U.S.A. - A new "long wave"
of expansion?
The economy is in crisis. We've been told so a competitive edge.
thousand times, and we feel the consequences in Not only does Mary C. Malloy think we are being our daily lives. But what is the fundamental taken for a ride - but she challenges the problem? They tell us that U.S. manufacturers standard left response - "America needs an are uncompetitive internationally, and that we industrial policy to stop deindustrialization"
must accept cuts in wages, benefits and job security, in our bosses' search for that
International Viewpoint #266 May 1995
The most common explanation of US economic problems is the inability of US manufacturing capitalists to compete internationally. We read that US manufacturers have not been able to meet the falling unit costs of either their "low wage" ("third world") or "high wage"
(European and Japanese) competitors since the early 1970s. In response, US capital has pursued a "low wage"
competitive strategy.
Most radical economists say this has led to increased unemployment in manufacturing.
Rather than this
"deindustrialization," they argue, any decent government would invest in public and private research training, and development and new public infrastructure investment. Implicit is the notion that capitalist state economic policies ("industrial policy" or "indicative planning"
could rebuild the US industrial base to the benefit of both capital and labor. Clinton's abandonment of the "pro-growth"
policies promised in his election campaign in favor of a singular focus on tight monetary policy and deficit reduction is merely the latest manifestation of finance capital's domination of US politics, the
'deindustrialists' argue. How come US state policy only ensures profitability for the
"unproductive" financial and military sectors?. Why don't the democrats follow the "strategic interventionist"
model purportedly responsible for West
German and Japanese economic success?
This
"deindustrialization" thesis appears to capture US economic reality in the last twenty years, while offering a path to economic recovery that would simultaneously raise capital's profitability and labor's living standards. Suspicious? You should be. The "deindustrialization" thesis has three fundamental flaws.
Long-term economic stagnation in the
World Economy - U.S.A. US is not primarily a problem of global competitiveness, but is the result of a crisis of falling average profitability across all economic sectors in all capitalist countries arising from the tendency of all capitalists to mechanize production. Economic growth is slow across the capitalist world: structural unemployment is growing and real wages falling for most working people continues and deepens And yet, there is growing evidence that US manufacturing
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International Viewpoint #266 May 1995
World Economy competitiveness is improving.
U.S. refusal of "industrial policy" is not the result of the dominance of finance capital. The emerging consensus in bourgeois circles around the world sees the US model of "free market" industrial revival as a road to enhanced profitability — one which other countries can apply too.
The current economic crisis is far more serious than is implied in the "deindustrialization" thesis. What is required to raise the average rate of profit to expansionary levels is the wholesale destruction of large segments of the capital stock globally and a temporary cessation of competition and investment.
The root of the crisis
Some segments of US manufacturing have experienced profound competitive pressures since the 1970s. The living and working conditions of US workers have declined sharply in the same period. In the
US manufacturing employment declined by over one million workers. Manufacturing workers have also seen their real hourly compensation fall steadily since 1979. Working class communities have been destroyed and families uprooted and weakened.
The critical question is what is the root cause of these developments — the declining position of US manufacturing capital in the world economy, or a stagnation in world growth rates because of the fall in average profitability in all industrialized countries? To answer this question properly we must separate the employment manufacturing of foreign competition and of falling average profitability (falling growth rates) worldwide.
The shift in economic weight from manufacturing to services began in the late nineteenth century, operating in both long waves of expansion and contraction. Until 1919 services and manufacturing employed a roughly equal proportion of the total work-force. But between 1919 and 1950 the proportion of the work-force employed in manufacturing increased by only 6%, while the proportion employed in the service sector rose by over 35% (both at the expense of agriculture) So although the size of manufacturing's share of employment increased steadily from Share of world exports
1981 1985 1993 Japan 9.0 10.7 8.5 Germany 13.7 15.0 10.4 US 13.8 10.5 13.7 source: DRI/McGraw Hill, 1994 22
1879 to 1950, the size of its share compared to services has fallen. And since 1950, manufacturing's absolute share of employment has fallen. During the long wave of expansion from 1950 to 1970, manufacturing's share of the work-force fell from 34% to 27.4%. Once the crisis and long wave of contraction began in the early 1970s, this decline accelerated. By 1990, only 17.4% of the work-force was employed in the manufacturing sector.?
