It feels like a depression

Economic growth in the major capitalist economies has slowed sharply.  The recovery from the Great Recession of 2008-9 that began in mid-2009 appears to be faltering.  In previous posts (Double dips, deficits and debt, 24 August 2011; US heading into recession again?, 15 August 2011), I have argued that a double-dip recession was unlikely.  By double-dip, most economists mean that, after a recession or slump, the subsequent recovery lasts less than a few quarters before the economy slips back into recession.  And by recession, economists mean a contraction in the level of national output in an economy for at least two quarters.

Well, a double-dip recession is a pretty rare event, happening  only once since the second world war – in 1980-2.  And I continue to hold that the economic data in the major economies do not suggest a contraction in output in the major economies, but merely a slowdown to very low economic growth rate of about 1-2% a year.

However, in many ways, what’s the difference between recession and slow growth for those out of work, those facing a freeze on their wages and for those seeing a slashing of public services and social benefits including pension entitlements?  For example, in the UK,  the median average household will have seen its net income fall by 3.5% in real terms in the financial year 2010-11 – the largest annual drop since 1981.  That will make it one of the worse decades for living standards since World War II.

The economic recovery in the capitalist economies since mid-2009 has not changed anything much for the majority of their populations.  Only the income of the richest and the profits of large capitalist corporations have recovered.   Also, although there has been a recovery in national output of the major economies since 2009, the absolute level of output is still below the last peak in 2008.  This is the slowest economic recovery for capitalism since the Great Depression of the 1930s.  Indeed, in that sense, we are in another depression rather than just a slump or recession as capitalism experienced in the 1970s, 1980s or 1990s.

This table from the HSBC bank has the key numbers.

In most industrialised countries GDP is still lower than it was in 2008

Consensus forecast for 2011 made in 2008 (2008=100) Actual Q2 2011 % change in actual since Q2 2008 % difference between actual and forecasts
US 107.8 100.0 -0.4 -7.8
Japan 105.1 94.0 -4.8 -11.0
UK 106.1 96.1 -3.7 -10.0
Germany 105.3 99.9 0.3 -5.3
France 106.0 99.1 -0.2 -6.9
Italy 104.1 95.2 -4.2 -8.9

As HSBC put it: “Back in 2008, the consensus forecast among independent economists was that the US economy would now be nearly 8% larger.  In the case of the UK, they were expecting cumulative growth of more than 6%. By historical standards, those were pretty downbeat forecasts.  Now they look positively utopian. National income is now lower than it was in 2008 in every single one of the countries listed – and much, much lower than expected.  Among the largest advanced economies, only Japan’s recovery has been more disappointing than Britain’s.  The UK economy is now 10% smaller than it was expected to be at this stage in the recovery – and the forecasts for 2011 and 2012 are now busily being downgraded.”

The employment situation in the US and the UK is correspondingly awful.  In the  UK, unemployment has jumped by 80,000 over the past three months and employment is up by just 24,000 over the past year.  The post-recession jobs rebound has ground to a halt.  Private sector employment peaked at 23.542m during the first quarter of 2008.  Private jobs reached a trough in the final quarter of 2009, when private sector employment fell to 22.515m, down 1.027m from the boom-time peak.  It would have been worse if  public spending, including in construction, had not propped up private sector employment with state-funded jobs (hundreds of thousands of “private” jobs are dependent on government contracts).  British companies started to add to their staffing levels at the start of 2010. Private sector employment has grown during each of the past six quarters, with a net 617,000 jobs added, taking the total back to 23.132m.

But the strong growth of previous quarters is now running out of steam. One reason for this is the loss of state-supported jobs; but the main factor is British companies, despite enjoying sharp increases in profits since 2009 are not willing to invest or employ more staff.  And now there is an acceleration of public sector job losses as the fiscal austerity measures of the coalition government begin to take effect.  Public sector employment reached its peak as a share of total jobs in late 2009, hitting 21.9% on the official measure; state payrolls reached 6.327m at the end of 2009. They then started to fall and dropped to 6.037m in the second quarter, 20.7% of the total.  So far, total state sector jobs are down by 290,000, through a combination of non-replacement and redundancies.   And in the last three months total public sector job losses (111,000) swamped private sector growth in jobs for the first time (41,000).

