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
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.
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.
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
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
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
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
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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