No double-dip

Are the developed capitalist economies going to plunge back into another economic recession in a replay of the double-dip of the early 1980s slump?  In my book, The Great Recession, I argued against that view (see chapter 43) and that’s as a long ago as mid-2009.  And in past posts, I reiterated that argument (see my post, Economic recovery or new recession?, 7 June 2010).

I argued that the most likely path for the advanced capitalist economies after the end of the Great Recession (when it troughed in mid-2009) would be an initial sharp recovery in economic activity and output, led by increased profitability and then investment.  However, the recovery would be much weaker than in previous recoveries from capitalist slumps since 1945.  The path of recovery would less like a U-shape (as in the 1990s) or L-shape (as in Japan in the 1990s) or even a ‘double-dip’ W-shape (as in the early 1980s).  It would be more like a square root, namely an initial jump back from falling GDP levels, followed by sluggish growth well below previous trend growth rates.

Capitalism can and does recover from crises and slumps.  It was Marx that explained that the very cause of capitalist crises explains the recovery.  The inexorable tendency for the rate of profit to fall under capitalist production eventually causes a fall in the mass of profit and an economic slump.  That can be triggered in different ways – in the Great Recession it was triggered by an excessive build-up in private sector debt, wild Ponzi-style speculation in the financial sector and a huge housing bubble that finally burst under it own weight.  But that would not have triggered a major slump, bigger than anything seen since the 1930s, if profitability in the productive sectors of the capitalist economy had remained firm and rising.  Instead, profitability, at least in the US, the world’s largest capitalist economy and the source of the financial crisis, was falling from 2005 onwards, well before the credit crunch began.

But, as Marx explains in his works, in the slump, capitalists liquidate or write-off bad assets, they close down plant, they lay off workers, they take over weaker businesses and they centralise capital.  All this sharply lowers the cost of capitalist production (the cost of plant, equipment, debt and above all, labour) and eventually raises the rate of profit, even if at a lower level of capacity, production and mass of profit.  That lays down the base for recovery.  Of course, recovery has been at the expenses of people’s jobs and livelihoods and at an enormous waste of productive potential.

The point of capitalist economic recovery brings us to the argument that is taking place between the major wings of mainstream capitalist economics, the Keynesians and the neo-classical ‘Austerians’, about how to ensure that the recovery is sustainable (see my post, Keynesians versus Austerians, 22 June 2010).

The Keynesians argue that capitalism can get into a trap that it cannot escape from, where existing capacity, both plant and labour, cannot be employed fully.  The economic recession becomes a depression.  Now this is not because of the lack of profitability but because of the lack of ‘effective demand’.  Consumers (households) are not able to buy goods and services at the same level as before.  They cannot do so because wages are down and jobs have gone.  Most important, banks won’t lend cheaply to businesses so that they can rehire and recover, because cash is king and confidence in lending and in the economy is shot.   There are no ‘animal spirits’ that can motivate businesses to start investing more.

The only way to break this vicious circle, say the Keynesians, is to get the central bank to cut interest rates to the bone and start printing money to release more funds.  Also the government must start to spend more and/or reduce taxes.  It must run a fiscal deficit in order to create sufficient ‘effective demand’ to compensate for its decline in the private sector.  This will kick-start the economy.  Now any attempt to cut back on this deficit before capitalism has got off its knees risks lengthening the recession or pushing the economy back into it – a double-dip.

When the UK coalition government announced its ambitious fiscal deficit reduction plan last week (see my post, Britain: slash and burn, 20 October 2010) , Paul Krugman, America’s leading Keynesian, wrote a frightening piece in the New York Times.  He spared no niceties: “The best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997.  That is, premature fiscal austerity will lead to a renewed economic slump.” The UK government has guaranteed a double-dip, says Krugman.

