Another View of the Economy

Steve Rose

IN 1971, PRESIDENT NIXON announced new policies to deal with U.S. economic difficulties; the left responded with a series of teach-ins on the “crisis” that had been long anticipated (in for example Baran and Sweezy’s Monopoly Capital and Ernest Mandel’s Marxist Economic Theory.)

Since then, the economy has swung wildly with higher unemployment rates, slower growth and bouts of inflation. With each tum, a new round of educationals on the failures of capitalism was organized.

In 1980, I predicted an opening for the left in 1987 because the liberal Democrat who in 1984 would follow the follies of Reaganism would also fail. According to my prediction, the inability of the system to perform well would demonstrate to large numbers of people that neither capitalist path, conservatism nor liberalism, held much promise.

It’s true that the performance of American economy has not been stellar in the 1980s (nor in the 1970s); but it has been strong enough to maintain the support of the vast majority of Americans. Many people are uneasy, but very few question capitalism or even its current stewards.

In fact, public opinion polls showed that the “strength” of the economy was fundamental to Reagan’s 1984 landslide electoral victory. It seems to me that intellectual honesty requires re-evaluation, not just of the left’s persistent prediction of imminent collapse, but also of the items it uses to make this prediction.

Whether we think the United States is now in or about to enter an economic crisis depends on how a crisis is defined. People’s judgments are formed relative to a standard they think is attainable-either from past performance or in relation to another region/country. And for these feelings to translate into meaningful political action, significant numbers of people must be similarly affected.

Thus, for an economic crisis to have significant impact on politics, it would seem to require, at a minimum, high unemployment, low incomes for the majority of the population and a widespread sense of desperation and despair, The experiences of the Great Depression of the 1930s, many Third World countries to­ day, and pockets of Black and Hispanic people in central cities and rural areas are examples of economic crises having political ramifications.

Prediction and Reality

Left predictions of economic crisis have been based on two sets of propositions, The first deals with changing income distribution — the shrinking middle class, greater gaps between rich and poor, rising poverty and unemployment.

The second set of factors are data describing economic performance-falling profits and investment, increasing debt, trade deficits and problems in inter­ national competition, and stock market gyrations.

The first set of propositions is posited on the assumption that capitalist societies perpetuate inequalities of power and income. This has an international dimension — the chasm between center and periphery — and an internal dimension. American capital, the primary world power since World War II has been able to sustain a high standard of living for a large number of people. And overall, this is still true.

In crude approximation, U.S. households can be divided into three almost equal groups: struggling to get by (family incomes below $20,000), struggling but doing okay although nervous about what the future holds ($20,000-40,000 household incomes), and successful (over $40,000). The bottom group is split in two between those who are stuck in poverty and those who are likely to move out. Similarly, the top group has its upper layer in which incomes and prospects are very high and secure.

The middle class has been shrinking due to lower real wages associated with deindustrialization (more low-paying service jobs), union concessionary contracts and the threat of plant closure. But the decline has been modest. Labor-market dynamics are fluid and not as many people have lower living standards as we may assume.

Sons no longer replace their fathers in industrial jobs but instead become hardware sales managers, typewriter repairers and insurance adjusters. Their wives are working. Careful disaggregation of the data shows that young males entering the labor market start at wages which are lower relative to the median than they used to be, and these men progress up the job ladder more slowly than before.

Some analysts, including Robert Lawrence of the Brookings Institute, argue that this is a temporary phenomenon and note that the median income of families headed by people in their prime earning years (35-55) is over $40,000 (the corresponding figure for &Blacks is $30,000).

Other commentators have noted that while real gross national product per capita has risen, real median household income has declined. This is because of the large number of single people living alone and the high incidence of divorce and female-headed families without a husband present. While these social factors result in more people living in low-income households, the performance of the economy can be summarized as weak but not disastrous.

