In the first twenty-five years after World War II, the US economy performed
very well. The rate of growth averaged 4-5% a year, the rate of unemployment
was seldom above 5%, inflation was almost nonexistent (1-2%), productivity
growth averaged 2% a year or more,
and the average real wage of workers improved significantly (approximately
60% over the entire period). Because of this outstanding performance, this
period is often referred to as the "golden age" of the US economy
(e.g. Marglin and Schor).
However, this long period of expansion and prosperity ended in the 1970s.
Since then,
the rate of growth has been slower (an average of 2-3% a year), and both
the rate of unemployment and the rate of inflation have been higher. The
term "stagflation" was coined to describe this poorer economic
performance and the unprecedented combination of higher unemployment and
higher inflation. During this period, productivity growth slowed to less
than 1% a year and the average real wage of workers has declined approximately
15%. The "American dream" of ever rising living standards ceased
to be a reality for many workers. For the first time in US history, many
young workers fear that they will have a lower standard of living than their
parents. Wallace Peterson's book on this period is entitled Silent Depression:
The Fate of the American Dream.
The opposing trends of real wages in the two periods - increasing 60% and
then declining 17% - is perhaps the clearest indicator of the turn from
prosperity to stagflation. These trends are shown graphically in Figure
1. Bluestone and Harrison (1986) have called this reversal of trends the
"great U-turn of wages." We can see that the average real wage
in 1997 was roughly the same level as in 1965. The recent small increase
of real wages has recovered only a small portion of the ground lost since
the peak in 1973.
This turn from prosperity to stagflation in the US economy and the consequent
decline of real wages was completely unexpected in the 1960s. For example,
Herman Kahn, a well-known futurologist, predicted in 1967 that the average
real wage in the US economy would more than triple by the year 2000 (Kahn
1967, pp. 176-80). A similar prediction - that real wages would increase
150% by the year 2000 - was made in a special issue of Forbes magazine the
same year. From the perspective of the optimism of the 1960s (based on the
trends of the early postwar "golden age"), the last quarter of
the 20th century in the US economy has been a shocking disappointment.
During the last two years or so, the performance of the US economy seems
to have improved. The rate of growth has accelerated somewhat (to 3-4%),
the rate of unemployment is below 5% for the first time since the 1960s,
inflation also remains very low (around 2%), and real wages have increased
a little (2-3)%. The stock market has been soaring beyond all expectations.
The word "boom" is increasingly heard to describe the US economy
these days. As a result, a growing number of economists, including some
Marxian and radical economists, have concluded that these last few years
mark a turning point in the long waves of US capitalism, and that the recent
acceleration of growth is the beginning of a new "long-wave" period
of expansion and prosperity, similar to that of the early postwar "golden
age," with lower unemployment and inflation and steadily increasing
real wages for the next several decades.
This paper will attempt to determine whether or not the US economy is indeed
entering a new era of prolonged prosperity, similar to the "golden
age", or whether the last two years will likely turn out to be only
a temporary blip in the long period of stagflation that has plagued the
US since the 1970s and which will continue into the 21st century.
1. THE DECLINE OF THE RATE OF PROFIT
To begin with, I will briefly summarize my explanation of the causes of
the stagflation of recent decades (presented in greater detail in Moseley
1991 and 1997), and then examine what this explanation implies concerning
the necessary conditions for an end to stagflation and a return to prosperity.
I and other radical economists have argued that the main cause of the stagflation
of recent decades was a significant decline in the rate of profit in the
early postwar period (Weisskopf 1979; Bowles, Gordon, and Weisskopf 1983;
Wolff 1986; Duménil and Levy XXXX; Shaikh 1992; and Brenner 1998;
a similar decline of the rate of profit occurred in almost all the countries
for which we have estimates). There are different measures of the rate of
profit, but all of them show essentially the same strong downward trend
during this period.1
According to my estimates, shown graphically in Figure 2, the rate of profit
declined 45%, from 22% in the late 1940s to 12% in the mid 1970s.2
As in periods of depression of the past, the decline in the rate of profit
resulted in a decline in business investment and higher unemployment. One
new factor in the postwar period is that many governments in the 1970s responded
to the higher unemployment by adopting Keynesian expansionary policies (more
government spending, lower interest rates, etc.) in an attempt to reduce
unemployment. However, these government attempts to reduce unemployment
generally resulted in higher rates of inflation, as capitalist enterprises
responded to the government stimulation of demand by raising their prices
at a faster rate in order to reverse the decline in their rate of profit.
