No Time for Misplaced Optimism

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Is the recession coming to an end? Chris Harman is sceptical.

Soon after Greg Dyke took over as head of the BBC he decreed that its coverage had to be much more friendly towards big business. One consequence of this is a second god slot in the 'Today' programme--only the god this time is not called Jehovah or Allah but money. The slot, for those of you who don't get up so early, runs from 6.15am to 6.25am, when it gives way to the lesser god of sport. One message comes blaring through, day after day. There is no need to worry about the economic crisis. It never hit Britain, and if it did it's already over, not just here but in the US as well. I don't know whether the business people who are meant to listen to the 'Today' programme believe this. If they do, not for the first time in history, their religion is blinding people to what is really happening.

Claims that the US is already recovering from economic crisis rest on figures showing that unemployment was not rising at the end of last year as fast as in the previous two months, and also that there has been a revival of consumer 'confidence'. Until about mid-January, the rise in the stock market since October by about 20 percent was thrown in as another reason for 'optimism'. The British 'optimists' point to a record Xmas for high street shops. They also claim that the growth of 'service' industries is compensating for a lot of the loss of jobs in manufacturing.

They are all ignoring a central point. The US and British economies are still being kept going by consumer spending, and this is dependent upon very high levels of borrowing. In both countries household debt now exceeds annual personal disposable income. Indeed, this is even true in Germany, where the recession has been deepening rapidly, with unemployment now well above the 4 million figure. Central banks have cut short term interest rates repeatedly to encourage such consumption in an attempt to counter the recession. Bush's tax cuts and record arms expenditure will also be increasing the market for important ranges of goods.

What none of this does, however, is touch the central economic malaise--the sudden realisation that profit rates are not as high as they were claimed to be two or three years ago. What is now coming to light is that much of big business was systematically exaggerating its profit levels at that time. Enron was only the most extreme example of a much more general phenomenon encouraged by the stock exchange boom. Firms massaged their profit figures upwards so as to discourage hostile takeover bids. And company directors with share options made personal fortunes by doing so. Restructuring industry and putting increased pressure on employees to work harder and longer had produced some increase in profits. But what matters for capitalism is not just the level of profit but the rate of profit. This never rose sufficiently to do more than postpone a new phase of intense economic crisis.

One indirect measure of real profit rates in the US, the 'share of non-financial corporate profits in non-financial corporate GDP', rose above the figure for the mid-1980s by 1997. But it was still only at the level that precipitated recessions in the early 1970s, the mid-1970s and the early 1980s. And from 1997 the figure began rapidly to fall. Yet precisely at this time most mainstream economists talked of a 'new paradigm' that had done away with recessions forever.

In recent months, one big company after another has been reporting lower profit levels. But those who make money gambling on the stock markets have still been trying to pretend everything will be rosy in a few weeks. 'Tech stocks are still priced for five-year earnings growth of 34 percent--an outcome never achieved in history,' warns Stephen Roach, chief economist at Morgan Stanley.

In quite a few cases the decline in profit is accompanied by an escalation of company debt. This is creating the conditions for more sudden, unexpected and damaging bankruptcies such as that of Enron (or, for that matter, the Argentinian state). The Paris bank BNP Paribus has suggested that a score of major companies could be vulnerable in the next two years. Its list includes ICU, BA, BT, Hanson, Olivetti and Powergen. It points out that there is no way of telling in advance which will stay in business and which will collapse. Any such collapse will leave scores of other companies suddenly finding they have lost funds they hoped to use to deal with their own debts, with effects like that of a ricocheting bullet suddenly likely to strike down unsuspecting victims. Such a scenario makes it very unlikely that consumption will be able to lift economies clear of the recession.

Can states do anything to stabilise the situation? The big states will try. For all their talk of 'free markets' and 'neoliberalism', few will allow their biggest capitalists to go bust. They can and have brought down interest rates, they have increased some sorts of government spending, and they can intervene to stop some business collapses. A combination of such measures has been enough over the last decade to stop Japan sliding from stagnation into slump, although it has been interspersed with shallow recessions.

What Japan did, the giant US state could also hypothetically do. But that would require much greater levels of spending than the Bush administration currently plans. And the price of buying short term relief would be the accentuation of long term pressures. Not only would the indebtedness of the US economy to the rest of the world grow, but the US state would also run up enormous debts. At some point these would begin to bite into profit rates, further lowering them. In fact, the Japanese example should send shivers down US capitalist spines. After ten years of palliative measures, the fundamental problems of the Japanese economy are nowhere near a solution. There is a growing panic over the level of indebtedness of both the state and major firms as I write.

The Financial Times correspondent Richard Katz tells of a new joke going round Tokyo: 'What is the difference between Japan and Argentina? Two years.' He points out that this exaggerates what is likely to happen. The Japanese state has much greater resources to throw at its problems than the Argentinian state. Japanese capitalists are (unlike their US counterparts) net lenders to the rest of the world, not borrowers. But the very fact that there can be such talk in the world's second biggest economy shows how serious the long term difficulties are. The world crisis is not over yet, and Argentina will not be the last important country to see it give rise to sudden massive social confrontation.