'Managers' find US economy refuses to behave
Official interest rates in the United States have been held almost to zero for nearly two years. In mainstream economic theory, low interest is a “stimulus” measure. The idea is that businesses are more willing to borrow and expand their operations when interest rates are low.
But the economists who claim that they know how to “manage” the economy have egg on their faces. US official unemployment — which understates the reality — remains at almost 10%, the highest rate in more than a quarter century and the second highest since the Great Depression. Although corporate profits are up, they are not being invested in new production; Marxist blogger Michael Roberts notes: “Indeed, US corporate net new investment in fixed assets (that’s after depreciation) is falling for the first time since records began [in 1951].” After getting near an annual growth rate of 5% at the start of this year, GDP growth has shrunk to well under 2%.
This is not to say that US corporations are not taking advantage of the easy credit, as the New York Times reported last month (“Cheap Debt for Corporations Fails to Spur Economy”, by Graham Bowley, October 4). Big companies have been borrowing at a rate at least equal to that of the pre-crisis year of 2007 (when they borrowed US$589 billion). But they have been using the money to buy back their own shares, take over competitors or pay off more expensive debt, or just sitting on it — almost anything except investing in production. This confirms that the current global crisis is one of overproduction, not merely a result of financial deregulation.
The Federal Reserve’s low interest rate (currently 0.25%) means that big companies can often borrow at less than 1%. For example, Microsoft borrowed US$4.75 billion in September, some of it for three years at a rate of 0.875%. Although the Times didn’t point this out, that rate is already below the inflation rate, which can be expected to rise as one result of the vast amounts of credit being made available. In effect, the big corporations are being given free money.
Microsoft’s borrowing was partly used to buy back some of its own shares. “Other companies”, Bowley reported, “are borrowing to finance acquisitions. PepsiCo borrowed recently to help pay for the takeover of two bottling plants. Hertz borrowed $300 million for its bid to buy a rival car rental company ...”
Meanwhile, smaller businesses, which normally have to use any funds productively, are finding it difficult to borrow. The banks are fearful of smaller companies going under and defaulting on their loans, while corporations like Microsoft are “too big to fail”.
Conflict of interests
According to Bowley, “Economists say it is rational for companies to seize the opportunity to borrow at low interest rates and to buy back shares. But Guy LeBas, a fixed income strategist at Janney Montgomery Scott in Chicago, said, ‘It is not particularly beneficial for economic conditions.’”
The contradiction here is a real one: between “economic conditions” — the welfare of the US capitalist class as a whole — and the individual interests of each capitalist. Yes, if economic conditions were better, if capitalists generally were re-investing profits and increasing production, capitalists would, on average, be better off. But this doesn’t happen because investing when there is already overproduction and therefore little likelihood of a good profit is directly contrary to “rational” behaviour for individual capitalists.
The contradiction between capitalists and workers is fundamental in capitalism. But contradictions among capitalists are also inherent in the system. The would-be managers of the economy can’t overcome those contradictions, not with any regulations, no matter how clever. The only way to get rid of the destructive contradictions of capitalism is for workers to get rid of the capitalists by creating a revolutionary government that nationalises the factories, mines and other means of production.