What caused the Great Recession? In an article called Clarifying the crisis in Jacobin
the Canadian political economist Sam Gindin explained it as ‘primarily financial crisis’. I commented on this view of Gindin when reviewing his new book co-authored with Leo Panitch in a previous post (https://thenextrecession.wordpress.com/2013/11/12/the-informal-empire-finance-and-the-mono-cause-of-the-anglo-saxons/).
As Panitch and Gindin put it in their award-winning book, The making of global capitalism: the political economy of the American Empire (http://www.versobooks.com/books/1527-the-making-of-global-capitalism): “Going back to the theories of imperialism a century earlier, that overaccumulation is the source of all capitalist crises, the crisis that erupted in 2007 was not caused by a profit squeeze or collapse in investment due to overaccumulation. In the US in particular, profits and investment has recovered since the early 1980s… Indeed investment was growing significantly in the two years before the onset of the crisis, profits were at a peak and capacity utilisation in industry had just moved above the historic average… it was only after the financial meltdown in 2007-8 that profits and investment declined.” Instead, the authors prefer to explain the Great Recession as a result of stagnating wages, rising mortgage debt and then collapsing housing prices, causing “a dramatic fall in consumer spending”.
Recently, Andrew Kliman rejected Gindin’s analysis in an article in the New Left Project
arguing that, had the crisis really been mainly financial, the economy would have recovered by now. Now Gindin has responded to Professor Kliman’s critique
I cannot help making a few comments on my own from this debate. In my view, Professor Kliman correctly criticises Gindin’s view that the Great Recession was just a financial crisis. But it is interesting that he seems to accept the Krugman-Summers view that the US economy (at least) is in ‘secular stagnation’ as the lynchpin of his argument. Does this mean he accepts their reasons for the economy stagnating, namely population slowdown, a ‘savings glut’ and Keynesian-style money ‘hoarding’?
Because I don’t, as I explain in a recent post
Surely, secular stagnation is the province of the Monthly Review school of Keynesian-Marxism – who wish to avoid accepting that it’s Marx law of declining profitability that is behind the Great Recession.
Moreover, I am surprised that Professor Kliman, a stalwart defender of Marx’s law against the likes of Gindin and the Monthly Review, in his critique of Gindin, seems to shy away from putting Marx’s law of profitability up as the underlying and crucial cause of crises including the Great Recession. He says ““is certainly right to warn against any effort to ‘squeeze… events into the straightjacket of a trans-historical causality (such as the falling rate of profit or production as the sole site of crisis-creation),’ but we should also be wary of efforts to dismiss the importance of factors such as the falling rate of profit and capitalist production in advance of careful consideration of the evidence”. This apparently balanced statement seems to me to concede too much to Gindin.
In Sam Gindin’s reply to Professor Kliman’s critique, he aims to refute Kliman’s empirical argument that the US rate of profit has been falling ‘persistently’ since the 1950s and there was no ‘neo-liberal’ recovery in that rate from the 1980s onwards. He uses Kliman’s own data although he cites after-tax profits, a usual ploy by ‘anti-law’ analysts. But there is a problem here – despite Sam Gindin’s assurance that his measure of the rate profit is the same as Professor Kliman’s, it looks different. Here is Gindin’s.
And here is Kliman’s (dotted line is after-tax profitability).
We can see that, on this measure, there was a significant recovery in the US rate of profit from the mid-1980s (using the dotted HP trend line). This recovery did not cease in the late 1990s despite two sharp falls in 2001 and in the Great Recession, although the trend rate remains below the peak achieved in the mid-1960s. However, Jones contrasts that measure of the rate of profit with what he calls the broadest measure of profit – of corporate gross value-added less depreciation and employee compensation and before interest or tax is deducted, against fixed assets measured in historic costs. This measure is pretty similar to that used by Andrew Kliman. This measure looks like this.
On this measure, the rate of profit makes no recovery on a trend basis (dotted line) in the 1980s, although it appears to flatten out in the last decade and was even rising slightly going into the Great Recession. So who is right?
