Saudi Arabian deserts, some have caught a cold, and others bronchitis. The following article on the recession now underway in the United States is taken from the October 19, 1990, number of La
Breche, the French-language journal of the Swiss section of the Fourth
International.
CHARLES-ANDRE UDRY
T IS being called the "third shock"
because of two previous dramatic increases in the oil price. In 1973, in
Kuwait, OPEC (the Organization of
Petroleum Exporting Countries) decided to break the old agreements with the big oil companies. The price per barrel (159 litres) of oil was increased to $10.
The generalized recession of the imperialist economies - brought about by a fall off in demand, an increase in surplus production capacity (under-utilization of the means of production) and a decline in profits - followed in 1974-75. The oil crisis" accentuated, but did not provoke, this recession.
The second shock came in 1979 and lasted until 1981 — the price per barrel reached $34. Three years after, in 1981-
82, a second recession developed in the imperialist countries, which also engulfed the dependent countries (through the debt crisis primarily) and a certain number of countries in Eastern Europe (Poland,
Rumania, Yugoslavia). It came after a very lukewarm period of upturn, marked by a high rate of unemployment and a persistent depression in some third world countries.
The explosion of oil prices deepened the crisis.
Since 1985, the price of oil has fallen — along with the exchange rate of the dollar in relation to other currencies oil is paid for in dollars) — and this has favoured an the collapse associations, of property giants, and so on. That is what explains the bronchitis, more speculative and perhaps temporary -Bush has a problem which is bigger than economy - slowing up well before the Iragi oil shock — which is now staggering towards recession"'. Lester Thurow, a well-known economist who lectures at the Massachusetts Institute of Technology, evokes in these terms the gravity of the possible repercussions of a recession for the United States; "Because of the debts and banking problems accumulated during the 1980s, any kind of recession in the 1990s will produce a volume of bankruptcies never seen since the Great Depression. Even without a recession, the savings of the middle class will melt away when house prices collapse in a great part of the United States, in reaction to the excess of indebtedness in the 1980s"2.
The recession has undoubtedly arrived in the United States and the real debate is about its depth and its duration, as the
1980-1988
FISCAL
SARY ACES WAY CAN'T YoU
Us companies. It is this that explained (and explains) the pronounced sluggishness of Wall Street and investment. In March, Business Week (BW) introduced thus its quarterly analysis of the results of 900 key enterprises in the US for the fourth quarter of 1989; "the American economy is not in recession, yet you would not know it by examining the results of the companies .... [they] have fallen by 19% in relation to the preceding year™4
In August 1990, BW made nearly the same remark for the second quarter of 1990, under the headline, "Are we in recession?"s. The weekly noted that economists still answered no to this question, but added, wisely, "But call any company boss, and he will certainly say yes". This impression was borne out by York Times in July 1990, in a survey that showed that states (of the USA) covering a third of the population were in recession or on the point of being so (according to the official definition of three consecutive quarters of negative growth).
The survey revealed that nine out of ten households had the "feeling" that their incomes were being squeezed by insurance premiums, taxes and other fixed 1. The Wall Street Journal (TWSJ), August 17-18, 1990. 2. International Herald Tribure (IHT), October 9, 1990, "How Supply-Side Myths Warp the Political Process". 3. New York Times, September 2, 1990, debate between F.H. Schott, Allen Sinai and H.D. Ranson, p. F9. 4. Business Week (BW), March 19, 1990. 5. BW, August 6 and 13, 1990.
1989-1990
Fiscal Fantesy Yol.
economic upturn. In 1990, the "third shock" (see box) has come, at a time FACE REALITY!? when the US economy has already been in a phase of downturn for some months. The same is true, to varying degrees, of Canada, Great Britain, Australia, Spain and very probably Italy. The economies of a united Germany and of Japan are still buoyant, albeit with question marks.
The current shock comes after the financial crashes of October 1987 and October 1989, and the long slide, since February
NOW
DEFICIT
REDUCTiON
-PAy
JUFFERING
----- pull-quotes on this page -----
Vietnam WAA • WAA REPUBLICAN HOUSE 15
International Viewpoint #194 • November 12, 1990
UNITED STATES costs which are growing more quickly than their salaries. The author of the survey drew the conclusion "this is not a recession peopled by the unemployed ....It is a recession affecting people who have a job, but whose income is ever more squeezed"6.
