US Boom: Triumph of the Paper Economy

Translated from Prometeo 18, December 1999

Eight years of uninterrupted growth in GDP, an inflation rate well under two per cent and unemployment amongst the lowest in the world (4.5 per cent): all these have turned the USA into a new mystery for political economy. All the specialist magazines are talking about it while the daily press now assumes that the American recipe is the panacea against all evil. It doesn’t matter whether the subject is teenage growing pains, the migraine of bank employees or higher petrol prices, the recipe is always the same: America! Except that in America itself the economists can’t agree on the reasons for this brilliant achievement. The high priests of monetarism maintain that credit should go to the government’s rigorous budget policies and a flexible labour market. For others, however, the secret of growth lies in the increased productivity brought by the technological revolution and the introduction of micro-electronics to the productive process. In addition, and more precisely, a key factor is the heavy involvement of the Federal Government, of the Departments of Defense and Energy and of Nasa which together account for 95% of spending on research and development in new technology. Contrary to the monetarists’ supposition, therefore, the secret behind the miracle lies in state intervention to reorient the economy - albeit not by the Keynesian strategy of direct stimulation of demand, but via state support for technological development. For this reason they speak openly of the “new theory of development”. (1)

In contrast to Keynesianism, rising demand is seen as the outcome of a growth in productivity and not the result of financing a public spending deficit. For this reason the economy is now supposed to be immune from the virus of inflation, an achievement that is due to become a structural and permanent fact of the modern capitalist economy.

On the other hand the more convinced Keynesians maintain that there is nothing new under the sun. For them the current boom is the fruit of increased demand following the Federal Reserve’s strong policy of credit expansion at the beginning of the second half of the 1990's: a policy which favoured an investment revival and encouraged the spread of the new technology. In the final analysis however, even for the economists beyond the ocean, this all goes to swell the sails and help the non-stop growth of Wall Street. The latter’s growth is not regarded as a huge speculative bubble (as Greenspan himself, for example, and many other economists fear). Instead it is presented as the logical outcome of enterprises in good health which are making a profit. It is all due to greater competitiveness and to superior techniques of production, a reflection therefore of the positive course of the so-called real economy. But is everything that glistens really gold?

The Other Side of the Coin

Meanwhile, one thing should be clarified: the way the United States measures macroeconomic variables differs from Italy and the rest of Europe. Recently, it was pointed out to the president of D’ Alema’s Council Chamber (who was claiming the Centre-Left government had created 600 thousand jobs) that really they were talking about fictitious jobs since these were obtained by sharing out the same quantity of work amongst a larger number of workers. (Thanks to the concessions on various forms of flexible work which are being taken up by employers.) He responded by challenging “our free marketeers” to answer why it is that,

... when America adopts flexible labour this is seen as the strength of the Yankee miracle, though otherwise it would have the same unemployment rate as Reggio Calabria. If Italy adopts flexible labour then it is only casual work. (2)

And he is right: flexible work is insecure whether you are in Italy or in the USA. Nevertheless, the methodological discrepancy is so large that it creates the appearance of full employment in the USA when in reality unemployment dominates. On the other hand, even if the different methods of calculating statistics are discounted, a full reading of the American data - which not only includes the positive measurement of eight years growth of GDP, but also other relevant parameters of the economy as a whole - shows extremely clearly that all is not so rosy in this highly praised El Dorado.

For example, little is said about the fact that:

the US trade deficit on current account - as the economist C. Fred Bergsten informs us - could reach 330 billion dollars in 1999. (3)

This is the biggest trade deficit in American history! So even this tells us something beyond the fact that the USA imports more than it exports. It demonstrates that the much lauded productivity growth brought by major investment in new technology is not as big as is made out since it is more convenient to acquire goods abroad than at home. When it is also noted that US working hours have increased by 4% in recent years - a clear “countertendency to global trends” (4) - and without a corresponding growth in wages, the doubts about the US economic miracle are more than justified. The argument of the various bourgeois economists that there has been a miraculous growth in productivity because of increased industrial investment does not hold water.