The long term decline in the relative share of manufacturing employment does not by itself imply an loss in the absolute number of manufacturing jobst. The number of jobs could continue to grow despite a loss of market share to foreign firms, if overall growth of demand is strong. Economists from the liberal Brookings Institution claim stagnant domestic growth caused a 1.5% decrease in manufacturing employment during the 1970s, while foreign trade effects led to an 2.1% INCREASE in employment. The same study maintains that only 20% of the fall in U.S. auto output during this period can be attributed to the negative net trade balance, the remaining 80% stemming from the overall decline in sales.
Radical economist Arthur MacEwan argues the US could have sold 700,000 more cars in 1984 if total automobile sales had remained at their 1978 level. 6
Job loss, particularly since the late 1980's appears to be the combined effects of increasing productivity (capitalization of production) and the continued slow growth in world-wide demand due to the fall in average profitability. Put another employment 1n manufacturing is stagnating because the job-destroying effects of substituting capital for labor are not being offset by the job-creation effects of increased levels of spending. Firms are increasing the capital intensity of production in existing operations, but they are not putting new capacity in place.?
This investment boom seems to be having a positive effect on US manufacturing competitiveness. Since the late 1980s, manufacturing productivity has risen 5% per year, 10% in the auto industry.® It appears that US manufacturing, after ten years of wrenching restructuring, may have regained some of its competitive edge. From 1987 to 1992, durable goods exports rose by 97% while imports rose only 34%.9 While exchange rate adjustments during this period spurred export growth, real productivity gains have also played a critical role. In the early 1980s, labor hours per metric ton of US produced steel were approximately 30% greater than German and Japanese steel. By 1993, US labor hours were 10% lower. 10
This restructuring of production, combined with the slow, painful, but real cyclical economic recovery in the US, has caught the attention of Washington policy makers. Certain aspects of the Japanese and Germany model of "industrial planning" which Clinton and his policy circle - Reich and Tyson - found so appealing just five years ago now appear bulky and bureaucratic. The current period demands increased flexibility and painful adjustments to shifting market dictates.
Is finance capital the primary barrier to a state-engineered revival of manufacturing?
The "deindustrialization" thesis' claim that the "free market" policies of the Clinton administration represent dominance of finance capital rests on two assumptions. First, the interests of finance capital are completely at odds with those of industrial capital. Second, finance capital has the economic weight to force Clinton to abandon his promised interventionist policies. It is difficult to support the notion that the financial and "real sector (manufacturing) are so clearly at odds economically and politically. Manufacturing firms still make up a large portion of the customers of the financial sector. And the last thirty years has witnessed an increased integration of
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Internatio financial and manufacturing concerns through interlocking directorates. It is true that resources directed to the financial sector have grown considerably. However, this trend began in the mid nineteenth century.
The impression that large profits made on sophisticated financial instruments and the huge salaries of financial executives are proof of "monopoly super-profits" in finance is not backed up by evidence that financial earning are consistantly superior to those in production. It is reasonable to assume that over a period in which capacity can adjust to above average returns (entry of new firms and new
SERGUEj 31. investment), there is an equalization of profit rates between the productive and financial sectors rather than the maintenance of higher financial returns. In other words, years of losses alternate with years of healthy profits in the financial sector as they do in the "real" sector. The financial sector should then experience the same cyclical and structural adjustments - concentration and centralization of capital, mechanization - as manufacturing. Developments in US financial services over the last eight years conform to these expectations, as a wave of mergers and acquisitions, down-sizing, and cost-cutting in response to low profitability has swept "Wall Street."
Finally, it is not clear that the Federal
Reserve's monetary policy over the last four years merely advances the narrow interests of financial capital. The Federal Reserve engineered a fall in short-term interest rates from 1991 to early 1994, unquestionably aiding the banking system to minimize the impact of bad loans made in the 1980s. Substantial profits were earned on the difference between the bank's cost of funds and the higher yields on long-term government bonds. But manufacturing capital too. Long-term interest rates fell along with short-term rates, reducing manufacturing capital's financing costs and contributing, in part, to the cyclical "boomlet" in capital spending.
