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 2000sThe 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.