2016 U.S. Economic Perspectives
The following document outlining the economic situation in the United States and the potential for downturn in the next period was submitted by the outgoing National Committee of Socialist Alternative to our recent National Convention in Denver and approved after discussion and amendment. In addition to this document on the economy, a longer document dealing with political and social trends can be found here.
Statement on Economic Perspectives
What Will Be the Impact of a Global Downturn?
For Marxists, a serious discussion about perspectives for struggle and politics, including changes in the consciousness of workers and young people, must begin with a discussion of economic developments. Ultimately the consciousness of all social strata is determined by material conditions though not in a straightforward, mechanical way. After all it was the deep economic crisis of 2007-8 which laid the basis for the current phase of social and political turmoil in US society although in the short term it had a “stunning effect” and a real fightback did not begin until 2011.
This underlines the approach of Socialist Alternative, in contrast to some on the left, we have always argued there is no automatic link between economic crisis and rising class struggle. We reject the mechanical idea promoted by Maoists and some others on the left that economic crisis and falling living standards leads inevitably to increased class struggle. For example, the crash of 2007-8 didn’t immediately lead to the Fight For 15 and the massive support for Bernie Sanders – this happened after the one-sided economic recovery in the U.S. since 2010 raised the confidence of workers.
Long Term Stagnation
The Committee for a Workers International has long argued that U.S. and world capitalism entered a long term phase of stagnation in the mid-70s. The war economy in World War II, the massive scale of destruction in Europe and Asia and the domination of the U.S. over its imperialist rivals united in a common front against the Soviet bloc all helped to create the conditions for the biggest phase of expansion in capitalism’s history in the 1950s and 1960s. During this period the ruling class faced a strong, well-organized workers movement both in Western Europe and the US which was pushing for change, alongside a massive revolutionary wave in the colonial world.
Because of the scale of the surplus being created, the capitalists had scope for compromise while maintaining a high rate of profitability. During the post-war period, an increased share of a rapidly growing economic pie went to wages. Combined with Social Security, the GI bill and Medicare this meant a significant increase in American workers’ living standards. The development of the “welfare state” in Western Europe and, to a lesser degree, in the U.S. has also been referred to as “structural Keynesianism” – policies which led to a significant expansion of the public sector and social benefits.
But these policies were not sustainable on a capitalist basis. By the early ’70s there were many signs of serious economic strain in the postwar economic order including rapidly increasing inflation. Broadly speaking it was no longer possible for the capitalists to make profits by investing in expanding the means of production as they had after the war.
The recession in 1974-5 was the sharpest global downturn since the Great Depression. Profitability was restored by reducing the share of surplus taken by the working class through a one-sided class war by corporate America aiming to drive down wages, reduce benefits and smash unions. There was a parallel drive to remove restrictions on finance capital, leading to the “casino economy” and a credit boom which inevitably produced massive indebtedness among workers and middle class people trying to maintain their standard of living. The ever growing role of parasitic finance capital was in turn linked to the drive towards “globalization,” removing barriers to trade and to the penetration of capital worldwide.
Structural Keynesianism in public policy was replaced by “neoliberal” policies which aimed to reduce the size of the public sector and to privatize public assets. This also hit the living standards of the working class but especially the poor, though the full effects of this offensive on workers living standards was partly masked by the growing participation of women into the workforce, the expansion of consumer credit, and lower prices made possible by neoliberal globalization.
But after 30 years of stagnation for global capitalism, the crash of 2007-8 marked the beginning of a much deeper phase of crisis where capitalism has been broadly exposed as offering no way forward for society. The capitalists are still saddled with neo-liberal policies despite the enormous unpopularity of these policies due to their effects over the past decades and the way in which they contributed to causing the crisis. The capitalists have not yet found a new model for how to develop their economic rule which can overcome the present crisis in a structural way beyond weak recoveries leading to new economic setbacks. This has led to a crisis of legitimacy for the system and its institutions and has enormously contributed to the radicalization we are seeing in sections of the youth and working-class here in the U.S.
