The Great Recession and the recovery: who is right?

Last week’s release of the gross domestic product figures for the US economy in the second quarter of 2011 was a shock to supporters of capitalism.  The US economy achieved an annual growth rate  of just 1.3% in Q2’11.   Translating those figures into quarterly numbers, that means the US grew by just 0.1% in the first quarter and by 0.3% in the three months after that. Even worse, personal consumption was stagnant.  Even more worrying was that figures for previous quarters were revised downwards.  As a result, the level of real US GDP is now found to be $216bn lower than previously reported.  Most signficant, the level of US GDP in Q2’11 remains below its peak before the credit crunch and the Great Recession reached back in late 2007.  The US capitalist economy still has not recovered to its previous peak after nearly four years.

The revisions in the data reveal that the Great Recession was even greater than previously thought.  US real GDP fell from peak to trough by 5.1% rather than 4.1% as previously estimated.  Indeed, in early 2009, the rate of decline reached 7.8%!  And the components of that GDP also showed how severe the Great Recession was.  Personal income fell 5.8% from a peak in Q2’08 to a trough in Q3’09, that’s more than double the previous estimate.   But most interestingly, corporate profits were revised upwards.  Now the level of corporate profits is 8.7% higher than reported before.  The Great Recession hit corporate profits, but the main price was paid in reduced incomes for average Americans and in lost investment and jobs.

Big business has been the only beneficiary of the recovery so far – as befits a capitalist economy.  So it should be no surprise that investment in new equipment and plant by businesses is beginning to accelerate, even though consumer spending has stalled.  With American households still struggling with heavy debts, falling real wages and high unemployment, it is no wonder that they stopped spending more in Q2’11, now that the tax credits in previous budgets have been ended.

But it is not just the US capitalist economy that is slowing.  The other great ‘Anglo-Saxon’ economy of the UK is also in trouble.   It has grown just 0.7% in the past 12 months, although well into the second year of recovery after one of the deepest recessions of the past 100 years.  And now the recovery will be the slowest in nearly 100 years.  At this rate, the UK’s GDP level will not return to its previous peak until 66 months later or 2014!

So there we have it.  The Keynesians argue that the UK and US economies will slip back into recession if the Republicans have their way on spending cuts or if the fiscal austerity measures of the Conservative-Liberal coalition continue to be applied.  For them, the level of debt is a red herring.  In contrast, the Austerians argue that ‘profligate’ government spending and high debt levels will mean that the US and UK economies will struggle to grow.  It seems that this argument is a bogus one between two wings of mainstream economics.  For the outcome is that both profligate US capitalism and austerian UK capitalism are growing at a snail’s pace and have not yet returned to the level of GDP achieved before the Great Recession, however much has been spent or saved by government.

6 Responses to “The Great Recession and the recovery: who is right?”

  1. Mike B) Says:

    Cutting government services to the working class should save the capos a bundle. Problem is that they’ll be no market to sell to, if the market doesn’t have a decent paying job.

  2. paulcockshott Says:

    Cutting services to the working class does nothing to reduce public debt since those in receipt of them do not save and accumulate government bonds. Only heavy taxes on the bond buying classes can possibly close the deficit — that and reducing the trade deficit.

  3. Matt Says:

    Perhaps Roberts will have to advance his forecast for the second recession?

  4. michael roberts Says:

    Not yet!

  5. purple Says:

    The US government is not profligate; it spends less per GDP than Europe and its deficit has more to do with revenue collapse. We need much more government spending and direct hiring, which incidentally works, even if it is resisted for reasons laid out by Kalecki about 65 years ago.

  6. Marcuso Says:

    Geez if cutting taxes on the “job creators” worked as an economic stimulus, in the US we wouldn’t have had a recession in the first place. All the US government has done in the last 30 years is reduce taxes on the wealthy and corporations and cut regulations.

    IT DOESN’T WORK AS A STIMULUS! And anybody that says it does is feeding you a load of BS.

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