who runs an asset management
firm, said last month that he does "not think we are in an economic
situation that allows for a sustainable recovery." Wynne Godley, a widely
respected economist, argues that the U.S. economy will AT BEST suffer from
several years of "seriously subnormal growth," and that several more
years of absolute decline is "easy to imagine." SMOKE AND MIRRORS Among the chief factors behind such negative outlooks is
the fact that U.S. companies and consumers have been borrowing so much that
their net saving is negative-they spend more money than they bring in-something
that cannot be sustained in the long term. Starting in early 1992, when it stood
at about 6% of GDP, net saving plummeted continuously and bottomed out at -6.2%
in the third quarter of 2000. The expansion of the 1990s was largely a matter of firms
and consumers investing and consuming beyond their means. This could not and did
not last forever. Investment spending fell sharply in the latter part of
2000, and the economy sank into recession. By the third quarter of 2001, the
savings rate had risen by 3.7 percentage points, to -2.5%. Despite its steep
rise, the savings rate remains in negative territory, and its current level is
therefore unsustainable. Although investment spending has dropped substantially,
consumer spending has not. Even in the wake of a stock market slump and a year
of recession, consumers are still spending money faster than they are making it.
Stephen Roach, chief economist at Morgan Stanley, quipped that "The swagger
of the legendary American consumer is starting to look more and more like that
of a drunken sailor. Yet it isn't just perverse psychology that has propped
up consumption during the recession. The Fed's unprecedented string of interest
rate cuts, as well as tax rebates, zero-interest financing on motor vehicles,
and other sharp price discounts, have kept consumer spending on a rising path.
The zero-interest motor vehicle loans alone served to boost spending on vehicles
by $58 billion in the final quarter of 2001. Yet if this and the other incentives to spend are
temporary-and they all do seem to have run their course-they can stimulate
spending only temporarily. In fact, since the zero-percent loans induced
consumers to buy new cars sooner rather than later, they will depress such
spending in the months ahead. The recent spending incentives have thus allowed the day
of reckoning to be postponed, but it cannot be postponed indefinitely,
particularly because the savings rate remains negative. Thus the key question is how quickly spending will fall
back onto a sustainable path. If spending growth slows down gradually over an
extended period, we can expect an extended period of below-normal economic
growth. If the savings rate moves back rapidly to a normal level, however, it is
likely either that the apparent recent upturn will be reversed and the recession
will continue, or that a new recession will follow quickly on the heels of the
latest one. Such "double dip" recessions are common; a double dip took
place during five of the six most recent recessions in the U.S. Another factor that threatens to prevent a genuine
economic recovery in the U.S. is that its trade deficit has recently hit an
all-time high and might rise further. U.S. imports exceed its exports by so much
that it has to borrow $4 billion daily from abroad to make up the difference.
Even a small decline in capital inflows could trigger a rise in interest rates
and inflation, and a fall in the value of the dollar, and thus lead the economy
into a renewed slump. The present recession in East Asia, largely a result of
the steep decline of Japan's economy, is yet another factor that might prevent
recovery in the U.S., in part by depressing U.S. export earnings even further.
In the final quarter of 2001, Japan's GDP fell for the third time in a row, and
especially sharply, at a 4.5% annual rate. Business investment dropped by 40%.
Industrial production fell by 15% last year, and now stands 10% below its 1989
level. In January, bank lending in Japan fell for the fiftieth
straight month and retail sales declined for the tenth. Unemployment, which
stood at 3.3% four years ago, has risen steadily and now stands at 5.3%.
Sluggish spending has led to serious deflation. Consumer prices in Japan fell
every month during the past two years, and last year they fell by 0.7%. Given
that inflation, not deflation, is the norm, this is a large decline. When prices fall, so do sellers' incomes, and the loss
of income makes it harder for them to pay off their debts. Thus if deflation in
Japan continues much longer, the likely result is widespread business and
personal bankruptcies, as well as a wave of bank failures or even a collapse of
the banking system. Japan's banking system is already in dire straits, in
part because of defaults on loans, but also in large part because the value of
the shares of stock the banks own has plummeted drastically. The Nikkei stock
price index has fallen by one-half during the past couple of years, and by
three-fourths since the country's bubble economy burst at the start of 1990. Although Japan's decline is much less steep than the
decline of the U.S. economy during the Great Depression, it has lasted longer.