Company profit figures for the second quarter of 1990 and the beginning of the third confirmed the tendency, sharply felt by Wall Street. But from June, unemployment has begun to be a feature of the
It passed from 5.2% of the active population in June 1990 to 5.7% in September 1990 (figures which underestimate reality, according to the statisticians of the Department of Labor themselves). Those who lose their job are taking very much more time to find another. 44% of the 356 industries examined by the Department of Labor took on new workers in September. The number of industrial jobs lost since the beginning of the year rose to 520,000 - of which 114,000 have been pruned in the last two months (48,000 in August and 66,000 in
Rise in unemployment
In construction, 194,000 jobs have gone, 20,000 in September alone. Jobs in services, which gencrated around 80% of new jobs in the post-1983 upturn, are falling more than in the course of six of the eight recessions since the war®. The initial rise in unemployment and above all the decrease in overtime (so important in the United States to "complete" income), linked with the price rises, lead to a reduction in purchasing power (demand).
The figures for distribution (trade) for September confirm the depression of the buyers, despite the discounts and credits so plentifully available in the pre-Xmas period. The relation of total consumer debt to disposable income (what remains after taxes) is 20% higher than at the beginning of the recession of 1981-82 "Personal bankruptcies" (incapacity to meet debts), which rose to 500,000 in 1987, will pass well beyond the million mark in 19909
Logically, jobs will also be cut in the commercial sector!0. The fall in the value of houses — which form part of the savings of a large layer of employees in the United States — does not encourage con-
This situation demolishes an argument advanced by fashionable economists according to which the growth of services — relative to industry — acts as a safety catch against recessions. This argument was in fact advanced in 1979 — before the recession of 1981-82.
First, the insecurity of employment in services is transparent from the beginning 16 of the slowdown. Then, bankruptcies hit firms in the service sector much harder.
Finally, as underlined already in July by Joseph Carson, a former economist for the Department of Commerce and General Motors and one of the best analysts of the US conjuncture, "I think that people should remember that in the service sector you will not necessarily lose jobs as much as in the manufacturing sector, but you will lose income"!. In other words, salaries decline during a slowing up of the economy (accompanied by an inflation rate of over 6%). Moreover, a considerable proportion of services are linked to various bonuses and commissions. These form an important part of the revenue of employees or independent operators in insurance, prop erty, banking, and so on. They go up in smoke when things turn bad. All this depresses demand.
Economic pseudo-science
Another argument advanced by "economic science" to explain the reduction of economic cycles is also coming to grief. Industrial strategy, it is said, has led to a reduction of stocks with high "maintenance" costs. From this it has been concluded that, should there be a fall in demand, industries will not be weighed down with stocks and will avoid massive production cuts and lay offs while waiting to get rid of them.
This description is not false, with the exception of the part about lay offs. The problem is that it is not the stocks which
La depression. This time, before, it has been provoked by a series of factors leading to a fall off in demand for durable goods, production (investment), and to an "excess" of building (villas, hotels, offices, shops) which leads to a collapse of property prices and
As little as five months ago, it was still fashionable enough to denounce the Cassandras who predicted recession. Today "very many (economists) say that it will be severe"i2. After the "soft landing" of the cconomy proclaimed over the last two years, the possibility of a "mild recession" is admitted. Karen Pennar notes correctly, "However, for those who have short memories or who simply know nothing, a dwarf recession is a very rare
The last eight recessions since the war have lasted an average of 11 months and have meant a decline in GNP
The two last recessions in the United States have spread out over 16 months and have sent unemployment soaring to 9% in 1974-75 and more than 11% in
Faced with such a perspective, the traditional government response is to reduce taxes and inject money — "deficit spending" — into the circuit to get the engine going again. However, the budget deficit is such that the very opposite - the reduction of the deficit and increases in taxes — is being discussed. In more than one state, such increases have already been imposed. They do not stimulate
This Reaganite budget deficit — stimulated by the combination of growth of arms expenditure, cuts in social expenditure and tax breaks for the rich and the companies — has important repercusand international economy. The payment of interest on the federal debt forms a decisive component of the budget. For the fiscal year 1990-91, it was equal to the total of expenditure on social security. Or again, it equalled half of revenue from taxes on the incomes of private persons. The servicing of the debt is growing rapidly - it should reach $259.8 billion this year, more than the budget deficit envisaged for the year to
