2004 Main Political Report – The U.S. Economy

The U.S. Economy

Long Term Decline of U.S. Imperialism

After World II, U.S. imperialism was top dog, with growth in the manufacturing sector conditioned by minimal global competition. The massive defense spending of the Cold War period, and the relatively high wages of the U.S. worker, marked the U.S. as the largest industrial economy in the world. At the very moment the rich were crowing about the American Century, it was ending. Competition from Europe and Japan and the existence of a Socialist camp, combined with blows from the national liberation movements, came together to end U.S. global hegemony. 1971 marked the end of the U.S. monetary order established at Breton Woods in 1945. Until then, the value of major currencies was fixed against the dollar.

In response to this decline, monopoly capitalism shifted to a policy of neo-liberalism in the 1980's. Neo-liberalism is characterized by an accelerating concentration of capital into the hands of the monopoly capitalists and the delivery of public funds to private corporations while pushing down employment, wage levels, and reducing social spending. Neo-liberal policy tends to concentrate capital into the three imperialist blocks: Japan, the European Union, and the U.S. and Canada.

This concentration has the effect of shaping not just the global economy but also global politics. The intensification of neo-liberal policies in Latin America has brought popular resistance to those policies to the forefront in Argentina, Brazil, Ecuador and Venezuela. Additionally, Japan has found itself unable to keep up with the United States and the European Union and is falling behind the two other imperialist powers. It has been in an economic crisis since 1997 from which it has yet to recover. The weakening of Japanese capital makes competition between the EU and the U.S. to divide the markets of Asia much more likely.

Under the neo-liberal policies of "free market" globalization, the world capitalist system has come to a point at which the crisis of overproduction and financial collapses, in both the underdeveloped and imperialist countries, interact with each other to cause a contraction of the global market to the detriment of all. A fundamental problem of imperialism is that the monopoly capitalists maximize profits by cutting down employment and incomes of the real producers and ultimately ruining the market for products in the real economy.1

Bust Follows Boom on a World Scale

1991 – 2000 was characterized by the longest upturn in the business cycle in United States history. The first tidal wave of a building world economic crisis hit Japan, South Korea and Indonesia in 1997 & 1998. This was termed the Asian Economic Crisis. It occurred when the export-oriented economies of Asia suffered a crisis of overproduction. In order to unload goods, these economies were forced to devalue their currency. The trade balances collapsed, which led to panic and capital flight. This early collapse was a signal of the generalized crisis of overproduction on a world scale. The exports of the countries of Asia, Latin America and Africa, and the countries of the former Soviet bloc are mostly raw material products, some semi-manufactures and still fewer manufactured products. All of these have been overproduced and the overproduction has led to production cutbacks, bankruptcies and mass layoffs. The trade deficits of these countries have become too wide and have resulted in a mounting debt burden of more than US $3 trillion, from which there is no foreseeable relief within the world capitalist system.

The U.S. economy was able to escape the impact of this crisis until the spring of 2001 because of super profits, generated by a technological advantage, and its strong position as a home base for capital inflows. Between 1991 and early 2001, 70% of the global flow of direct investment was concentrated in the United States and 68% of U.S. direct investments were in Japan, the European Union and Canada. Since the beginning of the worldwide crisis of overproduction which struck Asia, the former Soviet Union and Latin America beginning in 1997 and fully emerged in the United States in March of 2001, there have been some subtle but important quantitative shifts in the outflows of U.S. direct investments. Between 1999 and 2002 there was a decline in the overall level of Direct Investment outflows from the U.S. This downward trend has reversed in the first two quarters of 2003. This decline was a reflection of a lack of capital to invest given the economic downturn. The reversal of this trend for the first two quarters of 2003 may be an indication of easing crisis in the United States. While the EU remains by far the largest recipient of FDI outflows from the U.S., for the first time both Asia and Canada surpassed Latin America as a recipient of capital flows.2 This is a reflection of two different factors: first, a persistent economic crisis in Latin America, and secondly, the increasing size and importance of China's economy.

When the worldwide economic crisis began in 1997 there was tremendous capital flight into the U.S. Inflows of capital to the U.S. nearly doubled in a two-year period. When the economic crisis hit the U.S. in early 2001, capital flight out of the U.S. was just as rapid. Current Foreign Direct Investment into the United States is below the level it was at in 1994, though there is a reversal in the trend of capital flight, likely owing to a perceived stabilization of the U.S. economy.3

It should be noted that while there has been a worldwide crisis and no country or economic block has been unaffected, the EU economic block has experienced the crisis on a relatively minor scale up to this point. While Japan has not made a significant economic recovery since 1997 and has fallen behind the two other imperialist powers, the EU has strengthened its position vis-à-vis U.S. imperialism significantly. The introduction of the Euro and its use as a universal currency signals that European imperialism is on a rising tide economically, while at the same time U.S. imperialism and the power of the dollar is in long term economic decline.

