doom or gloom ahead?
Source Jim Devine
Date 10/05/13/07:50

The Case for Economic Doom and Gloom
Why we’re not out of trouble yet--not even close.
John B. Judis

THE AMERICAN added 290,000 jobs in April, the biggest monthly
increase in four years. Clearly, a recovery has taken hold. But how
strong and buoyant will it be? Will we eventually get back to growth
rates above 4 percent and to an unemployment rate of less than 5
percent? Or will this recovery sputter like the last one that began in

The strongest case for gloom that I’ve read has been made by UCLA
economic historian Robert Brenner in a new introduction that he wrote
to the Spanish edition of his 2006 book, The Economics of Global
Turbulence. New Republic readers will detect a similarity between
Brenner’s views and my own, but his are grounded in a far greater
knowledge of economic history than mine. His pessimism also outpaces

Brenner’s analysis of the current downturn can be boiled down to a
fairly simple point: that the underlying cause of the current downturn
lies in the “real” economy of private goods and service production
rather than in the financial sector, and that the current
remedies—from government spending and tax cuts to financial
regulation—will not lead to the kind of robust growth and employment
that the United States enjoyed after World War II and fleetingly in
the late 1990s. These remedies won’t succeed because they won’t get at
what has caused the slowdown in the real economy: global overcapacity
in tradeable goods production.

Global overcapacity means that the world’s industries are capable of
producing far more steel, shoes, cell phones, computer chips, and
automobiles (among other things) than the world’s consumers are able
and willing to consume. Companies can still sell their goods but at
prices that undercut their rate of profit. In the nineteenth century,
the redundant and less productive firms would have folded, and as
wages fell, and profit rates went back up, the economy would start to
revive. But that no longer happens. Firms have become too big and
powerful to fail; and the citizens of democratic nations will
justifiably no longer tolerate unemployment above 20 percent. Instead,
the average rate of profit falls, private and public debt rises, and
the danger of a large crash looms.

Brenner traces this problem of global overcapacity to the early 1970s
when the countries decimated by World War II had rebuilt their
industrial base and were capable of competing equally with the United
States, and when newly industrializing countries in Asia and Latin
America were beginning their ascent. At that point, global
overcapacity manifested itself in declining rates of profit. In the
United States, for instance, average profit rates in manufacturing
fell from 24.5 percent in the 1960s to 13.4 percent in the 1970s and
11.8 percent in the 1980s. As profit rates declined, firms were less
inclined to invest and expand, leading to a decline in overall growth
in the economy and to higher average unemployment over a decade.

The more immediate causes of the current downturn, he suggests, go
back to the vagaries of the real economy in the 1990s. The revival of
American manufacturing during that period was cut short by what
Brenner calls “the reverse Plaza accord.” (See my article, “Dollar
Foolish,” in TNR, December 9, 1996.) The U.S. agreed to drive down the
value of the yen and mark and drive up the value of the dollar to
protect Japan in particular from a severe recession. But the effect
was to price American goods out of markets in Asia and to widen the
American trade deficit.

In the past, this might have led to a downturn, but there were special
circumstances that sustained the Clinton era boom into the late ’90s.
In order to hold down the value of the dollar relative to their own
currencies, Asian nations sent the dollars they accumulated from their
trade surpluses back to the U.S. to buy Treasuries, stocks and bonds,
and real estate. The accumulation of dollars helped fuel a speculative
frenzy in information technology stocks, which created a “wealth
effect” of its own that buoyed consumption and investment. Brenner
calls it “asset price Keynesian.” Paul Volcker summed up the situation
thusly: “The fate of the world economy is now totally dependent on the
growth of the U.S. economy, which is dependent on the stock market,
whose growth is dependent upon about 50 stocks, half of which have
never reported any earnings.”

Of course, the dot-com bubble burst in 2001—inconveniently on the same
day that Ruy Teixeira and I were trying to auction our proposed book,
The Emerging Democratic Majority. Overcapacity had spread to
information technology. (See Noam Scheiber, “Wretched Excess,” in TNR,
December 3, 2001.) A recession had taken hold. A year later, the
economy began to recover, but the tradeable goods sector remained
stagnant. In 2005, investment by non-financial corporations was still
almost 5 percent below what it had been in 2000. Net borrowing by
non-financial corporations was nugatory. And the trade deficit
continued to rise.

