The real roots of the U.S. economic crisis

By BRUCE PARDOLL

I think that a comprehensive understanding of how the present U.S. economic crisis came about, and how things have considerably worsened not only since December 2007—when the Great Recession began—but also since 1974 (when wages for the working class began a steady downward slide) is greatly needed.

Marxism is uniquely qualified to give a real in-depth analysis of how capitalism works. And it can explain the current economic crisis in more objective terms than most current explanations, which tell us that, willy-nilly, the subjective greed of bankers, billionaires, hedge fund investors, real-estate agents, and financial traders of all kinds led to a “Casino Capitalism” and often to deliberate financial fraud.

That’s true enough, but there’s much more to it. We are told by the liberal media that the Financial Services Modernization Act of 1999 overturned the parts of the Glass-Steagall Act of 1933, which had put up walls between speculative investment banking on one hand, and commercial banking on the other, forbidding the financial industry to group together mortgage and other portfolios in order to sell them as investments.

In a word, “derivatives,” which are investments in already existing investments and loans, came into extraordinary wide use based mostly on the booming real estate market—hence “mortgage securities.” (Subsequently, there were automobile securities, credit card securities, and other securities based on debts). In other words, banks, hedge funds, insurance companies, and other financial institutions made it their business to radically increase the selling of debt.

That is all true enough. However, studying structural changes in the economy over a longer period of our economic history will tell us much more about why Glass-Steagall was overturned to begin with. And it will also give us understanding of the rather profound ideological changes this nation has experienced since the demise of New Deal liberalism starting in the 1970s, in order to complement and reinforce those structural changes.

The mainstream explanations of the financial crisis given above comprise only a surface analysis that doesn’t explain the underlying material forces that greatly pressured investors to buy into home mortgage derivatives, and then invent an array of new ones that had never existed before. The implication given us by the mass media and mainstream liberal economists is that if these risky investments had not taken place, the economy would just be humming along with fairly constant economic and profits growth—in a word, a stable economy in line with the 10-year boom of the 1990s.

U.S. in the world economy since 1945

To begin with, World War II never touched American shores. War production eliminated the Great Depression and spurred the greatest decade of U.S. economic growth (5.9%) of the 20th century. By the end of the war average white workers, almost 30% of whom were unionized, saved fully 25% of their gross wages. The U.S. was now by far the #1 economy in the world! Except for the neutral nations, Europe lay in ruins. The stage was set for the U.S. to dominate the world economy.

As early as 1944, when the U.S. and its allies knew it was only a matter of time before they would win the war, the Bretton-Woods Agreement, whose major architect was John Maynard Keynes, was agreed to by all the capitalist allies. It called for the dollar to be pegged at 1/35th of an ounce of gold and for the rest of the world’s currency values to be pegged to the dollar. Fixed exchange rates between various currencies were established.

The dollar was the world’s “reserve currency,” which meant that a huge portion of the “commodities markets” (in capitalist terminology, raw materials like metals, minerals, grains, but most importantly, oil) had to be traded in dollars. Ditto with large balances of payments between most nations.

After the war, even before the famed Marshall Plan was enacted, the U.S. gave $13 billion to the destroyed European countries, including West Germany. Japan was also given substantial reconstruction aid. Another $13 billion was given to Europe from 1948-52 under the auspices of the Marshall Plan.

There was an implicit proviso attached to the United States’ “generosity” toward Europe. Trade barriers were to be brought down—all the way down. Europe was inundated with American products. By 1953, more than 60% of all the world’s goods were produced in the United States. Europe prospered too, but its bigger ticket items couldn’t compete with those of the U.S.; cars, TV’s, hi-fi record players, and radios, for example, earned booming profits for the U.S.

But even with European imports from the U.S. exceeding exports, European capitalist economies benefited. Retail sales in Europe of American as well as their own goods expanded their economies and provided employment. A good portion of the profits from the European economies were invested in capital technology to increase their own manufacturing industries.

And so, slowly but surely, Europe and Japan eventually caught up, mostly through technological advances in production that effectively equaled and in some sectors exceeded U.S. productivity and quality of goods. The United States still ruled supreme through the 1960s—with some European and Japanese products, such as VW bugs and vans and Honda motorcycles, doing quite well in the U.S. marketplace.

