After the worst recession since the 1930s and a period of very weak ”recovery” over the past few months, there have been a number of signs of a certain upturn in the U.S. economy. For example, the number of jobs rose by over 200,000 per month in December, January, and February. While not enough to make a serious dent in structural unemployment, this was an improvement over figures for the last four years.
Also, the overall economy, reflected in Gross Domestic Product (GDP), grew at an annualized rate of 1.8% in the third quarter of 2011, followed by 4.4% in the fourth quarter.
Analysts have also pointed to an improving trend of consumer spending of 0.1% in December, 0.2% in January, and 0.5% in February. However, once one adjusts for increases in the cost of living, real disposable income (what people had available to spend) fell by 0.2% in January and 0.1% in February (www.bea.gov/newsreleases/glance.htm).
These figures have been greeted with praise by many analysts, including the Obama Administration, which argues that the economy is finally starting to pull out of the stagnation of the last four years. Obviously, the Obama Administration has a vested interest in projecting such comments, considering its fate could well be determined in the 2012 election by whether people think its economic policies are working.
March Unemployment Figures
New preliminary unemployment figures for March 2012 show a slightly contradictory trend, with only 120,000 new jobs being created compared to 200,000 in each of the three previous months. Referring to the March figures, Cliff Waldman, a senior economist at MAPI, the Manufacturers’ Alliance, stated: “It is obviously disappointing. This provides some pretty good evidence that part of the strength of the prior two months was probably seasonal.” (NY Times, 4/6/12)
Christine Owens, the executive director of the National Employment Law Project, stated: “We should not attach too much significance to one month’s numbers, especially in light of overall positive trends, but there’s no question that the persistence of a deep jobs deficit along with low labor-force participation rates and the lopsided growth in low-wage jobs remain a cause for concern about how robust and sustainable the recovery will be.” (NY Times, 4/6/12)
The fact that the U.S. economy is showing some signs of life after four years of stagnation has been extensively played up in the press. The capitalist economy thrives on enthusiasm. Encouraging people that things are fine - i.e. that everything is going to work out all right - is essential to stimulating economic activity. They also hope their happy chatter will convince concerned workers to ignore their own plight and return once again to the spending habits of the previous 20 years.
So has the economy turned a corner? Do the present improving statistics on jobs and GDP reflect an improvement in the fundamentals that will open up a new period of growth? Or is this another small blip that represents a false dawn and will break down in the next period? The only way to answer this is to review whether the structural problems that have plagued the U.S. economy since 2008 have been overcome.
The Housing Crisis
Many experts have pointed to improvement in certain housing statistics. There has been a considerable fall in house values and a shortage of housing has emerged. It is argued that these are signs that the housing crisis is being overcome.
But this is only looking at one side of the issue. Yes, the population has grown in the last six years and house prices have fallen. But most people in the bottom 90% do not have incomes to buy houses. The key problem dominating the housing crisis is the overload of debt of exiting homeowners who cannot afford to spend and the low wages of workers who cannot afford to buy a home.
In an article titled “The Strait of America,” Nouriel Roubini, who almost alone among major establishment economists predicted the 2008 crash, writes: “Even after six years of a housing recession, the sector is comatose. With demand for new homes having fallen by 80% relative to the peak, the downward price adjustment is likely to continue in 2012 as the supply of new and existing homes continues to exceed demand. Up to 40% of households with a mortgage – 20 million – could end up with negative equity in their homes. Thus, the vicious cycle of foreclosures and lower prices is likely to continue – and, with so many households severely credit-constrained, consumer confidence, while improving, will remain weak.” (1/13/12)
Paul Krugman, a regular economic columnist for the New York Times, writes: “The main thing standing in the way of a housing bounce-back is a sharp fall in household formation — econospeak for lots of young adults living with their parents because they can't afford to move out.” (NY Times, “Things Are Not O.K.,” 2/5/12)
The failure of the Obama Administration to pass legislation allowing courts to rewrite mortgage instruments to reflect the real price of a home has left tens of millions staggering to pay mortgages that are more than the house they own. Combined with the abysmal record of the Obama Administration to enact an extensive jobs program that could really turn around the economy, there will be no swift resolution to the housing crisis (see Justice issue #82 for “The Truth about Obama’s Foreclosure Bill”).
