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6 November 1996

'It's NOT the economy, stupid'

Living Marxism's economics editor, Phil Murphy, assesses the strengths and weaknesses of the US economy.

The health of the economy has been of especially marginal significance to the outcome of the recent elections. It is coping better than most with the impact of the world-wide slump and, although the state of the economy always impinges upon the state of politics, political events can never be reduced to economic determinants
  • The economy and the election.

Much commentary on the lacklustre US presidential election campaign has lazily claimed that Clinton's clear lead is based on the health of the economy. Valiant attempts have been made to talk up levels of economic confidence and the remarkable disappearance of the 'feelbad factor'. Recalling the sign in Clinton's campaign headquarters in 1992 which is reputed to explain his victory then: 'It's the economy, stupid', they claim that in 1996 'It's STILL the economy, stupid'.

Below we will see that the state of the real economy, and perceptions of its strength, are rather more mixed than many observers believe. More importantly, this type of electoral analysis ignores the sea-change in US - and western - politics which has emerged over the past few years. The strength of the TINA sentiment - there is no alternative - means that economics has become a relatively uncontested issue in bourgeois politics. Where it appears it has become trivialised to issues such as the appropriate level of personal taxation. At the same time the issues which arouse most popular interest and passion are those to do with individual behaviour, inter-personal relations and the agenda of public morality, values and trust.

It is in this social and political arena - not the economic one - that Clinton gains his incumbency strength. His policies, or even more the tone the White House strikes on issues, are more in tune with the popular new authoritarian trends, while the GOP's old right agenda comes across as out of time and irrelevant. More than in 1992, or before, the outcome of this election will confirm the adage: 'It's NOT the economy, stupid'.
  • Perceptions of the economy.

There has been a concerted effort to talk up the economy in much pre-election journalism. In particular attempts have been made to play up levels of economic optimism. For example, Business Week, 23 September 1996, headlined an article on the American economy 'Whatever happened to economic anxiety?'. The short answer is that it is still there. Although the tone of economic discussion is more upbeat than a year ago, this sentiment is only skin deep. Polls can show higher confidence levels but it is a confidence which is punctuated by frequent bouts of jitters. If one can identify a form of optimism it is a most wary version.

The more established and rooted feeling these days about the economy is that whatever the figures show, all is not right. This sentiment has been intellectualised in a series of recent books which all emphasise that the 'golden age' of the 1950s and 1960s will never return. (See J Madrick, The End of Affluence; P Krugman, Peddling Prosperity; R Samuelson, The Good Life and its Discontents; M Elliott, The Day Before Yesterday.)

In journalistic coverage, even for those who sincerely believe that the economy is doing well at present, the presumption remains that the good news cannot go on much longer. This is evidenced by the nervousness with which each economic announcement is awaited; for example, the monthly ritual now of the non-farm payroll figures. Indicative of the narrowing of real economic discussion the important issue here each month appears to be not the actual level of jobs created but whether the announced figure is in line with the earlier expectations. Whatever the reaction is, it usually prompts a renewed bout of second-guessing about where base rates are heading, bringing about shifts on the bond and stock markets. It is through this chain of expectations, anticipations, reactions and speculations that news of better job growth often leads to a fall in share prices. The stock market perversely falls on news of an apparently stronger economy.

Among economists the sentiment that things are about to go wrong is widespread. However there is no consensus about what might go wrong. To be simplistic there are two schools of thought, both anxious for the future but for diametrically opposite reasons. The 'strong economy' school fears an overheating economy. They point to some indices, such as strong retail sales, and anticipate a big jump in interest rates set by the Federal Reserve to offset inflationary dangers. This interest rate hike is assumed to bring economic growth to a halt.

On the other hand we have the 'weak economy' school. It points to other real indices, such as record levels of consumer debt and personal bankruptcies, which it says already heralds the stirrings of a recession next year.
  • What is going on and why?

The one-liner on the US economy is that it - along with the rest of the industrialised world - is in slump. But the US has been coping with the slump relatively well over the course of the 1990s. Its relative resilience is shown by the protracted, though undramatic, rate of economic growth since the 1991 trough - averaging 2-2.5 per cent of Gross Domestic Product per annum. Unemployment stands at only half the western European level, and the US seems less prone to the economic volatility of most of the rest of the advanced industrialised nations.

Taking a few elements of economic performance as illustration, a common picture emerges: evidence of some real reserve in the short term, offset by longer term weakness or unsustainability.

(a) Productivity growth.

