United States:
The Rosy Economic Recovery:
Roses for a Few, Thorns for the Rest

Feb 17, 1997

The economic recovery of the richest and most powerful country on earth is in full bloom. Federal Reserve Board Chairman Alan Greenspan, the bankers’ banker, put it most authoritatively in his January 21 testimony to the Congressional Budget Committee: "The current cyclical upswing is now approaching six years duration, and the economy has retained considerable vigor, with few signs of the imbalances and inflationary tensions that have disrupted the past expansions." To prove this, Greenspan ticks off the numbers: during the past year the GDP was humming along at almost 3% per year, inflation was low, unemployment was low.

Yet even Greenspan admits that there is growing anxiety in the working population. Said Greenspan, "Surveys of workers have highlighted this extraordinary state of affairs. In 1991, at the bottom of the recession, a survey of workers at large firms indicated that 25% feared being laid off. In 1996, despite the sharply lower unemployment rate and the demonstrably tighter labor market, the same survey organization found that 46% were fearful of a job layoff."

What kind of an economic recovery is this, when, as Greenspan says, there is more of a sense of insecurity after six years of recovery, than... "at the bottom of the recession"?

How Strong a Recovery?

Greenspan proclaims that the economic recovery "retains considerable vigor." Clinton concurs. In his recent "State of the Union Address" Clinton says, "We have much to be thankful for. With four years of growth, we have won back the basic strength of the economy."

The international economic watchdog, the Organization of Economic Development (OECD), makes a similar assessment in its most recent annual report (November 1996). The report begins by saying: "The United States has enjoyed another year of good economic growth." A few pages further the OECD declares that the U.S. economy "is operating near trend capacity in both levels and growth rates."

Words are one thing. But even according to a table in the OECD’s own report, the GDP growth rate was only 1.9% per year from 1990 to 1995. Contrast this to earlier periods. From 1960 to 1973, the GDP had grown, on average, about 4.3% per year, that is, more than twice as fast as in this latest recovery. From 1973 to 1979, GDP grew 3.1% annually. From 1979 to 1990, it grew 2.9%, which is considerably slower, but still one full percentage point above the current rate.

Thus, the economy’s growth rate has slowed in each succeeding cycle, with the first half of the 1990s much more anemic than previous ones. Of course, it is always possible for the GDP growth rate to pick up somewhat in the latter part of this decade. (In fact, the government’s very first preliminary estimate is that in 1996 GDP grew at about 2.5%.) But according to most economic forecasts, this pick-up in growth is very fragile. If anything, there is a much bigger possibility of a new recession before the decade ends.

Certainly, the capitalists’ own policies recognize this trend toward stagnation. Their lack of confidence in economic growth is reflected in the slowing down of their investment in new capital stock. Between 1965 and 1969, at the height of the Viet Nam War, net non-residential private investment was about 4% of gross domestic product. By the latter years of the 1980s, the proportion dropped to 2.5%. From 1990 to 1993, it fell still again to only just over one percent.

This decline in investment seems in contradiction to all the claims that rapid scientific and technological advances, especially in computers and microchips, have opened up new fields for investment in the knowledge-information- communication industries. Computers use vastly less capital than the great innovations of the past—steam engines, railroads, automobiles. And, more often than not, computers are installed to replace old, worn-out equipment, and this investment is financed much more through depreciation. This slowdown in investment, in turn, contributes to the general slowdown in economic growth since the capital goods industries themselves constitute a major part of the economy.

The creation of new jobs has also been slowing down. Greenspan and Clinton credit the recovery for creating new jobs, 12 million since 1991. And in its latest report, the OECD described employment growth as "ample."

The employment numbers might appear impressive. But compared to the size of the workforce and the rate of growth in past periods, they are not. Just like the declines in the rate of GDP growth and in the proportion of net investment to GDP, the growth rate in employment has slowed considerably in the 1990s. From 1967 to 1979, employment grew at a rate of 2.6%. Job creation slowed down to 1.9% from 1979 to 1989, and further down to 1.3% between 1989 and 1995.

This slowdown is compounded by an ongoing change in the composition of the workforce, with a growing proportion of contingency workers, that is, part-timers, temporary workers and independent contractors taking the place of permanent, full-time employees. Contingency workers used to be only a relatively small part of the workforce. But their numbers have grown so rapidly over the last few years, that the Bureau of Labor Statistics (BLS) carried out its first complete survey of contingent workers only in February 1995. In October 1996 the BLS issued a new, but still very incomplete survey of contingent workers rehired on a "rental" or "just- in-time" basis by the companies that had originally laid them off.

The slowdown in the employment of human capital corresponds to the slowdown of fixed capital, and contributes further to lower GDP growth.

This weak recovery of the U.S. economy appears strong only in comparison to the rest of the world. The U.S.’s main competitors in Western Europe and Japan are mired in either recession or stagnation, with their unemployment rates rising. Even South Korea, the largest of the Asian Tigers, another of the so-called economic miracles, is mired in recession. The U.S. economy may reign supreme, but the greater weakness of the rest of the world economy impacts on U.S. economic growth, dampening demand for U.S. exports, which have grown to become an increasingly important part of U.S. production.