In the 1980s, financial capitalists revolted against these higher rates
of inflation and have generally forced governments to adopt restrictive
policies (less government spending, higher interest rates, etc.). The result
has been less inflation, but also sharply higher unemployment and sharply
reduced living standards. Therefore, government policies have affected the
particular combination of unemployment and inflation that has occurred,
but the fundamental cause of both of these "twin evils" has been
the decline in the rate of profit.
In Moseley (1991 and 1997), I have argued that, according to Marx's theory,
the two main causes of the significant decline of the rate of profit in
the postwar US economy were:
(1) a 40% increase in the composition of capital (the ratio of constant
capital to variable capital), as predicted by Marx's theory and (2) an 80%
increase in the ratio of unproductive labor to productive labor.3 According to Marx's theory,
an increase in the composition of capital has a negative effect on the rate
of profit because it means a declining percentage of the total capital is
invested in labor-power, which is the source of profit. Similarly, an increase
in the relative proportion of unproductive labor means that a larger percentage
of the surplus-value produced by productive labor must be used to recover
the costs of unproductive labor and thus a smaller percentage of surplus-value
is left over as the profit of capitalists. According to this explanation,
the relative increase of unproductive labor accounted for approximately
60% of the decline of the rate of profit in the postwar US economy and the
increase in the composition of capital accounted for most of the remaining
40%.4according to
which the decline of the rate of profit was caused by an increase of wages
that resulted from the workers' struggles of the late 1960s and early 1970s.
It is argued that the lower rates of unemployment of this period increased
the bargaining power of workers and enabled them to gain higher wages at
the expense of capitalists' profits. My critique of the profit squeeze explanation
is also presented in Moseley (1991 and 1997) and stated briefly in endnote
9 below.
From this Marxian perspective, the crucial factor which will determine whether
or not the period of stagflation is ending and the US economy is indeed
entering a new era of prolonged prosperity is whether or not the rate of
profit has increased significantly since the 1970s, and has been restored
to the higher levels of the early postwar period.
2. ATTEMPTS TO INCREASE THE RATE OF PROFIT BY CUTTING WAGES
In recent decades, capitalist enterprises have attempted to restore the
rate of profit in a variety of ways. The main way has been to reduce the
wages of workers. Various strategies have been used to reduce wages, including:
direct cuts of wages (and benefits), the shift toward "contingent"
jobs (such as part-time jobs, temporary jobs, etc.), "two tier"
wage systems (in which new employees are hired at much lower starting wages
compared to existing employees), and transferring operations to low-wage
countries abroad (the desire to cut wages has been the main driving force
behind the "globalization" of recent decades). The success of
these strategies has been aided by the higher rates of unemployment that
has prevailed since the 1970s.
From the perspective of workers, the effect of these attempts by capitalist
enterprises to restore rate of profit by cutting wages has been the downward
trend of real wages in recent decades that we observed above in Figure 1.
Thus, the decline of real wages since the 1970s is not an accident or a
mystery, but is instead the expected outcome of deliberate attempts by capitalist
enterprises to reduce wages and restore profitability, aided by higher unemployment.
Another measure of the decline of wages in the US economy in recent decades
has been suggested by Mishal, et al (1997): the percentage of workers who
have "low-wage" jobs, where "low-wage" is defined as
the hourly wage necessary to keep a family of four above the official poverty
threshold ($7.28 an hour in 1995). According to Mishel, et. al., this percentage
of workers in "low-wage" jobs has increased steadily from 23.5%
in 1973 to 29.7% in 1997 (pp. 149-56; this book is an excellent and comprehensive
source on the current living and working conditions for US workers, and
is updated every two years).
Family incomes have not declined like real wages, but have instead remained
more or less constant since the early 1970s (with cyclical fluctuations).
The main reason for this not-as-bad performance of family income compared
to real wages is that the number of families with two wage-earners has increased
over this period. For many families, the only way to maintain their living
standards has been for more family members to enter the paid labor force.
