United States:
The Hard Times Recovery

Apr 28, 1994

The National Bureau of Economic Research, the official body in charge of such things, declared that the economy entered some kind of recovery in March 1991. But from March 1991 to the second half of 1993, even according to the GDP (Gross Domestic Product), the best that could be said was that the economy had stopped contracting. Except for an upward blip in the last part of 1992, the GDP stagnated. Officials called the recovery "sluggish".

GDP began to pick up in the latter half of 1993. In the second quarter, the GDP had grown at a paltry 1.4 per cent rate. It doubled in the third quarter to a still anemic 2.8 per cent. Then it leaped to 7 per cent growth in the fourth quarter. Of course, for 1993 as a whole, the economy had grown only by a little more than 3 per cent. This means that this recovery has had the lowest growth rate of the 8 recoveries which have occurred since World War II.

Feeding Frenzy in the Financial Sector

Only one sector grew vigorously during this last period: finance.

After the stock market crash of 1987, some speculative activities were curtailed, including the issuing of junk bonds, corporate takeovers, the ever rising real estate prices. And when the recession began in 1990, stocks and bonds dropped. But by the middle of 1990, stocks and bonds had already begun a rise that would rank among the greatest bull markets in history. In only 3 years, the Standard and Poors index of 500 stocks increased their value by 40 per cent. The recession and the subsequent "sluggish" recovery caused the demand for credit to fall. Contrary to all the talk at the time blaming a fictitious "credit crunch" for the recession, the supply of credit far outstripped the demand for loans. The trillions of dollars in the hands of the banks, insurance companies and finance arms of the major industrial companies were certainly not being invested in production and construction, which slowed to a crawl. The money had to go somewhere. So it went back into speculation.

As the speculative surge developed, the big investors and large companies took advantage of the low interest rates to borrow money cheaply in order to make still larger speculative bets, and a new bubble of raw speculation was born. This time it took the form of an explosion in ever more complex financial instruments called hedge funds and derivatives. These instruments are not under any government regulation, nor even kept track of centrally. Sometimes hedge funds are advertised as fool proof, with supposed built-in computer driven protections. Other derivatives are marketed as "heaven and hell bonds", "harmful warrants", "death-backed bonds". The point of all this was that it allowed the most wealthy to put little money down in the hopes of multiplying their profits in the future. Of course, it also multiplied the risks.

From the very beginning, the banks were involved. Six of the largest money center banks, including Citibank, Bankers Trust and Chemical became the biggest dealers in derivatives. The banks earned big fees by lending the money. And the banks themselves became large players in derivatives—therefore taking that added risk to the very heart of the financial system.

Felix Rohatyn, a leading Wall Street investment banker and an adviser in both Democratic and Republican Party circles, described the stupendous risks: "There’s a whole different world in off-balance sheet transactions that are potentially dangerous if people don’t know what they’re doing and a chain of financial commitments breaks down. These are interlocking commitments of trillions of dollars. As long as they remain solid and stable, everything is fine. But what do you do if something goes wrong?"

In the beginning of 1994, speculators began to take losses. A gradual, but still very small rise of interest rates from their unusually low levels was sufficient to cause some destabilization in the stock and bond markets. This showed how shaky and volatile this speculative bubble had become. It was said in retrospect that there was no way that interest rates could stay at record lows forever. But several large companies, including Cargill, Proctor & Gamble and Kidder Peabody, bet against interest rates rising, and suffered big trading losses. Some large hedge funds went bad, proving not to be as fool proof as advertised. One of the biggest international investors, George Soros, the head of New York’s Republic Bank, made the cover of Business Week after he lost 600 million dollars in one deal, on which it was said he bet wrong on the Japanese yen. Bankers Trust, Chemical and Citibank later admitted big declines in their trading revenues in the first three months of 1994.

It wasn’t just the large investors who bellied up to the "casino economy" starting in 1990. So did the small investors. As interest rates fell to 2 per cent on bank deposits, people who were accustomed to getting 8 per cent on money market or bank accounts had little alternative but to go into riskier investments, in order at least to maintain their former earnings level. The money poured into mutual funds for stocks and bonds. In 3 years, these funds took in over 650 billion dollars, bringing the total in mutual funds to almost 2 trillion dollars. It was said that the money from mutual funds propelled the bull market in its later stages. By the end of 1993, there were twice as many mutual funds as stocks listed on the New York Exchange; one out of every four households invested in mutual funds, and nearly half of them earned less than $50,000.

