[OPE-L:7539] [OPE-L:1078] Re: Re: Is anyone there

Fred B. Moseley (fmoseley@mtholyoke.edu)
Wed, 25 Aug 1999 23:13:45 -0400 (EDT)

Hello everybody,

I would like to try to respond to Allin's and Alejandro's question about
the current macroeconomic situation in the US: are we headed for a
recession? I think this is an extremely important question and I would
certainly be willing to participate in an OPEL discussion of it. The
problem is that it is such a huge topic, that it is hard to know where to
begin. But I think the US and world economy are in a crucial situation
right now, and that there is a high probability that the US economy will
fall into a severe recession within the next year or two, which in turn
would have devastating effects on the rest of the world economy.

I have written four papers recently related to this question in one way or
another. These papers are:

"The Rate of Profit and the Future of Capitalism"
Review of Radical Political Economy, December 1997

"The US Economy at the Turn of the Century: A New Era of Prosperity?"
Capital and Class, Fall 1998

"The US Economy in 1999: Goldilocks Meets a Big Bad Bear?"
Monthly Review, March 1999

"The Decline of the Rate of Profit in the Postwar US Economy:
Increasing Competition or Increasing Unproductive Labor?
A Comment on Brenner"
Historical Materialism, forthcoming

I would be happy to discuss any points from these papers, if anyone
wishes. Perhaps the best place to start would be the MR paper, since it
is concerned with "the economy in 1999" and discusses the probability of a
recession in the US economy in the next year or two. When I return to
Massachusetts (I am now in Maine), I will put these papers on my website.

In the following, I will try to very briefly summarize my main points, as
a way to get the discussion going.

1. Most broadly, there has been ONLY A PARTIAL RECOVERY OF THE RATE OF
THE RATE OF PROFIT in the US economy since the 1970s. There has been an
increase in profitability in the 1990s, but this has so far recovered only
about HALF of the prior decline of the rate of profit in the early postwar
period. The rate of profit still remains about 30% below its earlier
postwar peak (see my RRPE paper for an update of the estimates through

This partial recovery of the rate of profit is mainly the result of the
fact that real wages have not increased since the 1970s (real wages have
actually declined 10-15 % since the mid-1970s; see my CC paper).

Therefore, the US economy remains in a somewhat fragile condition. It is
not as robust as in the early postwar period, when it was able to maintain
high rates of growth, low rates of unemployment, AND significant increases
in real wages (real wages increased 50% from 1947 to 1973).

2. The US economy has benefitted greatly in the 1980s and 90s from HUGE
INFLOWS OF FOREIGN CAPITAL (the data are presented in my CC paper). This
record inflow of foreign capital has enabled the US economy to grow at a
faster rate than would have otherwise been the case. However, if this
foreign capital were to be withdrawn, or just cease to increase, then the
underlying weakness of the US economy would be revealed and it would fall
into recession, or worse (more on this later).

3. The other main stimulus to growth in the US economy in recent years
has been the STOCK MARKET BOOM , which has almost tripled in the 1990s
(and almost doubled since 1995). This windfall of increased wealth has
had an unusually powerful effect on consumer spending, as US households
evidently feel that their increasing stock market wealth provides all the
saving they need for the future, and hence they do not have to save out of
their current income (instead, they can spend all of their current income,
and more; i.e a negative savings rate!).

However, I argue that the stock market is overvalued by at least 30-40 %,
and that a major contraction is overdue. If such a contraction were to
occur (due to a declining dollar, or rising interest rates, or
disappointing profits), this would have a severe negative effect on
consumer spending, and ultimately on the US economy.

4. SO FAR IN 1999, the US economy has been stronger than I expected, (and
even stronger than most economists expected) with a rate of growth of
about 3.5%. The main reason for this stronger-than-expected growth has
been the continuing CONSUMER SPENDING SPREE of US households. Increased
consumer spending has accounted for more than the total growth of the US
economy so far this year. The savings rate has gone even further into
negative and the household debt level has continued to rise (and is now at
an all-time record - over 100% of disposable income).

But how much longer can this consumer spending spree last? As already
mentioned, a stock market contraction would certainly end it, and with it
the US expansion.

5. The main immediate problem is the continuing DECLINE OF NET EXPORTS
(or the continuing increase in the deficit on current account). The
current account deficit has increased from $150b in 1997 to $220b in 1998,
and is projected to increase further into the $300-350b range this year.
The main threat that this poses for the US economy is that it could lead
(indeed in theory is SUPPOSED to lead) to a devaluation of the dollar. A
significant DEVALUATION OF THE DOLLAR would almost certainly have very
negative effects on the US economy, because it would bring down the stock
market, which in turn would bring down consumer spending and the economy
as a whole with it. The Fed would probably try to stop the decline of the
dollar and the resulting inflation by raising interest rates, which would
further propel the economy into recession.

This devaluation of the dollar has been avoided so far because of the huge
inflows of foreign capital mentioned above; i.e. because foreign investors
have been willing to loan US firms and household sufficient amounts to
finance the deficit on current account. But again, one has to ask: how
much longer can this go on? Especially since the US deficit on current
account certain to continue to grow, and thus require even larger amounts
of foreign loans in order to avoid a devaluation of the dollar. At some
point, it seems likely that foreign investors will realize that the dollar
will have to decline eventually and will no longer be willing to finance
the US consumer spending spree.

Just in the last several weeks, the dollar has declined approximately 10%
against the yen, due in part to the announcement last week of yet another
record monthly balance of trade deficit for June. The business press has
begun to discuss the possibility of very negative effects of a declining
dollar on the US stock market, consumer spending, etc.

6. Finally, if a recession in the US economy were to occur in the next
year or two, then this US recession would in turn have devastating effects
on the rest of the world economy. The main hope for recovery for Asian and
Latin American countries now in recession is to increase their exports to
the "booming" US market. If the US economy falls into recession, then the
US demand for their exports would decrease, rather than increase. Without
their main hope for recovery, these economies would likely remain in a
deep recession for years to come. And if rest of the world remains in
deep recession (or depression), continues, then they will almost certainly
not be able to service their debt and repay their loans to US banks and
other creditors.

7. I would also add that the ASIAN CRISIS IS NOT OVER, mainly because the
fundamental problems of low profits / high debts / excess capacity / bad
loans (which I discussed on OPEL a while back) have not yet been solved.
But I will save further discussion of Asia and the rest of the world for
another post.

Allin, Alejandro, and others: any comments?