Bluestone and Rose (1997) estimate that the average hours worked by families
in which both husband and wife are working increased about 20% from 1971
to 1988 (see also Mishel, et al., pp. 79-94 for a further analysis of increased
family working hours). Furthermore, these data on family income are in terms
of the median income. As we shall see below, family incomes have become
much more unequal in the 1980s and 1990s. Therefore, a large percentage,
and perhaps a majority, of US families have suffered a decline in real family
incomes over this period.
One way household consumption has been maintained, in spite of declining
real wages and family incomes has been through increasing personal debt.
Personal debt as a percentage of after-tax income has increased from around
70% in the 1970s to all-time historic highs of almost 100% in 1997.5 However, the higher debt
load also makes households more vulnerable to personal bankruptcies, especially
in the event of a downturn in the economy. Indeed the personal bankruptcy
rate has increased steadily since the early 1980s and has increased even
more rapidly to record levels (of about 6 per 100 households) during the
recent "boom" years, with unusually low rates of interest. If
interest rates were to increase and/or incomes fall due to a recession,
then the personal bankruptcy rate would probably increase significantly.
A lot of families would lose the cars, houses, etc. that they have purchased
on credit.
Another way of maintaining consumption in spite of decline real incomes
has been for households to spend a larger percentage of disposable income,
i.e. to save a smaller percentage of disposable income. The saving rate
in the US economy has always been lower than in most other advanced countries
(around 5%) compared to 15% in Germany and 20% in Japan. In recent years,
the saving rate in the US has declined further to around 2-3% and in the
most recent quarter (the second quarter of 1998) has even fallen below 1%!
One important result of the declining real wages and family incomes has
been an increase in the percentage of the US population living in poverty.
According to government statistics, the percentage of the US population
with incomes below the official "poverty line" has increased from
around 11% in 1973 to around 14% in the mid-1990s - reversing a long period
of decline in the poverty rate from around 25% in the 1950s. Furthermore,
many researchers argue that these estimates understate both the absolute
levels of poverty and the extent of the recent increase. Alternative estimates,
based on a more consistent and reasonable measure of the poverty line, suggest
that the percentage of the population living in poverty has increased by
more than 50% in recent decades - from approximately 17% in 1973 to approximately
26% in 1989 (Ruggles 1990, p. 55). This percentage has almost certainly
increased further since then (the official estimates of poverty have increased
from 11.7% in 1989 to 13.8 in 1995).6
Hence during these recent decades of stagflation, the US economy has stopped
making progress in reducing poverty and has instead gone into reverse. The
extent of poverty in supposedly the richest country in the world is a shame
and a disgrace.
The reduction of real wages has also contributed to a significant increase
of inequality in the distribution of income in the US economy. The percentage
of total income received by the richest 20% of families increased from 41.1%
in 1973 to 46.5% in 1995, and the percentage of total income received by
the richest 5% of families increased from 15.5% in 1973 to 20.0% in 1995.
Meanwhile, the percentage of total income received by the poorest 40% of
families declined from 17.4% in 1973 to 14.5 in 1995 (data are from the
US Bureau of the Census). (We can see that the richest 5% now receive considerably
more income than the poorest 40%). From 1979 to 1994, the average real median
income of the richest 20% increased by 30% and the average real median income
of the richest 5% increased by 50%, while during the same period the average
real median income of the poorest 20% declined by 10%. The US economy may
indeed be booming for the wealthy elite, but it is definitely not booming
for the majority of US workers, especially for those with the poorest jobs.
Marx's "general law of capital accumulation" - that the accumulation
of wealth of capitalists is accompanied by the accumulation of poverty by
workers (Marx 1977, Chapter 25) - appears to have been all too true in recent
decades in the US (and indeed around the world).
It was mentioned above that one widely-used strategy to reduce wages (and
thereby restore profitability) has been the increasing proportion of various
types of "contingent" jobs, such as part-time jobs, temporary
"jobs", etc. According to one measure, the percentage of "contingent"
jobs in the US economy has increased from approximately 18% in the 1970s
to approximately 25% today. (Tilly 1996, Chapter 1). 80% of these contingent
jobs are part-time jobs. Some workers prefer to have part-time jobs for
various reasons (including lack of child care), but over the last two decades
almost all of the increase of part-time jobs has been due to the increase
of involuntary part-time employment. (Tilly provides an excellent analysis
of the growing importance of part-time jobs in the US economy). "Temporary"
jobs is one of the fastest growing categories in the Bureau of Labor Statistics
classification; it has grown 10 times faster that total employment since
1980 and has grown from almost nothing to over 2% of the labor force.7
In general, these contingent jobs are much less secure than full-time, permanent
jobs. These jobs will likely be the first to go in the next recession. Hence,
even though the rate of unemployment is low, a much larger percentage of
the labor force feels economically insecure, frustrated by their jobs, and
worried about the future. This deep, underlying sense of economic anxiety
is clearly seen anytime a major employer announces that they are hiring
for a few hundred "good jobs" - i.e. full-time, decent paying
jobs - and thousands of workers show up to apply.