We are in a recovery that feels like a depression for two big reasons.  First, the recovery in profitability for the capitalist sector is still not enough to convince companies to invest and employ more.  And second, as economic growth slows down, the UK government is applying measures to cut public investment by 40%, reduce state employment and wages and raise taxes.  In the US, Congress is discussing how much to cut back, not spend more.  These austerity policies don’t help get the economy going.

Mainstream economics is divided about what to do.  As I have argued in this blog before (The Great Recession and the recovery: who is right?, 1 August 2011), the Keynesian answer is to spend more money with more borrowing until economic growth is assured.  This policy has been applied by the Obama administration up until now and they want to continue it to some extent.  But it has not succeeded in reviving employment and consumer demand.  The Keynesians say that this is because the stimulus and borrowing has been too small.  More needs to be done.   The Austerians say that the economic crisis was the result of excessive private credit in a bubble that eventually burst.  The last thing we need to do now is to add to the level of debt by more public sector borrowing.  This merely drives up the cost of borrowing and thus stops investment to grow the economy.

In the US, this debate has taken a particularly crude turn with the attempt of the likely Republican nominee for the next year’s presidential election, Texas Gov. Rick Perry claiming that the Keynesian policies of the Obama administration and the monetarist policies of Fed Reserve chairman Ben Bernanke are ‘treasonous’  and will destroy the fabric of the capitalist economy.  The level of public debt is out of control.  We need balanced government budgets, no borrowing and an end to the Ponzi-scheme of social security.  Let people “make their own choices” for pensions, health and benefits.

Perry likes to claim these policies of balanced budgets and low public spending have been operating in Texas and, as a result, the Lone Star state has better growth and lower unemployment than the nation as a whole.  It’s true that Texas has gained more than a million jobs since the end of 2000, while the U.S. has lost almost 1.5 million, according data from the Bureau of Labor Statistics.  So has Perry proved his point?  Well, for a start, of those one million jobs, about 300,000 were in government (hardly an example of free market enterprise).  So the man who hates big government has presided over a huge increase in state employment.  Indeed, employment in the Texas state’s public sector has jumped 19% since 2000, compared with a 9% rise in the private sector. Looking at the number of net new jobs, the biggest increases were in private education and health, up 408,000 jobs, or 40%, and then government.

Employment in productive capitalist sectors like manufacturing and information actually fell.  The fastest-growing employment sector in Texas during Perry’s tenure has been in mining, which includes the booming oil and gas industry, up 63% in past decade, or 94,000 jobs.   This is a special advantage that Texas has over other US states.  But most of the new jobs in Texas are low-wage and without benefits.  According to federal data, the Texas state is tied with Mississippi for the largest percentage of hourly workers who make minimum wage or less, at 9.5%.

The main reason for the relatively fast growth in jobs in Texas is not Governor Perry’s policies but simply that the population has exploded.  Over the past decade, Texas has added more people than any other state and now accounts for 8.1% of the U.S. population, up from about 7.4% in 2000.   Indeed, given the growth of the population, Texas should have created MORE jobs than it has now.  Keynesian economist Paul Krugman singled out that one important statistic that debunks Perry’s arguments.  Relative to population, activity in work in Texas in declining faster than national employment to total population is.  As Krugman explained: “According to the figures we have for 2011, 44.7% of the total US population has a job, compared to 43.5% of the Texas population.  And Perry’s record is pretty bad, here: he inherited a ratio of more than 47% in Texas from George W Bush, and has presided over a steady decline ever since — including every year of the Bush presidency, bar 2005.”

You can argue about the facts in Texas, but the bottom line is that the Keynesians and Austerians are both right and wrong.  The Keynesians are right (and the Austerians are wrong in opposing it) in their view that curtailing the public sector when the private sector is on an investment strike will only make matters worse.  The Austerians are right (and the Keynesians are wrong in opposing it) in the view that, without reducing the level of debt (what Marx called fictitious capital) in the economy, capitalists cannot or won’t invest.  The level of debt inherited from the credit boom of the previous 15 years has eaten into the profitability of capital accumulation in tangible or physical productive assets.  This fictitious capital must be cleansed from the system before capital accumulation can resume sufficiently to sustain faster growth.  Ironically, that implies that another deep recession is necessary.

