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Everyone from pundits and politicians to experts and laypersons are wondering aloud about a long term crisis of our capitalist system since the Great Recession (2007-09) and the crash of 2008 that exacerbated and prolonged it. Demonstrators, consisting primarily of the working poor and their supporters, strike and protest demanding higher state minimum wage statutes. The Occupy movement which began as a protest against financial irresponsibility by Wall Street actually ended up as a movement dedicated to calling mass public attention to the massive and growing unequal distribution of wealth and income in American society. Well publicized studies by economists Thomas Piketty and Emmanuel Saez show the steadily growing socio-economic inequality in the US over the past three decades with such shocking discoveries as roughly two thirds of the net income growth over the course of the Bush up cycle (2002-2007) went to the top one percent of US households and that about 93% of the income growth in the first year of the recovery (2010) went to the top one percent of income earners. Such a highly concentrated economy is bound to be slow and unstable. Famous economists, such a Joseph Stiglitz, former director of the World Bank, wonder aloud if the current crisis is "the price we pay for inequality."

But as important as it is, inequality isn't the whole story. In dialectical fashion, it is both a cause and a consequence of a more basic feature of late monopoly capitalism namely, chronic stagnation. One of the indicators is the comparative time it takes to achieve a labor market recovery from the time of the start of any recession. Fred Magdoff and John Bellamy Foster compare trends in job market recovery times from the 1981 recession to the current one and find that with regard to the recession from 1980-81, it took 2.3 years to recover the total number of jobs lost since the very start of the recession. By the recession of 2007-2009, it has been well over six years and still counting! The authors contrast all this with the average time taken for job market recoveries between the end of WWII and late 1970s and found that it was less than two years! The authors relate this to a steady decline in average GDP growth rates which are essential to sustaining high levels of employment. They point out that there is a steady decline in average growth rates from the 1950s to the present. The authors explain;

Comparing economic growth between the 1950s and ‘60s with the subsequent decades, the real GDP growth rate slows down from over 4 percent in the 1950s and ‘60s, to around 3 percent for the 1970s to ‘90s, to less than 2 percent for the 2000s. (It is worth noting that the average annual real GDP growth in the 1930s was 1.3 percent.) GDP is reported on a quarterly basis and, thus, short spurts of growth are discernable. It is therefore possible to determine that these diminished annual growth rates are not due to far more quarters of slow growth, but rather result from far fewer quarters of very high growth during which capital accumulation achieved escape velocity. High rates of real GDP growth were very common during the 1950s and ‘60s, comprising some 35 to 40 percent of the quarters during those decades, compared with 20 to 25 percent in the 1970s and 1980s, 10 percent in the 1990s, and less than 4 percent of the time during the 2000s
The authors are referring to quarters in which there is a six percent annualized rate of growth. One quite common in the 1950s and '60s, the became virtually non-existent after 2000!  The authors similarly find that there is a dramatic reduction in non-residential, gross fixed investment from the decade of the 1960s to the current time. The contribution of personal consumption to GDP is actually slightly greater than it was fifty years ago but much of this was financed out of debt based on the abnormal rate of appreciation of such financial assets as stock portfolios and real estate. Finally, capacity utilization in the economy, particularly in manufacturing, has declined markedly. The Federal Reserve points out that at the height of the crisis in 2009, total US industrial utilization capacity sank to just below 67% from a high in the mid-1990s of 85%. Regarding the manufacturing sector, capacity utilization sank to just below 64% in 2009 from a peak in the late 1980s of 85.6% capacity. The remarkable part of the story is that even after four solid years of positive job growth and a near replacement of all the jobs lost during the last recession, capacity utilization in the total economy is still only about 78% still below the 1972-2013 average of 80.1%. For manufacturing, the first quarter of 2014 averaged about 76% capacity utilization per month compared to the 1972-2013 average of 78.7%.  All these trends indicate the stubborn nature of chronic stagnation in the US economy over the past thirty years. If all this has been the price of inequality, it is a high price indeed!