The Jobs and Income Crisis
The central issue underlying the crisis is the continuing low level of income of the majority of workers and young people, already on low wages and facing cutbacks and high unemployment.
The Economic Policy Institute found that fewer workers were employed in January 2012 than in January 2001. Paul Krugman writes: “The institute estimates that even at January's pace of job creation it would take us until 2019 to return to full employment.” (NY Times, “Things Are Not O.K.,” 2/5/12) And that estimate was based on an increase of 200,000 per month, which halved to 120,000 in March. At a job creation rate of only 120,000, that date would be extended to around 2024!
Robert Reich, formerly Secretary of Labor in President Clinton’s first administration, makes a similar point when he writes: “The most direct way of measuring the jobs deficit is to look at the share of the working-age population in jobs. Before the recession, 63.3 percent of working-age Americans had jobs. That employment-to-population ratio reached a low last summer of 58.2 percent. Now it's 58.5 percent.” (“Jobs Deficit Still More Important Than Budget Deficit,” 2/4/12)
In a further measure of the scale of attacks on workers’ living standards by the bosses, the Commerce Department reported that the share of people with health insurance from their employers dropped from 59.8% in 2007 to 55.3% in 2010. Also, the share of private-sector workers with retirement plans dropped from 42% in 2007 to 39.5% in 2010 (www.census.gov/hhes/www/hlthins).
High levels of structural unemployment have hardly changed since early 2009. The Bureau of Labor Statistics (BLS) stated that, in February 2012, an astounding 42.6% of the unemployed has been out of work for over 6 months.
Despite a tiny uptick, the jobs picture continues to be bleak. In February 2012, the BLS reported 12.8 million unemployed. Additionally, 8.1 million were working part-time because they were unable to find full-time work, and 2.6 million were marginally employed. This brings the total number of unemployed workers to 23.5 million.
This all shows an economy that has failed to create jobs for the almost ten million workers who lost jobs between 2008 and 2010, let alone provide jobs for young people leaving school or college. Many of the jobs that do exist pay low wages with few, if any, benefits. This is not enough to sustain high levels of spending in the real economy, an issue exacerbated by the record level of credit card and student debt, where money that might be spent in the real economy is instead being siphoned off into the pockets of rich bankers.
In these statistics, we can see U.S. society returning towards social conditions of the 1930s. For most African American and many Latinos, the economy is already in a depression. But now, on a more generalized scale, conditions of depression are returning for tens of millions of workers who have essentially been abandoned by the ruling elite and their two parties.
Capitalism can no longer find jobs for tens of millions of workers who are left to fend for themselves in any way they can. Karl Marx explained that capitalism needed to maintain a “reserve army” of the proletariat (working class) who are expelled from the workplace during periods of recession only to pick up work during economic booms. This “reserve army” of unemployed workers is used by the bosses to terrorize workers with jobs who threatened to move into struggle, as a means to drive down wages.
Writing about the U.S. in the 1930s, Leon Trotsky’s insights are very relevant to social conditions today. He wrote: ”The present army of unemployed can no longer be regarded as a ‘reserve army,’ because its basic mass can no longer have any hope of returning to employment… Disintegrating capitalism has brought up a whole generation of young people who have never had a job and have no hope of getting one. This new subclass between the proletariat and the semi-proletariat (self/employed/middle class) is forced to live at the expense of society.” (Introduction to “Living Thoughts of Karl Marx”, p.27)
Poverty, which spiked higher in 2008, also continues to rise. The following figures were released by the U.S. Census Bureau in September 2011 (www.nclej.org/poverty-in-the-us.php): In 2010, 46.2 million people – 15.1% of the population – were living in poverty. This is up from 43.6 million in 2009 and 39.8 million in 2008.