An even more catastrophic slump was only prevented by pouring trillions into the bailout of the banks, making working people pay for the crisis of capitalism through foreclosures and mass unemployment while creating the conditions to get the financial casino going again. Based on central banks pouring liquidity into world markets (“quantitative easing”) and the phenomenal growth of the Chinese economy that sucked in raw materials from across the world, there was a limited recovery. Some economies – including Brazil, India and Russia – experienced significant growth particularly because of the commodity boom driven by Chinese demand. These policies led inevitably to massive overproduction/overcapacity in the world economy which workers hit by declining real wages and massive austerity were in no position to absorb.
The underlying weakness of the economy was reflected in a trend towards deflation (a general decline in prices, the opposite of inflation). Deflation, reflecting the weakness of demand and overproduction/overcapacity, can lead to a vicious downward spiral as happened in the 1930s. In order to combat this central banks reduced interest rates to zero or even adopted negative interests rates, as both the European Central Bank and the Japanese central banks have now done. This means banks now pay the central bank to hold their money!
Now this phase of extremely weak recovery is ending and the world economy is heading into a downturn that could turn out to be as deep as that in 2007-8. The immediate trigger is the accelerating slowdown in the Chinese economy. In February, China’s exports were down 25.4% compared to a year earlier, the worst one-month decline since early 2009. Especially worrying to bourgeois commentators is the threat of competitive currency devaluations in the far East driven by the steady slide in the renminbi as well as the unwinding of trillions of dollars in “bad debt,” very reminiscent of 2007-8. The collapse in commodity prices – also driven by the Chinese slowdown – is pulling a number of “emerging” economies like Brazil into deep recession and encouraging a capital flight back to the “advanced capitalist economies,” especially the U.S. This is now described as a “flight to safety” like the “flight to quality” at the end of the 90s when the world economy teetered at the edge of a deep slump.
The European Union, the world’s second largest economic unit, is also showing signs of heading back towards recession as growth slows sharply in Germany, the area’s main source of growth since 2008. German growth was driven by industrial exports including to China and other rapidly growing emerging economies but the demand for these products is shrinking as the economic slowdown effects affects these countries.
The European Union has been shaken by the debt crisis in Southern Europe, the destructive effect of relentless austerity and now the refugee crisis which has undermined the free movement of goods and people across the Union. Now the upcoming referendum in Britain could lead one of its key economies to leave.
At the start of March, David Lipton, the deputy head of the International Monetary Fund warned of a growing “risk of economic derailment” unless immediate action were taken to boost demand. One of the key problems domestically and internationally is that central bankers have far fewer tools to deal with a serious crisis than they did in 2007-8. For example, they have basically no room to further reduce interest rates. Further stimulus measures will require government spending, which so far the ruling class has vigorously resisted.
Meanwhile, the U.S. Federal Reserve, haunted by the ghosts of inflation and still ideologically in the grip of neo-liberalism, is heading in the opposite direction. Based on the recovery in the US economy over the last period the Fed raised interest rates in December to between 0.25% to 0.5% with the goal of raising interest rates to around 3% in gradual steps over the next couple years. This has been the source of alarm among more far-sighted strategists for US capitalism like Paul Krugman, who has warned that the main danger facing the US and world economy is deflation, not inflation. They further worry that rising interest rates in the US can choke off the US recovery and create problems in the international financial markets.
Of course, in a sufficiently sharp downturn central banks can resort to simply printing money – which risks detonating inflation – and governments can be forced to adopt much bolder neo-Keynesian measures including nationalizing endangered sectors of the economy as was seen in 2008/2009.
Contradictions in U.S. Economy
Recent job reports have been touted by liberal commentators like Krugman as showing the rebound in the U.S. under Obama with 14 million jobs being created in 72 months, the fastest pace since the late ’90s and headline unemployment down to just under 5%. But workforce participation remains at the lowest level in 40 years and most of the jobs created are low-wage. Since the financial crash, as we have pointed out in Socialist Alternative, workers have seen significant real wage decreases. This did not turn around even after the job market improved. Recent data from the Census Bureau shows that median household income was 6.5% lower in 2014 than in 2007. This has been an extremely one-sided recovery, with over 90% of income gains accruing to the top 1%. It is no accident that most people don’t believe there is a real recovery.