Mutual funds are advertised as safer because they spread the risk of an investment around in a basket of corporate holdings. But they too can be risky. In order for all these funds to compete for business, they have to show high yields. As a result the mutual fund managers are more prone to sell a stock when it begins to drop and buy those on the rise—lest they miss the latest trend and investors flee. Laszlo Birinyi, a stock analyst describes what this means (The New York Times, September 7, 1993): "Funds jump in and funds jump out of the market. This is creating a major degree of stock volatility because all these funds are doing it together. Funds face real pressure on daily performance and this leads to a great deal of short-termism." Add to this the prospect of panicky shareholders who can overwhelm mutual fund redemption orders, forcing fund managers to sell shares to raise cash, and we can seen how easily mutual funds can fuel a market panic, with millions of small investors running the risk of losing their principal.

The stock exchanges hit their high on January 31, 1994. Since then, the markets have dropped to a somewhat lower level, dubbed a market "correction". So far, the small investor has stuck it out in mutual funds, most likely for lack of any income producing alternative. Interest rates paid by banks on deposits have not risen. Banks have taken advantage of the rise in interest rates to increase the spread between what they charge for loans and what they pay out for deposits.

As a consequence of the financial boom, the plentiful money thrown off by this activity, not just to the wealthy, but also to sections of the middle classes, could not help but provide some stimulus to sales and thus to the real economy. But as the recovery set in, the financial system became more fragile and potentially volatile.

How Much of a Recovery for Production and Construction?

As for the "real" economy, after the recession officially ended in March 1991, production and construction basically stagnated until early last year, when production finally reached its pre-recession peak. At that point, according to the U.S. Commerce Department’s Survey of Current Business (February 1994), the acceleration in the growth of GDP "was more than accounted for by a very large step-up in the production of goods and a smaller—but still sizable—step-up in the production of structures. Half of the acceleration in goods production was accounted for by an upturn in motor vehicle production..."

Ordinarily, recoveries are led by housing and autos. Besides taking up a major part of the GDP, their growth stimulates the growth of other industries. With more housing being built, so is more furniture and appliances. More autos means the production of more steel, tires, electronics, etc. But the weakness of this recovery is reflected in the relative limits in the increases in these two sectors, which means that they are not a particularly strong locomotive able to pull up the rest of the economy.

Auto and truck sales did rise sharply last year in the fourth quarter. Sales did continue to increase this spring. Moreover, the U.S. auto industry had captured an additional roughly 5 per cent market share from imports, especially their Japanese competitors.

But this boom has to be seen in its rightful context. Production is only reaching levels comparable to that of 15 and 20 years ago, that is, when the population was much smaller. A large part of this increase is due to pent up demand after 5 years of low sales. As a result, the average age of a car on the road is over 8 years, that is, the oldest since 1950. And this demand could soon exhaust itself.

That is why the auto companies themselves have approached the increase with real caution. Says, Wynn Van Bussman, a senior economist at Chrysler (The New York Times, April 24, 1994), "We have drawn a line at how far we will go in hiring and in adding factory capacity. If we can’t satisfy demand—well there are plenty of auto makers around the world who can... We don’t want to go through the costly experience of cutting back again when demand weakens." Ford and Chrysler, which both cut their workforces in half in the 1980s, at most plan on hiring a few thousand workers each. GM is not even doing that. It is in the middle of an enormous program to close plants and lay workers off. At most, it has put some of these plans on hold for awhile. The auto companies are squeezing more production out of existing facilities by increasing production rates in existing plants through speed-up, increasing overtime and by adding third shifts.

In fact, the auto companies are following the typical strategy of monopolies: restrict supply, raise prices, reap super profits. Thus the inevitable sticker shock showrooms. Already in the last 5 years, during a period of relatively slack demand, the auto companies average auto price had risen by 70 per cent. There are reports that many models of cars and trucks are today selling above sticker prices.

In the housing sector, new housing starts have also increased sharply from the lows of the recession. During the recession, housing dipped well below one million units per year. By early 1994, it was up to about 1.4 million units. But what one sees in these numbers is that the lows of the recession were close to an all time record low, barely 800,000 units per year. And historically the high is not particularly high. In the early 1970s, for example, housing starts regularly hit well over 2 million per year. This was with a lower population. Housing starts have not at all kept up with the growth of the population.

