The Recovery:
Another Phase of the Economic Crisis?

May 31, 1984

In the first quarter of 1984, the Gross National Product rose by 8.8 per cent, after increasing 6.1 per cent in 1983. It was the fifth consecutive quarter of growth since the recession of 1980-82. Unemployment also fell three per cent from a high of 10.8 per cent to 7.8 per cent by April 1984. Most economists have expressed surprise about the strength of the recovery. Martin Feldstein, chairman of the Council of Economic Advisers, went so far as to say that the recovery is the strongest since 1953. And Administration economists are claiming that there will be a new period of long, sustained growth coming out of this recovery.

Certainly there is always the chance that the bourgeoisie could find its way out of the economic crisis; this present recovery could be the beginning of a new long-term expansion. However, both the characteristics of this particular recovery and the underlying contradictions of the crisis of which this recovery is a part, make this possibility far from assured.

In fact, the recovery is not so vigorous. Martin Feldstein’s comment to the press about the strength of the recovery is contradicted by the Economic Report of the President for 1984, which he helped prepare. On page 176, the report compares the eight major recoveries since 1949, showing that the growth of the GNP for the first year of the present recovery was slower than those in five of the seven previous recoveries.

But there has been an important increase in production. The production index shows an increase of about 19.1 per cent in the 16 months since the low point of the recession. That increase in production has been led by increases in defense spending; an increase in consumer sales, mainly on the high end; and stepped-up production of construction materials. Housing starts went from 1,072,000 in 1982 to 1,712,600 in 1983. It is estimated that housing will remain at that level this year. Domestic auto sales went from 5.8 million cars in 1982 to 6.8 million in 1983, an increase of 17.8 per cent, and they are currently running at an annual rate of close to eight million cars for the first four months of 1984. Military spending for new equipment and spare parts went from 91 billion dollars to 109 billion dollars, for an increase of about 21 per cent.

However, if these are relatively large increases in percentage terms, it must be remembered that they come after the longest and deepest recession in 40 years. And in fact, except for defense, the increases don’t make up completely for lost ground. In the 1970s housing starts were consistently over two million units per year. This year, they have plateaued out at 1.7 million. Domestic auto sales have not come close to their peaks either. In 1973 there were 11.4 million sales, including 9.7 million cars produced domestically. In 1978 there were 11.1 million sales, with 9.1 million domestically produced. In 1984, there are only expected to be 10.5 million sales with eight million domestically produced. And many economists expect sales to fall in 1985.

The Limits of the Market

It is no surprise that the sales and production of items like cars and houses have not recovered to what they were before the recession. Ten years ago it took 28 weeks of the average weekly factory wage to buy a new car. Today it takes 38 weeks, an increase of ten weeks. Also, houses have become so expensive that they have been priced out of the range of the majority of the population. Thus the average price of a house today is $71,000, with a new house costing $75,400. The median monthly mortgage payment on a house is estimated at over $700 a month. Thus the new homes, appliances and cars can no longer be purchased by a large section of the working class, which before could afford them.

The U.S. bourgeoisie on the whole, recovered fairly well from the recession. This was paid for by an intensified exploitation of the U.S. working class and a growing impoverishment of the poor in this country. According to Business Week’s annual survey, in 1983 the nation’s 1,200 largest corporations had 15 per cent more profits on only a four per cent gain in sales. In the fourth quarter things were even better for them. Profits climbed 36 per cent over the same quarter in 1982 on a nine per cent sales gain. In the first quarter of 1984, profits climbed another five per cent over the last quarter of 1983. Certainly there are many reasons for these profit increases. During the recession, for example, many older, more unprofitable plants were closed, so that when production increased, it allowed more efficient use of the remaining productive facilities. But the biggest reason for the increase in profits was the more intense exploitation of the working class and the driving down of the standard of living of the poor. In the first nine months of 1983, there were 159 union settlements involving 1,000 or more workers. According to the Bureau of Labor Statistics, they averaged only 1.7 per cent increases, far below the eight to ten per cent increases of the late 1970s, and far below the three to seven per cent rates of inflation in the early 1980s. 760,000 workers for whom contracts were negotiated, took either a pay cut or elimination of cost of living allowances.