But the Keynesian view of recovery and sustainable economic growth is flawed.  It is not ‘effective demand’ that drives a capitalist economy but profitability.  If consumers spend less (or just the increase in spending slows), that loss of demand does not necessarily have to be replaced by increased government consumption.  That demand can be replaced by increased investment by businesses and/or government investment.  And it is investment in new capacity that generates employment and more income.

It is the key to growth in production.  It is supply that creates goods and services that add to national product not the demand for them by households, business and government.  The Keynesians have the cart before the horse.  If investment takes off, it will create demand for capital goods for other capitalists and raise employment.   As employment rises, wage income will rise to provide more demand for consumer goods.  Thus the economic recovery gets under way.

But under capitalism, investment will only take off if profitability has risen sufficiently to encourage capitalists to invest – ‘animal spirits ‘ must have a material base.  But investment does not have to depend on profits if the economy is primarily owned by the government sector and investment is part of a national plan of production.  Indeed, in China,where the bulk of fixed investment is under government control, economic growth has ploughed on through the Great Recession with hardly a splutter and so has growth and employment – no single or double dip there!  It is also no accident that Brazil has had a very mild economic recession after the government launched a huge infrastructure programme using its state-owned banks to finance it, in preparation for the 2014 World Cup and the 2016 Olympics.

In one sense, the Austerians are right over the Keynesians.  Capitalism can recover from the Great Recession without government intervention.  And if extra government spending has to be paid for by higher taxes on profits, it will inhibit capitalist investment and production not expand it.  If it’s paid for by increased government borrowing or by the printing of money, it will either drive up interest rates for businesses or generate inflation that will squeeze profitability.  That is what the Austerians mean by the ‘crowding out’ of the private sector.

But the Austerian path to recovery is equally flawed.  Their argument boils down to what one City of London economist said on the UK’s BBC TV this week.  Trevor Williams, in supporting the UK coalition government’s draconian government job cuts, said, ” Government does not ‘grow’ the economy, only the private sector can.  So it must make room for the private sector.

If investment provides the sinews of an economy that make it move faster and profits are the life blood of capitalism that allows the investment sinews to move, that might be right.  But investment does not require profit to increase under a planned publicly-owned economy.  Government does not just have to ‘raise taxes and make transfers’, while the private sector ‘grows’ the economy.  It does not just have to ‘consume’ goods and services, it can be a provider itself, either directly or indirectly (by investing in projects that are built by private contractors).  Only the eternal and given assumption of private ownership leads to the conclusion that government  cannot ‘grow’ an economy.  Government investment and production are only ‘unproductive’ in a capitalist sense, by reducing profits for the private sector.

Turning from theory to fact, the evidence is divided on whether extra government spending can help stimulate economic growth or, on the contrary, crowd out capitalist investment.  The Keynesians like Krugman, Brad De Long and others says it helps; the Austerians and neoclassical apologists for ‘free markets’  like Robert Barro (see “The Ricardian approach to budget deficits”. The Journal of Economic Perspectives 3 (2). ), say it does not and even makes things worse.

Data are bandied about to support either side.   But again all the data refer to government spending or tax cuts in general and do not distinguish between government social transfers and services (unproductive to capitalism) and government investment and it  is the latter that matters to growth.  And everywhere, government investment is being cut and slashed.

Even so, I reckon the US and UK economies are not heading into double-dip.  The Great Recession was deepest and longest in the US since the Great Depression.  But the recovery since mid-2009 has been quicker than in the recovery of the early 1980s.  US capitalism may still be on its knees (see my post, Capitalism still on its knees, 15 october, 2010), but the evidence is there that rising profitability will lead to a recovery in investment (it’s already visible in business equipment, up 17.8% over last year on the latest Q3’10 data) and will eventually sustain a new economic cycle.

The latest GDP figure for the UK showed that the economy had grown 2.8% over last year in Q3’10.  The equivalent figure for the US has just come out at 3.1% yoy.  Neither of these rates is sufficient to deliver enough ‘effective demand’ in the Keynesian sense to get unemployment down, especially as in both countries public sector jobs will disappear like snow in a desert over the next year or so.   But it does not suggest a drop back into recession, as long as private sector investment picks up.