The argument according to which this public debt is no higher than at the end of the 1940s is not very convincing. On the one hand, the place of the US economy in the world economy was different then. On the other, the cost of the servicing of the debt measured by relation to GNP was less (lower interest rates, growth, and so on). This recession will diminish incomes (thus revenues) and increase more or less unavoidable social expenditures, above all unemployment benefits. This could be neutralized by taxes, but, above all, the deficit will remain a problem even after the recession, all the more so if the federal government finds itself compelled to guarantee unsafe loans through various federal funds, as in the Savings & Loans
Massive private debt
Moreover, it is the total sum of public and private indebtedness (of individuals and companies) which is more "worrying" -- it is more than 2.5 times the GNP (the national production of goods and services), the highest ratio since the middle
Some economists argue that the upturn will take place thanks to arms expenditure!. This hypothesis seems far-fetched. Certainly, the arms firms "could have reasons to thank Saddam for the moment chosen for his attack", as the Financial Times put itl6. It is obvious that the govemment, while reducing the costs of the general functioning of the US Army, is maintaining and in some sectors increas 6. Published in International Herald Tribune, July 17, 1990. 7. BW, October 22, 1990 and Tribune de l'Expansion, October 16, 1990 (IBM) and October 15, 1990 (ALCOA). 8. BW, October 15 and 22, 1990. 9. BW, August 20, 1990. 10. USA Today, October 13-15, 1990 11. Barron's, July 2, 1990. 12. TWSJ, October 11, 1990. 13. BW, October 15, 1990. 14. The Washington Post, reproduced in The Guardian Weekly, October 14, 1990.
A sense of shock
THE fluctuations in the price of crude oil (until 1986, the spot reference price was that of Arabian light - since then, it has been Brent
In the final instance, the oil shock is paid for in several forms - taxes, inflation, wage freezes -- and by the workers above all. The embargo does not affect Saddam Hussein alone. *
November 12, 1990 • #194 International Viewpoint ing arms orders. This was evident even before the Gulf crisis!?. Nonetheless, even if a part of the "credits" allocated to the arms industry come from the recycling of the petrodollars of Saudi Arabia and the Emirates, their effects on the conjuncture
UNITED STATES crude from the North Sea) are not strictly linked to the relation between will be fairly limited, unless there is a supply and demand. The International Energy Agency Indicates that an long war. They will stabilize, at best, the Increase in production by Saudi Arabia, the Emirates, Venezuela, Mexicurrent level of arms expenditure, which co, Nigeria, and so on would be able to replace the two million barrels has not stopped the recession, but on the taken off the market by the embargo against Iraq and Kuwait. A part of contrary stimulated inflation. They will the increase is due then to speculation, precipitated by the low stocks also be allocated in part to the more "techof the big companies. nologised" industries which employ less workers, like Raytheon, Martin Marrietta However, a specific problem does exist — refining facilities are used or E-Systems 18. to near full capacity and certain replacement olls cannot be refined in the same Installations. Moreover, disposable stocks have been frozen for the use of US armed forces in the Gulf. Finally the Japanese, who Financial fragility are very dependent on Gulf oll, are ready to accept the price rises in
Private company debt has not dimin- order to obtain new suppliers. ished during the long period of expansion. The evolution of the price of crude will depend in great part on politiThe debt of firms is as high as 46% of co-military events. If a long conflict with considerable destruction of oil their capital — ten years ago the threshold wells can be avoided, the oil supply problem will not be acute and refinwas at 36%. Indeed, the particular charac- Ing can be reorganized in time. In real terms - taking account of inflateristic of this US recession resides in the tion and the fall in value of the dollar in relation to other currencies - a interconnection between the fall of pro- barrel at $35 would be equivalent to the price before the crisis of 1979 duction, demand and profits, and the and half of that attained in 1980-81. The "shock" is in some sense a financial fragility of the industrial firms, readjustment - which becomes even more apparent if one compares it the big property developers and certain to the evolution of the prices of manufactured products Imported by the banks and insurance companies. "Third World" oil producing countries. If the more efficient use of fuel
Other bankruptcies will follow the Sav- effected by the Imperialist economles since 1974-75 is added, the intrinings & Loans disaster. The property and sic effect of the oil shock should not be exaggerated. insurance sectors are likely to be hard The Increase in oll prices accentuates existing recessionary tendenhit'9. The banks are not being spared. cles. There is an Increase in the "cost of production" (oil can be comChase Manhattan announced some weeks pared to an element of constant capital), and thus the anticipated profit ago that it had written off $350 million has to be revised down. This discourages investment, with repercusswallowed up in the collapse of the prop- sions on production goods. The stock exchange fall has already regis-