Similarly, the Federal Reserves' repeated tightening of credit in 1994 was nor primarily an attempt to reduce productive investment and impede economic growth — although this may be an unintended result. Instead it was a successful attempt to stop the speculative frenzy in the bond market set off by the "steep yield curve." Financial and nonfinancial firms, and local governments (Orange County, California being the most spectacular example, were pocketing the difference between borrowing at low short-term interest rates and investing in long-term, higher yield government bonds. In February 1994, the Federal Reserve put on the brakes, and short-term rates started to rise. Speculators now found themselves payıng more to borrow than they were receiving on their investments. The Federal Reserve's move produced the bond market's WORST year since the 1920s. While firm after firm in New York is announcing lay-offs as a consequence of losses in bonds and derivative products, it appears that Federal Reserve Chairman Alan Greenspan may have extended the cyclical recovery of the "real" sector by eliminating the real possibility of a financial panic. Similarly, the Federal Reserve's casual attitude about the recent fall in dollar is difficult to reconcile with the "financial hegemony" thesis. Instead of rushing to shore up the value of dollar denominated financial investments through higher interest rates, the Federal Reserve is attempting, again, to extend the expansion through maintaining rates and supporting export growth and direct foreign investment through a lower dollar.
If finance capital is neither antagonistic to manufacturing capital, nor enjoys economic hegemony, how do we explain the present administration's exclusive reliance on monetary policy to steer the economy? The "anti-inflation" policy is part of a comprehensive, market-based strategy to advance the competitiveness of
U.S.A. U.S. capital both domestically and internationally. This strategy of fiscal constraint, particularly deficit reduction, seeks to eliminate any economic space for firms to survive without cutting costs and increasing productivity. This strategy is being pursued in a number of ways. First, public spending like welfare and other income supports are being reduced in the hope that resources will, over time, flow to "productive" hands via business and middle class tax cuts. As deficits shrink so will interest payments, further relieving the tax burden and redistributing income from government bondholders to "productive" capitalist taxpayers.
Second, reducing direct fiscal stimulation helps dampen US domestic demand for imports during a cyclical recovery (if aggregate demand is rising overseas helping to correct the trade deficit. From 1987 to 1991, the combination of a weakened dollar and slack total demand in the US helped reduce the trade deficit by 86% Since 1993, as the cyclical economic recovery has picked up steam in the US, the trade deficit has grown sharply because the recovery in Japan and Europe remains sluggish.
Finally, and perhaps most importantly, curtailing the growth of government spending imposes a strict market discipline on all capitalists. The inflationary measures needed to finance job creation and training, infrastructure development, urban renewal or tax cuts benefitting the working and middle class would allow inefficient, "high-cost" capitalists to remain profitable in the short-run by exploiting the gap between rising prices and their costs. After the merger and acquisition "mania" of the 1980s eliminated some of the least efficient capitalists and forced those remaining to reorganize production and cut costs, a consensus emerged within the capitalist class for real fiscal austerity that would intensify competition and allow only the "survival of the fittest" - those firms that produce at the least cost. With inflation adjusted total profits (not profit rates) close to an all time high, it appears that the Clinton administration has been seduced. not by "special interests," but by the logic of capitalist competition. Contradictions of competitiveness and efficiency in a Keynesian world
If history is a guide, a general recovery of profitability - the basis for a "long wave of expansion" in th
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International Viewpoint #266 May 1995
World economy - U.S.A. number of primarily economic obstacles. Remember that there were two crucial conditions for the rise in profit rates that ended the last two "long waves" of stagnation in the 1890s and 1930s. The first was a sharp rise in total profits through a shift in income from labor to capital. The second was relief from the intense competitive pressure that drives firms to mechanize the production process and raise their capital costs. This "pause that refreshes" allowed capitalists to raise sharply their returns on investment.
Today, the first condition for recovery is slowly being put in place, and surely will accelerate in the coming years in the absence of substantial working class and popular resistance. Firms have lowered real wages and benefits and increased the use of contingent workers, while simultaneously increasing productivity through intensifying the work day and automating production. State policies restricting unemployment and welfare benefits have aided firms in keeping real wages depressed by increasing competition among workers. Capital has reduced health care costs without If plans had continued to build Asia's largest nylon factory in Goa later this year, government "managed competition". The restructuring of the health care industry (in particular the increased number of Health Maintenance Organizations which ration health care) is delivering the savings capitalists require, without raising popular expectations with costly universal access and coverage.
The employers' offensive and state austerity are having their desired effect productivity is rising, real wages are stagnant or falling, and total profits are soaring. In the current cyclical recovery, capital is doing very well.