If you look at the graphic below taken from a previous post (see my post, Greenspan gets it, 8 October 2010), you can see that corporate profits (called internal funds here) have already recovered sufficiently in the US to suggest that private investment growth will soon follow.


US non-financial corporate investment is still 21% below its peak just before the crisis began in mid-2007 and corporations are still hoarding the bulk of their growing profits rather spending it.   In that sense, US capitalism is still on its knees.  But, as stated above, investment in business equipment is now rising at nearly 18% a year.  Even though investment in plant  is still down by 12% from the same time  last year, in Q3’10, it rose for the first time since mid-2008.

Indeed, now that the US Q3’10 GDP figures are out, we can see how much consumption and investment have contributed to US economic growth so far this year.  What is clear is that it is the movement of investment that is the major swing factor.

In 2009, the US economy contracted by 2.6%.  Household consumption contributed 0.8% pts of that 2.6% decline, or about one-third, but private sector investment dragged down growth by 3.2% pts, more than four times the impact of private consumption.  It was only US net exports and government consumption and investment that reduced the decline in US real GDP to 2.6%.

Now after three-quarters of 2010, the US  real GDP growth is averaging 2.5% (that’s different from the 3.1% yoy rise in Q3’10 over the Q3’09 mentioned above).  Private consumption has contributed an average 1.6% pts, but private investment has contributed 2.5% pts.  A negative contribution from foreign trade has curbed growth to just 2.5%.  So it is investment (and that means private investment under capitalism) that drives economic growth not consumption.

What will be different from hereon is that future economic growth is going to be much slower than it was before the Great Recession happened.  The sheer weight of extra debt (both private and government) that built up during the credit bubble of the last 15 years has not been devalued.   So it adds to the costs of capitalist production and wil keep profitability from rising back to the peak of 1997 or even the peak of 2005 (I’m referring to the US here).

Capitalism remains in long-term crisis even if it recovers from this recession and avoids a double-dip.  Another slump will be due down the road before this decade is out.


4 Responses to “No double-dip”

  1. Sergii Kutnii Says:

    Michael, wouldn’t you mind if this & some other posts from your blog will be translated into Ukrainian & published on Ukrainian Marxist sites esp. &

  2. michael roberts Says:


    no problem.


  3. Andrew Kliman Says:

    Hi Mike,

    You wrote, above, that “the recovery since mid-2009 has been quicker than in the recovery of the early 1980s.”

    But the latest issue of The Economist ( says, “Through the first five quarters of recovery after the 1982 recession, real GDP grew by 7.8%. The total expansion this time has been just 3.5%.”

    What’s going on?

    • michael roberts Says:

      I’ve checked the data for real GDP growth in the US to see if the Economist is right. According to that data, the US economy troughed in the second part of its ‘double-dip’ in Q1’1982. Over the next five quarters, the US economy grew 3.8%, not 7.8% as the Economist says. The US troughed in the Great Recession (no double-dip so far) in Q2’09. In the last five quarters, the US economy has risen 3.5% in real terms as the Economist says. Pretty much the same as in 1982.
      As everybody agrees, the Great Recession saw the biggest drop in US real GDP of all the capitalist slumps since 1945. It fell 4.1% in six quarters. That compares with a fall of 3% at the worst part of the 1980-2 double-dip recession in over just two quarters in 1982.

      US real GDP is now nearly back to its peak at Q4’07 after 11 quarters, or virtually the same point as 11 quarters after the peak in GDP in Q1’80 before the double-dip recession then. In the 1973-75 recession, the US economy took only 8 quarters to return to its real GDP peak in Q4’73.

      So I think the stats tells us that the slump in the Great Recession was worse than 1980-2 but the recovery has been about the same as in 1980-82 but slower and weaker than 1973-5.


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