In that sense, we are in another Great Depression.   After all, in the Great Depression of the 1930s and the Long Depression of the 1870s and 1880s, there was no double-dip recession, but instead we started with a huge slump (1873-8 or 1930-32), then a recovery (1878-82 or 1932-7) that did not restore the peak of output achieved before.  Then the recovery was followed by another deep recession (1882-4 and 1937-8).  In the case of the Long Depression, a sustained boom did not begin until the early 1890s.  After the recession of 1937-8, recovery was led by the arms race into world war through to 1946.

We can see a distinct depressionary period for capitalism, as the figures for economic growth in the 19th century show.

Growth rates of industrial production (1850s–1913)
1850s–1873 1873–1890 1890–1913
 Germany 4.3 2.9 4.1
 United Kingdom 3.0 1.7 2.0
 United States 6.2 4.7 5.3
 France 1.7 1.3 2.5
 Italy 0.9 3.0
 Sweden 3.1 3.5

In my book, The Great Recession, I have defined these depressionary periods within the idea of Marxist profit cycles lasting 32-36 years from trough to trough and in the longer prices of production cycle (lasting 54-72 years), named after the Soviet economist Kondratiev.  We can divide the Kondratiev cycle into four sections or seasons.  We start with the Spring season, when profitability is in an upwards phase and so are prices of production.  This spring season is a period of significant economic recovery for capitalism, where economic recessions or slumps are small, infrequent and short-lived.

Next is the Summer season when prices keep rising but profitability falls.  In this summer season, capitalism suffer more slumps of an increasingly deeper nature.  The Autumn season follows with prices of production having peaked and beginning to fall.  There is disinflation, but profitability rises.  In this autumn season, recessions are few and short-lived but the pressure is on wages as prices are hardly rising.  Finally, in the Winter season, we enter a period of depression in prices and falling profitability.  This is a really bad period for capitalism.

In the Kondratiev cycle, there was a winter season in the British capitalist economy from 1871-92, which coincided with falling profitability (see chapter 13 in my book), not dissimilar to the fall in profitability in the US economy since 1997.  The next winter season in the Kondratiev cycle was from 1929-46 and now we are in another winter season that began about 1997-00 and should last until 2016 or so.  In this context, the Great Recession of 2008-9 is part of the general depressionary winter season for capitalism that we are still in.


2 thoughts on “It feels like a depression

  1. Interesting post, but…

    “The Keynesians are right and the Austerians are wrong in opposing the view that curtailing the public sector when the private sector is on an investment strike will only make matters worse.”


    I assume you mean:

    “The Austrians are wrong in believing that curtailing the public sector when the private sector is on an investment strike will improve economic growth. The Keynesians are right to reject this view”.

    Having worked as research statistician, I’m probably less sanguine about the macroeconomic numbers than you are. It looks very “scientific” to mention numbers, especially with multiple decimal places, but in reality the numbers are only indicative estimates based on numerous assumptions, which ought to be understood in interpreting the numbers.

  2. I have been referring to this crisis as depression since 2008 myself. I believe it’s important to recognize and refer to it as such for several reasons. This article clarifies your position.Thank you. I don’t think words like recession or slump are adequate. They don’t relay the gravity and significance of this crisis. It’s a depression. Let under-consumptionists continue to confuse themselves.

    You say “Only … and the profits of large capitalist corporations have recovered.”
    If we describe Marx’s competition model as competition among industries and competition among firms within industries and the consequence of the former being equalization of rate of profit (tendential) then how would you explain the profit rate differentials between large corporations and others? How much of it would be due to state intervention via bailouts, tax give backs, lower interests, etc.?

    Also, “The level of debt … has eaten into the profitability of capital accumulation …”. Public or private or both? Cause is it the interest paid? Are you referring to enterprise rate of profit?

    Thank you.

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