The latter part of the 1960s marks a kind of turning point: first of all, inflation related to large budget deficits from the Vietnam War spending occurred. (Large budget deficits meant the government had to print and borrow more money to cover the deficits; the increase of the money supply devalued each dollar’s worth and hence prices resulting from the oversupply went up.) In response to what was deemed to be too much inflation, the Federal Reserve induced “fiscal tightening” by raising interest rates on borrowing, resulting in less business and consumer borrowing, and therefore downturns in production and higher unemployment. This happened in the first “Nixon Recession” of 1969-71.

The reason this kind of fiscal action is frequently taken in the face of high inflation is because it is deemed preferable to have a temporary economic downturn than to allow the currency instability that arises from rapid growing inflation. There is, among other things, the likelihood that foreign nations with much lower inflation rates will not want to sell their own goods and services to the U.S. at dollar value because the dollar has been devalued through inflation. Hence, they’ll look for markets elsewhere in the global economy, or otherwise lower their production and grudgingly sell what they can at lower prices to the U.S.

In any event, this was the fundamental cause of fiscal tightening back then. In response to higher U.S. deficits, inflation, lower growth, and perceptions of faltering U.S. economic growth, major advanced capitalist nations and their investors asked to be paid in gold for U.S. Treasuries and other American securities they were holding. Under the Bretton-Woods Agreement, this was their right.

In August 1971, another watershed event in capitalist history occurred. Nixon took the dollar off the gold standard. The new “floating” value of all world currencies was still to be pegged to the dollar, but from now on the dollar’s value was theoretically backed by the value and stability of the U.S. economy itself. This made the question of value very abstract and subject to speculation. For the first time in world history, all currencies were fiat paper currencies, unbacked by precious metals of any kind. The values of currencies were “floated” in currency markets, making for greater currency instability.

But Nixon, an advocate of monetarism (but not quite the same as Milton Friedman) brought forth what was perhaps the first giant step towards neoliberalism. Many monetarists pushed a laissez-faire economic regime. Federal Reserve Bank control over the money supply, primarily by regulating the interest rates on borrowing, would be the solution to prevent the U.S. economy from overheating (overproduction) or excessively cooling down (underuse of productive capacity). Milton Friedman was always against increasing the money supply to the point of rapid inflation. Nixon was not necessarily opposed to this.

However, U.S. monetarism supplied no solutions for underdeveloped nations around the world, no matter how big or small they were. In this age of late 20th-century and 21st-century globalization, the IMF intervenes, as it has all over the globe in “Third World” nations. (And now it is even participating in bailouts of “First World” economies in Europe). The scheme is always the same: in exchange for bailout money, the IMF (and now the European Union and the eurozone) imposes draconian cuts in social and educational spending, lowered wages, massive layoffs, and the privatization of public infrastructure and numerous public services in order that the indebted nation will balance its budget and pay off its debts to mostly rich foreign investors.

Now, back to the real economy of goods and services: It is here that Marxist political economy sheds light on what has transpired since the 1970s. As mentioned before, there were more foreign products showing up in the U.S., such as VW bugs and vans in the 1960s. In the ’70s the trend accelerated. You had Datsuns (now called Nissans) and Toyotas in greater numbers. Ditto German cars like BMWs and Mercedes. There were also numerous retail discount outlets such as Kohl’s, K-Mart, Walmart, and Target whose stocks eventually became predominantly foreign—especially Third World foreign—as the decades wore on.

The cost of increasing competition in the real global economy means capitalists buying more and more high priced technology in order to increase productivity, which adds tremendously to overhead costs. This doesn’t even necessarily open new markets; it just allows you to compete with other countries producing the same exportable goods and services.

It is very important to realize that “capital goods”—factory machinery; other technology involved in goods and services production; gigantic ships for transport of goods and people; airplanes for the same purpose; the buildings in which goods production takes place; skyscrapers and other buildings to house offices; trains, buses, and large trucks to also transport people and goods—these are the most colossally expensive things in the world. If you are going to pay the enormous costs of these huge capital expenditures, you had better make enormous profits.

