Why we’re not out of trouble yet--not even close.

The American economy added 290,000 jobs in April, the biggest monthly increase in four years. Clearly, a recovery has taken hold. But how strong and buoyant will it be? Will we eventually get back to growth rates above 4 percent and to an unemployment rate of less than 5 percent? Or will this recovery sputter like the last one that began in 2002?

The strongest case for gloom that I’ve read has been made by UCLA economic historian Robert Brenner in a new introduction that he wrote to the Spanish edition of his 2006 book, The Economics of Global Turbulence. New Republic readers will detect a similarity between Brenner’s views and my own, but his are grounded in a far greater knowledge of economic history than mine. His pessimism also outpaces mine.


Global overcapacity means that the world’s industries are capable of producing far more steel, shoes, cell phones, computer chips, and automobiles (among other things) than the world’s consumers are able and willing to consume. Companies can still sell their goods but at prices that undercut their rate of profit. In the nineteenth century, the redundant and less productive firms would have folded, and as wages fell, and profit rates went back up, the economy would start to revive. But that no longer happens. Firms have become too big and powerful to fail; and the citizens of democratic nations will justifiably no longer tolerate unemployment above 20 percent. Instead, the average rate of profit falls, private and public debt rises, and the danger of a large crash looms.

Brenner traces this problem of global overcapacity to the early 1970s when the countries decimated by World War II had rebuilt their industrial base and were capable of competing equally with the United States, and when newly industrializing countries in Asia and Latin America were beginning their ascent. At that point, global overcapacity manifested itself in declining rates of profit. In the United States, for instance, average profit rates in manufacturing fell from 24.5 percent in the 1960s to 13.4 percent in the 1970s and 11.8 percent in the 1980s. As profit rates declined, firms were less inclined to invest and expand, leading to a decline in overall growth in the economy and to higher average unemployment over a decade.

The more immediate causes of the current downturn, he suggests, go back to the vagaries of the real economy in the 1990s. The revival of American manufacturing during that period was cut short by what Brenner calls “the reverse Plaza accord.” (See my article, “Dollar Foolish,” in TNR, December 9, 1996.) The U.S. agreed to drive down the value of the yen and mark and drive up the value of the dollar to protect Japan in particular from a severe recession. But the effect was to price American goods out of markets in Asia and to widen the American trade deficit.

In the past, this might have led to a downturn, but there were special circumstances that sustained the Clinton era boom into the late ’90s. In order to hold down the value of the dollar relative to their own currencies, Asian nations sent the dollars they accumulated from their trade surpluses back to the U.S. to buy Treasuries, stocks and bonds, and real estate. The accumulation of dollars helped fuel a speculative frenzy in information technology stocks, which created a “wealth effect” of its own that buoyed consumption and investment. Brenner calls it “asset price Keynesian.” Paul Volcker summed up the situation thusly: “The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent upon about 50 stocks, half of which have never reported any earnings.”

Of course, the dot-com bubble burst in 2001—inconveniently on the same day that Ruy Teixeira and I were trying to auction our proposed book, The Emerging Democratic Majority. Overcapacity had spread to information technology. (See Noam Scheiber, “Wretched Excess,” in TNR, December 3, 2001.) A recession had taken hold. A year later, the economy began to recover, but the tradeable goods sector remained stagnant. In 2005, investment by non-financial corporations was still almost 5 percent below what it had been in 2000. Net borrowing by non-financial corporations was nugatory. And the trade deficit continued to rise.

How then was recovery possible at all? What happened was that the fundamentals behind the dot-com boom and bubble were replicated in the housing and commercial real estate markets. The rush of foreign dollars into the U.S. from the trade deficit helped the Federal Reserve keep interest rates near zero. With the interest rates plummeting, home sales rose. And as sales rose, the price of homes rose. Homeowners used their newfound home equity to purchase cars and other homes. Construction boomed, even while manufacturing floundered. When home prices threatened to discourage new purchases, banks and brokers, with encouragement from the Fed, offered new subprime mortgage deals. When the banks and brokers became worried about risk from these mortgages, they invented elaborate financial instruments to cushion and spread the risk. And when housing prices finally stalled, the whole Ponzi scheme collapsed, and the recession, the most severe since the 1930s, commenced.