The increasing prevalence of contingent jobs in the US economy is part of
the explanation of why inflation has remained so low in the last two years
even though the rate of unemployment is very low. In the past, when the
rate of unemployment was this low, wage increases would accelerate and hence
also the rate of inflation. However, this inverse relation between the rate
of unemployment on the one hand and the rate of wage increases and the rate
of inflation on the other hand - what macroeconomists call the "Phillips
curve" - appears not to have been valid for the US economy in the last
few years. The rate of unemployment has been declining and is now very low
by historical standards, but wage and price increases have not accelerated.
However, the official estimates of the rate of unemployment do not distinguish
between part-time jobs and full-time jobs. Hence, even though the official
rate of unemployment is low, an increasing percentage of those employed
have part-time jobs and thus the supply of labor is far from exhausted.
The remaining excess supply of labor of workers with part-time jobs continues
to put downward pressure on wages. Bluestone and Rose (1997) have presented
a similar explanation of the failure of wage increases and inflation to
accelerate under the current conditions of a low official rate of unemployment.
Therefore, the attempts by capitalist enterprises to restore profitability
by cutting wages have taken a heavy toll on workers. Their wages have declined
and their job security has also declined. For many, the "American dream"
of good jobs and ever rising living standards has become an illusion.
However, the very surprising - and alarming - fact is that, in spite of
this general reduction of real wages, the rate of profit in the US economy
has so far recovered only about one-third of its prior decline, so that
the rate of profit today is still 35-40% below its early postwar peaks,
as can be seen in Figure 2 (see Moseley 1997 for further discussion of these
estimates). In other words, the widespread attempts by capitalist enterprises
to increase their rate of profit, which have had such a negative effect
on the living and working conditions of workers, have so far been only partially
successful in restoring the rate of profit. This weak recovery of the rate
of profit is the main reason why stagflation has continued into the 1990s
and why stagflation is likely to continue into the foreseeable future.8 9
I have argued in Moseley (1997) that, according
to Marxian theory, the main cause of this weak recovery of the rate of profit,
in spite of the decline of real wages, has been a continuing increase in
the ratio of unproductive labor to productive labor. A thorough analysis
of the causes of this weak recovery of the rate of profit is presented in
Moseley (1997) and is beyond the scope of this paper. For the purposes of
this paper, the main implications of this incomplete recovery of the rate
of profit is that it suggests that the long period of stagflation in the
US economy is not over and that the downward pressure on real wages is likely
to continue, as capitalist enterprises continue to try to restore profitability
to its earlier postwar levels.
3. INCREASING DEPENDENCE ON FOREIGN CAPITAL
Why then has the rate of growth in the US economy accelerated in the last
two years, four years into an expansion when the rate of growth would normally
be expected to slow down, especially since the recovery of the rate of profit
has been so weak and incomplete? I do not have a complete answer to this
question, but I would like to suggest one important factor which seems to
have been generally overlooked: there has been a significant increase in
the net inflow of foreign capital into the US economy since 1993. Since
the early 1980s (when the US became a "debtor nation" - i.e. a
net importer of capital - for first time since before World War I), the
US economy has become increasingly dependent on foreign capital. The net
annual inflow of foreign capital (i.e. the inflow of foreign capital minus
the outflow of US capital abroad) averaged $88 billion a year from 1983
to 1993 for a total of almost $1 trillion.
But what is really striking is the sharp increase of the inflow of foreign
capital since 1993. The net inflow of foreign capital increased from $57
billion in 1990-93 to around $140 billion in 1994 and 1995 and then increased
again to $195 billion in 1996 and again to $263 billion in 1997.