According to Business Week, unit labor costs for the whole work force rose only 1.5 per cent, and actually dropped in manufacturing by 2.3 per cent, the first decline in almost 20 years. The decrease in unit labor costs shows that there was more production put out by fewer people who were paid less. This speed-up allows the capitalists to rehire fewer workers as production increases. Although the rate of unemployment dropped with the increase in production, a large part of the workers are still unemployed. In fact, the rate for April is higher than that of any year except one in the 1970s. And in the 1970s unemployment was high. In April 1984, 16 months into the recovery, there were more than 2.5 million more workers unemployed than in 1979, at the start of the recession. With all the people still without jobs, it is therefore no surprise that the average duration of unemployment actually increased in 1983 to 20 weeks, up from 15 weeks in 1982, and twice as high as in 1979. This number has not dropped in 1984. It means that the overall purchasing power of the working class continues to be restricted.

The U.S. government went to the aid of the bourgeoisie by using its budget and taxes to shift income from the poor to the rich. The 1981 Economic Recovery Act is estimated by a Democratic Party Congressional study to contribute $8,270 to households with incomes of $80,000 a year or more because of the tax cuts for the rich. The government is supposed to have taken $390 from households with $10,000 incomes or less, given the cuts in social benefits. People who made $10,000 to $20,000 are expected to be ahead of the game by $30, because the social benefit cuts balance with the small tax cut.

While all of this pain and suffering was beneficial for profits, there was a negative side of the economic coin for the capitalists. The spreading and deepening poverty, the lowering of the standard of living has, in the process also limited the markets for U.S. production. Workers with less can’t buy as much. Workers who have been unemployed, with the social benefits cut, can buy even less.

Lagging Capital Investment

The market was also limited on the world scale by the transfer of wealth to the U.S. bourgeoisie. The economies of the underdeveloped countries contracted in 1983. The World Bank estimates that in Latin America, the economies contracted by as much as ten per cent. For all the underdeveloped countries, the combination of large debt repayments and a sharp cutback in private bank refinancing resulted in a net transfer of 21 billion dollars in medium and long-term capital from the poor countries to private banks in the industrialized countries, especially in the U.S. This is according to A.W. Clausen of the World Bank. The IMF figures that these economies don’t have much chance to recover in 1984 either. Their wealth is being drained into the U.S. banks; each year the amount of the interest and of the repayment is growing. The extremely harsh austerity measures imposed by the governments of these countries, in order to keep up with at least some of their debt payments, have squashed economic growth. Not only does this cut down these countries’ markets for consumption. But there is also no money for these countries to invest and develop their economies. And that means that these countries provide much smaller markets for U.S. technology and capital goods.

So far, the expansion of the U.S. and world markets has been limited, almost stagnant. The existing productive facilities were sufficient to be able to absorb almost all of the new production. Factory capacity, which had been low, rose from 67 per cent to 81.9 per cent which still is not high by historic standards. Thus there has been little increase in capital spending. In fact, in the recovery year of 1983, capital spending declined by 4.2 per cent, after declining in 1982 by over five per cent. Plans for capital spending in 1984 are supposed to jump by almost 17 per cent. However machine tool orders, a major component of capital investment, still are only at half the level they were in 1980, an indication that capital spending probably won’t be as high as predicted. However even assuming that investment were to increase by 17 per cent, capital investment would still be low, less in real terms than the amount invested in ten of the last 14 years. Most of this capital investment will go simply to replace worn out equipment and for labor saving equipment, both in the factories and the offices, throwing even more workers out of work, and constricting consumption of the working class even further. Little of this investment, except most notably in defense, will actually go towards expansion. On the one hand, this is an important indicator that the capitalists themselves have little confidence in their own economy. Moreover, capital spending is the engine by which the economy expands. If the recovery doesn’t bring about a real increase in capital goods spending, if there is no real increase in investment, then the recovery will stop and we will be in a new recession.

Credit: The Escape from the Crisis Becomes the Trap

The picture of the economy in the midst of the crisis is one of a struggle against that crisis. Its contradiction is that in order for the capitalists to realize a profit, they have to impoverish a section of the population, which in turn cuts out a part of the capitalists’ market. Out of this contradiction comes long-term stagnation. The capitalists try to escape this contradiction through the use of credit to spur consumption and production. The growth of this debt has become, in its turn, however, a massive weight on the economy.