Since the core of late capitalism's stagnation problem is investment and the fall off in the growth of capital stock, or non-residential gross fixed investment, it makes sense to point out that it is gross private investment that not only makes the biggest contribution to the overall US economy but also varies the most over the course of the business cycle growing very quickly during a rapid upturn and falling off just as quickly during a steep down turn.  It is thus, investment that has the most determining effect on the growth path of the economy.  The inflation adjusted value of total fixed capital stock in the US has fallen since its peak of $2.6 trillion in 2006 just before the collapse of the housing bubble and has not fully recovered since that point according to data from the Federal Reserve Bank of St. Louis which puts the value of total fixed capital stock by the first quarter of 2013 at nearly $2.3 trillion (some sources have put the first quarter of 2014 at just below $2.5 trillion). The authors of the above cited Monthly Review article point to a dramatic drop in average annual real investment rates from the 1960s to the 2000s from averages of roughly 6% to averages of 2%. Fixed, non-residential net (new) investment (excluding inventories) as a share of total fixed investment drops from about forty percent in the 1960s to sixteen percent currently meaning that, according to Magdoff and Foster;

"More and more of total gross investment is thus being paid for out of depreciation funds set aside merely for replacing worn-out plant and equipment and less and less therefore constitutes new net investment."

Thus, less and less new private investment, or net additions to capital stock to create greater output capacity, is seen year over year due to chronic stagnation of income growth and effective consumer demand for goods and services. Thus, chronic stagnation has long plagued the US economy.

Slow GDP growth and fixed investment rates take place along side record profits. According to many sources, after tax corporate profits hit a record $1.7 trillion or more than ten percent of GDP! According to NYT figures from the Commerce Department, this 2013 record of after tax corporate profit as a ratio to national income is a record and exceeds the previous year's ratio of 9.7%. The Times adds that, "Until 2010, the highest level of after-tax profits ever recorded was 9.1 percent, in 1929, the first year that the government began calculating the number." One problem with investment is that wages are low and declining as a share of GDP and along with it effective demand for goods and services. The NYT report points out that worker compensation has dipped to about 42% of GDP currently down from a somewhat stable average of around 55% from the 1950s until the current crisis. Furthermore, credit is tighter since financial sector deleveraging began on the eve of the crisis which has also slowed the recovery. All this puts the low investment rates in a more comprehensible perspective.

It is the case that the financialization of the US economy has greatly mitigated the problem of stagnation by allowing consumers to borrow in lieu of real growing income.  Such debt financed growth has been the main driver of the economy for the last three decades. Former Fed Chairman, Alan Greenspan estimated that between 1991 and 2005, when house price appreciation began to cool off, consumers averaged $115 billion annually in home equity extraction to finance their personal consumption expenditures (PCE). Greenspan also estimated that a growing share of PCEs was funded over this period by home equity loans. The growth of the financial system and the market value of financial assets was quite rapid after 1991.

As the financial system grew it allowed greater consumption to mitigate the problem of chronic stagnation. It is also that case that with the growth of financialization we get slower and slower average growth and longer and longer time horizons for labor market recoveries. It is no accident that 1991 is the first true jobless recovery with longer and longer jobless recoveries following in its wake until the present time. The long time horizon for the current jobless recovery, an unprecedented six and a half years, followed on the heels of massive and rapid financial sector deleveraging as seen in the Chart 1 of the MR article. Beginning in 2007, financial sector debt as a share of GDP declined from 116% to 85% in 2013. As the financial sector deleveraged, credit availability tightened slowing consumer spending and economic growth. It is clear that the financial sector has been the key to economic trends since the early 1990s.

But it would be a grave mistake to see financialization as the cause of chronic stagnation and overall economic instability in the US economy for the past three and a half decades despite chronic and deep financial crises and slow growth. Financialization is only a reflection of the underlying structural weaknesses in the US economy created by chronic overcapacity, slow investment, low and declining real middle class income and hence slow GDP growth. Financial reregulation cannot restore long term self sustained growth in the US economy. Only a long term program of massive public investment for full employment can accomplish this goal.  Is such a program politically feasible given that its obvious effect would be upward pressure on wages and a gradual restoration of the political and economic power of the working class? This pressing issue must be relegated to an entirely new discussion.

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Comment Preferences

  •  There has not been stagnation but (3+ / 0-)
    Recommended by:
    FG, Rich in PA, VClib

    maybe I am just looking at different numbers than you. Capitalism is not dead.

