After A year of treading water, is the economy about to go under again? With unemployment expected to remain at 5.7 percent or increase, the question of how long the weak recovery will last was in the air.
Revised statistics released late last month did show better-than-expected economic growth for the end of 2002. However, growth for the fourth quarter of last year was still only 1.4 percent–twice the original estimate of 0.7 percent but still far below what is needed for job growth.
Low interest rates helped to spur on consumer spending, which accounted for the biggest part of the increase in gross domestic product (GDP). Nevertheless, spending on big-ticket durable goods declined by its greatest amount since the 1991 recession. If it wasn’t for a big increase in government spending–including a big burst of military expenditures–the economy would have barely registered any growth at all.
The lack of profits–and the record U.S. trade deficit–has raised the specter of a financial crisis should foreign investors decide that the U.S. dollar has become overvalued relative to other currencies, such as the euro.
But the main reason for lousy growth was the refusal of business to invest in new plant and equipment, aside from an increase in software and computers. That’s because the economy is still bearing the load of overcapacity built up during the boom of the late 1990s, when, backed by Wall Street, corporations plowed hundreds of billions into telecommunications and other industries in the hopes of grabbing high profits. The resulting crisis of overproduction undermined profits and burst the stock market bubble in 2000, and the U.S. sank into recession the following year.
Today, much of that plant and equipment lies idle–not because the commodities they need aren’t needed, but because they can’t be sold at a sufficient profit to satisfy capitalists. “With industrial capacity use close to the lowest in two decades, companies have little reason to purchase new equipment,” Bloomberg News reported, noting that Ford Motor Co. plans to cut spending on computers and software by $300 million this year.
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ECONOMIST RICK MacDonald summed up the situation in Business Week in January. “Capacity utilization in the manufacturing sector is sitting at 73.6 percent, still below the low point seen in three of the last six recessions, while utilization in high-tech industries remains near an all-time low at 61.7 percent,” he wrote.
“While the [Federal Reserve Bank’s] efforts to spark the economy through aggressive interest-rate cuts are generally viewed as a positive, the rapid easing of credit conditions may have prevented factory closings that would have been useful in clearing out ‘supply-side’ excess capacity. This may have served to prolong the capacity-overhang problem and further restrain investment.”
In other words, capital’s prescription to restore profits is more plant closures–and that means more joblessness. That’s grim news for the 2.2 million workers in the private sector who have lost their jobs since March 2001.
Ninety percent of the job loss since then was in manufacturing, which saw 592,000 jobs eliminated last year alone. As of December 2002, the number of manufacturing jobs had decreased 29 months in a row–the longest such decline since the Great Depression.
Even services, which has been the greatest source of U.S. employment growth for decades, is adding jobs at a far lowest rate for any economic recovery since 1960, according to the Economic Policy Institute.
Last month, 130.8 million people were employed in the ,000 fewer than a year earlier, when the recovery began. “The current recovery so far is generating much weaker growth in payrolls than even the infamous ‘jobless’ recovery following the 1990-91 recession,” Michael Swanson, an economist at Wells Fargo, told reporters.
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FEDERAL RESERVE Chair Alan Greenspan has tried to revive the U.S. economy by cutting interest rates–a tactic that has been successful in the past. But this time, the crisis of overproduction is so great that even cheap money can’t induce businesses to invest.
Moreover, many are drowned with debts piled up during the boom and are only using the cheap loans to stay afloat and try and avoid bankruptcy–a fate that has already met such corporate giants as K-Mart, Enron, WorldCom, US Airways and United Airlines.
So despite the lowest interest rates in 40 years, the U.S. is experiencing economic stagnation of the sort seen in Japan over the last decade. In Japan, debt-laden corporations have been bailed out repeatedly by the banks–which in turn have relied on assistance from the government.
After years of complaining that Japan should let the market rip to clean out unprofitable companies, the U.S. faces the same dilemma. If Corporate America and Washington allow companies like WorldCom and United Airlines to emerge from bankruptcy, they will only perpetuate overcapacity and depress the profits for their industries overall.
Yet if they allow such huge companies to simply disappear, they risk dragging down healthy businesses along with them–to say nothing of the devastating human costs. “[I]t’s unclear what the Fed can do besides keep rates low and keep printing money in the hope that the United States’ overcapacity issues resolve themselves more quickly than Japan’s,” wrote Justin Lahart of the CNN/Money Web site.
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WITH THE economy stagnant for two years, Washington is attempting to use the military to help drive its global economic agenda. “Free markets and free trade are key priorities of our national security strategy,” the Bush administration declared in its National Security Strategy document published last summer.
The spike in military spending has helped create economic growth in the short term. Yet even with the increase, the military budget will be at 4 percent of GDP, less than half the amount during the height of the Cold War, when a permanent arms economy underpinned long-term growth.
A war on and occupation of Iraq, far from providing an economic boost, could cost the U.S. economy from $100 billion to $600 billion over the next decade, according to Yale University economist William Nordhaus. The Bush administration simply refuses to make any estimates of the costs.
Nor will Washington’s “economic stimulus” plan do much of anything to create jobs. It is built on a $1.5 trillion tax cut geared overwhelmingly to the rich–who will have little incentive to invest as long as the problems of overcapacity and low profits remain.
“[I]t must have been hard for Bush to design a tax program that cost so much in revenue while at the same time doing so little to stimulate the economy,” wrote Joseph Stiglitz, former chief economist of the World Bank and chief economic adviser to former President Bill Clinton.
The real aim of the Bush tax cuts isn’t to spur economic growth, but to lock in the wealth and privilege of the richest Americans while creating a budget crisis to justify devastating budget cuts in the years ahead.
None of this is inevitable. Increasing, not cutting, taxes on the rich can pay for desperately needed social programs–such a national health care plan to solve the crisis of the uninsured.
Moreover, now that Washington has made government budget deficits legitimate after years of cutbacks, there’s no longer any excuse not to fund jobs-creation programs, an increase in and extension of unemployment benefits, and a tax cut aimed at working people rather than the rich. And rather than allow the free market to wipe out millions of good jobs, bankruptcy-ridden industries like steel, telecommunications and the airlines can be nationalized.
None of this can be accomplished without struggle, of course. We need to begin now to fight for the priorities of working people–and fight for a system based on human needs rather than profits.