A Painful Anniversary

Exactly ten years ago this past April 7, I posted an article on Marxism-Leninism Today entitled Tabloid Political Economy: The Coming Depression (for those who missed it, it is reproduced below). It was my first and only attempt at economic prognostication, always a challenging and risky venture. The “Tabloid” in the article’s title was a tongue-in-cheek reference to the headline in the April, 2007 issue of a now defunct supermarket tabloid, Weekly World News. Featured between Virgin Mary Slaps Boy and Jews Invented Pizzoh was the shrill admonition: Surviving the Next Great Depression! It’s Coming This Summer!

It didn’t come in the summer of 2007.

In fact, the Dow Jones Industrial Average continued to climb seemingly with no limit, reaching a new peak in the fall of 2007. The pundits continued to extol the virtues of unbridled capitalism.

While the folks at WWN built their case on scant evidence (“Skyrocketing gas prices, escalating war, crashing housing prices, calamitous weather and freefalling stock prices…”), there were many other good reasons to take their prediction seriously, reasons which I offered in my article. Unfortunately, the print edition did not survive to see the collapse that rocked the foundations of the global capitalist economy the following year. Nonetheless, the zany supermarket tabloid proved to be far more prescient than the Nobel laureates, academics, and popular pundits who postured as learned economists yet never saw the collapse coming. 

Ten Years On

The global economy never fully recovered from the crash of 2008. Instead, it has stumbled along from one setback to another, with economic growth only marginally topping population growth. When both the enormous loss of wealth from the crash and the obscenely unequal distribution of the wealth recovered since the crash are configured, it is fair to say that the vast majority of the world’s population have seen little or no recovery. In fact, the casualties from the crash continue to pile up.

The US economy is neither healthy nor without serious symptoms. Despite the market euphoria that surprisingly accompanied the Trump election, the Atlanta Federal Reserve has lowered its growth expectations for the first quarter to .5% from an earlier forecast of 3%. Other projections have similarly dropped.

For three months in a row, since January, durable goods orders (excluding volatile transportation orders) have dropped. Industrial production fell .1% in January and was unchanged in February. Factory output dropped .4% in March from February and was only up .8% from a year earlier.

Bank loan growth has slowed.

Retail sales slowed by .3% in February and .2% in March. Inflation, as a measure of consumer demand, dropped .3% in March. Retail stores are closing in unprecedented numbers and retail employment growth has slowed.

Sales of new cars-- the principal driver of consumption growth since the crash-- has fallen for three straight months. Auto dealers are now offering buyer incentives that are greater than the labor costs of production (labor costs are less than $2500 per car, on average). Incentives account for 10.5% of average sticker price ($31, 435). Yet the average car sits for over 70 days on the lot.

Used car prices were down 8% in February, another sign of declining demand. And auto loan defaults are on the rise.

The US trade gap-- the difference between imports and exports-- reached a 5-year high in February.

In stark human terms, the US economy is failing working people. Between January 2016 and January 2017, average hourly earnings slipped .1% and the hours of the average workweek dropped .3%. This calculates to a .4% loss in real average earnings for those twelve months.

With reduced earnings, more and more workers are drawing on their retirement savings: 20% of 401(k)s have been reduced through self-loans.

Not surprisingly, household debt in 2016 grew the most in a decade. Unlike in the lead-up to the crash, mortgage debt is growing modestly, still below the explosive growth rate of that time. Instead, the growth in debt is in credit cards, auto loans, and student loans. Auto loan debt has reached $1.2 trillion, while student debt has risen to $1.3 trillion.

Student debt is particularly crippling. There are 42 million outstanding loans. The average student loan debt jumped from $26,300 in 2013 to $30,650 in 2016. Defaults went from 3.6 million in 2015 to 4.2 million in 2016.

And senior citizens are saddled with growing debt as well. In 1998, 30% of people 65 and older were in debt. In 2012, the percentage of seniors in debt reached 43.3. Growing debt comes in the wake of the collapse of net worth since 2005, when it topped $300,000 among those 55 to 64. By 2013, average net worth within that group dropped to $168,900 (even below the net worth of $175,300 reached in 1989).