Did the housing bubble cause the recession? Yes, in the same sense that a patient suffering from lung cancer finally dies as a result of pneumonia. The bursting of the bubble precipitated the recession, but the underlying condition, which made possible the financial chicanery of the last 15 years, was the global overcapacity in tradeable goods. With American firms no longer eagerly seeking funds for expansion, the banks and shadow banks had to look elsewhere for profitable outlets. And with the economy that produces tradeable goods not producing new jobs, a government that took its responsibility for maintaining employment had to look elsewhere to stimulate demand and growth. Ergo, two bubbles, and two recessions.

So what now? There are good reasons to re-regulate finance—among them, to prevent fraud and to create transparency—but financial reform will not necessarily create an incentive for banks to loan money to firms that want to invest and expand. The problem right now is primarily that firms are fearful that they won’t make a sufficient rate of return on their investments, and are holding back. There is also good reason to make expenditures for infrastructure that will create jobs and make American industry more productive. But, Brenner argues, Keynesian spending is at best a palliative that temporarily creates jobs and that, over the long run, exacerbates the problem of excess capacity.

This is a crucial point and I want to quote Brenner on it. He says that Keynesian

additions of purchasing power were especially critical in reversing the severe cyclical downturns of 1974-5, 1979-1982, and the early 1990s, which were far more serious than any during the first postwar quarter century and would likely have led to profound economic dislocations in the absence of the large increases in government and private indebtedness that took place in their wake. Nevertheless, the ever increasing borrowing that sustained aggregate demand also led to an ever greater build-up of debt, which, over time, left firms and households less responsive to new rounds of stimulus and rendered the economy ever more vulnerable to shocks. Even more debilitating, it slowed the shakeout of high-cost low profit means of production required to eliminate overcapacity in the world system as a whole and in that way prevented profitability from making a recovery.

Brenner is not saying that the U.S. economy won’t “recover” from this or future recessions. What he is saying is that we and the rest of global capitalism will continue on the gradual downward slope that began in the 1970s. We will not be able to recreate the Golden Age of capitalism that lasted from 1945 to 1970 simply by applying the right mixture of spending, subsidies, re-regulation, and international negotiation. Instead, the world economy, and the U.S. economy, will resemble the post-bubble Japan of the 1990s—with its “L-shaped” recovery writ large.

Brenner doesn’t discuss the political repercussions, but they are pretty clear: Continued economic uncertainty and instability will make for political instability. This has already happened in Japan, and appears to be spreading to Europe, where recent elections in Germany and Great Britain have created uneasy governing coalitions. In the United States, the Republicans are likely to take back at least the House of Representatives in November, but that won’t issue in a new era of Republicanism any more than Obama’s victory now appears to have created a long-lasting Roosevelt-type Democratic majority. Unless a solution is at hand, we’re in for an era of what political scientist W. D. Burnham called “unstable equilibrium.”

And by Brenner’s logic, there is no lasting solution to global overcapacity and falling rates of profit short of the kind of depression that shook the world in the 1930s. This depression, it should be recalled, had some pretty terrible political repercussions of its own. It not only threw millions out of work, but also fed the growth of fascism and Nazism and contributed, if not led directly, to World War II. The combination of the Depression and World War II created the conditions for the Golden Age of capitalism that occurred from 1945 to 1970.

Brenner himself is certainly not advocating depression and war. He doesn’t offer solutions. He is trying to explain the dilemma that global capitalism faces. I would certainly hope that Brenner is wrong. I like to think the countries of the world could find a way out of this mess through national and global planning and cooperation. But I don’t presently see how.
