United States: recession over?

FRFI 217 October/November 2010

In September the US National Bureau for Economic Research declared that the recession was officially over, claiming that it ended in June 2009. To the capitalists, it must seem that way – their profits have soared. Yet although production has grown, its rate of growth has started to falter, declining in the first and second quarters of 2010. Some 15 months after the ‘end’ of the recession, the official unemployment rate is still at 9.6%, while estimates put the real rate of involuntarily unemployed at over 20%. What is really going on? How is this affecting the US working class? US correspondent STEVE PALMER reports.

Let’s examine the real state of the economy and start with the capitalists’ profits. After plunging to $995bn in the last quarter of 2008 (annual rate), profits shot up to $1639.3bn in the second quarter of 2010, the latest quarter for which figures are available. The annual rate of growth of profits in the last three quarters has been, respectively, 43%, 38% and 39% – staggering increases. Where have these profits come from? A sizeable chunk came from the rest of the world – when profits fell to their lowest, more than 50% came from outside the US. With a doubling of domestic profits, that proportion has fallen to 35% – still a sizeable slice.

But where has the growth in domestic profits come from? Not out of thin air, and certainly not from the efforts of the capitalists, but by intensified exploitation of the working class, by the production of what Marx called absolute surplus-value – typically widespread cost-cutting, speeding up the pace of work and lengthening working hours. The rate of growth of profits has far exceeded the rate of growth of sales, much of which has come about because companies have been rebuilding their inventories. However, these techniques for increasing profitability have their limits in the limits of human beings – cost-cutting can only go so far.

Companies are failing to invest. This is evident from the huge amount of cash which corporations are sitting on. This is at an all-time high – $1.84 trillion. Capitalists do not like to sit on cash – they like to ‘put it to work’ so they can expand their capital. The capitalists are not investing substantially, because of the weak economic growth and because industrial capacity is running at just 75% – there’s no point in investing in more plant and equipment if there is still plenty standing idle. Instead, they are looking at alternative ways of increasing profits and expanding their capital.

The reserves of cash both encourage and facilitate mergers and acquisitions – a strong cash position makes a takeover target more attractive; it also can provide the means for making acquisitions. As a consequence, deals have been on the increase. By the end of August, the deal flow totalled $1.56 trillion, a 22.3% increase over the same time a year ago. August deals alone totalled $262bn, according to Thomson Reuters, and include BHP Billiton’s $39bn offer for the Canadian company, Potash Corporation, Intel’s $7.7bn offer for McAfee and Kinross Gold’s acquisition of Red Back Mining for $7.1bn in stock.

One way of increasing apparent profitability while reducing the pile of cash is to engage in ‘stock buybacks’. In a stock buyback, a company buys back part of its stock. This has the effect of reducing the total number of shares, increasing the earnings per share for the remaining stockholders. The total size of the individual capital is expanded through this centralisation. Walmart ($15bn), Hewlett-Packard ($10bn), Exxon Mobil ($3bn), Yahoo ($3bn) and Intuit ($2bn) are among the hundreds of companies who have engaged in this practice in recent months.

At the same time, the imperialist imperative has been at work: the export of capital has been increasing after declining and reversing itself – from an inflow of $690bn at the height of the financial crisis in 2008, it is now flowing out again – some $787bn over the past year – in search of profits abroad.

Far from the recession being over and a recovery underway, we can see that US capitalism has just enjoyed a temporary respite from the crisis. The profits boom is going to run out of steam, the US Federal Reserve Bank still has a massively inflated balance sheet and is serving as the hedge fund of last resort, and the massive overhang of debt, some $50.2 trillion, continues to grow. All this points to further problems ahead for US capitalism. The first signs of this are beginning to show up in the indicators used by the Philadelphia Federal Reserve: manufacturing activity is flat, average work weeks have declined, along with new orders and prices. There is more of this to come in future.

However, US capitalism is creating problems right now for the US working class. In the first place, there is the price workers have had to pay to help restore profitability temporarily. Since the start of the recession, 7.6 million jobs have been lost. From 2002 to 2007 productivity grew by 11%, while hourly pay fell by 0.6%. Between 2007 and 2009, real median earnings of male workers declined by 4.1% and of female workers by 2.8%.

Poverty is on the increase. Recently released Census figures show that 1 in 7 US residents and 1 in 5 children live in poverty – a total of 43.6 million, the largest since figures began to be collected. Four million additional people were thrown into poverty in 2009. As homeless people have moved in with friends and relatives, the Census Bureau has recorded an 11.6% growth in ‘multifamily’ households in the last two years. Food stamp recipients have increased from 39 million at the beginning of 2010 to 41.3 million by mid-year. Food banks report swelling demand. The growth in poverty has hit minorities hardest: among non-Hispanic whites, the rate was 9.4%; among blacks and Hispanics, over 25%.