Twelve years into Japan's slump, output, profits, and asset values are all much
lower, relative to pre-slump levels, than they were 12 years after the U.S.
Depression began. This is occurring despite the Japanese government's
massive employment of Keynesian policies. Short-term interest rates are close to
zero, the basic money supply grew by 16% in the past year, and government
spending has skyrocketed to the point that its debt now stands at 140% of GDP. (Moody's,
a credit-rating firm, has threatened to downgrade Japan's credit-worthiness to
the level of Botswana's.) Such policies supposedly "prime the pump,"
but they haven't done so. On Feb. 25, U.S. Treasury Secretary Paul O'Neill voiced
a widespread sentiment when he said that Japan's economic situation "is not
sustainable for too much longer a period of time. Something will give." The deflation in Japan has spread to Hong Kong,
Singapore, Taiwan, and China. China's economics minister recently conceded that,
due to falling prices and weak demand from abroad, profits in the state sector
of the economy will fall in 2002, as they did in 2001. Western analysts paint a
gloomier picture, arguing that China's plan to revitalize the state sector has
not succeeded. Official state-sector profits, they say, are positive only
because creative accounting and lending by state banks boosts them artificially.
Partly because of this, the four big state-owned banks are now insolvent by
international standards. China's revitalization plan has thrown about 70 million
state-sector workers out of work. The official urban unemployment rate is only
5%, but Western scholars think it is actually about 25%. An estimated 170
million Chinese are either unemployed or "semi-employed," and China's
recent entry into the World Trade Organization (WTO) is expected to cause
millions of agricultural workers to lose their jobs. The failure of its revitalization efforts is
particularly threatening to Chinese capitalism because, ever since 1989, the
state has tried to spur economic growth in order to dampen social unrest. This also seems not to be working. Bombings have
escalated since the early 1990s. According to China-watchers Peter Kwong and
Dusanka Miscovic, several Communist Party officials were assassinated, and 28
deliberate explosions occurred-at factories, police stations, train depots, and
housing facilities-late last year, around the time China entered the WTO. ARGENTINa's deepening crisis Argentina is another country rocked by protests that its
latest president, Eduardo Duhalde, has characterized as a "social time
bomb." The East Asian crisis spread to Argentina in 1998, and its economy
has never recovered. Indeed, the recession has deepened, causing foreign capital
to flee. The government was forced, in December and January, to freeze bank
accounts, default on its $155 billion foreign debt-the largest such default in
history-and allow the value of its currency to fall by more than one-half, which
in effect makes the Argentine people poorer by one-half. The unemployment rate is now about 25%, and 44% of
Argentina's urban residents are now officially classified as poor. Sixteen
percent of the country's people-twice as many as two years ago-are not getting
their basic food needs met. The economy is not expected to turn around any time
soon. The Argentine working and middle classes have protested
against these conditions and policies in various ways. The Congress building was
set on fire, demonstrators fought police, and others obtained needed foodstuffs
from grocery stores by nonmonetary means. Banks continue to be a target.
Uruguay, Venezuela, Ecuador, and Peru are other South American countries that
have been shaken by protests triggered by the region's recession. Argentina was the richest country in South America only
a few years ago. In light of its apparent economic success, advocates of
free-market and neoliberal policies regularly pointed to it as a model for other
"developing" countries to follow. They do so no longer and, within
Argentina, free-market and neoliberal policies are widely blamed for the
country's crisis. The dismal experiences of other Latin American countries
that tried to resist the world market, however, calls into question the notion
that Argentina's people would be better off had it also done so. The country's
legacy of Peronism and military dictatorship suggests that the failed economics
of the recent past may well be replaced by something worse. The movement against global capitalism must therefore
not stop at opposing capitalism only in its neoliberal form. Fighters for
freedom need to articulate a vision of a future in which the power that
dominates over us, the self-expansion of value, and the recurrent economic
crises it engenders, are abolished. This is the only liberatory alternative to
the current state of affairs. |
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