These amounts for 1996 and 1997 were roughly 20% of gross private domestic
investment in the US economy during these years. This is a tremendous infusion
of capital, even by US standards. It seems highly likely that this large
increase of the inflow of foreign capital into the US economy contributed
significantly to the acceleration of growth in the US economy in the last
two years. Various ways in which this inflow of foreign capital contributed
to the acceleration of US growth will be suggested below.
An important cause of this recent sharp increase of the inflow of foreign
capital into the US economy has been an increase in the perceived risk of
investments in "emerging markets," especially in Latin American
and more recently in Asia. This perception of increased risk in these countries
has made the US increasingly attractive as a "safe haven" for
capital. Over half of this recent inflow of foreign capital has gone into
US Treasury bonds (currently the safest of all havens for capital). Also
a significant portion of this increase of foreign capital has gone into
the US stock market (see below for a further discussion of the contribution
of this inflow of foreign capital to the recent stock market boom).
There are a number of ways in which the large inflow of foreign capital
has probably contributed to faster growth in the US economy. In the first
place, the inflow of capital increased the supply of capital in the US which
led to lower interest rates than otherwise would have prevailed.10 The lower interest rates
in turn stimulated investment spending which, through the usual "multiplier
effect," produced a higher GDP and a faster rate of growth. Furthermore,
the faster GDP growth resulted in larger-than-expected tax revenues and
hence smaller-than-expected government budget deficits. The very rapid reduction
of the federal budget deficit has been another pleasant surprise of the
last few years. The smaller budget deficit in turn made possible a further
reduction of interest rates - in a virtuous circle initiated in part by
the increasing inflow of foreign capital.
Another important way in which the inflow of foreign capital probably led
to faster growth in the US economy is through the stock market. The strong
stock market rally of the last several years is due in part to the lower
interest rates just discussed (which makes stocks relatively more attractive
than bonds). In addition, as already mentioned, much of the recent increase
of foreign capital has gone into the stock market, thereby boosting the
demand for stocks further. In 1997, net foreign purchases of US stocks rose
rapidly from $12.6 billion in 1996 to $66.9 billion in 1997. This was over
three times the previous record of $19.0 billion in 1993.
As a result of these and other factors, stock prices have increased roughly
50% over the last two years (and have increased 150% since 1993). This very
rapid increase of stock values has greatly increased the wealth of the elite
minority of the US population who own almost off of the US corporate stock.
(In 1983, the richest 1% of families owned 89% of the personally-owned corporate
stock; the richest 1% owned 62%; and the richest ½% owned 47%; source:
Joint Economic Committee of the US Congress, 1986.) According to conventional
macroeconomics, this increased wealth should have a positive effect on consumer
spending (the "wealth effect") - on the consumer spending of the
rich, this is, who have enjoyed this wealth windfall. This increased consumer
spending should also have multiplier effects on the GDP and the rate of
growth, similar to the increased investment spending discussed above. This
faster growth again has increased tax revenue, reduced the budget deficit,
etc. along the virtuous circle just discussed. Furthermore, the greater-than-expected
capital gains income resulting directly from the rising stock prices has
been another important source of unexpected tax revenue in recent years,
thereby contributing further to lower budget deficits, lower interest rates,
etc.
Another important beneficial effect of the lower interest rates, which is
seldom mentioned, is that the debt payments by US non-financial corporations
have been greatly reduced in the 1990s. In the late 1980s, many US non-financial
corporations were suffering from very high debt burdens. Many economists
and the business press were very concerned because the increased debt burden
made the economy more vulnerable to widespread bankruptcies, liquidations,
etc. and thus to a more serious economic downturn (Friedman 1988, Bernanke
1988). The size of this corporate debt has not been reduced in the 1990s,
but the interest payments that must be made to "service" this
debt has been greatly reduced, because of the decline of interest rates.11 Hence, the dangers
of bankruptcies and a more serious recession have been reduced. Therefore,
the very sizable inflow of foreign capital in the 1990s, by contributing
to lower interest rates, has helped the US economy to avoid (at least so
far) a more serious financial crisis.
Of course, these beneficial effects of the inflow of foreign capital for
the US economy
are counterbalanced by the opposite harmful effects for the countries that
have suffered an outflow of capital in recent years. Most importantly, the
outflow of capital from Asia in particular has produced a very severe and
worsening depression. There is no doubt that the Asian crisis has deep and
endogenous causes (a discussion of which is beyond the scope of this paper),
but the immediate or "precipitating" cause of the collapse of
the Asian economies over the last two years has been the massive outflow
of capital from this region. The same international capital flows that contributed
to a "boom" in the US economy have precipitated a depression in
Asia.