But besides this, economists are already predicting that housing might have already peaked because of the 1 per cent increase in interest rates on mortgages. If that is so, it shows how weak the recovery is. In 1993, interest rates dipped to their lowest point since the early 1960s, down to 6.7 per cent on fixed rate 30 year mortgages. Even after the increase, mortgage rates are still very low compared to the rates during the 1970s and 80s. Apparently economists judge the market to be so weak that even a small rise is expected to at least partially choke off demand.

While domestic consumption has driven whatever recovery there is, there have also been some increases in two other important sectors, exports and capital spending.

Despite all the talk about imports crippling U.S. industry in the last 20 years, exports have increased their share of U.S. output to almost 11 per cent. Since 1985, the U.S. has been the largest exporter in the world, dominating in many kinds of exports, most especially capital goods and services. In 1992, for example, the U.S. exported more than 100 billion dollars more in capital goods than did Japan. At the end of 1993, exports zoomed up at an annual rate of 30 per cent, the biggest gain in 14 years. However prospects for further big increases have been dampened by the strong, intractable recessions in Europe and Japan.

Capital spending also increased by 15 per cent last year. And it is expected to increase again this year. Usually this would mean that manufacturers were planning on big production increases, as they add capacity. However, capital spending for industrial capital goods, that is, industrial equipment and machinery for services, mining, oil fields, agriculture and construction never really climbed out of the level to which it had fallen during the recession. Since the recession began, this kind of capital spending has remained relatively flat. On the other hand, there has been a big increase in capital spending for computers and communications equipment. Since 1991, that sector of capital spending has actually outstripped industrial capital goods.

So most capital spending is not going into adding more capacity. Like in auto, there are not a lot of new factories being built or even expanded, and the corporate board rooms are not preparing for big economic growth. Instead, there is just more automation. And this automation is now directed at the offices and services, resulting in a big increase in lay offs in those fields which had been providing earlier job growth. This structural change in the unemployment pattern began in the 1990-91 recession and it is actually increasing in the recovery. It is affecting white collar workers, employees and people in middle management positions, who formerly thought their jobs were protected.

Besides that, some important sectors of the economy are in a long-term depression. The speculative boom in commercial construction in the 1980s has left a high vacancy rate in office buildings and shopping centers across the country in the 1990s. This inventory will most likely not be worked off until the end of the century. And the aerospace industry is still in the midst of a massive downsizing, with a sharp drop in orders from both the Pentagon and the commercial airlines. This contraction began in 1990, and it still has another 40 per cent to go in a process that—according to a study last year by the UCLA School of Management—is supposed to take until at least 1999.

Profits, Productivity and Jobs

According to the Economic Report of the President, profits rose by about 10 per cent last year. And profits rose even faster for the largest companies. According to Fortune magazine’s annual report on the 500 largest industrial corporations, the Fortune 500, the profits of these big companies rose 18.3% in 1992, and another 15% in 1993. Return to investors increased from 9% to 11%. It all made for one of the great comebacks of the 20th century, they said.

In the case of the largest companies, these profits did not come as a result of increased sales. According to Fortune, the largest companies’ sales increased by 4% in 1992. In 1993, the year of the recovery, their sales only increased by .2%! Another business magazine’s annual survey, the Forbes 500, shows a similar trend. Profits increased 4 times as fast as sales last year.

It is, of course, no surprise where these profits came from: worker productivity. In the last quarter of 1993, manufacturing productivity actually increased by 7 per cent. And overall in the economy, productivity increased by 3 per cent last year. This has allowed the corporations to lay off, even while they were increasing production. Last year, for example, while production increased by 5 per cent, employment in production was cut by 1 per cent.

In fact, over the last years, the productivity increases in the U.S., especially among manufacturing workers, has far outstripped that in other countries. The Economist’s January 15 cover story, "Ready to Take on the World", estimates that U.S. manufacturing productivity is 22% higher than that of Japanese workers, and 14% higher than West German. However, what is most striking is that while unit labor costs measured in constant dollars have increased in manufacturing in Germany and Japan, in the U.S. they have steadily decreased since 1987—by almost 20 per cent.