Dynamics of the current crisis of overproduction in the United States

Capitalist economy has a cyclical boom/bust character. The history of American capitalism is a history of economic downturns (recessions and depressions). With the exception of the Vietnam War Years, between World War II and 1991 there had been a recession every 4 to 6 years. The boom period that the U.S. economy was in between 1991 and 2001 was the longest period ever. Nonetheless, "the end of history" predicted by some business pundits could not last.

U.S. stock markets experienced an overvaluation (speculative bubble) from 1996 – 2000, particularly in the "new" or high tech sector. Actual earning and profits came nowhere near meeting the valuations of stocks. The bubble burst first in the high tech sector, followed a year later by a collapse in stock prices in general.

The economy did not collapse because of an overvaluation in the stock market and mediocre earnings reports. A situation developed in which the production of goods and services could not be continued on a profitable basis. By overproduction, we do not mean that people do not need new cars or other durable goods, just that the capitalists cannot make a profit off of their continued production.

The crisis of overproduction hit the U.S. economy in early 2001. Since the attack on the World Trade Center in September 2001, there has been an attempt to rewrite economic history and blame the recession on those attacks. The fact is, however, that the manufacturing sector had already experienced three consecutive quarters of negative growth by that time. Though manufacturing often leads other sectors, the lead in the current recession was a little larger than normal. Industrial production peaked in October 2000. For 5 months, until March, the economy outside of manufacturing was expanding faster than manufacturing was shrinking, so that total employment continued to grow. In dating the start of the recession back to March, we ignore the media's shorthand definition of a recession: two consecutive quarters of decline in Gross Domestic Product (the broadest single measure of economic output) adjusted for inflation, or real GDP. Both industrial production and real (adjusted for inflation) sales in the manufacturing, wholesale, and retail sectors peaked early in the fall of 2000, and have fallen steadily since then. Once overall employment began to drop after March 2001, as job losses in manufacturing started to outweigh job gains in other sectors of the economy, the downturn was underway. The financial markets had already reacted to serious overcapacity issues in the tech sector, with a crash in the NASDAQ index coming in early 2000. The broader financial markets reacted to the general crisis more slowly, not seeing their first dip until mid to late 2001.

The "official end of the U.S. recession" is marked as November 2001. This is because the capitalist's shorthand definition overlooks several important realities. 1) Consumer spending, encouraged by government monetary policy, can be an engine for growth in the Gross Domestic Product (GDP) (which is a different figure than has been used historically to measure economic growth, traditionally Gross National Product was used) without solving the crisis of overproduction. The monetary policy of lowering interest rates to their lowest levels in decades spurred many consumers to purchase homes, creating economic growth while not solving the problem of overproduction. 2) Until November of 2003 the manufacturing sector continued to contract nearly every month, indicating an unresolved crisis. 3) Unemployment, which had been at its lowest level in 30 years, rose during the "official recession" and continues to be at its highest level since 1995.

After a year of "recovery" in official terms, GDP growth in the United States slowed markedly from about mid-2002, owing both to rising geopolitical uncertainties in the run-up to the war on Iraq and to the continued aftereffects of the bursting of the stock market bubble outside of the high tech sector. Amid weak demand and continued substantial excess capacity, inflation has fallen considerably, with core (Consumer Price Index) inflation still well below 2 percent.

Structural Changes

The current crisis of overproduction combined with the long-term decline of the U.S. economy has resulted in some major structural changes. There has been a further loss of light manufacturing jobs within the United States. Most job growth has taken place in the service sectors. This trend is likely to continue and indicates continued high unemployment and low wages for the U.S. working class. Given the restructuring of the global economy, it is unlikely that this trend will reverse in the context of the U.S. as an imperialist power.

Relative Stability Likely in Near Future

At the end of 2003, an economic recovery appears to have regained momentum in the U.S. On the one hand, second and third quarter Gross Domestic Product data proved stronger than expected. This has created consumer and business confidence and caused a jump in spending.

On the other hand, this jump start has been fueled by governmental policies that seek a way out of the economic crisis by a dual policy of giving tax cuts to the monopoly bourgeoisie and its firms (amounting to US $2.65 trillion over a ten-year period) and military purchases. Defense spending accounted for more of the GDP growth in the second quarter than durable goods manufactured4. Additionally, unemployment remains high and significant excess production capacity still exists. It is unlikely that the support to the GDP from consumer housing purchases will continue.

