US economy on the brink

The self-created mirage of recovery that helped sustain the tattered remnants of the American Dream evaporated yesterday as reality came calling.

The desperate measures taken to halt the imminent sacking of hundreds of thousands of public sector workers was only one event in a day of reckoning.

Five stark paragraphs comprising the statement issued by the Federal Reserve - America’s central bank - reeks of the stench of exhausted defeat. The first outlines the problem. It needs no interpretation:

Information received since … June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in non-residential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

In the action paragraphs, the committee explains that base interest rates will be kept at their historic low, but reiterates that “resource slack”, which means massive overcapacity in production, eliminates any hope of anything changing for years or decades to come.

In what is seen as a reversal of previous policy, the Fed is intent on printing even more money in a bid to stimulate the economy. It plans to use the income from repayments on mortgages it bought during the financial meltdown of 2008 to pump out more dollars.

If nothing else it gives a new meaning to recycling. Once the money has been captured from American families, the figures just keep moving around inside the Federal Reserve’s computers. Paul Ashworth of Capital Economics called the decision a "symbolic gesture".

Yesterday, Obama recalled the members of the House of Representatives back from their summer recess so that they could pass an emergency bill approving $26bn (£16.4bn) funds for states which have run out of money, and $16.1bn to extend funding for the Medicaid healthcare programme for low-income Americans.

Without the emergency aid, states would have laid off police, teachers and firefighters and all of the key services would have ceased functioning. The states themselves have suffered during the recession through a loss of revenue through sales and property taxes. The aid will only get them through the current financial year, however.

Those who claim that public spending is the answer to the economic crisis have had their fingers burnt by the US experience. Obama’s government has spent trillions in a various stimulus packages – all to no avail.

That’s because the crisis of capitalism is global and marked by the classic symptoms of over-production, over-capacity and falling demand. The boom was artificially fuelled by mountains of credit and debt which inevitably proved unsustainable and led to the implosion of the financial system. Without easy credit, consumers are in general spending what money they have on necessities like food and shelter.

It all adds up to the American economy being on the brink of collapse, adding to the sense of political crisis gathering around the Obama presidency.

Gerry Gold
Economics editor

The only thing we have to fear is capitalism itself

The dispute over the use of imported labour at a UK oil refinery looks like a minor side show compared to the global disquiet over a key part of Barack Obama’s economic package. The president’s throwback to 1930s Roosevelt-style government spending, and its inward-looking Buy American component, is causing concern amongst ailing corporations, as well as countries dependent on exports to the US.

In appealing to the millions of Americans who’d already lost their jobs as the credit-led boom ended, Obama’s presidential campaign touted economic nationalism, using slogans like “Buy American, Vote Obama”. He promised a requirement for the US government to buy American-built vehicles in a grim echo of Gordon Brown’s infamous “British Jobs for British Workers” remarks.

The protectionist provisions in Obama’s economic package bill now in Congress, including the use of domestic steel and manufacturing products in infrastructure projects funded by the stimulus package, have had to be watered down because the US is signed up to the World Trade Organisation’s agreement on international tendering for government procurements. Even so, among the countries which didn’t sign up are China, Brazil and India, so they can be excluded from tendering.

Opposition to Obama’s plans is mounting among capitalist rivals. Japan’s prime minister Taro Aso condemned the proposals in the Japanese Diet, the European Union has warned of trade litigation, and Australia’s government talks of trade war. Should the Buy American provisions survive, retaliation from countries throughout the world is sure to follow.

Even American firms are fearful about the consequences of the turn to economic nationalism. Thomas Donohue, president of the US Chamber of Commerce, said: “Such provisions would cost American jobs, trigger retaliation from our trading partners, slow economic recovery by delaying shovel-ready infrastructure and cede our leadership role as a long-standing proponent of free and fair trade and global engagement.”

The US Chamber has a better idea of what’s coming than the new president and his team. In a blog on its site it says:

Then there’s the lesson of history, which is that protectionism in the 1930s made the Great Depression worse. Here is the Encyclopaedia Britannica on the Smoot-Hawley Act of 1930, which raised import duties to protect American farmers and businesses: "Within two years, some two dozen countries adopted similar ‘beggar-thy-neighbour’ duties, making worse an already beleaguered world economy and reducing global trade. U.S. imports from and exports to Europe fell by some two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect.

Now that the debt-funded markets for their commodities have crashed, no national or even international “stimulus” programme can put them back on the path to growth. Obama’s own pledge to bring a “new politics” to Washington is already running into the sand. His bill is under fire in the US media for being the same old “pork barrel” politics. His call in the Washington Post for bipartisanship and an urgent response at a time when unless action is taken “our nation will sink deeper into a crisis that, at some point, we may not be able to reverse”, made no impression on Republicans in the Senate, who simply favour cutting taxes for the rich.

What history has shown, and Marx explained, is that before a new period of growth can begin, the surplus productive capacity accumulated during the boom years has to be destroyed. The shocking increase in unemployment that sets worker against worker is just the starting point of that process of destruction. The real enemy is capital itself, and the corporations and governments that do its bidding. They must be stopped. To paraphrase Roosevelt's famous remark on his inauguration in 1932, the only thing we have to fear is capitalism itself.

Gerry Gold
Economics editor