Robert Brenner on bubblenomics
Source Louis Proyect
Date 07/09/26/09:36

That hissing? It's the sound of bubblenomics deflating

Merely cutting the cost of borrowing will do little to remedy the long-term weaknesses of the advanced economies

Robert Brenner
Wednesday September 26, 2007
The Guardian

THE MORTGAGE LENDING AND banking turmoil in Britain and America seems to be contained, but its future course remains very much in doubt. If, as senior officials have long contended, economic fundamentals are strong, fears about the impact of the crisis should be allayed. But are they?

The bull runs of the 1980s and 1990s, and the first half of this decade, with their epoch-making transfer of wealth to the richest 1% of the population, have distracted attention from the actual long-term weakening of advanced capitalist economies. Economic performance in the US, western Europe and Japan has, by virtually every standard indicator - output, investment, employment and wages - deteriorated, decade by decade, business cycle by business cycle, since the early 70s.

The years since the current cycle began in early 2001 have been the worst of all - in the US, growth of GDP and jobs has been the slowest since the end of the 1940s, and real hourly wages for about 80% of the workforce have languished at about their 1979 level. The decrease in the dynamism of the advanced capitalist economies is rooted in a major drop in profitability, caused by a chronic tendency towards overcapacity in global manufacturing, going back to the late 1960s. Reduced profitability has, since the 1970s, led to a steady decline in the rate of investment as a portion of GDP, as well as step-by-step reductions in the growth of the capital stock and of employment. This slowdown of capital accumulation, along with a push by corporations to restore their rates of return by holding down wages, has reduced aggregate demand - a weakness that has long constituted the main barrier to growth in the advanced economies.

Governments, led by the US, have underwritten ever greater volumes of debt, through ever more baroque channels, to subsidise purchasing power. In the 70s and 80s they incurred continuously larger deficits to sustain growth. But since the mid-90s they have had to resort to more powerful and risky forms of stimulus to counter the tendency to stagnation, replacing the public deficits of traditional Keynesianism with the private deficits and asset inflation of what might be called asset-price Keynesianism - or, with equal accuracy, bubblenomics.

Despite his recent protestations to the contrary, none other than Alan Greenspan launched the experiment in the new macroeconomics, nurturing the great stock market run of the late 90s, after the attempts by the Clinton administration and the EU to wean the economy from its dependence on credit, via neoliberal budget balancing, were met by deep recessions in Europe and Japan, the jobless recovery in the US, and the Mexican peso crisis. As corporations and wealthy households enjoyed their growing paper wealth, they embarked on a record-breaking increase in borrowing, sustaining a powerful expansion of investment and consumption, the ill-fated "new economy" boom. However, the ascent of equity prices in defiance of falling profit rates and the escalation of overcapacity that resulted from accelerating investment prompted the crash and recession of 2000-01.

Undeterred, central banks turned again to the inflation of asset prices. By reducing real short-term interest rates to zero for three years, they facilitated an explosion of household borrowing that contributed to, and fed on, rocketing house prices. Inflated household wealth enabled increased consumer spending that, in turn, drove the expansion. Personal consumption plus residential investment accounted for 90-100% of the growth of GDP in the first five years of the current cycle. However, the housing sector alone was responsible for raising the growth of GDP by more than 40%, obscuring just how weak the recovery was.

The rise in demand revived the economy. But while consumers did their part, the same cannot be said for business, despite the incitement of unprecedented household borrowing. Focused on restoring profit rates, corporations unleashed a brutal offensive against workers. They increased productivity growth, not so much by investing in equipment as by cutting back on jobs and compelling employees to take up the slack. They held down wages as they squeezed more output per person, allowing them to appropriate an entirely unprecedented share of the increase that took place in net non-financial GDP.

Non-financial corporations have, then, raised their profit rates significantly, though still not back to the already reduced levels of the 90s. But by holding down job creation, investment and wages, they have held down the growth of aggregate demand, undermining their own incentive to expand. Instead, exploiting the cheapness of credit, they have devoted a record share of their resources to buying back their own shares, financing mergers and acquisitions, and paying dividends to stockholders - rather than expanding investment and creating new jobs.

Against this background of fundamental weakness in the real productive economy, the crisis set off by the collapse of the sub-prime mortgage market is indeed extremely threatening. Ben Bernanke - who replaced Greenspan as chairman of the US Federal Reserve - thus had little choice but to cut the cost of borrowing. The deflation of the housing bubble from its 2005 peak was already exerting pressure on consumer spending and residential construction, a problem that can be expected to worsen as house sales and prices plummet. Moreover, in view of their feeble response to one of the largest stimulus packages in history, corporations could hardly have been expected to take up the slack, and in fact had begun to reduce job growth even before the financial crisis hit.

Yet there is reason to doubt the efficacy of the Fed's reduced rates. How can consumers again rise to the occasion, when declining house prices increase saving, not spending? The consumption-led boom seems set to peter out. Will not the fall in the dollar that is bound to accompany the Fed's move force up longer-term rates, threatening to drive down asset prices and curtail real growth? How can lower borrowing costs reduce the massive mortgage security losses that cannot but result from the tide of defaults that has only just begun? There is little doubt that rough times are ahead: the expansion may end with both a whimper and a bang.

·Robert Brenner is the author of The Economics of Global Turbulence

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