The American economy 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 four percent and to an unemployment rate of less than five percent? Or will this recovery sputter like the last one that began in 2002?
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 mine.
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 19th 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.”
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