The major reworking of productivity figures at the end of last year confirmed that while productivity growth in the 1990s has been slightly faster than in the previous 20 years, the hyped 'economic productivity renaissance' never occurred. Whereas earlier estimates had given productivity growth so far this decade of two per cent per annum, compared to far less than one per cent from 1973 to 1990, the revised, and more accurate figures, are just above one per cent and just below one per cent respectively. This contrasts with a three per cent average during the boom years from 1960-73.

The verdict on recent productivity is therefore 'satisfactory', rather than continued decline. And within this aggregate picture, some sectors have done well above average on international markets; for example, software development led by Microsoft, and semi-conductors manufacture, led by Intel.

The longer term problem is pointed to by the breakdown of the investment which has brought about these productivity gains. A much higher proportion than in the past is in 'business equipment' in contrast to 'plant'. Purchasing more and more PCs has much more limited potential for companies, especially in the longer term, than investing in new plant and factories, and embarking on across-the-board technological restructuring.

(b) Profits.

Corporate profitability has doubled in real terms over the past three years; in 1995 alone they grew by 20 per cent. This represents mainly the bottom line gains from downsizing and cost-cutting. There will be more to come in the same manner but at some point cost-cutting reaches its physical and technical limits. Rationalising companies, on the one hand, and growing, rationalised companies, on the other, are two very different operations, and even for the companies which succeed in the latter, the profit gains are likely to be much less dramatic than the recent experience.

Already we see more evidence of new creative accounting techniques taking over from cost-cutting to maintain the strong profit-reporting record (see Business Week, 5 August 1996, 'Are profits shakier than they look?'). Several techniques are being employed to embellish Profit and Loss Accounts, sometimes at the expense of the Balance Sheet. Payments to suppliers are delayed, while the collection of customer revenues is speeded up. There is also the fashion to capitalise current expenditure, such as software. This artificially boosts investment levels, inflates the total of fixed assets, and removes expenditures from the P&L accounts. Creative accounting can satisfy investors in the short term but it does not translate into a sound foundation for the future.

(c) Jobs.

The US job creation record of 10 million new jobs over the past four years is much better than the western European experience. There is also, uniquely, no sign in America of the ratchet-type growth in unemployment rates after each recession. This is indicative of a stronger capability to cope with the slump. However this is limited, or offset, by a number of distinctive trends of the 1990s.

Job growth is at half the usual post-recession rate, i.e., this is a weaker than usual recovery. Unemployment levels have fallen but more slowly than in previous recoveries (and even this statistic is favoured by the slower demographic growth in the available workforce). One reason is that job creation coexists with the heavier than normal continuation of mass lay-offs during the 'recovery' phase; recently redundancies have been made at the fastest rate since the start of 1994.

There has also been a shift away from temporary to permanent layoffs. In the past the ratio between the two was about 1:1; recently it has been around 1:5.

The quality of the new jobs is also distinctive. 80 per cent of the new jobs are in services, reflecting the structural shift in the economy away from industry. Many, but not most, are low paid McJobs in catering, retailing and distribution. However, a majority of the new jobs are classified as professional and managerial, and some of these are quite well paid. But even these are not secure jobs. Recently created so-called 'good' jobs are already being lost, among managers and in the financial and telecommunications sectors. This helps explain why surveys show that the level of economic discontent remains strongest among baby boomer middle managers and college graduates.

Given that the American economy shows many signs of conjunctural resilience and an above average capacity to cope with slump trends - notwithstanding the longer term problems - what are the reasons? Three stand out:

i) The absolute size of the US economy and of its individual units has given above-average scope to the sort of cost-cutting and rationalisation which has characterised 1990s corporate America. Although the results are only one-off benefits, they have been considerable nevertheless.

ii) The scale of the economy also provides an absolute mass of profits which is of such a size as to fund significant speculative operations. America remains the place to go in the world for those seeking venture capital and for stock market flotations. And with all this surplus capital floating around some filters through into genuine productive activity with positive economic returns.

iii) There are the continuing benefits from the dollar's role as world money. Despite some trends towards the wider use of the yen and DM in international markets the dollar remains the only currency that can claim to be the world universal equivalent. This brings many benefits for an economy coping with depressed times.

State and corporate indebtedness is relatively easy and cheap to fund since international capital continues to take up offered dollar assets. The type of slowly depreciating currency experienced by the dollar during most of the 1990s presents a 'golden scenario' for US capital. (The recent dollar strength versus the yen and DM is unlikely to last too long as the Japanese and German economies pick up momentum again.) Not too rapid a fall either to scare off foreign investors or to make US foreign investment too expensive, the fall in the dollar has helped boost US exports as a proportion of GDP from their historically low levels to something closer to Group of 7 averages.

None of these distinctive features of US capital are going to disappear overnight. Although not significant for the outcome of the elections, they will continue to influence the parameters within which the US operates at home and abroad for some time to come.
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