But now, with all the giant corporations basing operations in countries throughout the world, intensely competing with one another, profit rates have a long-range tendency to fall as overhead expenses increase. One of the ways to bring down production costs is to pay less and less to labor, destroy workers unions, outsource labor to poor nations, and so on. The other cost saver for the capitalists is to get their taxes cut: the more drastic the better.

Nevertheless, this mad race among so many competitors to produce more at less cost per unit of production inevitably leads to market gluts of overproduction. That is exactly what happened during the recession of 1969-71; 1973-75 (which resulted in an unemployment rate of 9%); 1979-80 (the “stagflation” recession under Jimmy Carter); 1981-82 under Reagan (unemployment reached 10.8%); the eight-month recession of 1991-92, and another eight-month one in the early 2000s; and, finally, this Great Recession we have been mired in since December 2007.

These binges of overproduction are related to what mainstream economists call “capacity utilization.” In order for today’s industries to pay back the debts they’ve incurred for the very expensive technology they have purchased to increase productivity, they have to operate at full or nearly full capacity.

The trend since the 1970s in the United States has been a decline in economic growth, notable decline in workers’ wages, and an overall tendency for profit rates to decline. As you will shortly see, economic statistics illustrate the U.S. decline dramatically. And it is the declining rate of profit, which, in a sense, forced “financialization” to expand massively, from 8% of all U.S. corporate profits as Ronald Reagan took office in 1981 to as high as 41% in 2008, depending on which statistical sources you consult.

In a word, banks and investors lost confidence in the profitability of much of the real economy. Today, the percentage of corporate profits that are financial is still at 33%, according to many government sources; and the major investments are still in the speculative bond markets, the stock market—both of which are bubbles waiting to burst—and derivatives. That’s right, these are the same investments based mainly on real estate and debt that were the proximate cause of the crash of 2008!

And now, here are statistics to support our case: First, “The Boom & the Bubble: the U.S. in the World Economy” by Robert Brenner (whose stats come from a wide array of respected public think tanks), and secondly, from an important study by respected researchers Ergodan Bakir and Al Campbell, “Neo- Liberalism, the Rate of Profit and the Rate of Accumulation,” appearing in Science and Society (July 2010).

Gross profit rates in the U.S. were 20.8% between 1959-69; 17.9% from 1969-79; 15% from 1979-90; 11% from 1991-2000 (during the ballyhooed Clinton years); and 8.3% in 2001. After-tax profit rates were 6% in 2000, 5% in 2005, an upward spike to 6.75% in 2007 (due in large part to rapidly growing real estate and derivative sales profits in the first half of the year), and then back down again to 5.9% in 2008.

Marx’s “Law of the Tendency of the Rate of Profit to Fall” seems to be borne out in what has transpired in the last 40plus years. And profits today? Well, this writer would have to say, “Of course, they are up in many companies!” What would you think in the face of steeply declining wages since 2008?

In a New York Times October 2012 reprint (of an article written in April of 2012), economic analyst and reporter Catherine Rampbell reported that the median loss of income to American families during Obama’s first four years in office was nearly $3000 per year.

As for the big banks, none of them can be reported to have made authentic profits. They no longer are required to report the market worth of assets gone bad. They are permitted to report the values of bad assets as still having the values they were bought for! That’s why the bank bailouts in the form of “quantitative easing” through the Federal Reserve Bank and Treasury Department have given the big banks $8-12 trillion since October 2008 at taxpayer expense, mostly to the richest holders of U.S. Treasury Bills.

In the real economy, the “C.I.A. World Factbook” of 2007 stated that the U.S. share of the world’s manufactured goods production was 21%, as compared to more than 60% in 1953.   Fewer statistics better illustrate the decline and future fall of the American economic empire.

This article is based on partial transcripts from talks given to a San Francisco Bay Area branch meeting of Socialist Action in November 2012, and also at Socialist Action’s West Coast Educational Conference, on April 27, 2013.

Photo: Tony Savino / Socialist Action