How then was recovery possible at all? What happened was that the
fundamentals behind the dot-com boom and bubble were replicated in the
housing and commercial real estate markets. The rush of foreign
dollars into the U.S. from the trade deficit helped the Federal
Reserve keep interest rates near zero. With the interest rates
plummeting, home sales rose. And as sales rose, the price of homes
rose. Homeowners used their newfound home equity to purchase cars and
other homes. Construction boomed, even while manufacturing floundered.
When home prices threatened to discourage new purchases, banks and
brokers, with encouragement from the Fed, offered new subprime
mortgage deals. When the banks and brokers became worried about risk
from these mortgages, they invented elaborate financial instruments to
cushion and spread the risk. And when housing prices finally stalled,
the whole Ponzi scheme collapsed, and the recession, the most severe
since the 1930s, commenced.

Did the housing bubble cause the recession? Yes, in the same sense
that a patient suffering from lung cancer finally dies as a result of
pneumonia. The bursting of the bubble precipitated the recession, but
the underlying condition, which made possible the financial chicanery
of the last 15 years, was the global overcapacity in tradeable goods.
With American firms no longer eagerly seeking funds for expansion, the
banks and shadow banks had to look elsewhere for profitable outlets.
And with the economy that produces tradeable goods not producing new
jobs, a government that took its responsibility for maintaining
employment had to look elsewhere to stimulate demand and growth. Ergo,
two bubbles, and two recessions.

So what now? There are good reasons to re-regulate finance—among them,
to prevent fraud and to create transparency—but financial reform will
not necessarily create an incentive for banks to loan money to firms
that want to invest and expand. The problem right now is primarily
that firms are fearful that they won’t make a sufficient rate of
return on their investments, and are holding back. There is also good
reason to make expenditures for infrastructure that will create jobs
and make American industry more productive. But, Brenner argues,
Keynesian spending is at best a palliative that temporarily creates
jobs and that, over the long run, exacerbates the problem of excess

This is a crucial point and I want to quote Brenner on it. He says
that Keynesian

additions of purchasing power were especially critical in reversing
the severe cyclical downturns of 1974-5, 1979-1982, and the early
1990s, which were far more serious than any during the first postwar
quarter century and would likely have led to profound economic
dislocations in the absence of the large increases in government and
private indebtedness that took place in their wake. Nevertheless, the
ever increasing borrowing that sustained aggregate demand also led to
an ever greater build-up of debt, which, over time, left firms and
households less responsive to new rounds of stimulus and rendered the
economy ever more vulnerable to shocks. Even more debilitating, it
slowed the shakeout of high-cost low profit means of production
required to eliminate overcapacity in the world system as a whole and
in that way prevented profitability from making a recovery.

Brenner is not saying that the U.S. economy won’t “recover” from this
or future recessions. What he is saying is that we and the rest of
global capitalism will continue on the gradual downward slope that
began in the 1970s. We will not be able to recreate the Golden Age of
capitalism that lasted from 1945 to 1970 simply by applying the right
mixture of spending, subsidies, re-regulation, and international
negotiation. Instead, the world economy, and the U.S. economy, will
resemble the post-bubble Japan of the 1990s—with its “L-shaped”
recovery writ large.

Brenner doesn’t discuss the political repercussions, but they are
pretty clear: Continued economic uncertainty and instability will make
for political instability. This has already happened in Japan, and
appears to be spreading to Europe, where recent elections in Germany
and Great Britain have created uneasy governing coalitions. In the
United States, the Republicans are likely to take back at least the
House of Representatives in November, but that won’t issue in a new
era of Republicanism any more than Obama’s victory now appears to have
created a long-lasting Roosevelt-type Democratic majority. Unless a
solution is at hand, we’re in for an era of what political scientist
W. D. Burnham called “unstable equilibrium.”

And by Brenner’s logic, there is no lasting solution to global
overcapacity and falling rates of profit short of the kind of
depression that shook the world in the 1930s. This depression, it
should be recalled, had some pretty terrible political repercussions
of its own. It not only threw millions out of work, but also fed the
growth of fascism and Nazism and contributed, if not led directly, to
World War II. The combination of the Depression and World War II
created the conditions for the Golden Age of capitalism that occurred
from 1945 to 1970.

Brenner himself is certainly not advocating depression and war. He
doesn’t offer solutions. He is trying to explain the dilemma that
global capitalism faces. I would certainly hope that Brenner is wrong.
I like to think the countries of the world could find a way out of
this mess through national and global planning and cooperation. But I
don’t presently see how.

John B. Judis is a senior editor of The New Republic and a visiting
scholar at the Carnegie Endowment for International Peace.

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