Talking heads and media “experts” hail the job market. But they seldom delve deeply into its performance. Put simply, capitalists are hiring additional workers, rather than purchasing labor-saving equipment, because labor is cheap and flexible. The failure of organized labor to defend or advance labor’s relative position has served as a disincentive for capitalist investment in new technologies and equipment. They see no need to do so, when labor power can be used on demand, with no restrictions, and at low costs.

That trend is clearly reflected in the most recent period’s historically poor growth in productivity, among the lowest periods of productivity growth since the Second World War. Contrary to the widespread hawking of the idea that most workers are in danger of being replaced by robots, corporations are showing little interest in the introduction of new or old technologies. They are spending very little on equipment. While the technology may be there, capitalists have shown little need for it, given low labor costs.

As Shawn Sprague shows in a recent BLS paper, since 2009 the growth of aggregate hours-worked has grown more quickly than the growth of non-farm business output. This fact demonstrates that US capitalists feel little pressure to “save” labor while restoring profits during the so-called “recovery.” Rather than having existing workers work more hours, they are hiring more workers at low wages and contingently. Profits rebounded nicely because the working class had been slammed by the downturn, rendering the employment costs so low that there was no need to invest in labor-saving equipment.

This harsh truth has been ignored by economists and labor leaders alike because it shows the complete bankruptcy of class collaboration as an approach to social justice for workers.

US capitalists have enjoyed a decade of low labor costs, no pressure to invest retained earnings, and high profits (corporate after-tax profits dipped in 2015, but came back smartly in 2016). By securing labor power at low costs, they have foregone the purchase of labor-saving instruments and achieved modest growth by expanding employment. Today, capital is profoundly afraid that, with reduced unemployment, competition for labor power will drive up the costs of labor and erode profits. The Trump tax change package, favorable to corporations and the repatriation of profits, is one ruling class response to this anticipated problem.

Despite the return of an overheated housing market with escalating prices (lagging new construction is fueling demand), no systemic accumulation crisis comparable to that of 2007-2008 appears on the immediate horizon. Instead, the post-collapse era of stagnation and deteriorating living standards continues for the working class. As the shrinking income and mounting debt of working people erodes aggregate consumption, the possibility of a business cycle contraction grows more and more likely. The long, tepid expansion transferred nearly all its gains to the wealthy few, leaving little but debt or asset cannibalization for the majority. With declining retail sales, especially auto sales, and the growing weight of personal debt, the likelihood of further consumption growth is in doubt.

A business cycle contraction will only further weaken the position of working people, setting them up for a further dose of sacrifice and pain.

Isn’t it time to get off the capitalist roller coaster?

Zoltan Zigedy

zoltanzigedy@gmail.com

April 7, 2007 MLToday (unedited)

Tabloid Political Economy: The Coming Depression

Always alert to emerging trends, I spotted the latest issue of the Weekly World News at the checkout counter of my supermarket. The headline announced the coming depression scheduled for this summer. Sandwiched between a sighting of Batboy in the New York Subway and alien abductions was the dire warning to prepare for a severe decline in the world capitalist economy. Now, Left sects sport this prediction more frequently than Elvis sightings or the announcement of Armageddon. Nonetheless, I paused for a moment. Who, I asked myself, has their fingers on the pulse of the economy more than the tabloids? Should we trust the tabloids less than the battery of economists periodically assembled by The Wall Street Journal? Would Ben Bernanke of the Federal Reserve tell us a depression was coming if he knew? Would Bush? Or Hillary?

The pieces of the economic puzzle began to come together for me. The housing bubble - the steady march of rising residential values that fueled enormous borrowing against assets - had finally began deflating, with no signs of let-up. The US middle class - saddled with record consumer debt and living from pay check to pay check – mortgaged their homes to maintain their “middle” status. Deathly afraid of falling below the media fueled standards of respectable success, they drew from their most precious assets to stay in the game.

At the same time, predators seized the moment afforded by the heralded market-place. Sub-prime lenders fed on the false prosperity by drawing the poor and the status-hungry to absurd loans, front loaded with instant gratification and back loaded with long-term pain. Stoking the housing bubble, budding entrepreneurs borrowed irresponsibly to purchase residential properties fully expecting values to rise and affording them the opportunity to “flip” the properties for an easy profit.