Many leftists rightly point out that official statistics often underestimate the extent of poverty and unemployment. However, critics often commit the opposite error of overstating the problem:

a) Unemployment — over half the unemployed are in households in which another member is employed; the adult labor-force participation rate is at its all-time maximum. Because of multiple family earners, household income is the best measure of well-being.

b) Falling wages — while the real weekly wage is down significantly from its 1973 peak, the changing composition of the labor force (more women and teens) is part of the reason. Gender and age specific comparisons show that the decline in wages is much smaller.

c) Poverty — for most poor people, serious poverty is temporary. Studies show that the distribution of income is much more equal over a five-year time span than for a single year. This is one reason it’s so hard to organize the poor; those with prospects fight their way out. And since upward opportunity demonstrably exists, it is very easy for others (and the poor themselves) to blame the victim for their plight.

A Crisis of Profitability?

Let’s move on to the second set of propositions. Robert Brenner’s article in this issue argues forcibly that the crisis is upon us because of the inadequacy of profits. Again the data must be approached carefully.

Capitalist reproduction requires that the surplus-value pool be large enough to provide for both the opulent consumption of the wealthy and future investment. Over the last ten years, those at the top have increased their share of total personal income (primarily due to high interests, dividends, and rents).

But their high personal incomes have not seriously depleted the investment pool. Data show that gross investment is near long-term historical norms for the United States. Even if net investment or just non-defense plant and equipment purchases are used to measure investment, the current period is only slightly below long-term performance.

These numbers cast doubt on the hypothesis that a crisis of profitability is about to undermine the reproduction of capital. Accelerated depreciation allowances, greater use of debt financing, and other accounting gimmicks have been used to lower reported corporate profits and thus taxes. We should not be taken in. Yes, the surplus-value pool is probably down some, but not significantly enough to cause an historic break.

Even if the overall profit rate is down, this need not necessarily lead to a crisis. Falling rate of profit theory has never adequately specified the mechanism through which declining profit rates lead to a rupture in the circuit of capital and production.

A hidden assumption is that capitalist anarchy impedes any gradual adjustment process. In the modern world of large governments and financial and regulatory agencies, the forms of imposing discipline on all capitalists in the interest of the system as a whole are in place and make crises much less likely.

The growth of debt instruments is probably the least understood economic phenomenon. Many commentators treat debt as if it were manna from heaven that initially stimulates, but ultimately under­ mines, the economy. The fact is, however, that there are different kinds of debt, each with its own impact on capital reproduction.

For instance, if I give $1,000 to a company to buy a machine, it is termed a debt if the transaction takes the form of a corporate bond or bank loan based on my deposit. But it is called a capital investment if I buy newly issued stock or invest as part owner. Thus, I would argue that corporate debt is merely a different capitalist form and that the interest on that debt is the mechanism that transfers surplus value to the owner of the debt.

Personal debt, on the other hand, represents one person lending to another for the purpose of consumption, usually of a large durable product (such as a house or automobile). In this situation, individuals are able to spread their payments out over an extended period. The financial institutions which loan this money are protected by the value of the real property for which the loan is made.

Credit-card debt does not possess this safety mechanism for the banks. However, they offset their risk by charging high interest rates and have developed quite a lucrative return even though the default rates are up. Lending institutions also have become more discriminating in their practices; most families carry debt but the great bulk is owed by the upper third of the population. In the national income accounts, the personal savings rate is down but still far from zero; this means that wealthy people save enough to more than offset the new debt taken on by other people.

The federal government deficit is extremely convoluted and its size can be misleading. Much of the debt is held by other government agencies and is offset by the surplus of state and local government budgets. Part of the interpretation problem is accounting-the federal government does not have a separate capital budget, as do the private sector and state and local governments.

Still, the Reagan deficit was so large that it required some borrowing on national capital markets, some monetizing of the debt by the Federal Reserve System, and some borrowing from international sources.

But the left should not join many liberals in deficit-bashing. Deficits are expansionary; the federal government is the primary source of benefit programs, as inadequate as they are. Let’s attack the bloated military budget and tax cuts for the rich, but not as part of a program for reducing public spending because of the deficit.