Moreover, if the recent growth in GDP really had been based upon an increase in productive activity then that would have naturally led on to genuine full employment and allowed a meaningful reduction in poverty and marginalisation. Instead we can read - in the above-quoted “Business & Finance” of La Repubblica:

Fifty million American citizens live either below or close to the poverty threshold. The block on Bill Clinton's promised healthcare reform leaves over 40 million Americans without healthcare provision while Al Gore has opened the presidential campaign by promising free health care for the 11 million children who will be deprived of this by 2005! (5)

Nor do the figures for wealth distribution bear out the notion that the United States is heading towards full employment and non-stop growth simply as a result of increased productivity. If this were the case the statistics would show a narrowing in the distribution of wealth between classes and social strata. Instead, however, the figures - that is the official statistics which would mean that if Reggio Calabria were in the USA there wouldn’t be an unemployed person to be found - reveal, for example, that:

[the relation between] the income of a worker and that of an employer which was already 1 to 42 in 1980, is now 1 to 419. (6)

It might be objected that since this is only partial data over a long period it doesn’t account for a recent reversal in the tendency towards greater wealth disparity. - Or else the latter is indeed the general tendency which distinguishes US society today. This year - discloses Corriere della Sera:

One per cent of the US population, or 2,700,000 people, will have a total income equal to 38 per cent, or 100 million of the [world’s] poorest people. The reason: over the last twenty years US income as a whole has climbed 115 per cent in real terms, while that of the less well-off has decreased by 9 per cent.

Moreover, continues the writer, quoting the American economist and expert on income distribution, Frank Levy of the Massachusetts Institute Technology,

In 1999, 90 per cent of the growth in individual income went to 1 per cent of the most privileged. ... In practice, those 2,700,000 Americans will have a net income per capita of $515,000, almost 1 billion lire but another 55 million of the most needy will have an income of $8,800, i.e. less than 16 million lire.

Further, Levy emphasises,

In 1977 less fortunate citizens had an income equivalent to $10,000 today. (7)

The mismatch between the data, even if it is only partial, and the picture described by the economists is even more obvious when the statistics concerning the capacity of the American economy to create new jobs are examined. In fact an opposite tendency can be deduced from these. The American economy created,

... in the decade 1970-1980, 20.5 million jobs (those in work rose from 81.9 to 102.4 million), or more than two million per year. In the decade 1980-90 it created 17.2 million jobs (with those employed passing from 102.4 to 119.6 million), corresponding to 1.7 million per year. Between 1990 and 1995 6.9 million jobs were created. Thus the capacity for job creation has declined to 1.4 million per year. Creating 2 million jobs a year out of on an active population of 86 million (and a total population of 205.1 million, as of 1970), is a much more impressive performance than creating 1.4 million per year, out of an active population of 132.5 and a total population of 263.4 million (data for 1995). (8)

If, in addition, it is remembered that most of the jobs created recently have been casual and short-term, the statistical picture reveals a (real) economy in decline rather than one which is experiencing a mighty epoch of development.

The Irresistible Growth of the Financial Sphere

How, therefore, to reconcile these figures with those relating to GDP which has grown 19 per cent over the last few years, against 13.5 for the EU and 6 per cent for Japan? (9)

First of all a clarification is necessary. GDP includes all sectors; so, for example, a decline in industrial production could be compensated and annulled by a growth in agriculture, or a decline in both these sectors could be compensated or annulled by the growth of the service sector and so on. Thus it is not so risky to assume that each positive variation in GDP means that an economy is sailing along. Moreover, numerous parameters are left out of the equation - such as, for example, expenditure on public health which, if it were included (even many bourgeois economists admit this), would give a more exact indication of the real value of wealth creation than GDP claims to measure. The same argument is also valid when it comes to calculating the increase in labour productivity. Here the official statistics for the United States give an annual growth rate of 1.5 per cent for 1996. Taken as it stands, like the media and a good part of the specialist press do, such a figure can give a positive impression, but in fact it can also conceal a simple reduction in real wages that doesn’t necessarily mean a more efficient economy.

However, there isn’t any room for doubt when it comes to US financial data and the speculation associated with it over the last decade. Here the figures show an exponential growth which, if carefully interpreted, throw more than a few shadows over the present phase of the American and world economy.

