[OPE-L:6087] Re: empirical studies on causes of current world economic crisis?

From: Fred B. Moseley (fmoseley@mtholyoke.edu)
Date: Thu Oct 25 2001 - 12:43:39 EDT

On Tue, 23 Oct 2001, Gerald_A_Levy wrote:

> What does the empirical evidence tell us about the cause or causes of
> the current world economic crisis?

Jerry, here is my very brief answer to your very big question.

I think the main factor that has caused the current crisis in the US
economy is a very significant decline in the absolute amount of profit
from 1997 to the present (in spite of corporate reports to the
contrary).  According to recently revised estimates by the US Bureau of
Economic Analysis, after-tax profits for the non-financial corporate
business sector of the economy DECLINED BY ABOUT 25%, from around $400
billion in 1997 to around $300 billion in the first quarter of 2001.  This
25% decline is already bigger that the 15% decline in profits in the
1990-91 recession and is almost as big as the 30% decline in the 1980-82
recession, the biggest decline of the postwar period.  

And these estimates are for the ABSOLUTE AMOUNT of profit.  The SHARE of
profit in total income has declined even more, by about one-third, from
12.5% to 8.5%.  The share of profit is now about equal to the lowest
levels of the postwar period in the 1970s and early 1980s.  The limited
gains from 1992 to 1997 has been wiped out entirely by the recent sharp
decline.  The RATE of profit, I would guess, has declined even more,
because of the rapid increase of the capital stock during the "investment
boom" of the late 90s.  

And these estimates are only through the first quarter of 2001.  Since
then, profits have fallen further, and probably sharply.  Greenspan has
repeatedly cited throughout 2001 rapidly falling profits as the main cause
of the sharp decline in business investment, and one of the main reasons
for his more expansionary policy.  And most economists agree that the 4th
 quarter of 2001 (which we are now in) will be the worst so far.  It may
be that corporate profits will fall by as much as 50% by the end of the
year from the 1997 peak, far surpassing the worst decline of the postwar

This very gloomy picture for profits has become clear only recently, as a
result of a very significant downward revision of profits by the BEA,
published in the August issue of the Survey of Current Business.  A graph
of the pre-revised and the revised estimates for 1998 to 2001 is quite
striking.  The pre-revised estimates increased about 15% from 1997 to the
beginning of 2000 and then declined by roughly an equal percentage from
2000:1 to 2001:1, so that the level of profits in 2001:1 was about the
same as in 1997.  The revised estimates, on the other hand, DECLINED about
15% from 1997 to 2000:1, rather than increasing 15%, and then declined
another 10% from 2000:1 to 2001:1, so that the level of profit in 2001:1
is about 25% below its 1997 peak, rather than about equal to it.  It
appears that the stock market boom of the late 90s was based on an
illusion of rising profits, magnified by corporations cooking their books
with all kinds of accounting tricks, which the BEA rejects.  

I think this very significant decline in the amount and the share of
profit is the main cause of the rapid decline of capital investment over
the last year, which in turn has brought on the recession.

This rapid decline of profits will also make it more difficult for
businesses to meet their debt obligations in the coming months, and will
probably result in increasing defaults, bankruptcies, etc., especially
since business debt levels are at a very high level.  And spreading
bankruptcies could turn a normal recession into something worse.

I would like to learn more about the magnitude of corporate debt and the
likelihood of defaults and bankruptcies in the coming months.  If anyone
knows of any good articles, data, etc. on this question, I would very much
appreciate references.  I think that will be the crucial factor in
determining the length and severity of the recession.  Along with the
record level of household debt, which also threatens to cause very high
rates of personal bankruptcies.


P.S.  This crisis has nothing to do with "underconsumption of the
masses".  To the contrary, over-consumption (i.e. spending greater than
income) has been the main support for the economy over the last year,
while capital investment has declined sharply.  This over-consumption will
now require sharp retrenchment in consumer spending, which will make the
recession worse.  

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