Nevertheless, the fiscal policy of stimulating the economy by placing more money into the hands of the wealthy through tax cuts and increasing military spending while slashing public services has corresponded with the end of the crisis and will likely continue. Stock prices have risen markedly (though possibly are overvalued again); and long-term interest rates, despite a strong rebound since mid-June, are still low by historical standards. With low inflation and relatively few deflationary pressures, signs point to relative stability of the U.S. economy in the short to medium term. It is likely that this stability will be characterized by relatively slow growth in the GDP and little improvement in the unemployment rate, given the minimal job growth that has characterized the last three quarters of 2003. Nonetheless, a recovery from the capitalist perspective seems more likely than a recession.

Medium to long term there are a number of factors that would indicate that another record-long upturn in the business cycle is unlikely. The U.S. carries a record trade deficit that is now matched by an equally large government deficit. Attempts to correct this deficit will put an end to the government stimulus packages that are supporting the weak economic growth and are likely to setback the economy. Despite its depreciation over the last year, the dollar still appears overvalued from a medium-term perspective, and the crisis of overproduction and weakness of demand in the rest of the world continues.

Uneven Character of Polarization

Increasingly, the social character of the United States is polarizing into two distinct economic poles — wealth and poverty. The gap between the working class and the ruling class continues grow.

The fall in the equity markets and resulting decline in household wealth caused by the recession narrowed the gap between rich and poor slightly in the past two years. The crisis also meant a 1.1 percent real decline in household money income from 2001 to 2002. This marked the end of a very brief rise in real money income for the upper section of the working class, which took place between 1999 and 2001.

The gentrification of the inner cities continues and affordable housing stock is either torn down as community nuisances or modified to suit the rich. It is estimated that about 32% of Americans pay more than 30% of their household incomes for housing.5 Homelessness continues to rise. By most estimates, homelessness has doubled in the last 10 years. Between 2.5 and 3.5 million people are homeless every year.

Attacks on the working class continued with the systematic destruction of the social safety net. Lifetime limits on welfare are in effect. The state governments are throwing people off welfare roles at the same time that unemployment is rising. This only increases the polarization between the rich and poor. These gaping holes in the social safety net on the federal level puts our class back into the economic reality of 1928. Ending welfare as an entitlement and replacing it with block grants for the states means that public assistance devolves towards a state level, and ultimately to that of the county.

Nations within the U.S.

Polarization proceeds unevenly and affects oppressed nation alities within the U.S. more than the class as a whole. The U.S. is a country composed of more than one nation. There is a Black Nation, whose territory is in the South, a Chicano nation in the Southwest, numerous native nations, and a number of national minorities including Asian and Pacific Islanders, Puerto Ricans in the U.S., etc.

Most of the states in the South and Southwest have right to work laws. In the South, only 8 percent of the work force is unionized. For example, in South Carolina 3.6% of workers are unionized. This compares to 17.3% in Pennsylvania. Average income in right to work states is 15% lower than in non-right to work states.

In the last three years the median income for Blacks has fallen at twice the rate it has fallen for whites. The income gap between whites and Blacks is in the $15,000 dollar range. While Latin@s (government statistics use the term “Hispanics”, a non-Marxist and generally not that helpful category but one used by the government to keep statistics) have experienced a modest gain in income, the poverty rate for Latin@s is between 19.2 and 24.9%, depending on how it is calculated.

A chart for Latin@ income groups would show all the income groupings clustering around 70-75% of the income of their white counterparts, with less stratification than among African Americans. Incomes of the poorest Latin@s fell sharply relative to whites from the early 1970s through the mid-1980s, as new immigrants from Mexico, Central America, and the Dominican Republic arrived.6

In the final analysis, the problem is that the law of uneven development 7 functions in U.S imperialism’s relationship to the oppressed nations within its own borders in similar ways to the way it functions in oppressed nations abroad.


1 (Paraphrase) BOLDLY ADVANCE THE PHILIPPINE REVOLUTION AMIDST WORSENING GLOBAL AND NATIONAL CRISIS, Message on the 35th Anniversary of the Communist Party of the Philippines. Armando Liwanag Chairman, Central Committee Communist Party of the Philippines December 26, 2003. p.12





5 Census Bureau – 2001 American community survey.

6 Left Business Observer

7 “ ¼Uneven development and a semi-starvation level of existence of the masses are fundamental and inevitable conditions and premises of this mode of production (capitalism). As long as capitalism remains what it is, surplus capital will be utilized not for the purpose of raising the standard of living of the masses in a given country, for this would mean a decline in profits for the capitalists, but for the purpose of increasing profits by exporting capital abroad to the backward countries. In these backward countries, profits are usually high, for capital is scarce, t he price of land is relatively low, wages are low, and raw materials are cheap. The necessity for exporting capital arises from the fact that in a few countries, capitalism has become "overripe" and (owing to the backward stage of agriculture and the impoverished state of the masses) capital cannot find a field for "profitable" investment.” Imperialism, The highest stage of capitalism. V.I. Lenin pp. 73 & 74