But what is truly staggering is the huge number of Americans now living just above the poverty line. In December 2011, the Census Bureau reported that nearly half of Americans have either fallen below the poverty line or are classified under the category of "low income." The number of low-income residents has risen to a massive 97.3 million, coupled with 49.1 million in poverty, for a total of 146.4 million. The figure marks an increase of four million over 2009 (Democracy Now!, 12/16/11).
Once again, African Americans, Latinos, and women are suffering the worst. The report states: “In 2010, 9.9% of non-Hispanic whites lived in poverty and 4.3% in deep poverty; 26.6% of Hispanics lived in poverty and 10.9% in deep poverty; and 27.4% of blacks lived in poverty and 13.5% in deep poverty.
“12.4% of non-Hispanic white children under 18 lived below poverty; 35% of Hispanic children under 18 lived below poverty; and 39.1% of black children under 18 lived below poverty. Overall, 22% of children under 18 – 16.4 million children – lived below the poverty line.”
“Families headed by a single adult are more likely to be headed by women, and these female-headed families are at greater risk of poverty and deep poverty. 34.2% of families with a female householder where no husband is present were poor, and 17% were living in deep poverty. 17.3% of families with a male householder where no wife was present were poor, and 7.9% were living in deep poverty. 7.6% of married couple families with children were living in poverty, and 2.4% were in deep poverty.”
The report also exposed the massive increase in poverty among young people who cannot find jobs that can sustain them. It states: “The recession has continued pushing 25-to-34-year-olds to move in with family and friends to save money. Of that group, nearly half were living below the poverty line when their parents’ incomes were excluded.”
These figures on housing, jobs, and poverty show that the deep structural problems and widespread suffering that were uncovered by the 2008 crash still remain. Considering that 70% of U.S. economic activity depends on consumer spending by workers and their families, we can see the devastating effects wage stagnation, persistent high unemployment, and the growing level of poverty will have on the possibility for robust economic growth. The failure of the labor leaders to organize powerful struggles to raise wages and for jobs is also an important factor in this continuing downward trend.
These issues are all intertwined with the ongoing housing crisis. High unemployment and low wage growth mean house owners can’t make any progress paying off their bloated mortgages. The high interest payments on their loans further dampen spending. Without an increase in wages and income, the economy will remain stuck in a structural crisis.
Distribution of Wealth
The steady polarization of wealth since the 1970s has also not been reversed. Robert Reich writes: “Luxury retailers are smiling. So are the owners of high-end restaurants, sellers of upscale cars, vacation planners, financial advisors, and personal coaches. For them and their customers and clients, the recession is over. The recovery is now full speed. But the rest of America isn't enjoying an economic recovery. It's still sick. Many Americans remain in critical condition.” (“Whose Recovery? Many Remain in Critical Condition,” Robert Reich's Blog, 4/1/12)
An analysis of tax returns by Emmanuel Saez and Thomas Pikkety found that the top 1% pocketed 93% of the gains in 2010. 37% of the gains went to the top one-tenth of 1%. No one below the richest 10% saw any gain at all. This is reflected in the booming stock market, which is dominated by activity of the top 1% (elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf).
So where is all this money being spent? The answer is that the ruling elite are sitting on their new-won wealth. Even in a period of supposed economic upturn, when the rich are making money hand over fist, the corporate owners are failing to play an historically progressive task as capitalists and invest. The fundamental reason is not that they are mean and greedy - although they are. It’s a result of the warped logic of the capitalist system, where investment can only happen in the pursuit of profit.
In a moment of rare honesty, a column in The Economist on March 30, 2012 spells it all out.
“The past four years have been bad for workers and savers but good for the corporate sector. Profit margins in America are higher than at any time in the past 65 years. That helps explain why the equity market has rebounded so strongly despite a lackluster economy.
“Margins have been boosted by firms’ tight control of labor costs and by a reduction in interest expenses caused by the policies of central banks throughout the rich world.”
“However, the current high level of profits is not leading to a surge in investment. As a proportion of GDP, American business investment is close to 30-year lows. This shortfall has been blamed on many things, from over-regulation in America to uncertainty about the outlook for demand when real incomes are being squeezed by higher fuel prices and the lack of wage growth.
