The US economy – a crisis of capitalism?
The outlook for the US economy is deeply troubling. Amid a well publicised slowdown in the rate of recovery from a recession that was deeper than originally thought, a dual crisis is underway – one of jobs and one of investment. With political paralysis looming, no easy resolution is in sight.
This matters to people in the UK for two reasons – first, the US is still the major driver of the world economy and second the twin crisis of jobs and investment faced by the US may be a sign of things to come on this side of the pond.
The jobs crisis is the most immediate problem facing the country. As Robert Reich has noted, the economy is not generating enough jobs to keep up with population growth – let alone make inroads into reducing the pool of 15 million Americans out of work.
12,000 new jobs in July — when 125,000 are needed monthly just to keep up with population growth, when more than 15 million Americans are out of work, and when more than a half million more state and local jobs are on the chopping block.
As Brad DeLong has shown, this is increasingly looking like a jobless recovery.
(Note in particular the brief bounce in employment – and try not to get carried away with the similar bounce the UK has experienced)
44.9% of the unemployed have now been out of work for over 6 months, up from 34.2% one year ago.
The bigger long term issue though is the fall in US investment. As John Ross has convincingly argued:
The driving force of the depth of the US recession is also clear. It was due to the decline in US fixed investment. As shown in Figure 2, measured in constant 2005 prices, US GDP in the 2nd quarter of 2010 was $147 billion below its 4th quarter 2007 level. However several components of US GDP are already above their 4th quarter 2007 levels – inventories are up $63 billion, government consumption up $112 billion, and net trade up $135 billion. Consumer expenditure was below its 4th quarter 2007 level but only by $80 billion. But US private fixed investment was down $412 billion – dwarfing all other contributions to the recession.
This fall in investment is not only the driver of the current recession; it is also likely to affect the long run potential of the US economy to grow.
As John has pointed out previously the US has lost its position as the world’s largest supplier of capital.
Michael Pettis has argued that the US risks being flooded with excess capital from abroad (particularly China):
It [the USA] is far more likely to be swamped by a tsunami of foreign capital. This tsunami will bring with it a corresponding surge in the US trade deficit and, with it, a rise in US unemployment. It will also force the US Treasury to increase the fiscal deficit as more of the jobs created by its spending leak abroad.
Therein lies the problem. A reduction in net foreign capital inflows means a welcome decline in the US trade deficit, but the US is likely to see just the opposite. Foreign capital will push desperately into US markets and as an automatic consequence the US trade deficit will surge. So the problem isn’t too little capital inflow or a sudden boycott of USG bonds. On the contrary, the US will see too much capital inflow.
The US (like the UK) already had a low level of investment as a proportion of GDP before the financial crisis. The chart below shows fixed investment as a percentage of GDP for the G7 countries since 1980. Investment is much higher in emerging economies.
Notice how the US and UK are the laggards.
How then does one square the idea of a rapidly growing, dynamic US economy with the notion of an economy that is plagued by serial underinvestment?
There is no doubt that US GDP growth compares very favourably to that of, say, Europe. However when one stops looking at headline numbers and starts to examine per capita data, a different picture emerges.
According to the US Bureau of Labor Statistics (page 14 of this pdf) US GDP per capita grew by 1.2% annually between 2000 and 2008 -the same rate as Germany and Japan and lower than much of Europe, let alone Asia. Growth in US GDP per hour worked (page 17) in the period 1979 to 2008 was lower than that of France, Germany, Spain and the UK.
The headline growth of the US may look strong – but much of this is the product of a growing labour force, working longer hours for lower real wages.
The consequences of all of this have been spelt out by Ed Luce in the FT.
The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.
The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.
I’m hardly a revolutionary socialist (I spent most of the last 6 years working in finance for start) but when the world’s major capitalist economy is facing near double-digit unemployment, much of it long term, when median incomes are stagnating, when investment has fallen off a cliff and when government appears powerless to stop this – shouldn’t we call it a crisis of capitalism?