The housing crisis continues to unfold. RealtyTrac reported that in August foreclosure filings increased over July by 4%. Bank repossessions were up 25% from last year. Hardest hit States are Nevada, Florida, Arizona and metropolitan areas in California. ‘Option ARM’ resets (Adjustable Rate Mortgages) are building up and expected to peak in September 2011, increasing foreclosures and creating further financial problems.

In the second quarter, April to June 2010, bankruptcy filings reached the highest level since 2005, totalling 422,061. In the year ending 30 June, there were 1.57 million bankruptcies, up 20% from 1.31 million a year earlier.

Part of the cost of increased profits has come from withdrawing healthcare from workers. Between 2008 and 2009, the number of people covered by private health insurance fell from 201.0 million to 194.5 million. The number of US citizens without health insurance rose to a record 50.7 million. Government-run programmes have had to absorb the fall: the number of people covered by government programmes has risen from 87.4 million to 93.2 million over the same period. The number of adult women with job-based coverage has fallen from 64% to 61% and about 20% have no insurance at all. Among foreign-born non-citizens, the uninsured rate increased from 44.7% to 46%, nearly two and a half times the rate for the native-born population and mainly representing undocumented immigrant workers. Among companies who do provide healthcare to their workers, 30% have reduced the benefits available or increased workers’ share of the costs, while 23% have raised employee premiums. As a result, employees are paying an average of 14% or about $482 more a year in healthcare costs for a family plan. Between 2000 and 2010 workers’ share of such coverage has grown by 147%.

While companies are awash with cash, the States are starved of it. The economic ‘stimulus’ of government spending is wearing off; State revenues are static or falling. Every State but one, Vermont, must balance its budget, adjusting taxes and borrowing on one side and spending on the other. According to the National Association of State Budget Officers, fiscal year 2010 spending fell by 6.8% to $613bn from $687bn in 2008 and $658bn in 2009. Some estimates put this year’s shortfall as high as $141bn.

Nine States have missed their budget deadline and began the fiscal year without a plan. Illinois has had its credit rating slashed because of its budget difficulties. All the easy cuts have been made and now core services are on the chopping block. With an $11bn deficit, New Jersey just sliced $1bn off its education budget, a category considered untouchable in the past. Teachers are getting cut, replaced by volunteers; class sizes are increasing while art and sports programmes get cut. Programmes for the disabled, women, elderly and minorities are all being trimmed or axed altogether. Some states have introduced furloughs, closing State offices for one day per month and cutting workers’ pay accordingly. Some have attempted to release non-violent prisoners early, but right-wing opposition has prevailed and incarceration is being implemented over social rehabilitation programmes, which, though cheaper, are being slashed.

Fundraising gimmicks include attempts to legalise marijuana and to introduce digital car number plates, which carry advertising. Some States are playing ‘let’s pretend’ by using accounting tricks to push cuts out until next year or by borrowing further and moving debts around; others are simply hawking off State property and buildings to private contractors, then leasing them back. The California city of Maywood has taken cuts so seriously that it has disbanded its police force and fired all public sector employees, contracting out all public services.

The most difficult item on the States’ budget agenda is State pensions. For years States have treated pension funds as a kind of piggy bank, ‘borrowing’ always with the promise to repay. After decades of borrowing, combined with decline brought about by the financial crisis, these are estimated to be underfunded by $1 trillion – 30 States will run out of money to fund pensions by 2030. But the States are not going to get bailed out the way the banksters were. Illinois has taken what the Financial Times describes as the ‘imaginative’ step of raising the retirement age from 60 to 67 – some imagination! The logic of this is to push pensionable age out until everyone is dead.

While the poor have been getting poorer and the working class suffer attack after attack, the rich are getting richer. In 1973, the ratio of the average CEO’s pay to typical worker’s pay was 27 to 1; just before the recession in 2007 it was 275:1. The CEOs of the 50 firms with the most layoffs since the recession began took home an average $12m compared with $8.4m for the CEO of a typical blue-chip company. Fred Hassan, Schering-Plough CEO, took home $49.7m after selling the company to Merck, a deal that led to 16,000 job cuts; William Weldon of Johnson & Johnson took home $25.6m, while firing 8,900 workers, and disgraced Mark Hurd, former CEO of HP, not only fiddled his expense account, but made $24m while laying off 6,400 workers. The obscenity and sickness of the capitalist system knows no bounds.


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