“Peter Oppenheimer of Goldman Sachs points out that the high profit share of GDP is simply a corollary of the low share taken by labor. ‘With high unemployment and further substitution of technology for labor, it is unlikely that this will change dramatically any time soon,’ he says.”
Failure of Capitalism
There you have it! Oppenheimer states: “The high profit share of GDP is simply a corollary of the low share taken by labor.” Confirmation of what Marx wrote 160 years ago. Marx explained how the transfer of wealth from the poor to the rich was a result of their ownership of factories and workplaces. By owning the means of production, they owned the product of workers. This allowed them to pay workers less wealth than their labor created. The difference is profit. Accumulated day after day, week after week, and year after year, this is the basis of the capitalist’s increased wealth - and the subsequent poverty of workers. Thus Marx explained the opposing interests between workers and bosses – between Labor and Capital.
Far from a rising tide raising all ships, we can see the number of luxury yachts proliferate among corporate owners while workers are stuck in row boats that continue to leak water.
Marx explained that the contradictions inherent to capitalism continually reappear and create new crises. That is the case today. Two main contradictions are: 1) the tendency towards overproduction and subsequent bloated world markets; and 2) the tendency for profit rates to fall in established industries. This is not the place to explain these contradictions in detail, except to say that they are both rooted in the fact that, under capitalism, the owners of major factories and workplaces control the distribution of wealth created in the productive process.
The squeeze on wages, high unemployment, crippling levels of debt, growing inequality, and low levels of investment are all restricting the market for goods. This results in a stagnation of production, and the continued situation of low to zero growth. This makes it ever more difficult for the capitalist economy to find a means of growing. This lack of demand spells out well the desperate state of tens of millions of workers today and the present state of the U.S. economy.
It is this situation that leads to glutted world markets in autos, clothing, and other commodities and the lack of a buyer able to afford them. The rich get richer, while the mass of the population falls further into poverty and greater misery. This explains why the capitalist class is refusing to invest in productive industry. They are not sure there will be a market for subsequent production. Instead, they are putting their profits into financial markets and speculation. This explains the series of bubbles in stock market values, foreign currencies, and housing prices that we have seen in the last 20 years. This is the fundamental reason for a lack of capitalist investment, not over-regulation as is argued by many capitalist commentators. This lack of investment explains the four-decade-long decline in the industrial core of the U.S. economy.
The biggest growth industry now is gambling – i.e. fleecing the living standards of workers, making money out of their dashed hopes and dreams, and creating social misery. The other main area of growth has been the stock market – the creation of another bubble based on fictitious wealth waiting for another collapse. And this is going to rebuild the U.S. economy?
This is why this weak economic upturn has not led to a renewal of growth in real investment in the economy. Despite pleading from Obama, the owners of capital are hoarding their profits. Their continued pursuit of individual profit is doing nothing to rebuild the economy. Instead, they demand even more austerity and lower wages and benefits, which results in an economy in stagnation.
In the words of Robert Reich: “We can't possibly grow faster if the vast majority of Americans, who are still losing ground, don't have the money to buy more of the things American workers produce. There's no way spending by the richest 10 percent - the only ones gaining ground - will be enough to get the economy out of first gear.” (“Whose Recovery? Many Remain in Critical Condition,” Robert Reich's Blog, 4/1/12)
Obama’s Failed Policies
Of course there is a way of pulling this economy out of recession - putting the unemployed back to work under a huge public works program: building infrastructure, housing, schools, hospitals, and fundamentally retooling the whole economy with green technology. But that isn’t happening. The reason for this is that decisions about investment and allocation of resources are made by the owners of the big corporations, and they will only invest if they see a profit to be made.
It is the contradictions built into the foundation of the capitalist system that make it unable to resolve its problems. This is why socialists say capitalism needs to be replaced. As a first step to do that, we call for the 500 largest banks and corporations to be taken out of the hand of their present owners and run as part of socialist plan of production, democratically controlled by elected committees of the public and workers.
