Understanding the capitalist economic crisis
By Doug Lorimer
“The ultimate reason for all real crises”, Karl Marx argued in Capital, his seminal work on the laws of motion of the capitalist system, “always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their outer limit”.
Marx explained how each expansion of the capitalist economy carries within it the seeds of crisis. He argued that capitalist firms, in order to out-compete their rivals in the accumulation of profits, invest in more advanced machinery to increase their workers’ productivity and make more products they can sell at a lower cost. This generates a boom for a time, but in devoting a greater proportion of their capital to investments in technology and less in living labour, which is the source of capitalist profit, their rate of profit tends to decline. As the new technology comes into general use, the average rate of profit slumps. A crisis then erupts.
Capitalist firms find their productive capacity has outstripped their ability to sell products at high enough rates of return. Thus, a crisis of overproduction hits the system, leading to a sharp decline in investment. The slump in business investment can be overcome only when the capitalist class can boost the rate of profit by ridding itself of some of its over-accumulated productive capacity through the elimination of the weakest firms and by increasing the exploitation of living labour.
It was this fundamental dynamic that led to the global economic crisis of 2008-09. While mainstream commentators refer to this as the “Global Financial Crisis” , the collapse in the capitalist financial system came in September 2008, nine months after the beginning of the US recession. It was a symptom of the economic crisis, not its cause.
The core problem was the long build-up of overproduction (productive overcapacity) in the world capitalist economy. This was particularly marked during the US economic expansion of 2002-07, following the 2001 recession. From a low point of 72.8% capacity utilisation in 2002, US industry peaked at 79.6% utilisation in 2007. (The average for 1972-2001 was 81%.)
Previous recessions in the US had been triggered by overinvestment in the housing and automobile industries. The recession that began in late 2007 followed the same pattern.
Housing and car bubbles
Throughout the 2002-07 “boom”, the real median household income in the US declined — from US$60,804 to $58,718. This was the first time in US history this happened during economic expansion. As a result, US consumer spending was propped up by debt. As the paper value of residential real estate rose from $10 trillion to $24 trillion between 1996 and 2006, many people were able to use their houses as ATMs by refinancing their mortgages. In 2003 alone, one in four mortgages was refinanced, as the Federal Reserve Board kept interest rates at rock bottom to ease recovery from the 2001 slump.
The easy credit-fuelled housing construction boom drove up house prices, which in turn were often used as collateral for further borrowing for purchases of new homes or other consumer goods. This upward spiral of borrowing-building, in which an estimated 25% was purely speculative, came to an end during 2006, when large numbers of people in the US could no longer afford the skyrocketing price of a new home. As the housing price bubble finally collapsed, it became apparent that many low-waged people had been conned into taking on mortgages on delayed monthly payment schemes that were beyond their ability to pay — the “sub-prime” mortgages. There had been an overinvestment in housing.
Similarly, the big automobile manufacturers had invested billions to expand their capacity to produce cars and light trucks far beyond what the market could absorb. In 2005, General Motors, at that time the world’s biggest car maker, recorded a record loss of $10.6 billion. In the following years, the accumulated losses of the US “big three” — GM, Ford and Chrysler — pushed them toward insolvency.
As the world knows now, the sub-prime crisis was just the beginning of the financial blood-letting, which hit with full force in September 2008. The resulting credit squeeze choked off economic growth in much of the world, leading to a rapid unravelling of industrial production and international trade. Since then, multi-trillion-dollar bailouts and government guarantees of financial transactions have ended the freefall and laid the basis for a recovery. The Federal Reserve Board reported that US manufacturing sector capacity utilisation was 71.4% in June, up from 65.4% a year earlier. The previous historical low in the series, which began in 1967, was 70.9%, in December 1982.
But worldwide, capitalist industry is still burdened by huge overcapacity. In January, the US Industryweek web site reported, “According to KPMG’s 2010 Global Auto Executive Survey, which queried 200 senior leaders at automakers and suppliers from around the world, 88% of respondents said overcapacity is still a problem despite numerous closures and tens of thousands of layoffs in recent years … Research firm Wards Automotive has estimated that recent plant closings made by the respective reorganizations of General Motors and Chrysler, along with additional closings by Ford and Toyota, reduced North American capacity by about 1.5 million vehicles in 2009, down to 18 million units. But even those cuts might not be enough … Auto sales inside the US dropped 21% last year alone to 10.4 million vehicles ... Auto sales are estimated to improve by a million units in 2010. That’s a far cry from a decade ago, when the US auto industry averaged 16.7 million sales a year.”
In February, ICIS.com reported, “The global chemical industry remains in a state of oversupply and 15-20% of capacity, or around 50m tonnes/year, needs to be shut down to restore sustainable profitability by 2015”.
The US housing market also remains massively overstocked. Bloomberg.com reported on February 2 that, according to the US Census Bureau, there were 18.9 million vacant homes in the last quarter of 2009 — including foreclosures, residences for sale and vacation homes — up from 18.8 million in the third quarter.
The continued high levels of overcapacity mean that there are limited opportunities for big capitalists to make profits by investing in expanding productive capacity. Even speculation on the financial markets — a prime source of paper profits before the 2008 financial crash — appears to be far less attractive to many capitalists. The July 10 Australian reported: “... in the US alone, $US2.9 trillion is being held in cash and cash-equivalent securities funds. The total is down slightly from the peak of the global financial crisis, when, with banks crashing around the world and putting the financial system at risk, investors fled to the safe haven of cash. However, the amount in cash or equivalents is 53 per cent higher than just five years ago, when equity markets were rising and the double-digit returns of the stockmarket dwarfed the low returns offered on cash.”
Across the capitalist world, the capitalist rulers’ policy has shifted from deficit-financed stimulatory spending to limit the depth of the recession to austerity measures — targeting government spending on social services. The shift was signalled at the G20 finance ministers’ meeting the first week of June and formally ratified at the G20 summit meeting held at the end of that month in Toronto. Austerity means that capitalist governments will make their highest priority the repayment of the trillions they borrowed from big capitalists to save their banks and other financial institutions from collapse — ahead of schools, hospitals, the pay and pensions of government employees and “job creation”.
The major concern of pro-capitalist critics of this policy shift is that it could snuff out the weak recovery and produce a “double-dip” recession or a prolonged period of near stagnation. Thus, New York University economist Nouriel Roubini, dubbed “Dr Doom” by the New York Times for warning in 2006 that the US was headed for a massive housing bust and a deep recession, argued on his web site on July 16: “... the likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June). Growth is set to slow further, to 1.5% in the second half of this year and into 2011.
“Whatever letter of the alphabet US economic performance ultimately resembles, what is coming will feel like a recession … In the eurozone, the outlook is worse. Growth may be close to zero by the end of this year, as fiscal austerity kicks in and stock markets fall.”