No subject

In the early 1990s, therefore, in both the United States and Europe, led by
Bill Clinton, Robert Rubin and Alan Greenspan, governments moving to the
right and guided by neoliberal thinking (privatization and slashing of
social programs) sought to overcome stagnation by attempting to move to
balanced budgets. But although this fact does not loom large in most
accounts of the period, this dramatic shift radically backfired.

 In some parts of Detroit it's cheaper to buy a house than a car Because
profitability had still failed to recover, the deficit reductions brought
about by budget balancing resulted in a huge hit to aggregate demand, with
the result that during the first half of the 1990s, both Europe and Japan
experienced devastating recessions, the worst of the postwar period, and the
U.S. economy experienced the so-called jobless recovery. Since the middle
1990s, the United States has consequently been obliged to resort to more
powerful and risky forms of stimulus to counter the tendency to stagnation.
In particular, it replaced the public deficits of traditional Keynesianism
with the private deficits and asset inflation of what might be called asset
price Keynesianism, or simply Bubblenomics.

In the great stock market runup of the 1990s, corporations and wealthy
households saw their wealth on paper massively expand. They were therefore
enabled to embark upon a record-breaking increase in borrowing and, on this
basis, to sustain a powerful expansion of investment and consumption. The
so-called New Economy boom was the direct expression of the historic equity
price bubble of the years 1995-2000. But since equity prices rose in
defiance of falling profit rates and since new investment exacerbated
industrial overcapacity, there quickly ensued the stock market crash and
recession of 2000-2001, depressing profitability in the non-financial sector
to its lowest level since 1980.

Undeterred, Greenspan and the Federal Reserve, aided by the other major
Central Banks, countered the new cyclical downturn with another round in the
inflation of asset prices, and this has essentially brought us to where we
are today. By reducing real short-term interest rates to zero for three
years, they facilitated an historically unprecedented explosion of household
borrowing, which contributed to and fed on rocketing house prices and
household wealth.

According to The Economist,, the world housing bubble between 2000 and 2005
was the biggest of all time, outrunning even that of 1929. It made possible
a steady rise in consumer spending and residential investment, which
together drove the expansion. Personal consumption plus housing construction
accounted for 90-100% of the growth of U.S. GDP in the first five years of
the current business cycle. During the same interval, the housing sector
alone, according to Moody's Economy.com, was responsible for raising the
growth of GDP by almost 50% above what it would otherwise been - 2.3% rather
than 1.6%.

Thus, along with G. W. Bush's Reaganesque budget deficits, record household
deficits succeeded in obscuring just how weak the underlying economic
recovery actually was. The rise in debt-supported consumer demand, as well
as super-cheap credit more generally, not only revived the American economy
but, especially by driving a new surge in imports and the increase of the
current account (balance of payments and trade) deficit to record levels,
powered what has appeared to be an impressive global economic expansion.

Brutal Corporate Offensive

But if consumers did their part, the same cannot be said for private
business, despite the record economic stimulus. Greenspan and the Fed had
blown up the housing bubble to give the corporations time to work off their
excess capital and resume investing. But instead, focusing on restoring
their profit rates, corporations unleashed a brutal offensive against
workers. They raised productivity growth, not so much by increasing
investment in advanced plant and equipment as by radically cutting back on
jobs and compelling the employees who remained to take up the slack. Holding
down wages as they squeezed more output per person, they appropriated to
themselves in the form of profits an historically unprecedented share of the
increase that took place in non-financial GDP.

Non-financial corporations, during this expansion, have raised their profit
rates significantly, but still not back to the already reduced levels of the
1990s. Moreover, in view of the degree to which the ascent of the profit
rate was achieved simply by way of raising the rate of exploitation - making
workers work more and paying them less per hour - there has been reason to
doubt how long it could continue. But above all, in improving profitability
by holding down job creation, investment and wages, U.S. businesses have
held down the growth of aggregate demand and thereby undermined their own
incentive to expand.

Simultaneously, instead of increasing investment, productiveness and
employment to increase profits, firms have sought to exploit the hyper-low
cost of borrowing to improve their own and their shareholders' position by
way of financial manipulation - paying off their debts, paying out
dividends, and buying their own stocks to drive up their value, particularly
in the form of an enormous wave of mergers and acquisitions. In the United
States, over the last four or five years, both dividends and stock
repurchases as a share of retained earnings have exploded to their highest
levels of the postwar epoch. The same sorts of things have been happening
throughout the world economy - in Europe, Japan and Korea.

Bursting Bubbles

The bottom line is that, in the United States and across the advanced
capitalist world since 2000, we have witnessed the slowest growth in the
real economy since World War II and the greatest expansion of the financial
or paper economy in U.S. history. You don't need a Marxist to tell you that
this can't go on.

Of course, just as the stock market bubble of the 1990s eventually burst,
the housing bubble eventually crashed. As a consequence, the film of
housing-driven expansion that we viewed during the cyclical upturn is now
running in reverse. Today, house prices have already fallen by 5% from their
2005 peak, but this has only just begun. It is estimated by Moody's that by
the time the housing bubble has fully deflated in early 2009, house prices
will have fallen by 20% in nominal terms - even more in real terms - by far
the greatest decline in postwar U.S. history.

Just as the positive wealth effect of the housing bubble drove the economy
forward, the negative effect of the housing crash is driving it backward.
With the value of their residences declining, households can no longer treat
their houses like ATM machines, and household borrowing is collapsing, and
thus households are having to consume less.

The underlying danger is that, no longer able to putatively "save" through
their rising housing values, U.S. households will suddenly begin to actually
save, driving up the rate of personal savings, now at the lowest level in
history, and pulling down consumption. Understanding how the end of the
housing bubble would affect consumers' purchasing power, firms cut back on
their hiring, with the result that employment growth fell significantly from
early in 2007.

Thanks to the mounting housing crisis and the deceleration of employment,
already in the second quarter of 2007, real total cash flowing into
households, which had increased at an annual rate of about 4.4% in 2005 and
2006, had fallen near zero. In other words, if you add up households' real
disposable income, plus their home equity withdrawals, plus their consumer
credit borrowing, plus their capital gains realization, you find that the
money that households actually had to spend had stopped growing. Well before
the financial crisis hit last summer, the expansion was on its last legs.

Vastly complicating the downturn and making it so very dangerous is, of
course, the sub-prime debacle which arose as direct extension of the housing
bubble. The mechanisms linking unscrupulous mortgage lending on a titanic
scale, mass housing foreclosures, the collapse of the market in securities
backed up by sub-prime mortgages, and the crisis of the great banks who
directly held such huge quantities of these securities, require a separate
discussion.

One can simply say by way of conclusion, because banks' losses are so real,
already enormous, and likely to grow much greater as the downturn gets
worse, that the economy faces the prospect, unprecedented in the postwar
period, of a freezing up of credit at the very moment of sliding into
recession - and that governments face a problem of unparalleled difficulty
in preventing this outcome.

[This statement was written by Robert Brenner, a member of the ATC editorial
board and author of The Economics of Global Turbulence. References for all
data cited here can be found in this book, especially in the Afterword.]

from ATC 132 (January/February 2008)

Robert Brenner is an editor of Against the Current.