In early 2009, we explained that the Obama Administration needed to implement an extensive public works program to retool U.S. industry and create millions of jobs. Its failure to do so has meant it has presided over a crippled economy. Yes, Obama implemented a stimulus package in 2009, but it was woefully small and limited to two years, which gave only a temporary boost to the economy. It failed to solve the underling structural economic problems and failed to direct any serious investment into retooling the economy.
Also, Obama’s stimulus package was overwhelmingly aimed at putting money into the hands of banks and capitalists to allow the “private sector” to pull us out of the recession. This was a continuation of the neo-liberal agenda of giving tax cuts and hand outs to the private sector to solve problems When that inevitably failed, Obama was left with all the problems he inherited from Bush, plus a failure of his own policies.
Under Obama’s presidency, economic growth has been marginal. Instead of spearheading a further drive for federal spending to jumpstart the economy, in 2010 Obama jumped on board the Republican “solution” of austerity. In 2011, his main goal was to broker a deal with Republicans to enact a $3-4 trillion cut in the federal deficit.
Having downplayed talk of a new jobs program in favor of cutting deficits, any momentum for a further stimulus package was lost. His continued call for a limited jobs program in 2012 is mostly directed at shoring up support among labor unions and liberals in order to stop them jumping ship after supporting his administration. As result of Obama’s policies, government employment has been essentially flat so far this year. This followed 2011, when the government cut an average of 22,000 jobs per month (NY Times, 4/6/12).
The Republicans’ response to Obama stealing their program has been to move even further to the right, demanding even deeper cuts in social programs. They blocked Obama’ very limited stimulus package of 2011 and 2012. Yet, when Obama offered them a historic budget-cutting deal in the summer of 2011, under the influence of Tea Party zealots, the House Republican leadership was unable to seal the deal. The dysfunctional nature of the Republican leadership is now a real obstacle to the kind of bipartisanship that the U.S. ruling elite expects from its two parties when facing fundamental problems.
All the major Republican candidates, including Mitt Romney, have supported Paul Ryan’s budget that passed the House. This budget would slash taxes for corporations and the rich while drastically cutting food and medical aid to the needy. This Republican agenda of draconian cuts, if implemented, would be disastrous for U.S. capitalism, dragging the economy down into an even deeper recession and stirring up real anger among the poor and working people.
Perspectives for the U.S. Economy
Now with Obama’s main two-year stimulus package played out, the economy is pretty much dead in the water. With the main engines of the economy - consumer spending (70% of economic activity), government spending, corporate investment, and growth in exports - all failing, the economy is in a fragile state. While we can clearly say that a powerful economic recovery is not on the cards, it is very difficult to predict the short-term trends. This present sluggish level of growth could continue for a while. It also cannot be ruled out that new shocks to the U.S. or world economy could quite quickly drag the U.S. economy down into a new recession.
In an article, “The Uptick’s Downside,” Nouriel Roubini spells out four areas that could drag the U.S. economy down. First there is the Euro crisis, which has not gone away and can erupt at any moment, with Greece, Spain, Italy, Ireland, and Portugal alternating as the country in deepest crisis. As has been explained in detail in material written by the Committee for a Workers International (CWI), if any country breaks from the Eurozone or is expelled, which is very likely in the coming period, the effect on the world economy, including the U.S., could be greater than the financial plunge of 2008.
The second issue is a certain slowdown of the Chinese economy. Also there have been open political clashes within the leadership of the regime, with the removal of Bo Xilai, which could create more instability. Considering the size and importance of the Chinese economy to the U.S. and world economies, a serious slowdown in China will have a profound effect on the U.S. and world economies.
The third issue is the massive cuts in spending by the U.S. government that is continuing at a state and federal level.