4. WHAT LIES AHEAD?
How much longer can these widely divergent trends in the world economy continue?
How much longer can the capital flows from "emerging markets"
to the US remain at the very high levels of the last several years, thereby
contributing both to a boom in the US and to a deepening depression in the
"emerging markets" countries. These capital inflows could perhaps
remain at this high level for a few more years. If the Asian crisis continues
to deteriorate, then more capital will probably continue flee to the safe
haven of the US, which in turn would make the Asian crisis even worse. However,
this increasing polarization of the world capitalist economy could not go
on forever. Before long, the deepening Asian depression would drag down
the US economy (and the rest of the world economy) with it, in ways that
will be discussed below.
If, on the other hand, these capital inflows diminish back to the earlier
level of, say $100 billion a year, then the rate of growth of the US economy
would probably fall back at least to the 2.0 - 2.5% level that prevailed
in the early 1990s.
In addition, the Asian crisis has also begun to have negative effects on
the US economy - mainly so far through a reduction of US exports to Asian
countries. Most economists are predicting that this negative effect on US
exports will be small, because total US exports are only 12% of US GDP,
and because the percentage of total US exports that go to Asia (including
Japan) is only about 30%. So far the decline in US exports to Asia has been
about 20%. If this is the end of the decline, as many economists seem to
think, then the negative effect on the US GDP would be less than one percent.
However, if US exports to Asia continue to decline, then the negative effect
on US growth will be greater. For example, if US exports to Asia were to
decline by 30%, and if US exports to the rest of the world also decline
as an indirect result of the Asian crisis, then the overall negative effect
could be to lower the US rate of growth 2-3%, which would almost certainly
land the US economy in a recession.
Furthermore, in recent weeks, the escalating fears about the Asian crisis
seem to have brought the US stock market boom to a halt. Now there seems
to be a real possibility of a significant stock market decline in the near
future (this seems more likely every day as I write this in the hot days
of August 1998). If a stock market crash were to occur, then consumption
would decline sharply (especially the consumption of "high-income goods"
such as houses, cars, computers, TVS, stereos, restaurants, vacations etc.),
which would further propel the US economy into recession.
In addition, if the Asian crisis does indeed continue to worsen, then the
danger increases that one of more of the Asian countries will default on
their loans to US banks and other US creditors (or, more precisely, that
Asian banks and private corporations will default on their loans). Most
of these loans, which were originally short-term, have been rescheduled
and the term lengthened to 2-3 years. Whether or not Asian borrowers will
be able to repay these loans when they become due early in the next century
depends on how the Asian crisis develops between now and then. If the worst
of the crisis is over, and these economies start to recover in the next
year or two, then most borrowers should be able to repay their loans. However,
if the crisis continues to worsen, then many borrowers will probably be
forced to default on these loans in the next few years.
The more immediate question is whether these Asian borrowers will be able
to pay the interest on their loans over the next year or two. The rate of
interest of the rescheduled loans is 2-3% higher than before, which will
make "servicing" these loans more difficult. Even more importantly,
the 50% devaluation (or more) of the Asian currencies in the last year has
doubled (or more) their dollar debt obligations in terms of their own currencies.
Full payment of these interest installments does not seem very likely.12 Defaults on these
interest payments would of course result in losses for the US banks. If
these losses are significant enough, this could lead to a "credit crunch"
and higher interest rates in the US (as banks restrict their lending to
compensate for these Asian losses), which in turn would further push the
US economy into recession. The IMF "bail-out" loans to the Asian
countries are designed precisely to enable the Asian borrowers to repay
the US banks and other foreign creditors. But there is no guarantee that
the design will work. It all depends on how bad the Asian crisis gets.