Since 1996 the Dow Jones industrial share index has increased by more than 70 per cent. (10)

It may be observed that this figure taken by itself does not necessarily indicate a dangerous speculative tendency. Using this reasoning, the typical bourgeois economic theorist asks why shouldn’t the shares of a healthy company that is making a profit increase in value? And, from their point of view, they could be right if it were not that the shares of loss-making firms have also risen fantastically or that their activity has nothing to do with industrial production. For example, the virtual bookstore Amazon, though in deficit,

... is worth more than all the big American bookstore chains put together, and, a cheap air ticket sales service, was worth $11.7 billion the day after its quotation on the stock market, i.e. more than any other flight company. (11)

The rise is thus indiscriminate and unrelated to the reality of either a firm’s economic history or the state of its accounts: shares are bought because their price is increasing and not because the firm itself is healthy. And it is for this reason that Greenspan, president of the Fed, is perpetually raising the alarm against “the irrational exuberance of the markets” - something confirmed, amongst other things, by the unbelievable performances registered by the general Wall Street index in recent years. The Dow Jones, which in 1996 had reached 6,000, was quoted at 9,000 in March 1998. In March 1999 it had climbed to 10,000 and was already at 11,000 in May of the same year. This progression has no comparison in the real economy, seeing that the current capitalisation of the stock market is equivalent to more than the 150% of GDP while in 1988, for example, it had hardly reached 50 per cent. (12)

Oddly however, despite the fact that this phenomenon has taken on such gigantic proportions, when the tendencies at play in the American economy come to be appraised, it is either omitted altogether or considered as marginal. Even so, it is only in the light of this that a coherent explanation of the incongruities in the argument of the vast majority of bourgeois economists - that the American boom is rooted in the excellent course of the real economy - can be found. In fact a sharpening of the tendency towards centralisation of capital is intrinsic to the development of financial activity. Thus, as is typical of expansion in speculative and parasitic activity, service sector and generally menial jobs are growing markedly in the USA today.

The Origin of the Disparity

A society divided into classes such as the present one is structurally an unfair society and increasing inequality is a structural fact. Nevertheless, despite increasing social inequality, from the end of the Second World War (at least in the more advanced capitalist countries, headed by the United States) a combination of the huge growth in industrial production and a refinement in the forms of imperialist domination allowed redistribution of wealth. This secured a constant improvement in the living conditions of the proletariat, above all of the industrial working class. In fact the growth of large scale industry also led to a growing number of wage earners and a rise in wages as a whole which in turn stimulated demand, both of consumers and of investors. Today, as a consequence of the structural crisis in the cycle of capital accumulation, low rates of industrial profit are inducing finance capital to constantly search for extra-profit. Concretely this means acquiring quotas of financial revenue via the production of fictitious capital, or rather by the creation of financial capital from other financial capital. Thus the portion of financial capital that is transformed into industrial capital is reduced and the “virtuous” circle which offset mounting social inequality by a general improvement in living standards has broken. Now the wealth produced tends to concentrate in fewer and fewer hands.

The line that separates the rich from the poor in American society, but also in Europe and the rest of the advanced capitalist countries, increasingly coincides with the division between those who have access to the financial markets and those who are excluded.

Once again Corriere della Sera, commenting on the above-quoted study by F.Levy on the recent growth of social inequality in the USA, states:

Two anomalous factors have contributed to this worsening disparity: the incredible rise of Wall Street, where the poorest 40 per cent don’t get a look in while the better-off accumulate more wealth; and the fiscal reforms imposed by the Republicans, who control Congress, and which work to the advantage of the rich.

Levy further comments:

... while the welfare state once guaranteed a minimum redistribution of income, now it is in decline. (13)

Here it should be noted that, especially in the USA, most people who have access to the stock market do not automatically become rich. For example, workers with jobs often have no alternative but to get involved in the stock market. The big firms are trying all sorts of ways to force their employees to change over from traditional pension schemes hinged round monthly payments to investment funds.

It is a tempting formula at the present moment when Wall Street is rocketing.
But - Corriere again informs us - ... the workforce of IBM rebelled when the insurance company imposed a lower age limit of 25 years. IBM had to make do with a restriction on those under 10 years of age. (14)

Furthermore, in recent years the income of the petty bourgeoisie has been diminishing and many of them have been forced to re-direct their own savings into the stock market. Meanwhile the general wage earner, for whom access to the stock market is denied, is working harder. According to the economist, J. Schor:

in order to maintain the standard of living they had in 1973, they must work 245 hours (or six weeks) more each year. (15)

And in fact, according to a recent report of the International Labour Organisation (ILO), working hours in the US went up from 1,883 per annum in 1980 to 1,996 in 1997. Over the same period in almost all other developed countries working hours dropped, for instance from 1,809 to 1,656 hours in France; from 2,121 to 1,889 in Japan and from 1,512 to 1,399 hours in Norway.