However, the second condition, a cessation of capitalist competition that would reduce the need to invest in costefficient equipment, is not on the agenda. Firms are retro-fitting existing capacity at very high levels of capital intensity. Efforts to save on capital investment (replacing assembly lines with cell formations) are not generalizable throughout production. Even as total profits rise sharply due to productivity gains and depressed wages, the aggregate rate of profit adjusted for short,medium and long-term fluctuations in capacity utilization is not rising. Adjusting the rate villagers bumed it down in October 1994.
of profit for fluctuations in demand is critical for sorting out the causes of the current economic crisis. If the lack of demand was the underlying cause of the fall in profitability, then the adjusted measure would not display a downward trend, which it does. This strongly suggests that the fall of domestic demand is an effect, not the cause of the fall in the average rate of profit. While cost- cutting has not raised the basic rate of profit sufficiently above the interest rate to spur a "long wave" of expansion, it has prevented it from falling further.
The drive to continually lower costs through mechanization and slashing real wages can only intensify in the coming years as Japan and Germany streamline their economies in response to the new efficiencies in the US.A. Short of a worldwide financial crisis that would "stop the music" for a few years, competitive pressures will grind on. In the case of a global economic collapse, the central banks and capitalist governments would probably patch together a plan to keep effective demand and markets mechanisms moving at some acceptable level. Despite capital's embrace of "antistate" policies over the last twenty year capitalist governments have DOE
DuPont and Goan villagers avoid Bhopal-style disaster foreign owner DuPont intended to evade liability for deaths or injury caused by accidents at the plant. Local people decided to protect their interests in the traditional way, and burned the site to the ground earlier this year. DuPont had signed a contract with the Thapars group of India placing sole responsibility for the plant with the local joint venture Thapar-Dupont Ltd. (TDL). Green activists said this was an attempt to clear America's largest transnational chemical corporation of any liability in case of a Bhopal-type disaster. The contract allowed DuPont to dump all its shares in TDL within 30 days if the company decides that "Indian legislative or judicial developments do not justify its continued participation". "It's like getting married and stating beforehand that you will have nothing to do with any kids who come along as a result" says Norma Alvares, an environmental lawyer in Goa. "These kind of clauses should be made known whenever a chemical plant of this type is planned anywhere in the Third World". Local villagers burned down the site in Keri, Goa on 25 January during the funeral of Milesh Naik, a villager shot by police two days earlier in a protest against the restart of work at the plant (closed since 2,000 24
Demonstrators also burned .a clinic built by DuPont as a public relations measure and the local TDL office, where they discovered illegal weapons and twelve suitcases stacked with 500 rupee notes. The crowd wanted to lynch the TDL employees, but local activists were able to safely deposit them at the city limits. According to Indian social scientist Claude Alvares, *the militant and successful rejection of this multinational's factory is the first of its kind since the country began the process of liberalisation, and it presages more to come as multinationals attempt to grab more and more Indian resources with the help of agencies of the Indian state". * • Activists still lobbying for fair compensation for Bhopal victims report that trans-nationals like Union Carbide and DuPont are still trying to prevent the parent company from being sued in the United States, where compensation payments would be much higher than in India. * Adapted from articles by C. Alvares and Ashwini Desai (IPS) in Third World Resurgence no.55 completely abandoned Keynesian policies that prevent the collapse of effective demand and a resulting depression. However, the ability of capitalist governments to avert econom catastrophe (and the political threat of massive unemployment) postpones the "pause that refreshes" that could produce a sharp rise in the general rate of profit. *
1. See Anwar Shaikh, "The Current Crisis: Causes and Implications", ATC pamphlet, for an explanation of the falling rate of profit and its applicability to the U.S. economy
2. John Kendrick, "Productivity Trends in the United States", National Bureau of Economic Research, 1961.
3. P. Krugman and R. Lawrence, "Trade, Jobs and Wages", SCIENTIFIC AMERICAN, April, 1994
4. From 1950 to 1970 the share fell,but the number of jobs in manufacturing rose by 27%. Historical Statistics of the United States, Part I, p. 137, U.S Dept. of Commerce, Bureau of the Census 1975.
5. Robert Lawrence, "Can America Compete?,
6. Even though imports rose from 18% of sales in 1978 to 23% in 1984! Arther MacEwan, "Protection Without Protectionism", Dollars and Sense, 1986]
7. While the share of nonresidential gross (total) fixed investment as a percentage of GDP in 1994 was as high as it had been since World War II, projected net investment (the expansion of manufacturing capacity) was only 2.5% of GDP, a post war low. [U.S. Commerce Department, Bureau of Economic Analysis, 1994] The fall is partly explained by businesses investing more in equipment with short usable lives, and investing less in structures with long usable lives. More importantly, capitalists are upgrading existing capacity, rather than building new capacity and expanding
9. U.S. Commerce Department, Survey of Current Business, December, 1993
10. WEFA Group, 1994