    •  No one said it was "dead" (0+ / 0-)

      But it is stagnant compared to what it was fifty years ago. We seem to be in an irreversible crisis mitigated only by the incredible growth of the financial sector. That financial sector is now deleveraging leaving the system no possible escape other than massive reforms and public stimulus which the rich won't allow. In addition, the more we rely on the financial sector, the more unstable the system becomes! Seems like a crisis to me.

  •  Capitalism has devolved into symbolic (1+ / 0-)
    Recommended by:

    predation directed by humans at their own kind. That's very self-destructive behavior perpetrated by individuals who, apparently, don't know any better.
    They need to be stopped and restrained because they are obviously lacking in self-control.

    by hannah on Mon May 05, 2014 at 01:04:07 PM PDT

  •  Instead of being a crisis of capitalism as such (4+ / 0-)

    what we are seeing in the US and Europe may also be a decline in the hegemonic power that these societies have enjoyed. Emerging economies such as China and Brazil don't seem to be particularly stagnant, you they are more or less functionally capitalist at this point.

    •  China is running up against resource problems (0+ / 0-)

      Problems created by both its huge population and its reckless pollution of its land, air and water.

      That's why the Chinese are buying up so much land outside of China -- they're running out of unpolluted arable land.

      Visit for Minnesota news as it happens.

      by Phoenix Woman on Wed May 07, 2014 at 06:35:29 PM PDT

      [ Parent ]

      •  They say that Declines in Chinese grain production (0+ / 0-)

        will eventually cause global food prices to skyrocket. This is plausible as China's grain imports have been increasing while arable land under production has declined significantly.

  •  Instability hasn't been worse in the last 30 years (3+ / 0-)
    Recommended by:
    thanatokephaloides, Rich in PA, lina

    than it has been in the past. In fact, it has been better. Decreased investment in US is real but that's b/c a lot of it is going to the countries (e.g. China) with less developed economies and lower salaries where profit margin is higher. 2% drop in capacity utilization is not exactly the death of anything. Yes, there will be fewer manufacturing jobs in US but that's nothing new.

    •  The current capacity utilization (2+ / 0-)
      Recommended by:
      thanatokephaloides, FG

      Is less than 1% higher than the 1990-91 low.  So, the 2% below the 1972-2013 average is still odd.  We were losing manufacturing at a very high rate as far back as the late '80s.  The reason the 1972-2013 average is so low is because it includes the period from 2007-2013.  If that period was removed, the difference would be much more striking.

      I'm listening...there's clearly something different happening now from the previous downturn in the '90s.

      Still hoping someone can shed a little more light on this.

      Understanding is limited by perspective. Perspective is limited by experience. America is a great place to live but it limits our ability to understand.

      by CindyV on Mon May 05, 2014 at 01:46:46 PM PDT

      [ Parent ]

      •  We are definitely losing manufacturing. (2+ / 0-)
        Recommended by:
        Rich in PA, lina

        But that's been going on since 70s when it became feasible to do manufacturing in developing countries. I don't see anything beyond that although of course I can be wrong.

      •  One reason that capacity utilization figures seem (0+ / 0-)

        less starkly menacing than they currently do is that over the entire course of the post 1980s long wave slowdown we've seen the destruction of capital stock and thus the reduction of total output capacity. And still, capacity is lower than it once was! Capital stock investment as a share of GDP is a good measure (in real terms it seems to be dropping all the time). I didn't look at pre-1980 figures but I will try to do so.

      •  I think that capacity utilization during the 1960s (0+ / 0-)

        ...hovered around 90% given that it hovered around 88%-89% a year from 1967-69 when a recession hit. It seems logical to assume that from 1962 to 1966, a period of 4-6% average annual GDP growth rates due in part to increased Vietnam War spending during the middle of this business cycle upswing, was probably in excess of 90% average annual utilization capacity. I'm guessing that the entire decade, starting with the end of the 1960-1 recession, was about 90% average capacity utilization. Compare this with the annual averages between 2000 and 2013 of around 75-77%. We are clearly in a relative period of secular stagnation characterized by high overcapacity, unemployment and low fixed investment and GDP growth.