Roubini writes: “While U.S. data have been surprisingly encouraging, America’s growth momentum appears to be peaking. Fiscal tightening will escalate in 2012 and 2013, contributing to a slowdown, as will the expiration of tax benefits that boosted capital spending in 2011. Moreover, given continuing malaise in credit and housing markets, private consumption will remain subdued; indeed, two percentage points of the 2.8% expansion in the last quarter of 2011 reflected rising inventories rather than final sales. And, as for external demand, the generally strong dollar, together with the global and Eurozone slowdown, will weaken U.S. exports, while still-elevated oil prices will increase the energy import bill, further impeding growth.” (“The Uptick’s Downside,” 2/16/12)
The fourth item is the risk to the world economy coming from increased tensions in the Middle East, and in particular the Iran standoff. Oil prices have already increased in anticipation of such an event. In a separate article (“Scary oil,” 3/15/12), Roubini explains: “The last three global recessions (prior to 2008) were each caused by a geopolitical shock in the Middle East that led to a sharp spike in oil prices.” He states: “There are many things that could go wrong in the Middle East, any combination of which might stoke fear in markets and lead to much higher oil prices.”
Clearly, we can see that the present upturn in the U.S. economy is not based on any improvement in the fundamentals of the economy. Instead, it is shallow and could be quite temporary. Even if it continues for a little while, which is possible, it will not repair the damage of the period since 2007.
World Crisis of Capitalism
As the largest economy in the world, the U.S. has an important effect on the global capitalist economy. If the U.S. economy continues to grow for a little while, it could provide a certain stabilizing role on a world scale by providing a certain market for exports from Europe and China. However, in a counteracting trend, the present economic slowdown in Europe will limit any boost the U.S. economy could hope to get from its own exports. Overall, the best prospect for the U.S. economy would therefore seem to be a prolonged period of weak growth, within which there could be feeble periods of growth followed by renewed recessions. At some point, there will be another deep economic crisis, which can be triggered by the issues referred to by Roubini and more, like a Euro crisis, a financial crisis, an oil price hike, an upheaval in China or the Middle East, a stock market collapse, or currency or trade conflicts. Commenting on recent economic data that has raised fears of another global recession, Olivier Blanchard, the chief economist of the International Monetary Fund, said: "One has the feeling that any moment, things could well get very bad again." (ABC News, 4/20/12)
Central to this is the fact the ruling elite globally have no answers to this capitalist crisis. On the one hand, they call for austerity, yet at the same time they bemoan the fact the national economies are not growing due to a lack of demand caused by these same austerity policies. They are also petrified of over-stimulating the economies and re-awakening inflationary pressures.
Clearly, when confronted by a new deep downturn, they will look to pump money into the banks as they did in 2008/2009 to protect their financial institutions. But any return to full-blown long-term Keynesian spending policies comparable to the 1960 and 1970s is almost certainly ruled out except to pacify and distract a massive pre-revolutionary movement of the working class that threatens the capitalist system itself.
The CWI has characterized this coming period as one of revolutions and counter-revolutions. Capitalism has no way out except by attacking the living standards of the working class. Yet these same policies will force workers into struggle and to draw far-reaching political conclusions. It is only the bureaucratic outlook of the present labor leaders who see no alternative to capitalism, combined with a low level of socialist consciousness and the lack of mass radical workers’ parties, that’s preventing the present anger being translated into powerful class struggles and challenges to capitalism. This fear of the working class rediscovering its traditions and moving onto a revolutionary path haunts the consciousness of the strategists of capitalism.
The trends of the U.S. economy will have an important effect on consciousness and struggle in the U.S. Any prolonged period of growth, even if it is small, can lead to a certain upturn in struggles among workers who may perceive that the threat of being replaced if they go on strike will be lessened. But it can also lead to the development of increased illusions that maybe there is a way out under capitalism. However, this will be rudely shattered by further economic slowdowns and further downturns.
With long-term real sustained growth ruled out in the next while, this recovery will be unable to bring back the confidence and stability that existed before 2008. Instead, it can prepare the way for new shocks and changes, resulting in a further breaking of illusions in capitalism and the political system as more workers and young people see their hopes and dreams shattered as the present shaft of light at the end of the tunnel is extinguished. While this will be very painful for workers and the poor, it will create even more favorable conditions for the growth of socialist ideas.