The secular decline in US profitability, mainly achieved between the mid-1960s and the early 1980s, is best explained by Marx’s law, namely by a rising organic composition of capital outstripping the effect of counteracting factors like a rising rate of exploitation of labour. From the 1980s to the late 1990s, the counteracting factors dominated in the so-called neoliberal era. But after 1997, Marx’s law began to operate again, as a significant rise in the organic composition of capital was not sufficiently counteracted by a large rise in the rate of exploitation (partly revealed in inequality of incomes reaching extremes not seen since the 1920s – see my posts on inequality).
Themis Kalogerakos (EKHR61_Themistoklis_Kalogerakos) has analysed all the various rates of profit from broad to narrow. He shows that, however you measure the rate of profit, whether by the broadest or the narrowest measure or in between, the US rate of profit exhibits the four phases described above. The average rate of profit for the whole period 1946-2011 was 17.99% for the broadest measure and 6.03% for the narrowest. Between 1946-65, the rate of profit was 11% above this average of the broadest measure and 15% above for the narrowest. In the neoliberal period from 1982 to 1997, the rate was still 9% below the average (broadest) or 18% below (narrowest). And the average for 1997 to 2011 was still below the overall average by 5% (broadest). It was 5% higher than the average for narrowest measure from 1997-2011. But in this latest period, the rate in both cases was still below the 1946-65 golden age period by 10% and 15% respectively.
These measures were based on current cost fixed assets. If historic costs are used, then the results are no different. On the broadest measure, the closest to Marx’s, the average rate of profit from 1997 to 2011 was 23% lower, while on the narrowest measure it was 16% lower. A major counteracting factor in reviving corporate profitability after the 1980s in the US has been the significant reductions in corporate tax and interest costs. This is expressed in the narrow after-tax profit measure in the 1997-11 period exceeding slightly its overall average since 1946, although it was still below the period of 1946-65. And this is the figure that Gindin prefers.
Themis looks not just at the level of profitability but also at the annual change in the US profit rate. Across the whole period from 1946, whatever the measure of the rate of profit and whether measured from trough to trough in the cycle or from peak to peak, the US rate of profit has fallen, by about 0.6% a year. And even more useful for deciding whether profitability can be seen as the underlying driving cause of the Great Recession, in the period 1997 to 2011, the rate profit fell annually by 0.6% (broadest) and 0.3% (narrowest). This comprehensive analysis seems to confirm my own data that 1) there was a secular fall in the US rate of profit in the post war period or from 1965; that there was a recovery from 1982 which peaked in 1997; but the recovery from 2002 was not enough to restore profitability to the previous peak.
The US rate of profit based on this non-fictitious profit clearly shows a secular decline over the whole period and the same sharp fall after 1965. It also shows a stabilisation and slight rise after 1982 before falling sharply after 1997. So the rise in the rate of profit recorded from 2002 onwards in both his broadest and narrowest NIPA measures (as above) is down to fictitious profits that evaporated in the Great Recession.
Indeed the Gindin/Panitch account quoted above of the years before the credit crunch of 2007 and the Great Recession of 2008-9 just does not correspond with the facts. Yes, investment did not start to fall until 2008 BUT by then US corporate profits had been falling some two years and investment dropped as a result followed by GDP. And in the recovery, again it was profits that led investment and GDP up.
Let me summarise an alternative explanation to Gindin’s. Even though there was a rise in the rate of profit in the US from the early to mid 1980s, this peaked in 1997. The subsequent sharp rise in profitability from 2002 to 2006 was mainly fictitious in character, just delaying the oncoming slump that would be engendered by the squeeze in profitability in the productive sectors of the economy and indeed making the eventual slump, a Great Recession.
I am not arguing that each crisis of capitalism does not have its own characteristics. See my recent Amsterdam paper Presentation to the Third seminar of the FI on the economic crisis and my post https://thenextrecession.wordpress.com/2014/02/16/tendencies-triggers-and-tulips/. The trigger in 2008 was the huge expansion of fictitious capital that eventually collapsed when real value expansion could no longer sustain it, as the ratio of house prices to household income reached extremes. I do not say that such triggers are not ‘causes’, but argue that behind them is a general cause of crisis: the law of the tendency of the rate of profit to fall.