    •  Before 1980, I can't think of a single financial (1+ / 0-)
      Recommended by:

      crisis since the Great Depression. After  1980, there was a major financial crisis on average every few years; the S&L crisis of the late '80s, the 1987 stock market collapse worldwide, the 1998 collapse of LTCM, the 1997 collapse of the "Asian Tiger" economies, the Russian Meltdown, the 1995 Mexican default ("Tequila crisis"), the Japanese real estate bubble burst of the early 1990s and consequent stagnation, the bubble burst, and finally, the 2008 crash on Wall Street. According to one scholarly paper;

      "Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance—far more than in any other period since the advent of federal deposit insurance in the 1930s..."

      Also, average capacity utilization rates before 1980 were close to 90% afterwards they averaged below 80% which is a big drop resulting in chronic overcapacity and reduced fixed investment.

      After 1980, capitalism definitely entered a new phase and it was much worse, chaotic, unstable and detrimental to the interests of the middle class than before 1980.

      •  There were plenty of recessions. And how can you (0+ / 0-)

        make claims about capitalism overall based on the experience of a single country? Yes, we do have overcapacity b/c now we are not the only country in the world that can make stuff. But that was bound to happen at some point. Post-WWII situation was unsustainable.

        •  You're Quite Correct. The Post-WWII Economy was (1+ / 0-)
          Recommended by:

          unsustainable. I do believe that this is one of the core arguments of the "Monopoly Capital" or "Monthly Review School" thesis regarding the crisis of late capitalism. The three decades long post-WWII expansion was a unique situation and not the norm. Baran and Sweezy believed that stagnation was the norm and that it was the long upturns that needed to be explained. The current MR editors explain it this way;

          In “The Crisis of American Capitalism” as well as other articles, Sweezy singled out six factors external to the normal workings of private accumulation that had helped prop up the economy in the early post-Second World War era: (1) the rise of unrivaled U.S. economic hegemony which set the stage for the expansion of world trade and capital movements, leading to the growth of multinational corporations; (2) the enormous consumer liquidity (savings) that had been built up in the United States during the war period; (3) the rebuilding of the European economies that had been shattered by the war; (4) new technologies arising out of the wartime experience, including electronics and jet aircraft; (5) the second wave of automobilization of the U.S. economy in the 1950s with the construction of the interstate highway system; and (6) the acceleration of militarization and imperialism during the Cold War, including two major regional wars in Asia.
          In addition, both I and the MR school adherents agree that capitalism is a global system and that the system's trends are increasingly global as well. When you made the somewhat oblique reference to trade ("we are not the only country in the world that can make stuff.") you must also realize that we are talking about trade not between the US and China but between global US corporations that manufacture in China and the US. Globalization explains much of what is occurring within late capitalism. The world economy is no longer based on nation-state interaction but upon global corporations and their investment patterns. There is now much global overcapacity in addition to that which plagues the US economy.
          •  Completely agree. I'm not sure how much (0+ / 0-)

            overcapacity is an issue though. It usually takes care of itself in the long run. Global warming and environmental degradation are a more serious constraint.

            •  I can't find Capacity Utilization rates prior to (1+ / 0-)
              Recommended by:

              Capacity utilization fluctuates much but after 1980, there seems to be a secular downward trend even during upturns. From January 1967, when they were 89.4%, they seem to have averaged above 85% during the late 1960s and 1970s falling to around 80% in the 1980s and '90s. By the 2000s, annual averages were significantly below 80%.

  •  Capitalism is a frontier economy (1+ / 0-)
    Recommended by:
    Rich in PA

    I mean that in a broad sense, it can be land, resources or technology. The US economy was driven by all three historically. If you have new opportunities by virtue of revolutionary paradigms then by all means lets use greed to motivate development. As societies, land, resources and technology become more stable, we would have to actually plan an economy that is fair, stable and growing. In the long term, not only are we all dead, but so is Capitalism if by some lucky chance h. Sapiens survives gross planetary habitat destruction.

    All in all, a really good diary. I especially like the observation that recovery is monotonically getting longer and longer, indicating that the next one may be the last recovery.

    The good news is that we are going to be globally a smaller player. China will pass us this year as the largest economy. They are already first in so many sectors, except military, that I think they are already number one. We don't have an advantage in resources, or technology anymore. We launch satellites using Russian made rocket engines, and have no replacement for that. Given that, and our relatively small population we will be a middle level player. Probably a good thing considering that we have a non-functioning government and a nasty recent history of global behaviors.

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