The Recovery in Profits

What have recovered quite dramatically in the 1990s are corporate profits, which are running at record highs. In 1996, profits reached an estimated 635 billion dollars before taxes and 402 billion dollars after taxes. Most importantly, the rate of profit now exceeds its 1959 levels, when the economy was in the middle of the post-war boom. In 1959, the rate of profit before taxes was 10.4%. With the advent of the 1970s, it dropped to 7.6% and remained in that range through the mid-1980s. Since then it has climbed steadily back up, reaching 10.8% last year. This improvement in after-tax profits looks even better, having gone from 5.6% in 1959 to 7.0% in 1995. This is a truly remarkable achievement, especially given the relatively low rate of growth of the economy, in capital investment and in the labor force in this business cycle.

These record profits are what lead Greenspan, Clinton and the OECD to declare the recovery strong, or at least near its "potential."

These record profits are the highest among industrialized countries. As the OECD explains, "It is true that U.S. firms do invest relatively little in fixed capital in relation to their production in comparison with other OECD countries. However, the productivity of such capital investments appears to be higher than at least those made by Japanese and German firms, by some estimates 50% higher, with the result that substantially greater new financial wealth per capita is created nonetheless (McKinsey Global Institute, 1996). The higher capital productivity has allowed U.S. firms to maintain high levels of profitability: real internal rates of return to corporate sector capital have averaged 9.1% over the period of 1974-93, well above corresponding German and Japanese rates (7.4 and 7.1%, respectively)(McKinsey Global Institute, 1996). This is a strong indication of efficient capital allocation."

In other words, U.S. corporations have achieved their higher rates of return by squeezing higher productivity out of labor, as even the OECD noted. Productivity among blue collar workers has grown at a steady rate of 3% a year. The capitalist class has steadily increased the brutal exploitation of the working class.

U.S. Families: Working More for Less

No, the prosperity of the 1990s has hardly been shared by all. On the contrary, over the last six years, family incomes have both drifted lower and become more polarized.

According to the Economic Policy Institute’s State of Working America 1996-97, what is called the average family has done poorly in the 1990s. For the first time in the post-war period, median family income fell four years in a row, declining each year from 1989 to 1993. That is, it continued to fall in the first years of the recovery, which is unique in the post-war period. Finally, when median family income did turn up, the increases were small, and did not make up all of the lost ground. As of the end of 1995, median incomes had not yet returned to 1989 levels.

The years preceding 1989 were hardly that great either. In general the 1980s were years of stagnation, with median family incomes rising only a total of four percent in ten years. Using total family income hides the reality. Wages of workers fell 10.1% from 1979 to 1989 and another 7.2% between 1989 and 1995. In the 1990s, this decline spread from the working class to a section of the middle class, some managers and professionals. The erosion of employer-provided health insurance and pension coverage added to this deterioration, as well as the increasingly regressive tax structure and cuts in government social spending. The only reason that family income didn’t fall was a large increase in hours worked by the members of the family, especially by women who continued to pour into the workforce. Those who were already in the workforce were working longer hours. Families have been working much more for less, just to stay even. The fact that family income itself turned down in 1989 reveals the real worsening of the situation.

Not surprisingly, with wages dropping, the gap between families of different social strata has widened. In the 1980s, upper-income groups, particularly the top one percent experienced income growth of a spectacular 87.5%, while the lower fifth fell by 2.4%. In the 1990s, the growth of the richest five percent of families grew another 7.1%, while the bottom fifth’s losses accelerated, going down another 8.9%.

These figures show how the spectacular increase in bourgeois family income was paid for by the steep fall in the income of working class and poor families.

Labor "Flexibility"

Wages and living standards have been forced down through layoffs and job eliminations, which have become worse in the last years. A recent report by the Labor Department showed a high rate of layoffs from 1993 through 1995. And, according to the New York Times (December 29, 1996), "the number of people laid off in 1995, the most recent year for which Government data are available, rose to nearly the peak reached in 1992, right after the last recession. Through November 1996, even after more than five years of economic recovery, the number of layoffs announced by companies had increased 14% from a year earlier." The 1990s are shaping up to have higher layoffs than the preceding decade. From 1993-95, 10.1 million jobs were eliminated, versus 6.7 million in 1987-89, a comparable period of the earlier "recovery."

On the one hand, the increasing pace of downsizing and layoffs produces a more "flexible," that is, desperate workforce. Jobs that are eliminated are generally replaced by jobs that pay less and are less stable.

On the other hand, there is a growing army of the unemployed, which is masked by a seemingly low official rate of unemployment. As MIT economist Lester Thurow points out in the article, "The Crusade That’s Killing Prosperity" (American Prospect, March-April 1996), "The great untold story of the American economy in the 1990s is the disguised high rate of unemployment and its direct impact on stagnating living standards."