The New York Times recently ran an article about how the evidence of recovery shown by job growth is contradicted by the slow overall pace of economic growth in the U.S. economy. Part of the explanation for this is that while jobs have been lost in manufacturing and especially energy, this is more than compensated by the growth in service jobs. The service sector now accounts for 86% of employment in the US while manufacturing only accounts for 9% (NY Times, 1/18/16).
It was only in January 2016 that the monthly jobs report showed an increase in real wages for the first time (the February figure was lower), perhaps reflecting a certain tightening of the labor market and the increases in the minimum wage in a number of cities and states. Real wage growth would of course be a step forward for workers but it would take a whole period of wage growth to make up the ground which low wage workers in particular have lost.
Everyone understands that the jobs being created in this period are overwhelmingly low paid and working conditions are worsening. Better paid blue collar jobs continue to disappear. The failure of workers to make wage gains at this stage also reflects the serious weakness of the labor movement. This is on top of the massive inequality created in the past 40 years by neo-liberal policies.
Despite these qualifications, we should stress that the recovery of the U.S. economy over the past few years has been real, particularly in a number of big cities, spurred for example by growth in the technology sector. However, many working class people are being forced out of these cities by relentless gentrification and the lack of affordable housing. Up until recently there was also an energy boom in places like North Dakota. The recovery has also given sections of the working class confidence to assert themselves, though so far primarily on the political plane.
But, as a recent study by the Economic Innovation Group showed, there are drastically different realities in different parts of the US, sometimes in communities that are geographically very near each other. The New York Times (2/25/16) summarized the findings:
“From 2010 to 2013…employment in the most prosperous neighborhoods in the United States jumped by a fifth, according to the group’s analysis of Census Bureau data. But in bottom-ranked neighborhoods, the number of jobs fell sharply. One in 10 businesses closed down…While the problems in many poorer cities predate the recession, what has felt like a real recovery for Americans in healthier cities and towns has left the worst-off locations – many of them concentrated in the nation’s old industrial heartland – even further behind.”
As Steve Glickman, the EIG’s director, put it “It’s almost like you are looking at two different countries.” The NY Times correctly commented that these findings “help explain why the country’s economic and political situation has become so polarized in recent years.”
Will There Be A Recession in the U.S.?
In the past year or so, manufacturing has been negatively affected by the strength of the dollar which makes U.S. exports less competitive. And the energy boom has come to a crashing halt due to the collapse of the price of oil. There have been mass layoffs in the oil sector. The coal industry is also in deep crisis with a number of companies facing bankruptcy.
A number of recent articles in the corporate media have discussed the possibility of a recession in the U.S. if the world downturn deepens. To be clear an overall downturn in the world economy does not necessarily mean that all parts of the globe will go into recession at the same time; some could even prosper as an overall downturn occurs. As we see with the regional differences in the US there can be radically different realities in different parts of the same (very large) national economy.
At the same time, the U.S. is far too integrated into the global economy to remain immune from a general contagion. Obvious examples would be if there was a collapse in the financial markets or if the crisis led to the collapse of major financial institutions in Asia or Europe. And again because of the “empty toolbox” of fiscal policy, the ruling class will have more difficulty in coping with a shock from abroad leading to a bigger impact domestically.
We also need to keep in mind that a world downturn will impact a U.S. economy which already faces ongoing underlying problems including low wages limiting consumer spending, high levels of debt, a hollowed out manufacturing and productive base of the economy, and speculative financial bubbles.
The next recession will not have the same shock effect on the working class as the 2008/2009 crisis. Struggle will resume more quickly. It will also certainly deepen the political crisis of the system and the questioning of capitalism in big sections of the working class and further fuel the growing support for socialism. The massive political aftershock of another global downturn producing revolutionary upheavals in many parts of the world will also reverberate within the U.S.