The growing recession in the United States has the potential to start the most serious decline in the world economy in decades. The largest economy in the world now joins the second largest, Japan, in serious economic difficulty. The economic crisis is no longer confined to outbreaks in South East Asia, Brazil and Russia, as it was in 1997-98, but threatens to engulf the very heartland of advanced capitalism.
The mounting US recession is already flowing on to all its imperialist allies and neo-colonial client-states. Lower consumer spending in the US is reducing demand for the goods and services exported by other countries. Economic growth predictions among the rich OECD countries has been revised down from 4 percent in the last decade to 2.5 percent.
For the third world, accounting for a mere 18% of world exports and already suffering from acute overproduction of raw materials since the late 1970s, further recession will be devastating. Here, 3 billion people struggle in harsh agrarian conditions or sweatshops for $US2 a day; another 1.5 billion toil on less than $US1 a day. In sub-Saharan Africa and the other least developed countries, income per capita has dropped since 1970. The gap between the poorest 20 percent of the world’s population and the richest 20 percent has increased from 30 times in 1960 to 74 times in 1997. The wealth of the world’s 225 richest individuals is equal to the annual income of the poorest 47 percent of the entire world’s population.
Within the United States itself, the income of the poorest 20% decreased 10% between 1977 and 1999, while the incomes of the richest 20% have grown 40%. During the ‘80s, the number of families living below the poverty threshold increased 60% in the United Kingdom and 40% in the Netherlands.
The United States’ difficulties are the latest symptom of a prolonged crisis of overproduction that has been haunting global capitalism for the last three decades. Overproduction is a testimony to the productive power of capitalism. In the pursuit of profit capitalists invest in ever-more productive technologies, enabling workers to produce increasing amounts of goods and services for the same effort. Greater productivity leads to greater profits and heightened competition among capitalists, generating further drive for increased productivity and ever-larger productive capacity.
As capital grows, however, fewer and fewer workers are needed to produce the same quantity of goods and services. The accumulation of capital reduces the demand for labour. The productive power of capital outstrips the ability of workers to consume the goods produced.
In the car industry, for example, manufacturers are currently able to produce some 75 million vehicles per year. But sales only reached less than 56 million units in 1999. Hence there is overcapacity of about 20 million vehicles per year.
A crisis of overproduction emerges as the capitalists are unable to profitably accumulate if society cannot afford to consume the goods and services produced. In such crises, profits fall sharply, capitalists slow or cease production, many go bankrupt, workers are laid off, the reduced activity and wage payments further reducing demand for goods and services. A crisis of overproduction can quickly spiral into a severe depression.
The last major depression was in the 1930s. The severity of that depression taught capitalists the importance of consumer demand. Since that time capitalist governments have gone to great effort to increase government spending (particularly military spending) and make it easier for consumers to borrow money so as to stimulate consumer demand whenever overproduction problems have emerged (often called ‘Keynesianism’). But the accumulation of capital continually pushes the problem of overproduction to the fore.
Since the late 1960s the major capitalist governments around the world have been grappling with a long crisis of overproduction, generally described as an ‘unexplained slowdown in productivity growth’. This crisis has repeatedly emerged in unexpected international monetary crises. Economic crises first appear as financial crises because the slowdown in profitable productive activity forces smaller capitalists into ‘adventurous channels – speculation, fraudulent credit, fraudulent stocks’ (Marx, Capital Vol 3, Chp 15).
The oil price rises of the 1970s, the third world debt crisis of the 1980s, the competitive devaluations among the US, Japan and Europe in the 1980s, the trade conflicts among these blocks in the late 1980s, the 1987 sharemarket crash, the 1994-95 collapse of the Mexican peso and the 1997 Asian economic crisis have all been symptoms of the ‘adventurous channels’ of capital in the face of the prolonged overproduction crisis.
The crisis has been prolonged because each of these financial crises has been met by increasingly large government demand stimulation. While the British and US governments may have been practicing restrictive monetarist policies at home during the 1980s, at the same time they were heavily involved with other capitalist governments in internationally coordinated efforts to stimulate world consumption to stop these financial crises spreading. But while these efforts have warded off a severe world depression to date, because of the pressure of capital to accumulate and increase productivity, the pressure of overproduction continues to mount.
The current United States difficulties are the outcome of the US government’s attempts to prevent the 1997-98 Asian economic crisis from spreading. The US Federal Reserve Bank reduced interest rates at the time of the crisis to make it easier for firms and consumers to borrow and thereby stimulating consumer spending. The problem was that this also encouraged further financial adventure – stimulating widespread investments on the US sharemarket, particularly in highly speculative internet companies. The value of shares on the New York stock exchange at their peak in March 2000 were 3.3 times its level in 1994, while corporate after-tax profits were stagnant. The bubble of the sharemarket boom eventually burst and share prices fell rapidly. Between April 2000 and April 2001, some $US4 trillion in stock-market value evaporated.
What makes the unfolding US recession potentially so serious is that many US firms and households borrowed heavily to fund even greater purchases on the booming sharemarket. The 500 largest companies owe 116% of the value of their shares and US households owe 97% of their disposable income, the greatest percentage of debt in postwar US history. Because the shares purchased with this borrowing can no longer be sold for their purchase price, firms and households have serious difficulties meeting their debt obligations. This is severely restricting consumer spending in the US, the world’s largest economy, at the same time as a similar debt crisis (borrowing for property speculation) plagues Japan, the world’s second largest economy.
Desperate to ward off crisis the US and Japanese governments have been dramatically cutting interest rates to make borrowing more manageable. But Japan has already cut interest rates to zero, with little effect and the US is not far behind. Japan is now facing even more severe problems of deflation as consumer prices fall in the face of collapsed demand. This simply compounds problems for borrowers, who must still meet their repayments on undeflated debts. Despite the best efforts of capitalist governments to stimulate demand, the world economy has not been closer to serious depression since the 1930s. #