According to Thurow, if one combines the 7.5 to 8 million who are officially not working with the 5 to 6 million who are not working but who do not meet any of the tests for being active in the workforce and are therefore not considered unemployed, and the 4.5 million part-time workers who would like full-time work, then there are 17 to 18.5 million looking for more work. This brings the real unemployment rate to almost 14%.

Besides that, Thurow says, there is now an enormous contingent workforce of underemployed people. There are 8.1 million workers in temporary jobs, 2 million who work "on call", and 8.3 million self-employed "independent contractors" (many of whom are laid off workers and professionals who can’t find a regular job and so have no choice but to try to scrape by on bits and pieces of irregular work). Most of these 18.4 million people are also looking for more work and better jobs. Together these contingent workers account for another 14% of the workforce. These contingent workers have no bargaining power with employers. Like the unemployed, they generate downward pressure on wages.

In addition, Thurow says, there are 5.8 million missing males (another 4% of the workforce) 25 to 60 years of age. They exist in census statistics but not in labor statistics. They have no obvious means of economic support. They are the right age to be in the workforce, were once in the workforce, are not in school and are not old enough to have retired. They have either been dropped from, or have dropped out of the normal working economy. Some are known as homeless; others have disappeared into the underground economy.

Says Thurow, put these groups together and it comes to about one-third of the workforce that is potentially looking for more work than they now have, a virtual sea of unemployed and underemployed. He adds, "two decades of surplus labor have broken the linkage between productivity gains and wage increases... The best example is the computer industry—an industry that pays very low wages for its production workers. Productivity is growing very rapidly, but all of that productivity gain shows up in lower prices or higher profits for chip-makers or software firms. None shows up as higher wages as used to occur in industries such as automobiles or steel."

These millions of job-hunters explain why regularly there are stories of thousands of people lining up to apply for a few jobs at a hotel or shopping center that may pay slightly more than the minimum wage. It is why there are so many instances in which companies threaten 20 to 40% wage cuts and workers accept them, when before they would have walked.

Of course there is a growth of anxiety in the middle of the recovery, but it is not so "extraordinary" as Greenspan would make it seem.

Speculation, the Stock Market And The Economy of "Self-Reliance"

Growing exploitation has led to record profits, which in turn are accumulating. Given the weakness of the economy, not only in the U.S., but worldwide, most of these profits are not being recycled into new production. Instead they continue to flow into a financial sector that for the past several decades has grown to dwarf the real economy. It continues to balloon.

Just like during the Roaring ’20s, prices on the stock market have skyrocketed. This time around, the run-up of prices is incomparably greater, tripling and quadrupling since the bull market got going in 1982. The extent of this run-up is illustrated by the growth of just one kind of financial instrument, mutual funds, whose assets rose from 2.16 trillion at the end of 1994 to 3.3 trillion dollars at the end of October 1996, equaling half the U.S. GDP.

According to Greenspan, this speculative run is beneficial for most families. "In the aggregate, households experienced an enormous further accretion of net worth as the stock market continued to climb at a breathtaking rate..."

"In the aggregate," yes. But Greenspan fails to mention that 75% of all stock is owned by the richest 10% of the population, that is, the bourgeoisie. It is the bourgeoisie and the upper levels of the petty bourgeoisie who have benefitted from the run-up in prices. The rest of the families, who own only a few shares of something, do so mainly because their pension benefits were eliminated: they are left with 401(k) plans that leave them little choice but to buy stock automatically, every month.

Speaking "in the aggregate," Greenspan may say: "Households appear... to have set aside a greater share of their income for financial investment. Perhaps Americans are finally becoming conscious of the need to accumulate additional assets to ensure not only that they can handle temporary interruptions in employment but also that they will have the wherewithal to enjoy a lengthy retirement down the road."

But, speaking in the concrete, individual human cases, how many people will be able to enjoy that retirement down the road? That’s questionable. The big institutional investors are able to shift more of the risk onto the others. At the first whiff of a serious downturn, the big institutions flee with their bundles intact, further depressing the market. It is every man for himself. And this will leave the small investors, with their continuing benign monthly contributions into 401(k) plans, swamped by the stampede to unload.

In fact, Greenspan himself has been warning of the inherent dangers of the run-up in stock prices, even while he touts the economic rewards of investing in the stock market. Greenspan issued his first warning at a business dinner at the end of November that was leaked to the press. His second warning came during his Congressional testimony in January. The third warning came in the transcripts of the Federal Reserve’s Board of Governors deliberations that were released in February. But these warnings have so far failed to moderate this increasingly dangerous panic buying. Where else can the speculators put their money?

So, this is capitalist society as it approaches the millennium: general economic stagnation, a general decline in living standards for the working class, all in order to increase profits to spectacular heights, which leads only to speculation, that is, the vast casino economy. Little is produced by all these profits but extraordinary wealth for a few, which only generates more gambling, and finally ruin.