Thus the fact that:

In 1997, 43% of adult Americans invested in the stock exchange [and that] shareholding portfolios represent 25% of economic activity in America - against 1.8% in 1984... (16)

far from showing that we are witnessing a massively growing economy, demonstrates rather that the weight of the financial sphere has now become dominant.

The Irresistible Rise of Wall Street

In the light of these considerations the US boom appears to be more a financial boom than one of the real economy.

I don’t know - says the economist H. Kaufman - ... any other period since the Second World War in which the well being of the USA and the rest of the world depended so much on the well being of the American stock market. (17)

And many people think the rise of Wall Street is unstoppable. Yet even if nobody can deny the possibility of this growth continuing, a more careful analysis of what lies behind it tells us that when it stops there could indeed be catastrophic consequences. More than a few people sense the spectre of 1929. In any case we are talking about growth which, at least in recent years, has had devastating financial crises as its fulcrum with first Mexico, then East Asia, Russia and finally Brazil going under. The capital that left these markets has flowed predominantly to the American stock market, buying up all and sundry. Besides, the International Monetary Fund and the Fed itself, worried about the state of the American banking system and accordingly the international one, have also introduced liquidity to the markets, a liquidity which again has largely flowed in the direction of Wall Street and given new vigour to the already burgeoning growth.

Now generally when surplus liquidity is created on the market, once the acute phase of the crisis is over and in order to avoid this giving rise to inflation, the central banks act to reabsorb it by increasing interest rates. The Fed, therefore, should have raised interest rates again; but it has not done so. Partly because it could not and partly because it has not wanted to. As we have seen, in the United States the expansion of the financial sphere has brought changes to the process of income generation and distribution. Today a substantial part of internal demand depends directly on the amount of financial revenue which the “system-country” as a whole is able to appropriate and this makes the risk of a stock market collapse being echoed immediately in the sphere of production stronger than elsewhere. This is without considering how an ensuing drop in US imports would hit the already disastrous state of export-dependent Asian economies. As it is, interest rates and share prices have followed opposite courses. In order to lessen the possibility of Wall Street collapsing and economic recession, the Fed has kept interest rates low while the long bull market not only doesn’t show any sign of slowdown but continues to rise, even when interest rates have also gone up. This latter circumstance has convinced many economists that a new period in the history of capitalism has opened, the famous third way by which the mixture of more finance plus more technology supposedly will allow the rich to get richer whilst turning the world into an immense Eldorado. In reality the truth is exactly the opposite.

The so-called US miracle - whereby low interest rates exist side by side with excess liquidity and very low inflation - appears as such only if it is forgotten that we live in the epoch of imperialism, that the USA is the most powerful state in the world and that the quoted price for oil has passed, in the course of the 1999, from $9 per barrel [December ’98] to the present $26. (18)

The USA is an Imperialist Power

The dollar’s privileged position as the most widely used means of international payment goes beyond assuring the USA a financial income. (By the fact that a great part of the dollars issued by the Fed are not used for acquiring American goods but either become locked in the treasuries of central banks all over the world or else remain in the circuit of international exchange without ever returning to their country of origin.) The primacy of the dollar also permits fluctuations in the volume of dollars, not only by using the interest rate lever but also by varying the prices of raw materials which are almost totally expressed in dollars. For example, the increased price of oil, since it is calculated in dollars, has forced all the importing countries to pay out more dollars thus increasing the demand and the value of the greenback in relation to other currencies. In this way the dollar depreciation that would have occurred as a result of the expanding amount of dollars in circulation has been counter-balanced by the increased value of the dollar provoked by a higher oil price. In short, the inflation that excess dollar liquidity should have provoked in the United States has been transferred to the oil-importing currencies and countries. In fact the Fed has recently raised the interest rate by one point, but only because inflation has begun to reappear in Europe as the price of oil goes up. This has forced the European Central Bank (ECB) to raise the discount rate once again in order to avoid an excessive devaluation of the Euro against the dollar. In this way the differential between the US discount rate and the European one remains substantially unchanged and so there is no incentive for investors to abandon the American stock market in favour of competing markets. The rise in the US discount rate has directly led to a new boost in the Dow Jones index since it is clear to everyone that the Fed is still not going to change the monetary policies it has set itself to preserve the mad course of Wall Street. However, if on the one hand this policy reflects all the imperialist might of the USA, on the other it underlines the tangle of contradictions in which that giant over the Ocean is enmeshed. Meanwhile, foreign imports are growing and by the same token so too is the trade deficit and the difficulties experienced by a domestic industry forced to suffer the competition of foreign goods made more competitive by the highly valued dollar. So the indebtedness of domestic producers is also growing. Thanks to all the privileges enjoyed by the dollar, US interest rates are lower than they ought to be and this encourages private debt. In fact, in the current market situation it is very advantageous to run up debts at 7-8 per cent then invest in the stock market certain of earning 20-30 per cent and pocket the difference. In spite of the balanced budget and in contrast to the EU, the United States has a net debt of $2 billion, of which the economist, Wynne Godley has recently commented:

We are turning round the economy, instead of public debt - as in the time of Reagan [ed.] - there is private credit, on a large and unusual scale. (19)

But debt is still debt, and sooner or later, in one way or another, somebody will have to pay out. Up until now, as we have seen, this burden has been offloaded onto the price of the oil and through that, internationally, onto the proletariat and all those similar social groups who cannot compensate for their falling wages and incomes by getting their hands on even a small portion of financial revenue. Many of those small and middle savers who have dabbled in the stock market either because their companies gave them no other choice or because they were allured by the easy earnings, will soon be cleaned out.

However, unless US industry is going to be drowned by the wave of foreign imports, it won’t be long before the highly valued dollar will have to come down. Then we will see a drop in the price of oil - perhaps with the assistance of a few bombs as when the last rise in the value of the dollar was engineered. Will the Wall Street bubble succeed in reaching a soft landing? Or will it burst and with what consequences? Certainly, much of today’s savings will be wiped out. The bourgeois economists maintain that there is nothing to fear; that we are witnessing a new period of mighty growth, if not of a completely new epoch. But experience persuades us not to trust most bourgeois economists. For example - I. Warde reminds us - on the eve of the 1929 crash, one of the most respected financial gurus of the time, Irving Fisher, economics professor at Yale, declared:

The stock exchange seems destined to sustain itself at the peak it has reached.

The collapse came a few days later and the finance house where he had been the highly-regarded adviser lost a good few million. On the other hand, Ward also reminds us that when Joseph Kennedy - who was no economist - realised investing on the stock market had become so popular that even his shoeshine boy was capable of offering a tip to an experienced speculator like himself, concluded:

If my shoeshine boy knows more than me then there is something wrong in the world of finance. (20)

The same day he liquidated his complete stock portfolio and so saved the fortune he’d amassed from bootlegging.

Giorgio Paolucci

(1) See A. Lettieri, “US Growth and the Keynesians of the Digital Era” in “Business & Finance”, La Repubblica, 11-10-1999.

(2) Interview in La Repubblica, 06-11-1999.

(3) Surplus no. 3/99, p.10 - “America and Europe: A Struggle of Titans?” By July 2000 the Financial Times was reporting $400 bn as the US current account deficit.

(4) Ibrahim Warde, “Dow Jones, A Bubble That’s Over-inflated”, Le Monde Diplomatique, 22-10-1999.

(5) A. Lettieri ibid.

(6) Ibrahim Warde ibid.

(7) Enzo Caretto, “One Rich Person is Worth 38 Poor”, Corriera della Sera, 27-09-1999.

(8) L. Gallino, If Three Million Do Not Seem Many - On the Ways To Fight Unemployment, p.25, Einaudi, 1998.

(9) “Which Scenario for 2000?” Interview with I. Visco, Surplus 3/99, p.107.

(10) LMD loc.cit.

(11) Ibid.

(12) Ibid.

(13) Enzo Caretto, loc.cit.

(14) Ibid.

(15) Mark Hunter, “Tempo of Life, New American Dream”, Le Monde Diplomatique, Nov. 1999.

(16) Ibrahim Warde, loc.cit.

(17) Quotation drawn from “Eurasia Without Empire”, B.P. Pinegin, Surplus 3/99.

(18) During the year 2000 the trend continued with the price per barrel reaching $34.50 by September then falling briefly. At the time of going to press the crisis in the Middle East is pushing the price of crude oil way higher.

(19) Ibid.

(20) Ibrahim Warde, loc.cit.