International debt is the most potentially destabilizing. Nonetheless, global capitalists have developed a series of cushions (based on the tax dollars of all Americans) to offset a chain reaction that might undermine a significant portion of the world banking system.

Various writers have continually pointed out the system’s fragility and vulnerability, especially when a major financial failure occurs. But each year the day of reckoning seems to be narrowly avoided, yet the articles proclaiming impending doom appear anew.

A Flexible System

The trade deficit is another popular problem that really offers very little for the left. Jingoism runs wild here — targets include Arabs and the high price of oil, foreign production that take American jobs, and foreigners buying up our assets.

But there are countervailing factors. For example, we deplore the jobs lost to foreign investment by U.S.-based multinational corporations. But what of the jobs created by the reverse flow of foreign capital here? Now that the United States is a debtor nation, the inflow of funds exceeds U.S. foreign investment abroad.

The world is becoming more interdependent and specialized. The import share of gross national output has doubled in the last fifteen years to just over 10 percent; the comparable figures for most Western European countries are over 30 percent. No doubt Third World labor is used to discipline the working classes of the advanced capitalist countries. But the prophesies of the demise of “middle class life in America” are alarmist and without merit.

The large movement of foreign capital into the United States during the last five years indicates that people around the world with large amounts of money are betting on a positive future here.

Finally came the event that has shown that the left was right all along-the stock market crash. It was so devastating that in its wake unemployment decreased, investment plans remained steady, and personal income and consumer spending rose slowly. This steady flow of real world events indicates what a speculative capitalist game the market has become.

The market decline represented a downward valuation of assets that had been overappraised. The final outcome seems to be some reshuffling among the capitalists, and a wipeout of “paper gains.”

I began reassessing the “crisis” while preparing a book on economic statistics, The American Economy Poster and Factbook. I tried to marshal the facts in such ways as to convince an open-minded person of the failures of the system and to demonstrate the inevitability of crisis. I felt that I was only partially successful and could not find a “smoking gun” set of statistics to indict capitalism here.

Modem capitalism in the core countries is much more flexible and adaptable than we have anticipated. The image of the Great Depression has dominated our thinking; we’ve neglected the structural changes of the last forty years.

These comments should not be taken as a blanket support of our current economy; capitalism is not a wonderful and stable social system. It creates hierarchies that deny the majority meaningful roles in public life, reduces human relationships into profit-and-loss calculations, and treats the ecosystem as another resource to exploit.

Even with its tremendous wealth and level of productivity, the fact that many people are still inadequately provided for is manifested so clearly in the growing numbers of homeless in this country and the widespread misery in the Third World.

But predictions of capitalist economic crisis may not be accurate or effective, and have in fact been -used by the right for their political agenda. Invoking fears about the economy, it has attacked the social welfare state and the poor as the cause of the problem. The terms of acceptable public political debate have narrowed. Even some left commentators treated the stock market decline as evidence that “we” (the elusive national body) were living beyond our means and had to cut back.

In this very short piece, I have presented some alternative evidence and interpretation of data that is commonly used to prove the near-term inevitability of a capitalist crisis. I have tried to be provocative, “bending the stick backwards” to offset the failures of most leftists to look carefully at what has been happening.

Yes, the economy has performed less well than during the 1950s and ’60s. However, the left has often played fast and loose with the numbers and used slower rates of change as a sign of imminent collapse.

I am not here denying the possibility of a significant rupture in the near future. Although unlikely, capitalist greed and/or bad reactions by key government actors could precipitate disastrous results. Given the widespread misery that would result, it is unclear that the left should desire this result.

For now, though, playing Chicken Little all the time is counterproductive and often damages our credibility, something that is constantly being challenged by members of the ideological apparatus. We have a lot to say, but we must make our critiques and propose alternatives with the detail and nuance they deserve. If we misstate our case, we permit ourselves to be dismissed too early.

January-April 1988, ATC 12-13