Sharply increased productivity has allowed almost all of the largest U.S. corporations to go on an unprecedented series of layoffs. In the last 3 years, the Forbes 500 companies had laid off 1.8 million workers, or 10 per cent of their work force. During the same period, 27 of those companies announced layoffs of at least 10,000 each. Topping the list is IBM, which lopped off 85,000 jobs, followed closely by AT&T, which shed 83,500. Others with heavy axes include GM, cutting 74,000 jobs; Sears, with 50,000, GTE’s 32,500 and Boeing’s 30,000. Thus, these layoffs have hit all sectors of the economy: manufacturing, high tech, retail and services. They have come in firms that are losing money and also those turning record profits. These lay offs come under different names: restructuring, reorganizing, rationalizing, re-engineering. But they all amount to the same thing: mass firings.

There is every indication that almost none of these jobs are coming back. And this has led to a growth of longterm unemployment. All indicators show this. The duration in longterm unemployment grew. Those expecting recall as a percentage of lay-offs hit an all-time low, while what economists call "job losers", that is, those not expecting recall to their former jobs, are at an all time high.

Meanwhile, job prospects shrank. The ratio between the number of unemployed and the number of "help wanted" advertising hit a level comparable to that in the deep recessions of the mid-1970s and early 1980s. (And, despite the fact that fewer people in general are reading newspapers, the number of people reading want ads has steadily increased over the past 2 decades.)

Of course, some more jobs have been added to the overall economy. The Clinton administration takes credit for the 2 million jobs being created in 1993, the first year of the Democratic administration. But of course, there are several things wrong with this. First, jobs are being created at a much lower rate than in any other recovery. In the first year of the Reagan recovery starting in 1983, over 5 million jobs were created.

And those 2 million jobs themselves are not what they seem. Generally, they are not high paying jobs. Most are either part-time or temporary. And most of the people who took them were looking for full-time work. What this means is that the two million is more a measure of people who are partially unemployed, or on the edge of unemployment. And, if anything, this problem has accelerated in 1994. In February, 1994, the government claimed that 456,000 jobs were created, the fastest rate in 6 years. But at the same time, 458,000 more jobs were part-time, that is, 2,000 more than all the jobs created.

Is it any wonder that in a poll taken by Time magazine in April, that is, in the midst of the economic recovery, 60 per cent of the people said that they believed that the recession had not ended where they live? This was down from 80 per cent a year before. However, almost two-thirds of the people said that they were still feeling and seeing the recession all around them.

In fact, the very means by which the corporations boosted their profits, their increased exploitation of the working class, contributed to the overall instability of their own product markets, as millions of the very people who constitute that market were driven out of it. And millions more fear that they could soon lose their job. The overall weakness of the recovery is mirrored in what is happening to the working class.

The Capitalists’ Crisis

The actions by U.S. corporations are an admission of what they think of the present economic expansion. They have not planned for any large expansion in production. They have laid off increasingly in order to squeeze more profits out of their workforces today, and in anticipation of future contractions. Their actions show that they recognize that this recovery is not solving any of the problems of their own economy, an economy which has stagnated for over 20 years, in a crisis in which the recessions are stronger and the recoveries are weaker.

The corporations are very capable of continuing to make profits in this environment, just as they did during the depression of the 1930s. But in so doing, these corporations actually fuel the crisis and weigh on the whole society. And their means of multiplying their wealth through the financial system only brings greater instability and puts their system in greater danger of a much deeper crisis.

This crisis is a reflection of an American ruling class that seems to have achieved domination at every level—over their own working class, and over their foreign rivals. And yet their complete irresponsibility to everything but their profits means that this only increases the risk of bringing down the whole society.

For the working class, the usual way of looking at things is to try to endure the hard times, until the good times produce new jobs and higher pay. But the problem now is that this is the recovery, which is supposed to be the good times. This recovery is marked by growing permanent unemployment and full-time jobs being replaced by part-time and temporary jobs. If this is the recovery, then what prospects will the next downturn in the business cycle, the next recession hold?

More than ever, this capitalist economy is one of decline. It holds no prospects for the working class. For the workers, the only way out is through struggle, not only to defend ourselves, but to rip the control of the economy from the hands of the capitalists, get rid of this economic system entirely, and replace it with one in which the means of production are put at the disposal of the whole population.