Fight Racism! Fight Imperialism! 237 February/March 2014
According to the people who decide these things, the US economy has been recovering since June 2009. At first glance the economy does seem to be improving. Unemployment is down from 10% in October 2009 to 6.7% in December 2013. GDP rose at a 4.1% annual rate during the third quarter of last year. Housing starts in 2013 were some 18.3% up on 2012 and house prices increased by over 7%. The S&P 500 stock index closed the year at its highest ever level of 1846.87, up 31.8% over the year. Yet something is not quite right with this rosy picture. STEVE PALMER reports.
A survey of economists gave a median prediction of job gains of 197,000 in December 2013; the actual increase turned out to be 74,000. The Schiller P/E Ratio – a ratio of the price of a stock to its earnings – has an average of 16.51, yet currently stands at 25.61, implying that stocks are significantly overvalued in relation to earnings. The increase in house prices conceals huge regional variations: in California prices rose by 21.8%, in Florida by 14.8%; but in Texas by 3.4% and by 3.0% in New York State. None of these are evidence of a stable, robust recovery. We obviously need to look closer to see what this so-called ‘recovery’ is really all about.
Behind the ‘recovery’
A deeper look shows that this ‘recovery’ is tapering off. Profits are the lifeblood of the capitalist economy, the entire end and aim of production. Over the two-year period from the last quarter of 2008 through 2010, domestic profits grew by 113%. Over the most recent two-year period, they grew by just under 10%. Capital accumulation is feeble. Instead of investing idle cash, non-financial corporations are sitting on $1.93 trillion in liquid assets, up from $1.65 trillion in 2011.
Corporate debt, which hovered around the $7.5 trillion level from 2008 into 2011, grew almost $1.4 trillion, some 17.5% in the last two years. This was not used for accumulation: the total additional increase in private fixed investment during the same period was only about $375bn. Where did the remaining trillion dollars go? The answer is on buying shares back from shareholders – ‘buybacks’. Over the same period, corporations spent some $822.7bn on buybacks.
Buybacks and stock prices
The point of buybacks is that they reduce the number of outstanding shares on the market and therefore increase the relative ownership stake of each shareholder. Since cash, an asset, has been spent, the total asset value of the company is reduced, increasing the return on assets and also, due to reduced outstanding equity, the return on equity. So the stock price rises. With enough corporations doing this, the stock indices rise as well. This is how, without any significant change in production, stock prices have been boosted and the P/E ratio increased. It is estimated that buybacks are responsible for 75% of the increase in S&P500 earnings per share even though revenues stagnated for the second year in a row and actual earnings growth was lacklustre.
This huge addition of money into the economy via the stock exchanges, together with the $1 trillion pumped into the economy by the Federal Reserve Bank during 2013, as part of its ‘Quantitative Easing’ programme (QE), has inflated a bubble in stocks and other markets in the US and other countries. There is a limit to both buybacks and QE. Companies have ceilings on the amount of debt they can carry, and the amount of cash to spend on buybacks. Maintaining QE in an expanding economy carries the possibility of major inflation, so with the ‘recovery’ supposedly under way, the Fed has decided to scale back the QE spending by $20bn, from $85bn to $65bn each month. These explain the recent declines in world stock markets and the turbulence in some ’emerging market’ economies.
Real unemployment
The decline in the unemployment rate is nothing to do with any economic recovery. The total number of employees peaked at just over 138 million in 2008 and has still not returned to that level. The labour force – the total number of people available to work – which grew steadily from 1948 to 2008 by about 1.5 million per annum – has been on a plateau around the 155 million mark for the last five years. This represents 7-8 million uncreated jobs. While the ‘headline’ unemployment rate was 6.7% in December 2013, a broader measure, which includes short-term ‘discouraged’ workers and those forced to work part-time, was 13.1%. Long-term ‘discouraged’ workers were excluded from the unemployment statistics in 1994. When they are added in, the real unemployment total in December 2013 was a staggering 23.3%, according to John Williams, who runs the sgstats.com website. Capacity utilization, the share of productive resources actually used, was 89.4% in 1967 and has been declining ever since. The most recent peak in utilization was in December 2007, at 80.8%; in December 2013 it was 79.2%.
Clearly, with so many people and so much equipment and resources idle, the potential for growth and recovery is present. But the persistence of these problems shows that we are not witnessing recovery but a form of stagnation.
Growing parasitism
A crucial symptom of this stagnation is the massive growth in US capital invested abroad. 40 years ago, US capital invested abroad was less than 25% of US GDP. By 2011, this had risen to almost 140% of GDP (see Fig 1).