Like all hustles, the lure of easy money drew the most vulnerable, the most gullible, and the greediest into the game just as the bubble was bursting. Millions are facing stifling debt, foreclosures, and destruction of much of the value of their most valuable asset, their home. Economists estimate that 1,300,000 homes will foreclose this year, throwing additional housing stock into a market already suffering low demand. With an expected 50% decline in sub-prime and other easy mortgage terms in 2007, fewer people will have even a remote chance to buy from the swelling housing glut.

Of course those wiser heads who diligently worked two jobs, overtime, and  ignored the temptation of easy credit also lost big time.  The value of all housing is expected to drop 5% this year - the steepest drop since the Great Depression. In other words, the most precious asset of the working class will decline to 95% of last year’s value through the sheer irrationality of the market economy.

Nor is this a short term setback. A late March report by Emmanuel Saez and Thomas Piketty shows a level of inequality in 2005 unmatched since before the Great Depression (see The New York Times 3-29-07). Based upon 2005 IRS data, the authors concluded that the top 10% of the US population now commands 48.5% of all annual income, leaving 51.5% for the other 90%. Similar inequalities exist within the top 10%: The top 1% receives 21.8% of all income (nearly half of the income share of the top 10%). And so it goes. The top 1/10 of 1% (roughly 30,000 individuals) shares nearly as much income as the bottom 150,000,000.

In short, the US has become a society rivaling and exceeding pre-industrial England in class division and inequality. One of the earliest reasonably accurate surveys of class and income division – the famous 1688 estimates of English incomes by Gregory King – show the top 5% of English families garnering 28% of incomes (the top 1% of US individuals receive 21.8% of all incomes!). So the barons, lords, merchants, and traders of Olde England were less privileged than our own capitalist class. And we fought a revolution to escape the tyranny of the English ruling class only to replace it with our own home – grown privileged class!

No doubt the insightful team of political economists at the Weekly World News are aware that the post-2000 economic “recovery” was fueled by consumer spending, a source of energy that would appear to be nearly tapped out with personal debt at an all time high and personal wealth - the home - declining in value.

While bourgeois economist whistle past the graveyard, the coveted market – the magical mechanism that guides capitalist economic growth—seems to reflect deep – seated fears and insecurities. Despite being awash in capital, financial power searches for investment opportunities to no avail. Economic theorists have been puzzled by the low returns available, even for high-risk or long-term investment. Under normal circumstances, risk and patience earn a premium in investment, but not today. Instead, the enormous pool of wealth concentrated in fewer hands can only lure borrowers at modest rates. There is simply too much accumulated wealth pursuing too few investment opportunities.

Other alarm bells sound: Productivity growth, a centerpiece of US economic health, is now slipping below historic averages. Much of the economic success of the Clinton era is attributed to the restoration and maintenance of high productivity. During the last half - decade of his term productivity hovered at the same level as the post - World War II period. Most economists attribute this largely to the integration of new technologies into US industry. After the 2000 decline, productivity rose again thanks to the Bush administration's support for draconian management practices that squeezed every extra ounce of labor from the retreating working class. Outsourcing, downsizing and bankruptcy maneuvers forced fewer workers to work harder for less. Thus, the first hike in productivity came from technological change and the second from sweated labor.

But now productivity is dropping. Apparently, the technology impact has played out and the squeeze on labor is bearing limited returns: productivity growth dropped to a low of 1.4% in the last quarter of 2006.   

The enormous national debt adds to the list of ominous signs of decline. The obscene costs of the Iraqi occupation, the hysterical “war on terror”, and tax relief for the rich have left the US with unprecedented debt. Foreign trading partners have largely financed this debt by using their enormous surplus of dollars to buy US treasury notes. Yet there are increasing signs that as the dollar declines in value, they may be looking at other options.

The recent US tariff against Chinese high – gloss paper signals increasing tension between the US and its leading trading partners. There is a strong feeling internationally that the US is anxious to pass its economic burdens onto others. In the past, US economic might was sufficient to bully other countries to accept this sacrifice. But today, there is a growing resistance to US unilateralism—another sign of declining economic power.

Since both political parties maintain a general consensus on economic doctrine, it is unlikely that any new solutions will emerge to confront these serious cracks in the US economy. This ideological uniformity limits the policy decisions of the two parties to faith in the neo-liberal market and free, unfettered trade. With no answer to growing inequality, wasteful imperial aggression, and market anarchism, the prospects for avoiding crisis appear bleak. Let’s see if the Weekly World News gets it right.

Zoltan Zigedy