An additional danger is that Japanese banks might be forced by their own
economic crisis to cease to export capital to the US and may even start
to withdraw its existing capital in the US back to Japan in order to satisfy
their own domestic liquidity needs. This withdrawal of Japanese capital
from the US (or even the cessation of additional lending) would have similar
negative effects on the US economy as defaults by Asian borrowers - a credit
crunch, higher interest rates, etc. - and thus would be yet another factor
pushing the US economy into recession (or worse).13
If a recession in the US economy were to
occur over the next year or two, then this US recession would in turn have
devastating effects on the rest of the world economy, and especially on
the Asian countries. The main hope for recovery for the Asian countries
from their current crisis is to increase their exports to the "booming"
US market (an earlier hope was to increase their exports to Japan, but that
hope has evaporated as Japan itself has fallen into its own recession).
If the US economy falls into recession, then the US demand for Asian exports
would decrease, rather than increase. Without their main hope for recovery,
the Asian economies would likely remain in a serious depression for years
to come. And if the Asian depression continues, then they will almost certainly
not be able to service their debt and repay their loans to US banks.
On the other hand, if a serious recession in the US economy is avoided,
then the Asian crisis should provide US companies with an opportunity to
buy up the assets of bankrupt Asian companies at bargain basement prices.
The business press is full of stories about US executives flying all over
Asia looking for the best assets at the cheapest prices. According to Kim
(1998), the S. Korean government has taken in upon itself the task of deciding
which bankrupt Korean companies should be allowed to die and which should
be offered for sale to foreign investors. In this case, one important result
of the Asian crisis would be the increasing ownership of Asian assets by
US companies, i.e. the increasing domination of the world economy by US
capital. (Tabb 1998 emphasizes this possible outcome of the Asian crisis.)
This purchase of the assets of bankrupt firms by surviving firms happens
in every depression. This time, for the first time, this process of liquidation
and the concentration of capital will probably have a significant international
dimension. The low purchase price of Asian assets would also raise the global
rate of profit of US companies, perhaps thereby contributing to at least
a partial solution of the decades long profitability problem of US capitalism.
The probabilities of these various outcomes is difficult to estimate, but
at least it seems fairly certain that the recent "boom" in the
US economy has been due in large part to a temporary inflow of foreign capital
and that this "boom" will almost certainly be short-lived. The
recent "boom" is not an indication that the long period of stagflation
is over. Very soon, the US economy will almost certainly fall back to the
slower growth that prevailed in the 1980s and early 1990s. Whether or not
the slower growth turns into recession is a crucial question. Under the
best of circumstances of slow growth but no recession, real wages are not
likely to increase very much, if at all, as in the period of stagflation
since the 1970s. The "American dream" will continue to be elusive
as US capitalism continues to try to restore its rate of profit. And if
slow growth turns into recession, then there is an increasing danger that
this US recession will trigger a world-wide capitalist depression.
I hesitate to venture a longer-run forecast for the US and world economy,
but if history (and Marx's theory) is any guide, a period of declining profitability
and increasing debt will eventually be followed by a period of depression,
characterized by significant and widespread bankruptcies which raise the
rate of profit for surviving firms and eliminates much of the existing debt,
thereby making possible another period of expansion and prosperity. In other
words, a return to prosperity requires a prior depression. It may be possible
to continue to avoid such a depression for a few more years, but without
such a depression, a return to the more prosperous conditions of the early
postwar "golden age" is not very likely.
It is even more difficult to predict what the response of US workers will
be to continued economic stagnation and stagnant real wages (at best) or
to another worldwide capitalist depression (at worst). So far, US workers
have been surprisingly passive in accepting declining real wages and declining
job security. However, much of this passive acceptance has been based on
the optimistic premise that the years of "pain" will soon be over
and that the US economy will soon return to the more prosperous conditions
of the early postwar period, with its steady and substantial increases of
real wages. Continued stagnation, or worse, would invalidate this premise.
Perhaps then acceptance will turn into resistance.
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U.S. Foreign Net
Capital Capital Capital
Outflow Inflow Inflow
1983 - 61,573 83,380 21,807
1984 - 36,313 113,932 77,619
1985 - 39,889 141,183 101,294
1986 -106,753 226,111 119,358
1987 - 72,617 242,983 170,366
1988 -100,087 240,265 140,178
1989 -168,744 218,490 49,746
1990 - 74,011 122,912 48,181
1991 - 57,881 94,241 36,360
1992 - 68,622 154,285 85,663
1993 -194,609 250,996 56,387
1994 -150,695 285,376 134,681
1995 -307,207 451,234 144,027
1996 -352,444 547,555 195,111
1997 -426,938 690,497 263,559
Source: Survey of Current Business, July 1998