The income from this investment has become increasingly important to US capitalism. In 1948, the share of profits from overseas in total profits was slightly more than 5%, only exceeding 10% in 1970. This share increased to just less than 20% in 1980 and did not top 25% until 1999, remaining around this level until 2006. Since then it has moved into the 30-35% band, with the exception of 2008 when it exceeded 45%. The profits from imperialism have become more important to US capital (see Fig 2).
Who benefits?
If recovery is so illusory, why is there so much talk about it as if it is a reality? The fact is that some people have enjoyed a huge recovery: the rich and wealthy. They pay the scribblers, bloggers and talking heads who keep repeating the ‘recovery’ mantra. Between 2009 and 2011 – the beginning of the ‘recovery’ – the wealthiest 7% of Americans, about eight million households with a net individual worth of more than $836,000, enjoyed a growth in their aggregate wealth of $5.6 trillion. The wealth of the other 93% – 111 million households – fell by $0.6 trillion over the same period. The bottom 18% – 24 million households – had zero or negative net worth.
Not that the rich have had it that easy, mind you. Since 1982, the official cost of living has increased by a factor of about 2.5, but over the same period Forbes Magazine’s CLEWI index (Cost of Living Extremely Well Index – the cost of one’s yacht, the mansions, racehorse, chopper, the Lambo, etc) has increased five-fold. However, net worth of the ‘Forbes 400’ – the 400 richest people in the US – has grown twice as fast over the same period; their total wealth last year was some $2 trillion, about the same as the GDP of Italy or Russia.
By contrast, in 2013, median workers’ pay after inflation was slightly less than it was in 1979. Real household income has increased by about 5% over this period, but only because more women are working now. Over the same period, productivity, output per hour, has almost doubled. All the benefits of this huge increase have gone to the rich. The share of wages and salaries in US gross domestic income has fallen from around 50% in the 1950s and 1960s, to its lowest level ever in 2012: 42.6% (see Fig 3).
Measuring the true progress of working class living standards is extremely difficult. Since the early 1980s, the Consumer Price Index (CPI) has been tweaked to understate the real growth in the cost of living. According to official CPI calculations, inflation in December was at an annual rate of 1.5%, while John Williams’s estimates on the traditional basis show inflation running at 9.1%. At 1.5%, the cost of living would take 47 years to double; at 9%, it will double in just eight years and over 47 years grow about 60-fold. The fraudulent official CPI is used in wage negotiations, cost-of-living adjustments to Social Security, targets for retirement savings, economic analysis etc.
The desperation created by the huge growth in real unemployment and poverty has swollen the size of the underground or shadow economy – workers working off the books. This is estimated to have grown from about $1 trillion in 2009 to $2 trillion in 2012.
Prospects
The extent of inequality has become so obvious that everyone from the Pope to Obama has voiced concerns. ‘Left’ and liberal economists argue that inequality holds back personal consumption spending, supposedly threatening the ‘recovery’; they recycle traditional Keynesian solutions of modest redistribution of wealth and increased government spending, hoping to save capitalism. The problem however, from the standpoint of capital, is not that inequality has gone too far, but that it has not gone far enough. The faltering profitability, the huge corporate hoard of idle cash, the continuing high level of export of capital – all point to the need to increase the exploitation of the US working class way beyond its present level. In order to overcome its crisis, capitalism needs to increase its profitability. It does this by driving down the living standards of the mass of the people and cutting ‘wasteful’ government spending – by which it means, not the $700bn war budget, but social programs: anti-poverty, Social Security, Medicare, education etc. which benefit working class Americans. Low-paid workers, such as those who work at the huge retailer Walmart, or in fast-food restaurants, are dependent on these programs just to make ends meet and feed their families.
We can only begin to describe the depth, extent and consequences of these cuts. Although some 775,000 students have been added to the primary and secondary school system since 2008, the number of teachers has fallen by 324,000. Thirty four States have cut spending on primary and secondary education, in some cases by over 20%. States’ spending on higher education has been cut by 28% over this period, leading to increased tuition costs and lower quality education. Some 40 million people now owe more than $1 trillion in student loans. Seven million have already defaulted, resulting in a plethora of problems; those who haven’t defaulted see a huge slice of their income – if they have a job – evaporating in interest payments which can only increase as the Fed tapers off its stimulus programme.
While important battles have been and are being fought against the onslaught of US capital, with some important local victories, the US working class overall is in a weakened condition, with union membership at its lowest for decades. It is faced with a massive ideological onslaught, in which the working class’s attempts to maintain living standards, pensions and medical benefits are blamed for the crisis inevitably experienced by US capitalism due to its own internal contradictions.
Far from being in the process of recovery, the US economy is poised for worsening crisis. The only way it can seriously recover from the position it finds itself in is by further, even more massive and deeper attacks on the US working class.