The recovery in 1983 was stimulated by the actions of the government which handed hundreds of billions of dollars over to the capitalists. It did this through huge contracts with guaranteed profit margins built in, first of all through the defense budget. It also did this, as we showed, through the tax cuts for the rich and cuts in social spending for the poor. But the government has been unable to finance its massive social spending for the bourgeoisie simply through taxes. There has been a growing short fall between what the government has spent for the bourgeoisie and what the government has collected in taxes. Thus the government has gone ever deeper into debt. The record 180 billion dollar deficit came in 1983, a reflection of the magnitude of the government’s efforts to bail out the bourgeoisie, and to stimulate the economy out of the recession.

The federal government may have been able to stimulate the recovery in part by its actions; these actions, nonetheless, had consequences for the economy. In order to cover part of this massive debt, the Federal Reserve had to print up still more dollars. Between December 1982 and August 1983, the money supply grew at rates of between 10.7 and 15.4 per cent, that is double and triple the Federal Reserve Board’s original maximum target levels. This monetary growth allowed the federal government to finance its debt, which had accumulated to 1.4 trillion dollars. It also eased the pressure of the other credit markets, which have struggled under the weight of their own debts, which have accumulated to the point that today there is over 1.5 trillion dollars on residential, commercial and farm mortgages, one half trillion dollars in other consumer debts, and over a half trillion dollars in corporate debts held by commercial banks.

Credit became the principal means by which the bourgeoisie has been able to escape stagnation in its profits and stimulate the economy. In the 1950s and 1960s, the increasing reliance on debt seemed to work. But the accumulation of debt carries greater and greater risks for the economy. Today, the financial institutions that dispense and manage the debts have taken on a life of their own, seemingly cut off from production. The lending of money and speculation, when the bourgeoisie cannot realize adequate profits through production, is the means by which the bourgeoisie tries to increase its profits. Thus capital flows from production into speculation; that is, the bourgeoisie tries to make money off of money in a burgeoning number of ways: in the commodities, stock and bond markets, money markets, mergers, real estate, futures markets and futures on stock markets, etc. And one of the consequences of the speculation is a demand for money, which in its turn, and along with the effort by the banks to cover their increasing bad loans, pushes the real interest rates up to the highest level of the century.

The debts and speculation may be a temporary escape for the bourgeoisie, but they have consequences on production. The high interest rates have made the cost of borrowing for investment and large consumer goods more expensive, and therefore cut down on the sale of such items as capital goods, cars and homes. The speculation in the money markets, with its wild fluctuations, has led to huge uncontrolled capital flows from one currency to another, upsetting trade and the capital markets.

On the whole, one can say that the credit that was created to ease production and trade, increasingly interrupts it, leading to a possible new constriction of the market. As the debts mount, it also raises the specter of more catastrophic bankruptcies, which pull the creditors down with the debtors. Several underdeveloped countries have been close to default on hundreds of billions of dollars. The number of domestic defaults on mortgages, commercial debt and consumer debt is at its highest level since the Great Depression. This has led to the highest number of bank failures, also, since the Great Depression. Today, the eighth largest bank in the country, Continental Illinois, is in serious trouble stemming from billions of dollars of bad commercial and foreign loans and a run on its reserves by worried commercial depositors.

The only solution that the bourgeoisie has found to this has been to loan even more money, lest the house of cards collapses. Today, Continental Illinois has an open line of credit with the Federal Reserve, and a 5.5 billion dollar line of credit with a consortium of major banks to cover the run on its deposits. Continental Illinois received this help because, if it would fail, it would mean tremendous losses for a whole range of other banks, financial institutions and companies, just as the failure of the Penn Square Bank two years ago meant a loss of over a billion dollars to Continental Illinois itself and a loss of several hundreds of millions of dollars to the Chase Manhattan Bank. So far the damage from major losses in the financial system has been limited by the support by the financial system of the institution in trouble. But the current situation at Continental Illinois shows the depth of the problems.

Faced with economic stagnation and the threat of financial collapse, the bourgeoisie resorts to the creation of more and more credit. It tries to prop up its profits and relaunch production. But by doing so, over and over again, it causes the balloon of credit to grow to undreamed of proportions. The threat of general financial collapse looms larger. The means by which the bourgeoisie tries to limit damage in the short term aggravates the crisis in the long term.

Perhaps the bourgeoisie could still get out of the present crisis. But up until now, the present recovery doesn’t provide a way out. It is instead, the latest part of the economic crisis, a crisis during which, over the past 11 years, the recessions have been stronger and the recoveries increasingly weaker. Neither the recessions nor the recoveries have resolved the underlying contradictions. They have only been pushed to ever higher and more dangerous levels.